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1996
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, 1996
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
SUN COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-1743282
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TEN PENN CENTER1801 MARKET STREET,
PHILADELPHIA, PA 19103-1699
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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
------------------- -----------------
Depositary Shares, each share representing One- New York Stock Exchange
Half of a Share of Series A Cumulative
Preference Stock, no par value
Common Stock, $1 par value New York Stock Exchange
Philadelphia Stock Exchange
Convertible Subordinated Debentures 6 3/4%, New York Stock Exchange
Due June 15, 2012
Sinking Fund Debentures 9 3/8%, Due June 1, New York Stock Exchange
2016
Notes 7.95%, Due December 15, 2001 New York Stock Exchange
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. [X]
At January 31, 1997, the aggregate market value of voting stock held by
nonaffiliates was $2,407 million.
At January 31, 1997, there were 72,991,478 shares of Common Stock, $1 par
value and 12,460,550 shares of Cumulative Preference Stock--Series A, no par
value, outstanding.
Selected portions of the Sun Company, Inc. Annual Report to Shareholders for
the Fiscal Year Ended December 31, 1996 are incorporated by reference in Parts
I, II and IV of this Form 10-K.
Selected portions of the Sun Company, Inc. definitive Proxy Statement, which
will be filed with the Securities and Exchange Commission within 120 days
after December 31, 1996, 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" below for a discussion
of the factors which could cause actual results to differ materially from
those projected in such statements.
GENERAL
Sun Company, 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, and its telephone number is (215) 977-3000.
The Company, through its subsidiaries, is principally a petroleum refiner
and marketer with interests in coal mining and cokemaking. Sun'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.
These operations are conducted principally in the eastern half of the United
States. Sun's coal mining and cokemaking operations are conducted in Virginia
and Kentucky. Sun also has an investment in real estate operations in the
United States which is subject to a plan of disposition.
On September 30, 1996, Sun sold its international production business, and
on June 8, 1995, divested its remaining interest in Suncor Inc., a Canadian
integrated oil company. Prior to these divestments, Sun had interests in oil
and gas production in the United Kingdom sector of the North Sea and in
petroleum refining and marketing, oil and gas exploration and production and
oil sands mining in Canada.
The Company's operations are organized into seven business units 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 1996 Annual Report to Shareholders.
Additional business segment information is presented in Note 17 to the
Consolidated Financial Statements in the Company's 1996 Annual Report to
Shareholders.
REFINING AND MARKETING
The Company's refining and marketing operations consist of the manufacturing
and marketing of fuels, lubricants and petrochemicals and the transportation
of crude oil and refined products. These operations are conducted principally
through Sun Company, Inc. (R&M), a wholly owned subsidiary of the Company, and
are classified into the following six business units: Sun Northeast Refining;
Sunoco Northeast Marketing; Sunoco Chemicals; Sun Lubricants; Sunoco
MidAmerica Marketing & Refining; and Sunoco Logistics.
- --------
*In this report, the terms "Company" and "Sun" are used interchangeably to mean
Sun Company, Inc. or collectively, Sun Company, 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 1996 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, 1996, 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
Sun owns and operates five domestic refineries which are located in Marcus
Hook, PA, Philadelphia, PA, Toledo, OH, Tulsa, OK and Yabucoa, Puerto Rico.
The refineries in Marcus Hook, Philadelphia and Toledo produce principally
fuels and petrochemicals while the refineries in Tulsa and Puerto Rico
emphasize lubricants production with related fuels being sold in the wholesale
market.
The following tables set forth certain consolidated information concerning
Sun's domestic refining and marketing operations. Additional information is
set forth on pages 52-53 in the Company's 1996 Annual Report to Shareholders.
Products Manufactured
1996 1995
----- -----
Crude Unit Capacity (MB/D)...................................... 777.0* 777.0
===== =====
Input to Crude Units (MB/D)..................................... 721.0 700.4
===== =====
Products Manufactured (Percent):
Gasoline....................................................... 42 43
Middle Distillates............................................. 26 25
Residual Fuel.................................................. 9 9
Petrochemicals................................................. 3 4
Lubricants..................................................... 3 2
Asphalt**...................................................... 2 3
Other.......................................................... 15 14
--- ---
100 100
=== ===
- --------
*Sun's crude unit capacity will decrease 85 thousand barrels per day in
connection with a project to be completed in the first quarter of 1997 to
reconfigure the Puerto Rico refinery to process intermediate feedstocks
instead of crude oil (see below).
**Sun ceased producing asphalt in December 1996.
Supply and Distribution
Sun's crude oil requirements during 1996 were met largely by purchases from
various foreign national oil companies and independent exploration and
production companies as well as from various integrated oil companies. There
is an ample supply of crude oil available to meet worldwide refining needs,
and Sun has been able to supply its refineries with the proper mix and quality
of crude oils without disruption. Sun's refineries processed approximately 90
percent light sweet crude oil during 1996. The Company believes that ample
supplies of light sweet crude oil will continue to be available. The following
table sets forth the net sources of crude oil for Sun's domestic refineries
(in percentages):
1996 1995
---- ----
United States...................................................... 20 15
Canada............................................................. 7 9
Africa............................................................. 41 36
North Sea.......................................................... 21 20
Arabian Gulf....................................................... 4 11
South and Central America.......................................... 7 9
--- ---
100 100
=== ===
2
The following table sets forth summary information concerning the supply and
distribution of crude oil and refined products at Sun's domestic refineries
(in thousands of barrels daily):
1996 1995
----- -----
Supply:
Crude oil purchases........................................... 686.1 682.2
Crude oil inventory change.................................... 5.3 (8.3)
Refined product purchases (including feedstocks).............. 120.8 122.4
----- -----
812.2 796.3
===== =====
Distribution:
Refined product sales......................................... 794.8 777.8
Refined product inventory change.............................. (2.8) .2
Internal consumption and other................................ 20.2 18.3
----- -----
812.2 796.3
===== =====
Refined Product Sales
Sun sells fuels through retail and wholesale channels principally in the
Northeast and upper Midwest and sells petrochemicals and lubricants on a
worldwide basis. The following table sets forth Sun's consolidated domestic
refined product sales (in thousands of barrels daily):
1996 1995
----- -----
Gasoline:
Wholesale....................................................... 167.0 154.0
Retail.......................................................... 205.7 204.6
Middle distillates............................................... 219.9 210.9
Residual fuel.................................................... 82.4 73.9
Petrochemicals................................................... 31.5 31.1
Lubricants....................................................... 23.9 20.0
Asphalt.......................................................... 18.3 26.7
Other............................................................ 46.1 56.6
----- -----
794.8 777.8
===== =====
As of December 31, 1996 and 1995, branded fuels sales were made through
3,806 and 3,861 retail gasoline outlets, respectively. All but 424 of these
outlets were independently operated at December 31, 1996.
