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2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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.
(Exact name of registrant as specified in its charter)
23-1743282
Pennsylvania (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
19103-1699
Ten Penn Center (Zip Code)
1801 Market Street, Philadelphia, PA
(Address of principal executive
offices)
Registrant's telephone number, including area code (215) 977-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange on which
Title of each class registered
------------------- --------------------------
Common Stock, $1 par value New York Stock Exchange
Philadelphia Stock
Exchange
Convertible Subordinated Debentures 6 3/4%, Due New York Stock Exchange
June 15, 2012
Sinking Fund Debentures 9 3/8%, Due June 1, New York Stock Exchange
2016
Securities registered pursuant to Section 12(g) of the Act: None
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments of this Form 10-K. [_]
At January 31, 2002, the aggregate market value of voting stock held by
nonaffiliates was $2,905 million.
At January 31, 2002, there were 75,646,517 shares of Common Stock, $1 par
value, outstanding.
Selected portions of the Sunoco, Inc. Annual Report to Shareholders for the
Fiscal Year Ended December 31, 2001 are incorporated by reference in Parts I,
II and IV of this Form 10-K.
Selected portions of the Sunoco, Inc. definitive Proxy Statement, which
will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2001, are incorporated by reference in Part III of this
Form 10-K.
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Those statements in the Business and Properties discussion that are not
historical in nature should be deemed forward-looking statements that are
inherently uncertain. See "Forward-Looking Statements" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the Company's 2001 Annual Report to Shareholders for a discussion of the
factors that could cause actual results to differ materially from those
projected.
General
Sunoco, Inc.* was incorporated in Pennsylvania in 1971. It or its
predecessors have been active in the petroleum industry since 1886. Its
principal executive offices are located at 1801 Market Street, Philadelphia,
PA 19103-1699. Its telephone number is (215) 977-3000 and its Internet website
address is www.SunocoInc.com.
The Company, through its subsidiaries, is principally a petroleum refiner
and marketer and chemicals manufacturer with interests in cokemaking. Sunoco's
petroleum refining and marketing operations include the manufacturing and
marketing of a full range of petroleum products, including fuels, lubricants
and petrochemicals, and the transportation of crude oil and refined products.
Sunoco's chemical operations comprise the manufacturing, distribution and
marketing of commodity and intermediate petrochemicals. The petroleum refining
and marketing and chemicals operations are conducted principally in the
eastern half of the United States. Sunoco's cokemaking operations are
conducted in Virginia and Indiana.
The Company's operations are organized into five business units (Refining
and Supply, Retail Marketing, Chemicals, Logistics and Coke) plus a holding
company and a shared services organization. The accompanying discussion of the
Company's business and properties reflects this organizational structure. For
additional information regarding these business units, see Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the Company's 2001 Annual Report to Shareholders. Business segment information
is also presented in Note 19 to the Consolidated Financial Statements in the
Company's 2001 Annual Report to Shareholders.
Sunoco currently owns and operates four refineries which are located in
Marcus Hook, PA, Philadelphia, PA, Toledo, OH and Tulsa, OK. The refineries in
Marcus Hook, Philadelphia and Toledo produce principally fuels and commodity
petrochemicals while the refinery in Tulsa emphasizes lubricants production
with related fuels production being sold in the wholesale market. A fifth
refinery in Puerto Rico, which also emphasized lubricants production, was sold
in December 2001, completing the Company's restructuring of its lubricants
operations. Sunoco markets gasoline and middle distillates, and offers a broad
range of convenience store merchandise through a network of approximately
4,150 retail outlets in 21 states on the East Coast and in the Midwest United
States. Sunoco also owns and operates facilities in Philadelphia, PA and
Haverhill, OH, which produce phenol
- --------
* In this report, the terms "Company" and "Sunoco" are used interchangeably to
mean Sunoco, Inc. or collectively, Sunoco, Inc. and its subsidiaries. The
use of these terms is for convenience of discussion and is not intended to
be a precise description of corporate relationships. References in this
Annual Report on Form 10-K to material in the Company's 2001 Annual Report
to Shareholders and in the Company's definitive Proxy Statement, which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001, mean that such material is incorporated herein by
reference; other material in those documents is not deemed to be filed as
part of this Annual Report on Form 10-K.
1
and acetone, facilities in LaPorte, TX, and Neal, WV, which produce
polypropylene, and facilities in Neville Island, PA, and Pasadena, TX, which
produce plasticizers. In addition, Sunoco is a joint venture partner in a
facility in Marcus Hook which produces propylene and polypropylene and in a
facility in Mont Belvieu, TX, which produces MTBE. Sunoco also owns and
operates a geographically diverse and complementary group of pipelines and
terminal facilities which transport, terminal and store refined products and
crude oil. Sunoco makes high-quality, blast-furnace coke at its Indiana Harbor
facility in East Chicago, IN, and Jewell facility in Vansant, VA, and produces
metallurgical coal from mines in Virginia primarily for use at the Jewell
cokemaking facility.
The following are separate discussions of Sunoco's business units.
Refining and Supply
The Refining and Supply business consists of the manufacture of petroleum
products, including gasoline, middle distillates (including jet fuel, heating
oil and diesel fuel) and residual fuel oil at Sunoco's Marcus Hook,
Philadelphia, Toledo and Tulsa refineries and commodity petrochemicals,
including olefins and their derivatives (ethylene, ethylene oxide and
refinery-grade propylene) and aromatics and their derivatives (benzene,
cyclohexane, toluene and xylene) at Sunoco's Marcus Hook, Philadelphia and
Toledo refineries and the sale of these products to other Sunoco business
units and to wholesale and industrial customers. This business also
manufactures lubricant products at Sunoco's Tulsa refinery which are sold into
process oil, wholesale base oil and wax markets ("Western Lubricants") and,
prior to the completion of the restructuring of lubricants operations in
December 2001 (see below), included the manufacture and wholesale marketing of
base oils and related fuels produced at the Puerto Rico refinery and the
blending, packaging and branded marketing of specialty oils ("Value Added and
Eastern Lubricants").
The following tables set forth information concerning operations at the
Company's refineries excluding the Puerto Rico facility, which was sold in
December 2001 (in thousands of barrels daily):
Delaware Toledo Tulsa
2001 Valley* OH OK Total
---- -------- ------ ----- -----
Crude Unit Capacity.............................. 505.0 140.0 85.0 730.0
===== ===== ==== =====
Input to Crude Units............................. 468.5 140.6 78.6 687.7
===== ===== ==== =====
Conversion Capacity.............................. 210.0 88.0 8.7 306.7
===== ===== ==== =====
Conversion Unit Throughput....................... 189.4 81.4 6.5 277.3
===== ===== ==== =====
Products Manufactured:
Gasoline........................................ 231.9 86.9 18.5 337.3
Middle Distillates.............................. 167.8 34.2 28.0 230.0
Residual Fuel................................... 52.5 3.9 .1 56.5
Petrochemicals.................................. 22.1 8.2 -- 30.3
Lubricants**.................................... -- -- 12.0 12.0
Other........................................... 39.0 20.5 20.2 79.7
----- ----- ---- -----
513.3 153.7 78.8 745.8
===== ===== ==== =====
- --------
* Consists of Marcus Hook and Philadelphia refineries.