Strategic Actions
During the fourth quarter of 1996, Sun reconfigured its Philadelphia
refinery to process only light sweet crude oil and to cease asphalt
production. This reconfiguration continues the integration of the Point Breeze
and Girard Point facilities within the refinery and should result in a simpler
and more reliable and cost-efficient operation. Sun also announced that it
intends to reconfigure its Puerto Rico refinery in the first quarter of 1997.
This reconfiguration should result in a significant reduction in unprofitable
fuels production while maintaining the refinery's current volume and quality
of lubricants production. The Philadelphia and Puerto Rico refinery
reconfigurations will result in the shutdown or mothballing of redundant
and/or unprofitable processing units and the elimination of approximately 225
positions (both employees and independent contractors). See "Sun Northeast
Refining" and "Sun Lubricants" below, for a more detailed discussion of these
actions.
3
In the fourth quarter of 1996, Sun also initiated a comprehensive
competitive improvement plan that will be implemented during 1997 at its
Marcus Hook refinery. This plan is focused on improving reliability and
reducing cash operating costs through a reduction of approximately 200
positions (both employees and independent contractors), improved operating and
maintenance procedures and energy conservation measures.
The following is a discussion of the six business units which comprise Sun's
domestic refining and marketing operations.
SUN NORTHEAST REFINING
The Sun Northeast Refining business consists of the manufacture of petroleum
products, including gasoline, middle distillates (including jet fuel, heating
oil and diesel fuel), residual fuel oil and petrochemical feedstocks at Sun's
Marcus Hook and Philadelphia refineries and the sale of these products to
other Sun business units and to wholesale and industrial customers. (See
"Sunoco MidAmerica Marketing & Refining" and "Sun Lubricants" below, for a
discussion of operations at Sun's Toledo, Tulsa and Puerto Rico refineries.)
The following table sets forth information concerning operations at Sun's
Marcus Hook and Philadelphia refineries:
1996 1995
----------------------------------------- ---------------------------------------
PHILADELPHIA, PA PHILADELPHIA, PA
---------------- TOTAL ---------------- TOTAL
MARCUS GIRARD POINT NORTHEAST MARCUS GIRARD POINT NORTHEAST
HOOK, PA POINT BREEZE REFINERIES HOOK, PA POINT BREEZE REFINERIES
-------- -------- -------- ---------- -------- -------- -------- ----------
Crude Unit Capacity
(MB/D)................. 175.0 177.0 130.0 482.0 175.0 177.0 130.0 482.0
===== ======== ======== ===== ===== ======== ======== =====
Input to Crude Units
(MB/D)................. 151.5 179.2 116.7 447.4 144.7 195.4 110.5 450.6
===== ======== ======== ===== ===== ======== ======== =====
Conversion Capacity*
(MB/D)................. 86.0 68.0 37.0** 191.0 86.0 68.0 65.0 219.0
===== ======== ======== ===== ===== ======== ======== =====
Conversion Capacity
Utilized (MB/D)........ 65.3 54.7 31.9** 151.9 81.1 54.6 51.9 187.6
===== ======== ======== ===== ===== ======== ======== =====
Products Manufactured
(Percent):
Gasoline............... 43 40 49 43 50 38 45 44
Middle Distillates..... 32 28 21 27 27 29 21 26
Residual Fuel.......... 7 19 3 11 7 19 2 11
Petrochemical
Feedstocks***......... 6 2 3 3 7 1 3 3
Asphalt+............... -- -- 10 3 -- -- 18 5
Other.................. 12 11 14 13 9 13 11 11
--- --- --- --- --- --- --- ---
100 100 100 100 100 100 100 100
=== === === === === === === ===
- --------
*Represents Sun's capacity to upgrade low-value petroleum products into
higher-value products through catalytic cracking and hydrocracking
processes.
**In December 1996, Sun mothballed a 28 thousand barrels-per-day hydrocracker
unit as part of the Philadelphia refinery reconfiguration. This unit, which
was utilized at approximately 23 thousand barrels per day during 1996, has
been excluded from the conversion capacity and utilization amounts for 1996
in the above table.
***Petrochemical feedstocks are utilized by the Sunoco Chemicals business to
produce petrochemicals at these facilities. (See "Sunoco Chemicals" below.)
+Sun ceased producing asphalt in December 1996.
During 1996, production at Sun Northeast Refining was adversely impacted by
a planned four-week refinery maintenance turnaround at the Girard Point 68,000
barrels-per-day fluid catalytic
4
cracking unit and 177,000 barrels-per-day crude unit, as well as by a six-week
scheduled turnaround and modernization of the 86,000 barrels-per-day fluid
catalytic cracking unit at the Marcus Hook refinery. Production was also
affected at Marcus Hook by the shutdown of an 85,000 barrels-per-day crude
unit during most of the six-week turnaround of the catalytic cracking unit at
this facility. The catalytic cracking and crude units at the Marcus Hook
refinery are currently operating at close to rated capacity.
During the fourth quarter of 1996, Sun reconfigured the Philadelphia
refinery to process only light sweet crude oil and to cease asphalt
production. With this change, Sun's Philadelphia and Marcus Hook refineries
now process only light sweet crude oils, which were supplied primarily from
foreign sources during 1996. Previously, the Point Breeze facility processed a
substantial quantity of heavy sour crude oil and purchased gas oils. The
reconfiguration continues the integration of the Point Breeze and Girard Point
facilities at the Philadelphia refinery and resulted in the elimination of
approximately 125 positions (both employees and independent contractors) and
the shutdown or mothballing of several redundant and/or unprofitable
processing units. These units included a reformer, a sulfur plant, a
hydrocracker, a hydrogen plant and asphalt and alkylation units. The
streamlined Philadelphia refining operation should significantly improve
overall efficiency and flexibility, lower fixed costs and reduce ongoing
capital spending and working capital requirements. Sun will continue to
implement other infrastructure consolidation opportunities in 1997 at this
facility. However, if sufficient improvements in operating results at this
facility are not realized, the Company will consider shutting down additional
units.