** Consists of base oils, waxes and extracts.
2
Delaware Toledo Tulsa
2000 Valley* OH OK Total
---- -------- ------ ----- -----
Crude Unit Capacity.............................. 505.0 140.0 85.0 730.0
===== ===== ==== =====
Input to Crude Units............................. 460.5 133.6 79.2 673.3
===== ===== ==== =====
Conversion Capacity.............................. 210.0 88.0 8.7 306.7
===== ===== ==== =====
Conversion Unit Throughput....................... 188.5 74.3 5.8 268.6
===== ===== ==== =====
Products Manufactured:
Gasoline........................................ 232.3 81.9 18.6 332.8
Middle Distillates.............................. 165.2 30.3 27.5 223.0
Residual Fuel................................... 52.2 3.5 -- 55.7
Petrochemicals.................................. 23.6 8.7 -- 32.3
Lubricants**.................................... -- -- 12.4 12.4
Other........................................... 26.7 21.2 20.8 68.7
----- ----- ---- -----
500.0 145.6 79.3 724.9
===== ===== ==== =====
Delaware Toledo Tulsa
1999 Valley* OH OK Total
---- -------- ------ ----- -----
Crude Unit Capacity.............................. 505.0 140.0 85.0 730.0
===== ===== ==== =====
Input to Crude Units............................. 468.9 133.4 75.9 678.2
===== ===== ==== =====
Conversion Capacity.............................. 210.0 88.0 8.7 306.7
===== ===== ==== =====
Conversion Unit Throughput....................... 200.3 78.3 5.3 283.9
===== ===== ==== =====
Products Manufactured:
Gasoline........................................ 242.3 85.0 16.6 343.9
Middle Distillates.............................. 168.4 28.1 25.8 222.3
Residual Fuel................................... 51.7 4.2 .1 56.0
Petrochemicals.................................. 25.7 9.0 -- 34.7
Lubricants**.................................... -- -- 11.8 11.8
Other........................................... 26.0 19.5 21.4 66.9
----- ----- ---- -----
514.1 145.8 75.7 735.6
===== ===== ==== =====
- --------
* Consists of Marcus Hook and Philadelphia refineries.
** Consists of base oils, waxes and extracts.
During 2001, the Philadelphia refinery had a scheduled turnaround of a
crude unit, a catalytic cracking unit and a reformer unit. In mid-2001, the
Marcus Hook refinery had an unplanned shutdown of the ethylene complex and
associated processing units as a result of the failure of a flare line at the
ethylene plant.
During 2000, Refining and Supply had turnarounds of the Marcus Hook and
Toledo refineries' catalytic crackers and associated processing units as well
as a crude unit at the Philadelphia refinery.
Sunoco meets all of its crude oil requirements through purchases from third
parties. There has been an ample supply of crude oil available to meet
worldwide refining needs, and Sunoco has been able to supply its refineries
with the proper mix and quality of crude oils without disruption. Virtually
all of the crude oil processed at Sunoco's refineries during 2001 was light
sweet crude oil. The Company believes that ample supplies of light sweet crude
oil will continue to be available. The Philadelphia and Marcus Hook refineries
process crude oils supplied from foreign sources, while the Toledo refinery
processes crude oils supplied primarily from Canada and the United States and
the Tulsa refinery
3
processes crude oils supplied from the United States. The following table sets
forth information concerning the Company's crude oil purchases (in thousands
of barrels daily):
2001 2000 1999
----- ----- -----
Crude Type:
West African Light........................................ 437.8 413.2 369.3
West Texas Intermediate and Oklahoma Sweet................ 133.9 133.0 135.1
Canadian.................................................. 82.8 96.7 94.1
North Sea................................................. 37.1 20.2 40.0
South and Central American Light.......................... .6 14.3 28.4
"Lubes-Extracted" Gasoil/Naphtha Intermediate Feedstock... 3.2 1.1 5.0
----- ----- -----
695.4 678.5 671.9
===== ===== =====
Refining and Supply sells fuels through wholesale and industrial channels
principally in the Northeast and upper Midwest and sells petrochemicals and
lubricants on a worldwide basis. The following table sets forth Refining and
Supply's refined product sales excluding amounts attributable to the Value
Added and Eastern Lubricants operations (in thousands of barrels daily):
2001 2000* 1999*
----- ----- -----
To Unaffiliated Customers:
Gasoline.................................................. 137.5 145.0 169.1
Middle Distillates........................................ 205.7 219.5 227.3
Residual Fuel............................................. 59.8 55.6 56.2
Petrochemicals............................................ 13.5 13.4 14.0
Lubricants**.............................................. 9.3 8.5 7.7
Other..................................................... 52.8 52.0 51.6
----- ----- -----
478.6 494.0 525.9
To Affiliates***........................................... 287.6 263.7 252.5
----- ----- -----
766.2 757.7 778.4
===== ===== =====
- --------
* Restated to conform to the 2001 presentation.
** Consists of base oils, specialty oils, waxes and extracts.
*** Includes gasoline sales to Retail Marketing and benzene and refinery-grade
propylene sales to Chemicals.
Petrochemicals manufactured by Refining and Supply during 2001 were
marketed through the following channels:
. Benzene and Benzene Derivatives (including Cyclohexane)--Benzene is sold
to the Chemicals business for its use in the production of cumene. Other
customers are large manufacturers of fibers, detergents and specialty
products who buy a significant percentage of their requirements from
Sunoco under long-term contracts with prices based on market conditions
at time of delivery;
. Toluene and Xylenes--Large-volume buyers participate in markets for
fibers, film and urethane products. These sales are largely domestic with
occasional export volumes. Customers and distributors also take
individually small volumes of toluene and xylenes for paints, coatings,
solvents and a variety of specialty applications;
. Refinery-grade Propylene--Refinery-grade propylene is sold primarily to
the Chemicals business for its use in the production of cumene and for
its Epsilon Products Company, LLC ("Epsilon") joint venture's use in the
production of polypropylene; and
4
. Ethylene and Ethylene Oxide--Sales are primarily to intermediate-size
specialty chemical companies that make diverse products such as
surfactants, co-polymer resins and emulsions, and additives and to the
Chemicals business' Epsilon joint venture for its use in the production
of polypropylene.
Petrochemicals produced at the Toledo refinery are sold along with similar
products produced by Suncor Energy Inc. through a joint venture partnership.
The lubricant base oils produced at the Tulsa refinery are sold to domestic
and international customers who manufacture their own finished transportation
and industrial lubricants. Some base oil production is also upgraded into
process oils.
Feedstocks can be moved between Sunoco's Philadelphia and Marcus Hook
refineries by pipeline, barge, truck and rail. An interrefinery pipeline
leased from Sunoco Logistics Partners L.P., Sunoco's 75.2 percent owned master
limited partnership, enables the transfer of unfinished stocks, including
butanes, naphtha, distillate blendstocks and gasoline blendstocks. Finished
products are delivered to customers via the pipeline and terminal network
owned and operated by Sunoco Logistics Partners L.P. and by third-party
pipelines and barges.
Sunoco entered into an agreement to charter two new innovative VLCCs (Very
Large Crude Carriers) to transport crude oil to its Philadelphia and Marcus
Hook refineries. Construction of the two two-million-barrel-capacity tankers
was completed in 2001 and the tankers were put on three-year charter to Sunoco
at that time. The new VLCCs provide transportation cost savings compared to
existing VLCCs and the smaller, one-million-barrel-capacity tankers also used
to supply the Company's Northeast refineries.
During the fourth quarter of 1999, Refining and Supply entered into an
agreement with a subsidiary of FPL Energy ("FPL") to purchase steam from a
725-megawatt, natural gas fired cogeneration power plant currently being
constructed and to be owned and operated by FPL at Sunoco's Marcus Hook
refinery. Steam supplied by the power plant will reduce the refinery's steam
supply costs. Construction commenced on this facility in 2001 and is expected
to be completed in 2004.
During 2000, Sunoco announced its intention to sell its Value Added and
Eastern Lubricants operations. In connection with this decision, Sunoco sold
its lubricants marketing assets in March 2001, closed its lubricants blend
plants in Marcus Hook, PA, Tulsa, OK and Richmond, CA in July 2001 and sold
the Puerto Rico refinery in December 2001, which concluded the lubricants
restructuring plan. Sales of lubricants and other refined products
attributable to the Value Added and Eastern Lubricants operations totalled
17.1, 30.8 and 34.0 thousands of barrels daily during 2001, 2000 and 1999,
respectively. For a discussion of the financial impact of these actions, see
Note 3 to the consolidated financial statements in the Company's 2001 Annual
Report to Shareholders.