The reconfiguration and extensive refinery maintenance turnarounds completed
during the year should result in higher overall production at Sun Northeast
Refining in 1997. Increases in gasoline, middle distillates and petrochemical
feedstock production are expected to more than offset the elimination of
asphalt production.
Sun's Philadelphia and Marcus Hook refineries are connected by pipeline,
barge, truck and rail. The inter-refinery pipeline allows transfer of
unfinished stocks, including butanes, naphtha, distillate blendstocks and
gasoline blendstocks. Finished products are delivered to customers via Sun's
pipeline and terminal network, third-party pipelines and barges.
Total fuels products sold to third parties at wholesale by Sun Northeast
Refining in 1996 were 322.2 thousand barrels daily compared to 346.4 thousand
barrels daily in 1995. Sales to other Sun business units by Sun Northeast
Refining (primarily gasoline, middle distillates and chemical feedstocks)
totalled 188.3 thousand barrels daily in 1996 versus 184.3 thousand barrels
daily in 1995.
Environmental laws require Sun to make significant expenditures at its
refineries, of both a capital and expense nature. During the 1994-96 period,
approximately $185 million was spent for environmental capital projects at
Sun's Northeast refineries, including $58 million in 1994 to complete a $110
million project to upgrade the wastewater treatment facilities at the Marcus
Hook refinery.
Significant alterations in the composition of gasoline sold in Sun's
northeastern U.S. marketing area are required by the Clean Air Act of 1990, as
amended (the "Clean Air Act"). The Company has implemented the first phase of
the reformulated gasoline regulations which requires an increase in the
minimum quantity of oxygen for certain non-attainment areas, a reduction in
benzene content, and a reduction in summertime Reid Vapor Pressure ("rvp").
Sun expects to implement the next more stringent phase of these regulations in
1998 with minimal capital investment. Management believes the Company will be
able to continue to meet these regulations even though they will become even
more stringent in 2000 when the phase-in of the Clean Air Act is completed.
However, the Company cannot ascertain at this time the extent of the capital
outlays that will be required to comply with this final phase of the
regulations.
5
SUNOCO NORTHEAST MARKETING
The Sunoco Northeast Marketing business consists of the retail sale of
gasoline and middle distillates and the operation of convenience stores in the
New England and Mid-Atlantic states. These activities are conducted in a 12-
state region from Maine through northern Virginia, with the highest
concentration of outlets in Connecticut, Massachusetts, New Jersey, New York,
Pennsylvania and Rhode Island. (See "MidAmerica Marketing & Refining" below
for a discussion of similar operations conducted in the midwestern U.S.)
The following table sets forth Sun's retail gasoline outlets in the New
England and Mid-Atlantic states at December 31, 1996 and 1995:
1996 1995
----- -----
Direct outlets:
Company owned or leased:
Traditional:
Company operated.............................................. 139 131
Dealer operated............................................... 349 369
----- -----
488 500
aplus(R) convenience stores:
Company operated.............................................. 175 145
Dealer operated............................................... 240 267
----- -----
415 412
ultra service centersSM --dealer operated...................... 249 259
----- -----
Total Company owned or leased................................... 1,152 1,171
Dealer owned*................................................... 424 454
----- -----
Total direct outlets............................................. 1,576 1,625
Distributor outlets.............................................. 1,304 1,319
----- -----
2,880 2,944
===== =====
- --------
*Primarily traditional outlets.
Sunoco Northeast Marketing's portfolio of outlets is designed to provide
optimal profit potential in each of its marketing areas. These 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 where fuel products are delivered directly to the
site. Investment in the property, through ownership or lease, may be held by
either the Company or an independent dealer. These sites may be traditional
locations that sell almost exclusively fuel products or may include aplus(R)
convenience stores that supplement sales of fuel products with a broad range
of high-margin merchandise or ultra service centersSM that provide state-of-
the-art automotive diagnosis and repair. Included among Sunoco Northeast
Marketing's outlets at December 31, 1996 were 55 outlets on limited access
highways in Pennsylvania, New Jersey, New York and Maryland. Of these outlets,
36 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 sunoco(R) products are available. Although these sites fly the
sunoco(R) flag, Sun does not own or operate these retail locations.
During 1996, Sunoco Northeast Marketing changed its retail gasoline product
slate from a five-grade offering to a choice of four grades. The current
product slate consists of the highest octane
6
premium gasoline commercially available in the United States (ultra(R) 94) and
93, 89 and 87 octane grades of gasoline. Branded fuels sales by Sunoco
Northeast Marketing averaged 175.2 thousand barrels daily in 1996 compared to
172.7 thousand barrels daily in 1995.
In 1996, excluding environmental outlays, capital expenditures for branded
marketing activities in the Northeast totalled $67 million. Most of these
outlays were to upgrade and modernize the retail service station network and
to complete the conversion of atlantic(R) branded gasoline outlets to the
sunoco(R) brand. Sunoco Northeast Marketing also continued the expansion of
its pay-at-the-pump program in 1996 with the installation of CardMaticSM, its
credit card activated gasoline dispensing system, at 293 additional high-
volume service stations. This brings the total number of outlets offering this
convenience to 1,095, or 38 percent of total retail marketing outlets in the
Northeast. Environmental capital spending totalled $14 million during 1996,
primarily for the ongoing underground storage tank replacement program and for
tank top upgrades.
SUNOCO CHEMICALS
The Sunoco Chemicals business consists of the manufacturing, distribution
and marketing of base commodity and intermediate petrochemicals. These
chemicals are comprised principally of olefins and their derivatives
(ethylene, ethylene oxide and propylene) and aromatics (benzene, cumene,
cyclohexane, toluene and xylenes). As a partner in a joint venture, Sunoco
Chemicals also produces mtbe which is utilized by Sun Northeast Refining in
manufacturing reformulated gasolines. Petrochemicals are manufactured by
Sunoco Chemicals at Sun's Marcus Hook and Philadelphia refineries, at an
ethylene/ethylene oxide facility in Brandenburg, Kentucky and at the joint
venture mtbe facility in Mont Belvieu, Texas. (See "Sunoco MidAmerica
Marketing & Refining" for a discussion of the petrochemicals produced at the
Toledo refinery.)
The following table sets forth information concerning petrochemicals
production by Sunoco Chemicals (in thousands of barrels daily):
PRODUCTION
CAPACITY AT -----------
DECEMBER 31, 1996* 1996 1995
----------------- ----- -----
Benzene....................................... 1.5 .6 1.5
Toluene....................................... 2.0 1.0 1.0
Xylene........................................ .5 .5 .5
Cumene........................................ 4.5 4.3 3.9
Cyclohexane................................... 2.5 1.4 1.3
---- ----- -----
Total Aromatics............................. 11.0 7.8 8.2
Ethylene...................................... 1.7 1.1 1.3
Ethylene oxide................................ 1.8 1.4 1.5
Propylene:
Polymer-grade................................ 9.5** 5.3 6.3
Refinery-grade............................... .5 1.8 1.7
---- ----- -----
Total Olefins............................... 13.5 9.6 10.8
Other***...................................... -- 1.5 1.7
---- ----- -----
Total Petrochemicals........................ 24.5 18.9 20.7
==== ===== =====
- --------
*Reflected on a calendar-day basis.
**Reflects an increase of 3,500 barrels daily in the fourth quarter of 1996
as a result of the expansion of the propylene unit at the Marcus Hook
refinery (see below).
***Consists of refining by-products, principally carbon dioxide and sulfur. In
December 1996, Sun ceased producing these by-products in connection with the
reconfiguration of the Philadelphia refinery.
7
Sun's petrochemical products are distributed and sold on a worldwide basis.
Sales of petrochemicals to third parties by Sunoco Chemicals totalled 20.2
thousand barrels daily in 1996 versus 20.9 thousand barrels daily in 1995, a 3
percent decrease. The decline in both sales and production volumes was due to
increased planned refinery maintenance activity.
Sales volumes during 1996 were distributed through the following channels:
. Benzene and Benzene Derivatives (including Cyclohexane and Cumene)--
Customers for these products are large manufacturers of fibers and
polymers who buy a significant percentage of their requirements from
Sunoco Chemicals under long-term contracts;
. Bulk Toluene and Xylenes--Buyers generally procure large volumes for
fibers and urethane products. These sales are made in both the contract
and spot markets and tend to be international in scope;
. Solvents--Customers and distributors take individually small volumes for
paints, coatings, solvents and a variety of specialty applications;
. Propylene--Sales are primarily made pursuant to long-term contracts to
large customers who manufacture polypropylene fibers and resins; and
. Specialty Ethylene and Ethylene Oxide--Sales are primarily to small and
intermediate size specialty chemical companies that make diverse products
such as surfactants, co-polymer resins and emulsions, and additives.
During the fourth quarter of 1996, Sunoco Chemicals completed a project to
expand its polymer-grade propylene production capacity and delivery systems at
the Marcus Hook refinery from 400 to 650 million pounds per year (6,000 to
9,500 barrels per day). Most of Sunoco Chemicals' polymer-grade propylene
production is sold pursuant to a long-term supply agreement with Epsilon
Products Co., a polypropylene manufacturer.
At the end of 1994, Sunoco Chemicals completed a project (the "Northeast
Aromatics and Cyclohexane Project"), which included the expansion of benzene
extraction capacity by 60 million gallons per year and construction of a 34-
million-gallon-per-year cyclohexane plant at the Marcus Hook refinery. During
the fourth quarter of 1996, Sunoco Chemicals installed a new hydrogen
purification unit at the cyclohexane plant to provide a consistent source of
high-quality hydrogen. This enhancement has enabled the plant to increase
cyclohexane production levels.
Benzene, extracted at Sun's Marcus Hook and Girard Point facilities, is
combined with refinery-grade propylene to produce cumene at Girard Point. The
cumene is then sold primarily to AlliedSignal Inc. pursuant to a long-term
contract. In 1996, Sunoco Chemicals began a project to expand its cumene
production capacity at Girard Point from 500 to 850 million pounds per year
(4,500 to 7,700 barrels per day). The expanded facility, which will utilize
new catalyst technology, is expected to be operational in mid-1998. A
significant portion of the incremental production from this facility will also
be sold to AlliedSignal Inc. under a long-term contract.
The construction of a 14,000 barrels-per-day mtbe production facility owned
and operated by Belvieu Environmental Fuels ("bef"), a joint venture in which
Sun is a one-third partner, was completed in 1995. Sun is purchasing all of
the mtbe production from this facility pursuant to an off-take agreement which
expires in 2004. During 1996, Sun established a $130 million accrual ($85
million after tax) for estimated losses expected to be realized with respect
to this off-take agreement. For additional information concerning Sun's
participation in this joint venture and the off-take agreement, see Note 12 to
the Consolidated Financial Statements in the Company's 1996 Annual Report to
Shareholders.
8
SUN LUBRICANTS
The Sun Lubricants business is comprised of the manufacturing, blending,
packaging and marketing of a broad line of paraffinic and aromatic lubricating
and specialty oils produced at the Tulsa and Puerto Rico refineries as well as
the related manufacturing and wholesale marketing of the fuels produced at
these facilities. Blending and packaging operations are conducted at lube
service centers located at the Marcus Hook and Tulsa refineries as well as at
facilities located in Los Angeles and Richmond, CA and Toronto, ONT.
Sun Lubricants manufactures base oils which are sold to domestic and
international customers who manufacture their own finished transportation and
industrial lubricants. Sun Lubricants also upgrades a significant portion of
its base oil production into specialty oils at its blending and packaging
facilities. These specialty oils are comprised principally of transportation
and industrial lubricants. In addition, Sun Lubricants produces other
specialty lube products such as horticultural and agricultural oils, aromatic
and paraffinic rubber oils, paper defoamer oils, asphalt recycling extracts,
textile oils and finished waxes. These products are marketed under the
Sunoco(R), Kendall(R), Amalie(R) and Archer(R) brand labels directly by Sun or
through distributors to a wide variety of domestic and foreign customers.
The following table sets forth information concerning operations at Sun's
Tulsa and Puerto Rico refineries:
1996 1995
--------------------- ---------------------
TULSA PUERTO TULSA PUERTO
OK RICO TOTAL OK RICO TOTAL
----- ------ ----- ----- ------ -----
Crude Unit Capacity (MB/D)...... 85.0 85.0* 170.0 85.0 85.0 170.0
==== ==== ===== ==== ==== =====
Input to Crude Units (MB/D)..... 85.0 63.1 148.1 78.4 60.7 139.1
==== ==== ===== ==== ==== =====
Paraffinic and Aromatic Lubes
Capacity (MB/D)................ 8.1 9.3 17.4** 7.8 9.0 16.8
==== ==== ===== ==== ==== =====
Paraffinic and Aromatic Lubes
Production (MB/D).............. 7.9 8.1 16.0 6.6 8.2 14.8
==== ==== ===== ==== ==== =====
Products Manufactured (Percent):
Lubricants..................... 12 17 15 11 18 14
Gasoline....................... 19 17 18 18 17 18
Middle Distillates............. 34 31 32 32 32 32
Residual Fuel.................. -- 23 10 -- 22 10
Other.......................... 35*** 12 25 39*** 11 26
---- ---- ----- ---- ---- -----
100 100 100 100 100 100
==== ==== ===== ==== ==== =====
- --------
* After completion of the reconfiguration project in the first quarter of
1997, there will be no crude oil processing capacity at the Puerto Rico
refinery as Sun will process intermediate feedstocks instead of crude oil
at this facility (see below).