Retail Marketing
The Retail Marketing business consists of the retail sale of gasoline and
middle distillates and the operation of convenience stores in 21 states on the
East Coast and in the Midwest region of the United States. The highest
concentration of outlets is located in Massachusetts, Rhode Island,
Connecticut, New York, New Jersey, Pennsylvania, Florida, Ohio and Michigan.
5
The following table sets forth Sunoco's retail gasoline outlets at December
31, 2001, 2000 and 1999:
2001 2000 1999
----- ----- -----
Direct Outlets:
Company Owned or Leased:
Company-Operated:
Traditional............................................. 203 167 166
Convenience Stores...................................... 421 300 270
----- ----- -----
624 467 436
----- ----- -----
Dealer-Operated:
Traditional............................................. 354 357 388
Convenience Stores...................................... 230 235 244
Ultra Service CentersSM................................. 225 228 241
----- ----- -----
809 820 873
----- ----- -----
Total Company Owned or Leased*............................ 1,433 1,287 1,309
Dealer Owned**............................................ 686 550 532
----- ----- -----
Total Direct Outlets....................................... 2,119 1,837 1,841
Distributor Outlets........................................ 2,032 1,798 1,697
----- ----- -----
4,151 3,635 3,538
===== ===== =====
- --------
* Gasoline throughput per Company owned or leased outlet averaged 108.2,
109.8 and 108.5 thousands of gallons monthly during 2001, 2000 and 1999,
respectively.
** Primarily traditional outlets.
Retail Marketing's portfolio of outlets is designed to provide optimal
profit potential in each of its marketing areas. Sites differ in various ways
including: product distribution to the outlets; site ownership and operation;
and types of products and services provided.
Direct outlets are sites at which fuel products are delivered directly to
the site by Sunoco's 128 trucks or by its contract carriers. The Company or an
independent dealer owns or leases the property. These sites may be traditional
locations that sell almost exclusively fuel products or may include APlus(R)
convenience stores or Ultra Service CentersSM that provide automotive
diagnosis and repair. Included among Retail Marketing's outlets at December
31, 2001 were 71 outlets on limited access highways in Pennsylvania, New
Jersey, New York, Ohio and Maryland. Of these outlets, 54 were company-
operated sites providing gasoline, diesel fuel and convenience store
merchandise.
Distributor outlets are sites in which the distributor takes delivery at a
terminal where branded products are available. Sunoco does not own, lease or
operate these locations.
During February and July 2001, Sunoco completed acquisitions of a total of
473 retail gasoline outlets and related working capital from The Coastal
Corporation for $59 million. The acquisitions consisted of 166 company-owned
or leased outlets, 150 dealer-owned traditional outlets and 157 distributor-
owned or supplied outlets. The outlets are located in 15 eastern states with
the largest concentration in Pennsylvania, New Jersey, Virginia, Tennessee and
Florida. The acquisitions are part of the Company's strategy to grow and
diversify its retail presence.
Retail Marketing typically offers four grades of gasoline at its retail
locations, consisting of Ultra(R) 94, the highest octane premium gasoline
commercially available in the United States, and 93, 89 and 87 octanes. Retail
Marketing also offers an 86 octane at its outlets in the Midwest. Branded
fuels sales (including middle distillates) averaged 279.1 thousand barrels
daily in 2001 compared to 257.0 thousand barrels daily in 2000 and 245.5
thousand barrels daily in 1999. The increase in branded fuels sales during
2001 was largely due to the acquisition of retail sites from The Coastal
Corporation.
6
Retail Marketing is one of the largest providers of home heating products
in the eastern United States. In 2001, the Company sold 77 million gallons of
these products to approximately 150 thousand households. Sunoco is also the
largest manufacturer and marketer of high performance (racing) gasoline in the
United States with approximately 11 million gallons sold during 2001.
Sunoco's APlus(R) convenience stores are located principally in
Pennsylvania, New York, Massachusetts, Ohio, Michigan and Florida. These
stores supplement sales of fuel products with a broad mix of high-margin
merchandise such as groceries, fast foods and beverages. The following table
sets forth information concerning Sunoco's convenience store locations:
2001 2000 1999
----- ----- -----
Number of Stores (at December 31).......................... 652 541 519
Merchandise Sales (Thousands of Dollars/Store/Month)....... $64.3 $62.0 $58.3
Merchandise Margin (Company Operated) (% of Sales)......... 25.5% 26.3% 26.4%
The increase in the number of stores during 2001 is due to the 110 outlets
added in connection with the Coastal acquisition. The Company intends to
continue to grow its convenience store business through acquisitions, new site
construction and redesign of traditional gasoline outlets in an effort to
reduce its dependence on gasoline margins.
In the fourth quarter of 2000, Sunoco entered into an agreement with Wal-
Mart Stores, Inc. which will enable Sunoco to build and operate retail
gasoline outlets at selected existing and future Wal-Mart locations in nine
eastern states. During 2001, Sunoco built 13 of these facilities and expects
to build approximately 50 additional sites during 2002 at an estimated cost of
$40 million and add up to 100 sites per year in subsequent years. In addition
to gasoline, these outlets offer customers a limited selection of convenience
store merchandise. This agreement will enable Sunoco to market significantly
more of its own gasoline production directly to the consumer and to take
further advantage of its existing logistics infrastructure in the region.
Chemicals
The Chemicals business comprises the manufacturing, distribution and
marketing of commodity and intermediate petrochemicals. The Chemicals business
manufactures polypropylene, aromatic derivatives (cumene, phenol, acetone,
bisphenol-A and aniline) and plasticizers and their derivatives (phthalic
anhydride, 2-ethylhexanol and phthalate plasticizers). The Chemicals business
also produces polymer-grade propylene and polypropylene at its Epsilon joint
venture and MTBE at its Belvieu Environmental Fuels joint venture.
Petrochemicals are manufactured by the Chemicals business at facilities
throughout the United States. Cumene is produced at the Philadelphia refinery;
phenol and acetone are produced at facilities in Philadelphia, PA and
Haverhill, OH; polypropylene is produced at facilities in LaPorte, TX and
Neal, WV; and plasticizers and related feedstocks are produced at facilities
in Neville Island, PA and Pasadena, TX. The Epsilon Products Company, LLC
polypropylene joint venture is located in Marcus Hook, PA and the Belvieu
Environmental Fuels MTBE joint venture is located in Mont Belvieu, TX. (See
"Refining and Supply" for a discussion of the commodity petrochemicals
produced at the Marcus Hook, Philadelphia and Toledo refineries.)
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 in debt. The purchase price included $107 million for working
capital. Contingent payments with a net present value as of the acquisition
date of up to $167 million (the "earn out") may also be made if realized
margins for polypropylene and phenol exceed certain agreed upon thresholds
through 2006. In connection with the transaction, Sunoco also entered into a
7
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 connection with the margin hedge agreement, Sunoco
received $19.5 million from Mitsubishi in 2001 related to Aristech's
operations for the first nine months and will receive an additional $6.5
million in the first quarter of 2002 related to the fourth quarter's
operations. These payments are being reflected as reductions in the purchase
price when received. 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. 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 have the capacity to
produce annually 1.5 billion pounds of polypropylene, over 1.8 billion pounds
of phenol and related derivatives (including bisphenol-A), and 800 million
pounds of plasticizers and related feedstocks. The acquisition has been fully
integrated with the Chemicals business' existing chemical operations.