** In 1996, Sun Lubricants increased the paraffinic and aromatic lubes
capacity at Sun's Tulsa and Puerto Rico refineries through minimal capital
investment.
*** Includes approximately 23 and 25 thousand barrels daily (28 and 33 percent
of products manufactured) in 1996 and 1995, respectively, of "lubes-
extracted" feedstocks which are transported to the Toledo refinery for
further processing or are sold to third parties.
During 1996, Sun Lubricants initiated two major strategic actions designed
to improve its competitive position. These actions consist of the
reconfiguration of Sun's Puerto Rico refinery to significantly reduce fuels
production and the acquisition of the Kendall/Amalie lubricants business.
9
In the first quarter of 1997, Sun Lubricants will reconfigure the Puerto
Rico refinery to eliminate the processing of crude oil and to process,
instead, between 20,000 and 30,000 barrels per day of purchased intermediate
feedstocks, such as vacuum gas oil and reduced crude oil. This change will
significantly reduce the amount of unprofitable fuels produced at this
refinery while maintaining the current volume and quality of lubricants
production. As a result, the atmospheric crude tower, the gas oil desulfurizer
and the gasoline reformer will be shut down and approximately 100 positions
will be eliminated. The streamlining of the Puerto Rico refining operation is
expected to improve operating efficiency, lower fixed costs and reduce ongoing
capital spending and working capital requirements.
In November 1996, Sun Lubricants acquired the Kendall/Amalie lubricants
blending, packaging and marketing business. This acquisition has increased the
amount of existing base oil production upgraded into transportation lubricants
at Sun facilities and has enabled Sun Lubricants to increase its specialty oil
lubricants sales. These sales are made primarily through supply contracts with
more than 300 distributors in the United States.
Sales of specialty oil lubricant products totalled 9.3 thousand barrels
daily in 1996 versus 8.6 thousand barrels daily in 1995 while sales of base
oils, waxes and other lubricants totalled 14.6 thousand barrels daily in 1996
versus 11.4 thousand barrels daily in 1995. The 8 percent increase in
specialty oil sales reflects the Kendall/Amalie acquisition and an expansion
in Sun Lubricants' contract customer base and volumes, while the 28 percent
increase in base oil, waxes and other lubricant sales reflects higher contract
and spot market sales. Fuels sold to third parties from the Tulsa and Puerto
Rico refineries totalled 124.3 thousand barrels per day in 1996 compared to
101.4 thousand barrels per day in 1995.
Sun's Tulsa refinery runs a light, low-sulfur crude oil slate which is
supplied from domestic sources. Prior to the reconfiguration, the Puerto Rico
refinery was able to process heavier, higher sulfur crude oils which were
supplied from foreign sources. In 1997, purchased intermediate feedstocks will
be processed at the Puerto Rico refinery instead of crude oil.
The lubricants manufacturing facilities at the Tulsa and Puerto Rico
refineries, as well as Sun's lube blending and packaging facilities, are iso
certified indicating they have passed the International Standards
Organization's standards for quality management and oversight.
SUNOCO MIDAMERICA MARKETING & REFINING
The Sunoco MidAmerica Marketing & Refining ("Sunoco MidAmerica") business
consists of the retail sale of gasoline and middle distillates and the
operation of convenience stores in the Midwest as well as the manufacturing,
distribution and wholesale marketing of fuels and petrochemicals produced at
Sun's Toledo refinery.
Retail Marketing
Sunoco MidAmerica markets, through direct and distributor channels, a five-
grade slate of retail gasoline products under the sunoco(R) brand ranging from
ultra(R) 94 to an 86 octane grade of gasoline. These outlets are located in
Indiana, Kentucky, Michigan, Ohio and West Virginia with the strongest market
presence in Michigan and Ohio. Sunoco MidAmerica is also the sole supplier to
all 16 gasoline stations on the Ohio turnpike.
10
The following table sets forth Sun's retail gasoline outlets in the Midwest
at December 31, 1996 and 1995:
1996 1995
---- ----
Direct outlets:
Company owned or leased:
Traditional:
Company operated................................................ 22 21
Dealer operated................................................. 57 74
--- ---
79 95
sunoco food market(R) convenience stores:
Company operated................................................ 88 89
Dealer operated................................................. 22 26
--- ---
110 115
ultra service centers SM--dealer operated........................ 48 65
--- ---
Total Company owned or leased..................................... 237 275
Dealer owned*..................................................... 138 157
--- ---
Total direct outlets............................................... 375 432
Distributor outlets................................................ 551 485
--- ---
926 917
=== ===
- --------
*Primarily traditional outlets.
In this region, branded fuels sales averaged 51.0 thousand barrels daily in
1996 compared to 50.8 thousand barrels daily in 1995. As part of the strategy
to increase the overall level of branded gasoline sales, primarily through the
distributor channel, in 1996, Sunoco MidAmerica entered into numerous supply
agreements. These supply agreements are expected to significantly increase the
retail gasoline volumes sold by Sunoco MidAmerica in 1997. Sales under these
agreements are expected to increase further in 1998, in part due to an
expected increase in the number of outlets rebranding to sunoco(R) pursuant to
these agreements. Sunoco MidAmerica also expects to increase the volumes sold
through its current outlets.
Refining and Wholesale Marketing
The following table sets forth information concerning operations at Sun's
Toledo refinery:
1996 1995
----- -----
Crude Unit Capacity (MB/D)....................................... 125.0 125.0
===== =====
Input to Crude Units (MB/D)...................................... 125.5 110.7
===== =====
Conversion Capacity (MB/D)....................................... 86.0 86.0
===== =====
Conversion Capacity Utilized (MB/D).............................. 77.4 70.0
===== =====
Products Manufactured (Percent):
Gasoline........................................................ 63 64
Middle Distillates.............................................. 15 11
Residual Fuel................................................... 3 3
Petrochemicals.................................................. 6 8
Other........................................................... 13 14
----- -----
100 100
===== =====
11
Fuels products sold at wholesale to third parties from Sun's Toledo refinery
in 1996 averaged 66.7 thousand barrels daily compared to 55.4 thousand barrels
daily in 1995. Sales of petrochemicals to third parties by Sunoco MidAmerica
totalled 11.3 thousand barrels daily in 1996 versus 10.2 thousand barrels
daily in 1995.