Effective June 15, 2000, Chemicals entered into the Epsilon joint venture
which combined its 735 million pounds-per-year polymer-grade propylene
operations at the Marcus Hook refinery with the adjacent polypropylene
business owned by Epsilon Products Company. The polypropylene facility has an
annual production capacity of 750 million pounds. In October 2001, Sunoco
entered into an agreement with the Epsilon joint venture under which Sunoco
assumed responsibility for general administration, sales and support functions
on the joint venture's behalf. The Chemicals business will market the joint
venture's production under the Sunoco name in combination with production from
its LaPorte, TX and Neal, WV polypropylene plants.
Sunoco's Philadelphia phenol facility has the capacity to produce annually
more than one billion pounds of phenol and 700 million pounds of acetone.
Under a long-term contract, the Chemicals business supplies Honeywell
International Inc. ("Honeywell") with approximately 740 million pounds of
phenol annually at a price based on the market value of cumene feedstock plus
an amount approximating other phenol production costs.
The following table sets forth information concerning petrochemicals
production by the Chemicals business (in millions of pounds):
Production*
Capacity at -----------------
December 31, 2001* 2001 2000 1999
------------------ ----- ----- -----
Phenol.................................. 2,050 1,534 1,067 1,027
Acetone................................. 1,275 952 661 633
Bisphenol-A............................. 215 182 -- --
Other Phenol Derivatives................ 290 204 69 63
Cumene.................................. 1,215 1,026 1,150 1,006
Polypropylene........................... 1,500 1,345 -- --
Plasticizers and Related Feedstocks..... 755 650 -- --
----- ----- ----- -----
Total Production...................... 7,300 5,893 2,947 2,729
=====
Less: Production Used as Feedstocks**... 1,501 1,150 1,006
----- ----- -----
Total Production Available for Sale... 4,392 1,797 1,723
===== ===== =====
- --------
* Excludes joint venture operations.
** Consists of cumene (used in the manufacture of phenol and acetone), phenol
and acetone (used in the manufacture of bisphenol-A and aniline), and
plasticizer feedstocks phthalic anhydride and 2-ethylhexanol (used in the
manufacture of plasticizers).
8
Petrochemical products produced by the Chemicals business are distributed
and sold on a worldwide basis with most of the sales made to customers in the
United States. The following table sets forth the sale of petrochemicals to
third parties by Chemicals (in millions of pounds):
2001 2000 1999
----- ----- -----
Phenol and Related Products (including Bisphenol-A)....... 2,605 1,771 1,744
Polypropylene............................................. 1,384 -- --
Plasticizers and Related Feedstocks....................... 532 -- --
Propylene................................................. 715 761 747
Other..................................................... 175 297 289
----- ----- -----
5,411 2,829 2,780
===== ===== =====
The tables above reflect only volumes manufactured and sold directly by the
Chemicals business. Chemicals also manages the third-party chemicals sales for
Refining and Supply, the joint venture with Suncor Energy and the Epsilon
joint venture bringing the total petrochemicals sold under the Sunoco(R) name
to approximately 7.6 billion pounds in 2001.
Sales made by the Chemicals business during 2001 were distributed through
the following channels:
. Phenol and Related Products--Long-term phenol contract sales to Honeywell
are used in nylon production. Other phenol contract sales are to large
manufacturers of resins and adhesives primarily for use in building
products. Large contract sales of acetone are to major customers who
manufacture polymers. Other sales of acetone are made to individually
smaller customers for use in inks, paints, varnishes and adhesives.
Bisphenol-A, manufactured from phenol and acetone, is sold to
manufacturers of epoxy resins and polycarbonates;
. Polypropylene--Sales are made to a diverse group of customers for use in
fibers, carpeting, packaging, automotive, furniture and other end
products;
. Refinery-grade Propylene--Refinery-grade propylene is sold to the Epsilon
joint venture for its use in the production of polypropylene; and
. Plasticizers and Precursors--Phthalic anhydride and 2-ethylhexanol are
sold to third-party customers in addition to their use by Chemicals in
the production of plasticizers. Phthalic anhydride customers manufacture
plasticizers, unsaturated polyester resins and coatings. 2-ethylhexanol
is supplied to producers of plasticizers, fuel and lubricating oil
additives, and surfactants, with significant volumes exported.
Plasticizers are consumed by medium and small customers making PVC
plastics, packaging, wire and cable coatings, and a number of specialty
polymers.
The Belvieu Environmental Fuels joint venture sells MTBE to Refining and
Supply for use in manufacturing reformulated gasoline. (See "Environmental
Matters" below.)
Logistics
The Logistics business operates refined product and crude oil pipelines and
engages in refined product and crude oil terminalling operations and crude oil
acquisition and marketing activities. These operations are conducted primarily
in the Northeast, Midwest and South Central regions of the United States.
In February 2002, the Company contributed a substantial portion of its
logistics business to Sunoco Logistics Partners L.P., its recently formed
master limited partnership (the "Partnership"), in exchange for a 73.2 percent
limited partner interest and a 2 percent general partner interest in the
9
Partnership, and a $245 million special distribution, representing the
estimated net proceeds from the Partnership's sale of ten-year senior notes.
The Partnership concurrently issued 5.75 million limited partnership units,
representing a 24.8 percent interest in the Partnership, in an initial public
offering at a price of $20.25 per unit. Net proceeds from this offering
totalled an estimated $102 million. Concurrent with the offering, Sunoco
entered into various agreements with the Partnership which require Sunoco to
pay for minimum storage and throughput usage of certain Partnership assets.
These agreements also establish fees for administrative services provided by
Sunoco to the Partnership and indemnifications by Sunoco for certain
environmental, toxic tort and other liabilities.
Pipeline operations are conducted through the Logistics business' pipelines
and through other pipelines in which Sunoco has an ownership interest. The
pipelines are principally common carriers and, as such, are regulated by the
Federal Energy Regulatory Commission for interstate movements and by state
regulatory agencies for intrastate movements. The tariff rates charged, while
regulated by the governing agencies, are based upon competition from other
pipelines or alternate modes of transportation.
The Logistics business' refined product pipeline operations, located
primarily in the Northeast and Midwest, transport gasoline, jet fuel, diesel
fuel, home heating oil and other products for Sunoco's other businesses and
for third-party integrated petroleum companies, independent marketers and
distributors. The crude oil pipeline operations, located primarily in the
South Central United States, transport foreign crude oil received at its
Nederland, TX, terminal and crude oil produced in Oklahoma, Texas, New Mexico
and Louisiana to refiners (including Sunoco's Tulsa and Toledo refineries) or
to local trade points.
At December 31, 2001, the Logistics business had an equity interest in
5,388 miles of crude oil pipelines and 4,680 miles of refined product
pipelines. In 2001, crude oil and refined product shipments, including
Sunoco's proportionate share of shipments in pipelines in which it had an
ownership interest, totalled 52.2 and 31.3 billion barrel miles, respectively,
as compared to 54.0 and 30.2 billion barrel miles in 2000 and 49.4 and 32.0
billion barrel miles in 1999.
Product terminalling operations include 35 terminals in the Northeast and
Midwest that receive refined products from pipelines and distribute them
primarily to Sunoco and also to third parties, who in turn deliver them to
end-users such as retail outlets. Terminalling operations also include an LPG
terminal near Detroit, Michigan and three crude oil terminals adjacent to
Sunoco's Philadelphia refinery.
Sunoco's Nederland, TX, terminal provides approximately 11.2 million
barrels of storage and provides terminalling throughput capacity exceeding one
million barrels per day. Its Gulf Coast location provides local and midwestern
refiners access to foreign and offshore domestic crude oil. The facility is
also a key link in the distribution system for United States government
purchases for and sales from the Strategic Petroleum Reserve storage
facilities.
The Fort Mifflin Terminal Complex, located on the Delaware River in
Philadelphia, supplies Refining and Supply's Philadelphia refinery with all of
its crude oil. The terminal complex is comprised of the Fort Mifflin Terminal,
the Hog Island Wharf, the Darby Creek Tank Farm and connecting pipelines.
The Logistics business' crude oil pipeline operations in the South Central
United States are complemented by crude oil acquisition and marketing
operations. Approximately 176 thousand barrels daily of crude oil were
purchased from third-party leases during 2001. This crude oil is delivered to
various pipelines either directly from the wellhead or utilizing the Logistics
business' fleet of 144 trucks.
10
Coke
Sun Coke Company's business consists of blast-furnace coke manufacturing at
the Company's facilities in East Chicago, IN, and Vansant, VA, and
metallurgical coal production from mines in Virginia. Such operations are
conducted by Sun Coke Company and its affiliates.
The Sun Coke business produces high-quality coke at its 1.3 million ton-
per-year Indiana Harbor cokemaking operation in East Chicago, IN, and at its
700 thousand ton-per-year Jewell cokemaking operation in Vansant, VA. These
facilities use a proprietary low-cost, heat-recovery cokemaking technology,
which is environmentally superior to the chemical by-product recovery
technology currently used by other coke producers.
In 2000, Sun Coke 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 the Jewell and Indiana Harbor cokemaking operations are currently
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 following table sets forth information concerning the cokemaking and
coal mining operations:
2001 2000 1999
----- ----- -----
Production (Thousands of Tons):
Coke..................................................... 2,006 2,010 1,910
===== ===== =====
Coal:
Metallurgical (Jewell).................................. 1,027 810 850
Steam (Shamrock)*....................................... -- -- 204
----- ----- -----
1,027 810 1,054
===== ===== =====
Proven and Probable Metallurgical Coal Reserves
at December 31 (Millions of Tons)........................ 110 111 112
===== ===== =====
- --------
* In February 1999, the Shamrock steam coal mining operation located in
Kentucky was divested. With this divestment, steam coal mining activities
ceased.
In 2001, 76 percent of Sun Coke's metallurgical coal production was
converted into coke at the Jewell cokemaking facility and 24 percent was sold
in spot market transactions. This is consistent with the Company's strategy of
using its metallurgical coal production principally in its Jewell cokemaking
operation. All of the metallurgical coal used to produce coke at Indiana
Harbor is purchased generally under one-year contracts from third parties. The
Company believes there is an ample supply of metallurgical coal available to
meet worldwide needs, and Sun Coke has been able to supply its Indiana Harbor
facility without disruption.
Production from the Indiana Harbor cokemaking facility is sold to Ispat
Inland Inc. ("Ispat") for use at Ispat's Indiana Harbor Works steel plant
located adjacent to the Indiana Harbor facility. A supply agreement requires
Sun Coke to provide Ispat 1.2 million tons of coke annually on a take-or-pay
basis through 2013. Additional production of up to 150,000 tons per year will
be sold either to Ispat or to other steel producers. Sun Coke is also required
to supply all of the flue gas by-product produced at the cokemaking facility
to a third-party utility for the generation of steam and electricity. In
return, the utility reduces the sulfur and particulate content of the flue gas
to acceptable emission levels.
11
During 2001, all of Indiana Harbor's coke sales were made to Ispat while 96
percent of Jewell's coke sales were made under a long-term contract which
provides for delivery of nearly all of this facility's coke production to
National Steel Corporation ("National") through April 1, 2005. Long-term sales
contracts contain cost pass through or escalating fixed price provisions. Both
Ispat and National have credit ratings below investment-grade. Competition
from foreign steelmakers and an economic slowdown have had a particularly
adverse impact on the U.S. steel industry. As a result, a number of other
steel companies have recently filed for bankruptcy protection. In response to
these events, the U.S. International Trade Commission recently issued a report
indicating that the U.S. steel industry has been harmed by foreign steel
imports. Therefore, the U.S. government is providing economic relief for the
industry, including tariffs and limitations on foreign imports.
In late February 2002, National failed to make a required payment to Sun
Coke for its January shipments and further shipments to National were
suspended. National subsequently filed for Chapter 11 bankruptcy protection in
early March 2002. Amounts due from National, which relate to sales during
2002, total $6 million. If National does not fulfill its contractual
commitments to Sun Coke, the selling price of coke is expected to be
significantly lower than National's current contract price. Sun Coke has
committed that, until the third-party preferential return period ends, it will
use best efforts to operate the Jewell plant at capacity and sell the Jewell
production to third parties. Management believes that there is sufficient
demand to sell this production for the remainder of 2002 and that lower
selling prices could adversely impact Sun Coke's 2002 income by approximately
$5-$10 million. In addition, the preferential return period of the third-party
investor at Jewell could be extended beyond 2007.
Ispat has given no indication that it will not perform under its contract.
However, in the event of its nonperformance, Sun Coke's results of operations
and cash flows may be adversely affected and the period during which the
third-party investor at Indiana Harbor is entitled to preferential returns
could be extended.
Sunoco intends to continue to grow its cokemaking business both in the
United States and internationally so that it can capitalize on its proprietary
cokemaking technology and realize additional earnings diversification and
growth.
Competition
The refining and marketing business is very competitive. Sunoco competes
with other domestic refiners and marketers in the northeastern United States
and U.S. Gulf Coast, with foreign refiners who import products into the United
States and with producers and marketers in other industries supplying other
forms of energy and fuels to consumers. While the number of Sunoco's
competitors has decreased due to consolidation in the refining and marketing
industry, the competitiveness in the marketplace has not declined.
Profitability in the refining and marketing industry depends largely on
refined product margins, as well as operating efficiency, product mix, and
costs of product distribution and transportation. Certain of Sunoco's
competitors that have larger and more complex refineries may be able to
realize lower per barrel costs or higher margins per barrel of throughput.
Several of Sunoco's principal competitors are integrated national or
international oil companies that are larger and have substantially greater
resources than Sunoco. Because of their integrated operations and larger
capitalization, these companies may be more flexible in responding to volatile
industry or market conditions, such as shortages of feedstocks or intense
price fluctuations. Refining margins are frequently impacted by sharp changes
in crude oil costs, which are not immediately reflected in product prices.
The refining industry is highly competitive with respect to feedstock
supply. Unlike certain of its competitors that have access to proprietary
sources of controlled crude oil production, Sunoco must
12
obtain all of its feedstocks from unaffiliated sources. Most of the crude oils
processed in Sunoco's refining system are light sweet crude oils. However,
management believes that any potential competitive impact of Sunoco's
inability to process significant quantities of less expensive heavy sour crude
oils will likely be mitigated by: the higher-value product slate obtained from
light sweet crude oils; the higher cost to process heavy sour crude oils; and
the continued availability of ample quantities of light sweet crude oils.
Sunoco also faces strong competition in the market for the sale of retail
gasoline and merchandise. Sunoco's competitors include service stations of
large integrated gasoline companies, independent gasoline service stations,
convenience stores, fast food stores, and other similar retail outlets, some
of which are well-recognized national or regional retail systems. This
competition is expected to continue. The principal competitive factors
affecting Sunoco's retail marketing operations include: site location, product
price, selection and quality, appearance and cleanliness, hours of operation,
store safety, customer loyalty and brand recognition.
Sunoco competes by pricing gasoline competitively, combining its retail
gasoline business with convenience stores which provide a wide variety of
branded products, and using effective advertising and promotional campaigns.
Sunoco believes that it is in a position to compete effectively as a marketer
of refined products because of the location of its Northeast and Midwest
refineries and retail network which are well integrated with the distribution
system owned by Sunoco Logistics Partners L.P. (the "Partnership"), the
Company's 75.2 percent owned master limited partnership.
Sunoco's chemical business is largely a commodities business and competes
with local, regional, national and international companies, some of which have
greater financial, research and development, production and other resources
than Sunoco. Although competitive factors may vary among product lines, in
general, Sunoco's competitive position is primarily based on raw material
costs, selling prices, product quality, manufacturing technology, access to
new markets, proximity to the market and customer service and support.