Sun's Toledo refinery is a relatively complex, high conversion refinery that
refines predominantly light, low-sulfur crude oil. Feedstocks for 1996
consisted primarily of: West Texas Intermediate crude oil (38 percent);
Canadian sweet, sour and synthetic crude oils (44 percent); and a "lubes-
extracted" gasoil/naphtha intermediate feedstock from Sun's Tulsa refinery (18
percent). In March 1995, a 41-day turnaround of the catalytic cracking and
crude units at the Toledo refinery was completed as was the expansion of the
refinery's sulfur plant, which enabled the processing of a larger volume of
higher-sulfur crude oil. In April 1996, a 25-day turnaround of certain
components of the hydrocracker unit was also completed. Subsequent to the
turnarounds, Sunoco MidAmerica has increased its input to crude units to over
100 percent of rated capacity compared to 90 percent in 1994. In addition,
ethanol blending is currently being utilized by Sunoco MidAmerica at its
terminals to reduce octane costs, simplify the product slate and enhance the
storage and transportation of gasoline products.
Chemicals
Sunoco MidAmerica chemical operations consist of the manufacturing,
marketing and distribution of base commodity and intermediate petrochemicals.
These chemicals are comprised of aromatics (including benzene, toluene and
xylene), spirits, nonene and tetramer. All of these products are sold under a
marketing agreement with Suncor Inc., through a joint venture partnership with
this former Canadian petroleum subsidiary of Sun. A significant portion of the
aromatics production is sold in bulk. Additionally, toluene, xylenes and
spirits are sold through a solvent channel.
SUNOCO LOGISTICS
The Sunoco Logistics business consists of: crude oil and refined product
pipeline operations; domestic lease crude oil acquisition and related trucking
operations; crude oil terminalling; marine shipping and tug/barge operations;
and product terminalling and transport operations. These operations are
conducted primarily in the Northeast, Midwest and South Central regions of the
United States.
Pipeline operations are conducted through wholly-owned subsidiaries and
through other pipelines in which Sun 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 local 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.
Sunoco Logistics crude oil pipeline operations, located primarily in the
South Central United States, transport crude oil produced in Oklahoma, Texas,
New Mexico and Louisiana to refiners (including Sun's Tulsa refinery) or to
local trade points. The refined product pipeline operations, located primarily
in the Northeast and Midwest, transport gasoline, jet fuel, diesel fuel, home
heating oil and other products for Sun's other businesses and for third-party
integrated petroleum companies, independent marketers and distributors.
In 1996, a third party signed a five-year contract to transport a minimum of
3 thousand barrels daily of refined products from Philadelphia to Rochester,
NY on a Sun pipeline. Also in 1996, Sunoco Logistics assumed operating control
of the Harbor Pipeline, an 80-mile refined petroleum products pipeline from
Woodbury, NJ, to Linden, NJ. Sunoco Logistics has a one-third undivided
interest in this pipeline, which provides Philadelphia-area refineries,
including Sun's, access to the New York harbor markets.
12
At December 31, 1996, Sunoco Logistics had an equity interest in 5,119 miles
of crude oil pipelines and 4,548 miles of refined product pipelines. In 1996,
crude oil and refined product shipments, including Sun's share of shipments in
which it had an ownership interest, totalled 56.3 and 28.8 billion barrel
miles, respectively, as compared to 50.1 and 28.7 billion barrel miles in
1995.
Sunoco Logistics' crude oil pipeline operations in the South Central United
States are complemented by lease crude oil acquisition and related trucking
operations in this region. Approximately 158 thousand barrels daily of crude
oil were purchased from third-party leases during 1996. This crude oil is
delivered to various pipelines either directly from the wellhead or utilizing
Sunoco Logistics' fleet of 80 trucks.
Marine shipping and tug/barge operations include 2 ocean-going tankers and a
fleet of 15 coastal distribution tankers, tugs and barges. Sun supplements its
own marine fleet with charters that account for the vast majority of its
marine transportation requirements. Sun maintains an extensive vessel
inspection review and evaluation program to assure the vessels chartered into
Sun service are of appropriate quality.
Product terminalling and transport operations include 43 terminals in the
Northeast and Midwest that support Sun's branded and wholesale marketing
operations in these regions, 135 trucks that transport gasoline and
distillates and a railroad fleet of 220 owned and 1,900 leased tank cars that
primarily support the Sunoco Chemicals and Sun Lubricants businesses.
Sun's Nederland, TX terminal provides approximately ten million barrels of
storage and provides terminalling capacity exceeding one million barrels per
day of throughput. Its Gulf Coast location provides local and midwestern
refiners access to increasing volumes of 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. During 1996, a five-year agreement signed with a third
party will increase the amount of crude oil throughput at this terminal by 30-
50 thousand barrels per day.
SUN COAL & COKE
Sun Coal & Coke Company's business consists of coal production from mines in
Virginia and Kentucky and coke manufacturing at the Company's facility in
Vansant, VA. Such operations are conducted by Sun Coal Company and its
affiliates.
At December 31, 1996, Sun Coal & Coke had 132 million tons of estimated coal
reserves classified as proven and probable compared to 139 million tons at
December 31, 1995. Of the reserves at December 31, 1996, 87 percent were
metallurgical coal located in Virginia and 13 percent were bituminous steam
coal located in Kentucky. Sun Coal & Coke's total coal production in 1996 was
4.4 million tons, compared to 5.1 million tons in 1995.
Sun Coal & Coke's principal market for both metallurgical coal and coke is
the domestic steel industry. In 1996, 62 percent of Sun Coal & Coke's
metallurgical coal production was converted into coke at its cokemaking
facilities and 38 percent was sold in spot market transactions. During 1996,
82 percent of Sun Coal & Coke's coke sales was made under a nine-year contract
with a domestic steel producer which became effective in January 1996.
Subsequent to March 1996, this contract provides for delivery of Sun Coal &
Coke's entire coke production from its Vansant, VA cokemaking facility. Coke
production totalled 648 thousand tons in 1996, compared to 638 thousand tons
in 1995.