Sunoco's competitors can be expected in the future to improve technologies,
expand capacity, and, in certain product lines, develop and introduce new
products. While there can be no assurances of its ability to do so, Sunoco
believes that it will have sufficient resources to maintain its current
position. Sunoco faces similarly strong competition in the sale of base oil
lubricant products.
Logistics operations are very competitive. Generally, pipelines are the
lowest cost method for long-haul, overland movement of refined products.
Therefore, the most significant competitors for large volume shipments in the
areas served by the Partnership's pipelines are other pipelines. However, high
capital requirements, environmental considerations and the difficulty in
acquiring rights-of-way and related permits make it difficult for other
companies to build competing pipelines in areas served by the Partnership's
pipelines. As a result, competing pipelines are likely to be built only in
those cases in which strong market demand and attractive tariff rates support
additional capacity in an area. In addition, pipeline operations face
competition from trucks that deliver product in a number of areas that the
Partnership's pipeline operations serve. While their costs may not be
competitive for longer hauls or large volume shipments, trucks compete
effectively for incremental and marginal volumes in many areas served by the
Partnership's pipelines.
Cokemaking operations are also highly competitive. Sunoco's cokemaking
business' current production is largely committed under long-term contracts;
therefore, competition mainly impacts its ability to obtain new contracts
supporting development of additional production capacity, both in the U.S. and
internationally. The principal competitive factors affecting Sunoco's
cokemaking business include coke quality and price, technology, reliability of
supply, proximity to market, access to metallurgical coal, and environmental
performance. Competitors include conventional chemical by-product coke oven
engineering and construction companies, other merchant coke producers and
engineering companies that are attempting to develop non-recovery cokemaking
technology. Much of
13
the world's coke production capacity is currently owned by integrated steel
companies, utilizing conventional chemical by-product coke oven technology.
International merchant coke trade is increasingly controlled by Chinese
producers. However, Chinese exports historically have been produced primarily
in lower-cost, but highly polluting beehive coke ovens that produce coke of
varying quality. The Chinese government has instituted a policy to shut down
those ovens. Sunoco believes it is well-positioned to compete with other coke
producers since its proven proprietary technology allows Sunoco to construct
coke ovens that, when compared to other proven technologies, are more
environmentally benign, produce consistently higher quality coke, are
substantially less costly to build, and require significantly fewer workers.
Research and Development
Sunoco's research and development activities are currently focused on
applied research, process and product development, and engineering and
technical services related to chemicals. Sunoco spent $13 million on research
and development activities in 2001 and $4 million in each of the years 2000
and 1999. As of December 31, 2001, approximately 90 scientists, engineers,
technicians and support personnel participated in these activities. Sunoco
owns or has made application for numerous patents in the U.S.
Employees
As of December 31, 2001, Sunoco had approximately 14,200 employees compared
to approximately 12,300 employees as of December 31, 2000. The increase in
2001 is primarily attributable to the acquisition of Aristech Chemical
Corporation and the purchase of retail gasoline sites from The Coastal
Corporation. Approximately 7,000 of Sunoco's employees as of December 31, 2001
are employed in company-operated convenience stores and service stations and
the Company's home heating products business. Approximately 21 percent of
Sunoco's employees were covered by 48 collective bargaining agreements as of
December 31, 2001. The collective bargaining agreements have various terms and
dates of expiration. In management's opinion, Sunoco has a good relationship
with its employees.
Environmental Matters
Sunoco is subject to numerous federal, state and local laws and regulations
which regulate the discharge of materials into the environment or that
otherwise relate to the protection of the environment. As with the industry
generally, compliance with existing and anticipated laws and regulations
increases the overall cost of business, including capital costs to construct,
maintain and upgrade equipment and facilities. These laws and regulations have
required, and are expected to continue to require, Sunoco to make significant
expenditures of both a capital and expense nature. The following table
summarizes Sunoco's expenditures for environmental projects and compliance
activities (in millions of dollars):
2001 2000 1999
---- ---- ----
Pollution abatement capital*................................. $ 45 $ 52 $ 33
Remediation.................................................. 41 40 35
Operations, maintenance and administration................... 158 156 155
---- ---- ----
$244 $248 $223
==== ==== ====
- --------
* Capital expenditures for pollution abatement are expected to approximate $55
and $115 million in 2002 and 2003, respectively.
In December 1999, the U.S. Environmental Protection Agency ("EPA") adopted
a rule under the Clean Air Act which phases in limitations on the sulfur
content of gasoline beginning in 2004 and, in
14
January 2001, adopted another rule which will require limitations on the
allowable sulfur content of diesel fuel beginning in 2006. 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 2002-2006 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 and diesel requirements will be in the range of $300-$400
million. The ultimate impact of the rules may be affected by such factors as
technology selection, the effectiveness of the banking and trading credit
systems, production mix, 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 the
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 four
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.
Sunoco has received notices of violation from the EPA relating to its Marcus
Hook, Philadelphia and Toledo refineries. Sunoco is currently evaluating its
position. 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, operate these refineries at reduced levels
and pay significant penalties.
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, including bans, restrictions on
use or opting out of the EPA's reformulated fuels program. 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
December 31, 2001, the Company had a $54 million investment in this operation.
The joint venture is currently evaluating alternative uses for this facility
in the event MTBE is banned.
15
During 2001, the EPA issued its final rule addressing emissions of toxic
air pollutants from mobile sources (the Mobile Source Air Toxics ("MSAT")
Rule). The rule is currently being challenged by certain environmental
organizations and a number of states, and by a member of the petroleum
industry. It requires refiners to produce gasoline which maintains their
average 1998-2000 gasoline toxic emission performance level. If the rule
survives the challenges and if MTBE is banned, it could result in additional
expenditures or reductions in reformulated gasoline production levels.
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 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 product liability 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 the three 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 other two New
York cases are ongoing.
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 obligations 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 December 31, 2001, Sunoco had been named as
a PRP at 46 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.
Sunoco establishes accruals related to environmental remediation activities
for work at identified sites where an assessment has indicated that cleanup
costs are probable and reasonably estimable. For a discussion of the accrued
liabilities and charges against income related to these activities, see Note
14 to the consolidated financial statements in the Company's 2001 Annual
Report to Shareholders.
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.
16
Management believes that the environmental matters discussed above are
potentially significant with respect to results of operations or cash flows
for any one year. However, management does not believe that such matters will
have a material impact on Sunoco's consolidated financial position or, over an
extended period of time, on Sunoco's cash flows or liquidity.
ITEM 3. LEGAL PROCEEDINGS
An agreement has been reached between Aristech Chemical Corporation, a
subsidiary of the Company, and the United States Environmental Protection
Agency ("EPA") to settle alleged violations of certain Clean Air Act
Regulations at Aristech's Haverhill, Ohio facility. This agreement requires
Aristech to pay a civil penalty of $450,000.
In early 2002, an agreement was reached with the Pennsylvania Department of
Environmental Protection to settle alleged violations of Pennsylvania permit
conditions and air regulations at Sunoco's Marcus Hook refinery. Under this
agreement, Sunoco will pay a civil penalty of $28,000, as well as undertake
certain environmental projects.
With respect to a pipeline release of crude oil in February 2000 in the
John Heinz National Wildlife Refuge in Philadelphia, the Company has conducted
remedial activities at the release area and has initiated restoration efforts
in the area. The Company expects the EPA to assess a penalty with respect to
the release which could exceed $100,000.
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 December 31, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of Sunoco, Inc.
Name, Age and Present
Position with Sunoco,
Inc. Business Experience During Past Five Years
--------------------- ------------------------------------------
Michael H.R. Dingus, 53 Mr. Dingus was elected Senior Vice President, Sunoco, Inc.