In 1996, approximately 59 percent of Sun Coal & Coke's bituminous steam coal
was sold under long-term contracts, with the remainder sold in spot market
transactions. Sun Coal & Coke's coal and coke sales contracts generally
provide for the periodic adjustment of prices to reflect the changing costs of
labor, equipment and services.
13
Sun Coal & Coke produces high-quality coke at its 650 thousand ton-per-year
cokemaking facility using its non-recovery cokemaking technology and related
patents. This technology, which is environmentally superior to the by-product
technology currently used by most coke producers, is currently being marketed
outside North America through an exclusive license with Raytheon Engineers and
Constructors, Inc. ("Raytheon"). In January 1997, Raytheon signed a contract
to construct a 700 thousand ton-per-year coke plant in Madras, India for a
third party utilizing the non-recovery cokemaking technology. In connection
with this agreement, Sun Coal & Coke will receive a license fee from Raytheon
for the use of its proprietary technology.
In 1988, Sun Coal & Coke began a program to replace all existing coke ovens
at its cokemaking plant in Vansant, VA, with 142 new ovens in order to improve
overall cost efficiencies and enhance coke quality at this facility. In July
1996, 27 of the new ovens were placed into service. Construction of the final
battery of 35 replacement ovens commenced in late 1996. Seventeen of these
ovens are expected to be operational in 1997 with the remainder placed into
service in early 1998. In 1995, Sun Coal & Coke transferred an interest in its
cokemaking operations to a third party in exchange for $95 million in cash.
The transferee is entitled to a preferential return from the cash flows of the
cokemaking operations until certain cumulative return targets have been met.
In November 1996, Sun Coal & Coke entered into an agreement to construct,
own and operate a $187 million cokemaking facility in East Chicago, IN, which
will produce coke for Inland Steel Company ("Inland") for use at its Indiana
Harbor Works steel plant located adjacent to the new cokemaking facility. The
agreement requires Inland to buy 1.2 million tons annually on a take-or-pay
basis for a period of 15 years commencing after the scheduled mid-1998 start-
up date. Additional production of up to 100,000 tons per year will be sold
either to Inland or to other steel producers. The plant will utilize Sun Coal
& Coke's proprietary non-recovery cokemaking technology.
Additional information concerning Sun Coal & Coke operations is set forth on
page 53 in the Company's 1996 Annual Report to Shareholders.
REAL ESTATE
Sun's real estate business is conducted through Radnor Corporation and its
subsidiaries (collectively, "Radnor"). As of December 31, 1996, Radnor's
remaining portfolio of real estate was located in 9 states and consisted
principally of three office buildings, three shopping centers, a resort hotel,
and single-family home, condominium, residential land and business park
developments.
As a result of Sun's decision to sell its real estate business through a
program of controlled disposition, such operations have been classified as
operations held for sale in Sun's consolidated financial statements. Since
adoption of the disposition plan in October 1991, Radnor has divested 61
commercial properties, completed 26 housing and land developments and reduced
its total assets and debt by $842 and $743 million, respectively. At December
31, 1996, Radnor's total assets and debt were $215 and $109 million,
respectively. Divestment activities in 1996 included Radnor's sale of two
office building projects located in Florida and Virginia and three commercial
land parcels located in Virginia, Georgia and Arizona. The disposition of
Sun's real estate business is expected to be substantially completed by the
end of 1998.
For additional information regarding Sun's real estate operations held for
sale, see Note 2 in the Consolidated Financial Statements in the Company's
1996 Annual Report to Shareholders.
SUN INTERNATIONAL PRODUCTION
During 1996, Sun sold its international oil and gas production business.
Information concerning this sale is presented in Note 2 to the Consolidated
Financial Statements in the Company's 1996 Annual Report to Shareholders.
14
CANADA (SUNCOR)
During 1995, Sun completed the divestment of its remaining 55-percent
interest in Suncor Inc., a Canadian integrated oil company. Information
concerning this divestment is presented in Note 2 to the Consolidated
Financial Statements in the Company's 1996 Annual Report to Shareholders.
COMPETITION
The refining and marketing business is intensely competitive. Sun 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. Several of Sun's principal competitors
are integrated multi-national oil companies that are larger and have
substantially greater resources than Sun. Because of their integrated
operations and larger capitalization, such major oil companies may have
greater flexibility than Sun in responding to volatile industry or market
conditions, such as shortages of feedstocks or intense price fluctuations.
Unlike certain of its competitors that have access to proprietary sources of
controlled crude oil production, Sun must obtain all of its crude oil
feedstocks from unaffiliated sources.
With the reconfiguration of the Philadelphia and Puerto Rico refineries,
virtually all of the crude oils processed in Sun's refining system are light
sweet crude oils, which historically have been priced higher than the
alternative heavy sour crude oils. However, management believes that any
potential competitive impact of Sun'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 for its processing needs. Sun
believes that it is in a position to compete effectively as a marketer of
refined products because of its strong marketing presence in its principal
markets and its considerable distribution flexibility resulting from the
location of its two Northeast refineries and retail network, which are well
integrated with its distribution system.
Coal mining and cokemaking operations are also highly competitive. Demand
for coke has fallen as domestic steelmaking capacity has declined and
steelmakers have switched to electric arc furnaces and coal injection
production methods. However, Sun anticipates that the supply of coke will
decrease quicker than demand as the inability to meet increasingly stringent
environmental regulations will lead steelmakers and other coke producers to
close their plants. Sun believes it is well-positioned to compete with other
merchant coke producers, since Sun's proprietary technology allows Sun to
construct coke ovens that, compared to conventional coke ovens, are more
environmentally benign, are generally less costly to build, and can be
operated with fewer workers.
Sun does not consider one or a small group of competitors to be dominant in
the refining and marketing and coal and cokemaking industries. The
availability of a ready market for Sun's refined products, as well as its coal
and coke production, depends on numerous external factors, including: the
level of consumer demand; the extent of industry production of refined
products and coal and coke; the import levels of refined products and coal and
coke; the cost and availability of alternative fuels; the cost and proximity
of refineries, pipelines and other transportation facilities that support the
retail gasoline marketing infrastructure; and regulations by federal, state,
local and foreign authorities including those imposed by or resulting from
compliance with applicable environmental laws.
RESEARCH AND DEVELOPMENT
In recent years, Sun's research and development activities have focused on
applied research, process and product development, and engineering and
technical services related to fuels, lubricants and chemicals. Sun spent $6,
$5 and $8 million on research and development activities in 1996, 1995 and
1994, respectively. As of December 31, 1996, approximately 120 scientists,
engineers, technicians
15
and support personnel participated in these activities. Sun owns or has made
application for numerous patents in the U.S.