Senior Vice President, in January 2002. He was elected a Vice President of Sunoco,
Sunoco, Inc., and Inc. in May 1999 and President, Sun Coke Company in June
President, Sun Coke 1996.
Company
John G. Drosdick, 58 Mr. Drosdick was elected Chairman of the Board and Chief
Chairman of the Board, Executive Officer in May 2000. He was elected a Director and
Chief Executive President and Chief Operating Officer in December 1996.
Officer
and President
Bruce G. Fischer, 46 Mr. Fischer was elected to his present position in January
Senior Vice President, 2002. He was Vice President, Sunoco Chemicals from November
Sunoco Chemicals 2000 to January 2002, Vice President and General Manager,
Sunoco MidAmerica Marketing and Refining from January 1999
to November 2000 and General Manager, Sunoco MidAmerica
Marketing & Refining from June 1995 to January 1999.
17
Name, Age and Present
Position with Sunoco,
Inc. Business Experience During Past Five Years
--------------------- ------------------------------------------
Deborah M. Fretz, 53 Ms. Fretz was elected President and Chief Executive Officer,
President and Chief Sunoco Logistics Partners L.P., the Company's 75.2 percent
Executive Officer, owned master limited partnership, in October 2001. She was
Sunoco Logistics Senior Vice President, MidContinent Refining, Marketing and
Partners L.P., Former Logistics of Sunoco, Inc. from November 2000 to February
Senior Vice President, 2002. From August 1994 to November 2000, she was Senior Vice
Sunoco, Inc. President, Logistics of Sunoco, Inc. and from January 1997
to November 2000 also held the position of Senior Vice
President, Lubricants of Sunoco, Inc.
Thomas W. Hofmann, 50 Mr. Hofmann was elected to his present position in January
Senior Vice President 2002. He was Vice President and Chief Financial Officer from
and Chief Financial July 1998 to January 2002. From July 1995 to July 1998, he
Officer served as Comptroller.
Joseph P. Krott, 38 Mr. Krott was elected to his present position in July 1998.
Comptroller From September 1997 to July 1998, he served as Director of
Compensation, Benefits & HR Systems and from July 1996 to
September 1997 as Manager, Compensation & HR Systems.
Michael S. Kuritzkes, 41 Mr. Kuritzkes was elected to his present position in May
Vice President and 2000. From August 1997 to May 2000, he served as General
General Counsel Attorney. He was Vice President and General Counsel of
Ultramar, Inc., a subsidiary of Ultramar Corporation, from
1993 to 1997.
Joel H. Maness, 51 Mr. Maness was elected to his present position in September
Senior Vice President, 2001. He was Senior Vice President, Sunoco Northeast
Refining and Supply Refining from May 2000 to September 2001. He was President
of Mobil de Venezuela, a subsidiary of Mobil Corporation,
from 1997 to 2000 and General Manager of Supply and Trading
for Mobil from 1996 to 1997.
Paul A. Mulholland, 49 Mr. Mulholland was elected to his present position in April
Treasurer 2000. From May 1996 to April 2000, he served as Assistant
Treasurer.
Rolf D. Naku, 51 Mr. Naku was elected to his present position in May 2000.
Vice President, Human From July 1998 to May 2000, he served as Director of
Resources and Public Compensation, Benefits & HR Systems. He was a Human
Affairs Resources Consultant for Catalyst Consulting Group from 1997
to 1998 and Vice President of Human Resources for Ultramar
Corporation from 1995 to 1997.
Robert W. Owens, 48 Mr. Owens was elected to his present position in September
Senior Vice President, 2001. He was Senior Vice President, Sunoco Northeast
Marketing Marketing from May 2000 to September 2001 and Vice President
and General Manager, Sunoco Northeast Marketing from
February 1997 to May 2000. He was Vice President, Marketing
and Services of Ultramar Diamond Shamrock Corporation from
1996 to 1997.
Charles K. Valutas, 51 Mr. Valutas was elected to his present position in May 2000.
Senior Vice President He was Vice President, Sunoco Chemicals from August 1994 to
and Chief May 2000.
Administrative Officer
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference
to the Quarterly Financial and Stock Market Information on page 49 of the
Company's 2001 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference
to the Selected Financial Data on page 8 of the Company's 2001 Annual Report
to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference
to pages 9-25 in the Company's 2001 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by this Item is incorporated herein by reference
to Derivative Instruments on pages 23-24 in the Company's 2001 Annual Report
to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information in the Company's 2001 Annual Report to
Shareholders is incorporated herein by reference: the Consolidated Financial
Statements on pages 26-29; the Notes to Consolidated Financial Statements on
pages 30-46; the Report of Independent Auditors on page 47; and the Quarterly
Financial and Stock Market Information on page 49.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on directors required by Items 401 and 405 of Regulation S-
K is incorporated herein by reference to the Company's definitive Proxy
Statement ("Proxy Statement") which will be filed with the Securities and
Exchange Commission ("SEC") within 120 days after December 31, 2001.
Information concerning the Company's executive officers appears in Part I
of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated
herein by reference to the Company's Proxy Statement which will be filed with
the SEC within 120 days after December 31, 2001, except that the Report of the
Compensation Committee and the Stock Performance Graph contained in the Proxy
Statement are specifically excluded from incorporation by reference herein.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated
herein by reference to the Company's Proxy Statement which will be filed with
the SEC within 120 days after December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated
herein by reference to the Company's Proxy Statement which will be filed with
the SEC within 120 days after December 31, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements:
The information appearing in the Company's 2001 Annual Report to
Shareholders as described in Item 8 is incorporated herein by
reference.
2. Financial Statement Schedules:
Schedule II--Valuation Accounts is included on page 24 of this Form
10-K. Other schedules are omitted because the required information is
shown elsewhere in this report, is not necessary or is not applicable.
3. Exhibits:
3.(i) --Articles of Incorporation of Sunoco, Inc., as amended and
restated effective as of November 6, 1998 (incorporated by
reference to Exhibit 3.(i) of the Company's 1998 Form 10-K filed
March 5, 1999, File No. 1-6841).
3.(ii) --Sunoco, Inc. Bylaws, as amended and restated effective as of
March 7, 2002.
4.1 --Instruments defining the rights of security holders of long-term
debt of the Company and its subsidiaries are not being filed
since the total amount of securities authorized under each such
instrument does not exceed 10 percent of the total assets of the
Company and its subsidiaries on a consolidated basis. The Company
will provide the SEC a copy of any instruments defining the
rights of holders of long-term debt of the Company and its
subsidiaries upon request.
4.2 --Fourth Amendment, dated as of September 6, 2001, to Rights
Agreement between Sunoco, Inc. and First Chicago Trust Company of
New York (predecessor to EquiServe Trust Company, N.A.)
(incorporated by reference to Exhibit 4.6 of the Company's Form
8-A/A filed October 5, 2001, File No. 1-6841).
4.3 --Third Amendment, dated as of July 6, 2001, to Rights Agreement
between Sunoco, Inc. and First Chicago Trust Company of New York
(predecessor to EquiServe Trust Company, N.A.) (incorporated by
reference to Exhibit 4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001 filed on August
8, 2001, File No. 1-6841).
20
4.4 --Second Amendment, dated as of February 3, 2000, to Rights
Agreement between Sunoco, Inc. and First Chicago Trust Company of
New York (predecessor to EquiServe Trust Company, N.A.)
(incorporated by reference to Exhibit 4.4 of the Company's Form
8-A/A filed February 7, 2000, File No. 1-6841).
4.5 --Amendment, dated as of July 3, 1997, to Rights Agreement between
Sunoco, Inc. and First Chicago Trust Company of New York
(predecessor to EquiServe Trust Company, N.A.) (incorporated by
reference to Exhibit 4 of the Company's Current Report on Form 8-
K dated July 8, 1997, File No. 1-6841).
4.6 --Rights Agreement between Sunoco, Inc. and First Chicago Trust
Company of New York (predecessor to EquiServe Trust Company,
N.A.) dated as of February 1, 1996 (incorporated by reference to
Exhibit 99(b) of the Company's Current Report on Form 8-K dated
February 2, 1996, File No. 1-6841).
10.1* --Sunoco, Inc. Long-Term Performance Enhancement Plan, as amended
and restated as of February 6, 2002.
10.2* --Sunoco, Inc. Long-Term Performance Enhancement Plan II, as
amended and restated as of February 6, 2002.
10.3* --Sunoco, Inc. Executive Long-Term Stock Investment Plan, as
amended and restated as of September 6, 2001 (incorporated by
reference to Exhibit 10.3 of the Company's Current Report on Form
8-K dated December 21, 2001, File No. 1-6841).
10.4* --Sunoco, Inc. Directors' Deferred Compensation Plan, as amended
and restated effective as of September 6, 2001 (incorporated by
reference to Exhibit 10.4 of the Company's Current Report on Form
8-K dated December 21, 2001, File No. 1-6841).
10.5* --Sunoco, Inc. Deferred Compensation Plan, as amended and restated
as of September 6, 2001 (incorporated by reference to Exhibit
10.5 of the Company's Current Report on Form 8-K dated December
21, 2001, File No. 1-6841).
10.6* --Sunoco, Inc. Pension Restoration Plan, as amended and restated
effective February 1, 1996 (incorporated by reference to Exhibit
10.5 of the Company's 1995 Form 10-K filed March 7, 1996, File
No. 1-6841) and as amended effective September 1, 1997
(incorporated by reference to Exhibit 10.6 of the Company's 1997
Form 10-K filed March 6, 1998, File No. 1-6841).
10.7* --Sunoco, Inc. Savings Restoration Plan, as amended and restated
as of September 6, 2001 (incorporated by reference to Exhibit
10.6 of the Company's Current Report on Form 8-K dated December
21, 2001, File No. 1-6841).
10.8* --Sunoco, Inc. Executive Incentive Plan, as amended and restated
as of September 6, 2001 (incorporated by reference to Exhibit
10.7 of the Company's Current Report on Form 8-K dated December
21, 2001, File No. 1-6841).
10.9* --Sunoco, Inc. Executive Retirement Plan, as amended and restated
as of September 6, 2001 (incorporated by reference to Exhibit
10.8 of the Company's Current Report on Form 8-K dated December
21, 2001, File No. 1-6841).
10.10* --Sunoco, Inc. Special Executive Severance Plan, as amended and
restated as of September 6, 2001 (incorporated by reference to
Exhibit 10.9 of the Company's Current Report on Form 8-K dated
December 21, 2001, File No. 1-6841).
21
10.11* --Sunoco, Inc. Executive Involuntary Severance Plan, as amended
and restated as of September 6, 2001 (incorporated by reference
to Exhibit 10.10 of the Company's Current Report on Form 8-K
dated December 21, 2001, File No. 1-6841).
10.12* --Sunoco, Inc. Retainer Stock Plan for Outside Directors, as
amended and restated effective as of May 3, 2001 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2001 filed on
August 8, 2001, File No. 1-6841).
10.13* --Amended Schedule to the Form of Indemnification Agreement,
individually entered into between Sunoco, Inc. and various
directors, officers and other key employees of the Company. The
Form of Indemnification Agreement is incorporated by reference to
Exhibit 10.11 of the Company's Current Report on Form 8-K dated
December 21, 2001, File No. 1-6841.
10.14* --Directors' Deferred Compensation and Benefits Trust Agreement,
by and among Sunoco, Inc., Bankers Trust Company and Towers,
Perrin, Forster & Crosby, Inc., dated as of January 11, 1999 and
amended and restated as of September 6, 2001 (incorporated by
reference to Exhibit 10.12 of the Company's Current Report on
Form 8-K dated December 21, 2001, File No. 1-6841).
10.15* --Amended Schedule 2.1 to the Directors' Deferred Compensation and
Benefits Trust Agreement.
10.16* --Deferred Compensation and Benefits Trust Agreement by and among
Sunoco, Inc., Bankers Trust Company and Towers, Perrin, Forster,
& Crosby, Inc., dated as of January 11, 1999 and amended and
restated as of September 6, 2001 (incorporated by reference to
Exhibit 10.13 of the Company's Current Report on Form 8-K dated
December 21, 2001, File No. 1-6841).
10.17* --Amended Schedule 2.1 to the Deferred Compensation and Benefits
Trust Agreement.
12 --Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio
of Earnings to Fixed Charges for the Year Ended December 31,
2001.
13 --Sunoco, Inc. 2001 Annual Report to Shareholders Financial
Section.
21 --Subsidiaries of Sunoco, Inc.
23 --Consent of Ernst & Young LLP.
24.1 --Power of Attorney executed by certain officers and directors of
Sunoco, Inc.
24.2 --Certified copy of the resolution authorizing certain officers to
sign on behalf of Sunoco, Inc.
- --------
* These exhibits constitute the Executive Compensation Plans and Arrangements
of the Company.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on December 21, 2001 to disclose
under Item 5--"Other Events" and Item 7--"Financial Statements and Exhibits"
exhibits amending the Company's bylaws and certain benefit plans. On January
25, 2002, the Company filed another Form 8-K to update under Item 5--"Other
Events" certain disclosures concerning environmental matters that were
contained in the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2001.
Note: Copies of each Exhibit to this Form 10-K are available upon request.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Thomas W. Hofmann
Thomas W. Hofmann
Senior Vice President and Chief Financial Officer
DateMarch 7, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by or on behalf of the following persons on
behalf of the registrant and in the capacities indicated on March 7, 2002:
Raymond E. Cartledge* James G. Kaiser*
Raymond E. Cartledge, Director James G. Kaiser, Director
Robert J. Darnall* Robert D. Kennedy*
Robert J. Darnall, Director Robert D. Kennedy, Director
John G. Drosdick* Joseph P. Krott*
John G. Drosdick, Chairman of the Joseph P. Krott, Comptroller
Board, Chief Executive Officer, (Principal Accounting Officer)
President and Director
(Principal Executive Officer) Richard H. Lenny*
Mary Johnston Evans* Richard H. Lenny, Director
Mary Johnston Evans, Director Norman S. Matthews*
Ursula F. Fairbairn* Norman S. Matthews, Director
Ursula F. Fairbairn, Director R. Anderson Pew*
Thomas P. Gerrity* R. Anderson Pew, Director
Thomas P. Gerrity, Director G. Jackson Ratcliffe*
Rosemarie B. Greco* G. Jackson Ratcliffe, Director
Rosemarie B. Greco, Director Alexander B. Trowbridge*
Thomas W. Hofmann* Alexander B. Trowbridge, Director
Thomas W. Hofmann, Senior Vice
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas W. Hofmann
*By
Thomas W. Hofmann
Individually and as
Attorney-in-Fact
23
SUNOCO, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION ACCOUNTS
For the Years Ended December 31, 2001, 2000, and 1999
(Millions of Dollars)
Additions
-------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
of Period Expenses Accounts Deductions of Period
---------- ---------- -------- ---------- ---------
For the year ended
December 31, 2001:
Deducted from asset in
balance sheet--allowance
for doubtful accounts
and notes receivable.... $ 8 $ 7 $-- $ 8 $ 7
=== === === === ===
For the year ended
December 31, 2000:
Deducted from asset in
balance sheet--allowance
for doubtful accounts
and notes receivable.... $ 9 $ 6 $-- $ 7 $ 8
=== === === === ===
For the year ended
December 31, 1999:
Deducted from asset in
balance sheet--allowance
for doubtful accounts
and notes receivable.... $ 9 $ 4 $-- $ 4 $ 9
=== === === === ===
24