EMPLOYEES
As of December 31, 1996, Sun had approximately 12,150 employees compared to
approximately 12,000 employees as of December 31, 1995. The increase in 1996
is primarily attributable to the Kendall/Amalie acquisition. Approximately 40
percent of Sun's employees are employed in company-operated convenience stores
and service stations. The above amounts exclude employees of real estate
operations held for sale totalling 337 in 1996 and 332 in 1995. Approximately
27 percent of Sun's employees were covered by 49 collective bargaining
agreements as of December 31, 1996. The collective bargaining agreements have
various terms and dates of expiration. In management's opinion, Sun's
relationship with its employees is generally satisfactory.
ENVIRONMENTAL MATTERS
Sun is subject to numerous federal, state and local laws which regulate the
discharge of materials into, or otherwise relate to the protection of, the
environment. These laws have required, and are expected to continue to
require, Sun to make significant expenditures of both a capital and expense
nature. Several of the more significant federal laws applicable to the
Company's operations include the Clean Air Act, the Clean Water Act, 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").
The following table summarizes Sun's expenditures for environmental projects
and compliance activities (in millions of dollars):
1996 1995* 1994*
---- ---- ----
Pollution Abatement Capital**............................... $ 29 $ 60 $203
Remediation................................................. 37 48 57
Operations, Maintenance and Administration.................. 185 238 214
---- ---- ----
$251 $346 $474
==== ==== ====
- --------
*Restated to exclude expenditures attributable to discontinued International
Production and Canadian Upstream Petroleum operations. (See Note 2 to the
Consolidated Financial Statements in the Company's 1996 Annual Report to
Shareholders.)
**Capital expenditures for pollution abatement are expected to approximate $25
and $55 million in 1997 and 1998, respectively.
The high level of pollution abatement capital expenditures during 1994 was
due primarily to outlays for projects to upgrade wastewater treatment
facilities and expand benzene extraction capacity at the Marcus Hook refinery.
The Clean Air Act establishes stringent criteria for regulating air toxics
at operating facilities by mandating major reductions in allowable emissions
and establishing a more comprehensive list of substances deemed to be air
toxics. The Clean Air Act also requires refiners to market cleaner-burning
gasoline that reduces emissions of certain toxics and conventional pollutants.
The Company has implemented the first phase of the reformulated gasoline
regulations which requires an increase in the minimum quantity of oxygen for
certain non-attainment areas, a reduction in benzene content, and a reduction
in summertime Reid Vapor Pressure ("rvp"). Sun expects to implement the next
more stringent phase of these regulations in 1998 with minimal capital
investment. Management believes the Company will be able to continue to meet
these regulations even though they will become even more stringent in 2000
when the phase-in of the Clean Air Act is completed. However, the Company
16
cannot ascertain at this time the extent of the capital outlays that will be
required to comply with this final phase of the regulations.
cercla and rcra, and related state laws subject Sun to the potential
obligation to remove or mitigate the environmental effects of the disposal or
release of certain pollutants at Sun's facilities and at third-party or
formerly owned sites. Under cercla, Sun 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 December 31,
1996, Sun had been named as a prp at 46 sites identified or potentially
identifiable as "Superfund" sites under cercla. Sun has reviewed the nature
and extent of its involvement at each site and other relevant circumstances
and, based upon the other parties involved or Sun's negligible participation
therein, believes that its potential liability associated with such sites will
not be significant. Under rcra and related state laws, corrective remedial
action has been initiated at some of Sun's facilities and will be required to
be undertaken by Sun at various of its other facilities. The cost of such
remedial actions could be significant but is expected to be incurred over an
extended period of time.
Sun 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
12 to the Consolidated Financial Statements in the Company's 1996 Annual
Report to Shareholders.
Total future costs for environmental remediation activities will depend
upon, among other things, the identification of additional sites, the
determination of the extent of the contamination of 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 Sun's liability
at multi-party sites, if any, in light of the number, participation level and
financial viability of other parties.
Management believes that the overall expenditures for environmental
activities are likely to be significant but are expected to be incurred over
an extended period of time and to be funded from Sun's net cash provided by
operating activities. Although potentially significant with respect to results
of operations or cash flows for any one year, management believes that such
costs will not have a material impact on Sun's consolidated financial position
or, over an extended period of time, on Sun's cash flows or liquidity.
FORWARD-LOOKING STATEMENTS
Those statements in the business and properties discussion that are not
historical in nature should be deemed forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. Although Sun
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. Such forward-looking statements involve
risks and are inherently uncertain. Important factors that could cause actual
results to differ materially from those projected in such statements are
discussed below.
Sun is affected by changes in industry-wide refining margins, changes in
crude oil and other raw material costs, and world and regional events that
could significantly increase volatility in the marketplace. Sun's crude oil
supply could be affected by factors beyond its control, such as embargoes, the
continued discovery and production of light sweet crude oil, or military
conflicts between (or internal instability in) one or more oil-producing
countries. Other factors that could affect Sun's business include: the
continued availability of debt and equity financing, changes in labor
relations, general economic conditions (including recessionary trends,
inflation and interest and currency exchange rates), market supply and demand
for Sun's products, the reliability and efficiency of Sun's
17
operating facilities, the level of operating expenses and hazards common to
operating facilities (including explosions, fires, oil spills and the effects
of severe weather conditions), actions taken by competitors (including both
pricing and expansion and retirement of refinery capacity in response to
market conditions), and civil, criminal, regulatory or administrative actions,
claims or proceedings.
Sun's operations could also be affected by domestic and international
political, legislative, regulatory and legal actions, such as restrictions on
production, restrictions on imports and exports, price controls, tax increases
and retroactive tax claims, expropriation of property and cancellation of
contract rights. In addition, Sun is impacted by laws pertaining to workers'
health and safety, and current or amended state and federal environmental and
other similar regulations (including, particularly, regulations dealing with
gasoline composition and characteristics) or the judicial interpretation of
such regulations.
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 Sun. Unpredictable or unknown factors not discussed herein could also have
material adverse effects on forward-looking statements.
ITEM 3. LEGAL PROCEEDINGS
The United States Department of Justice on behalf of the United States
Environmental Protection Agency filed on February 3, 1997 an action in the
United States District Court for the Northern District of Oklahoma seeking
civil penalties in excess of $100,000 for alleged violations of the Clean Air
Act and the Oklahoma State Implementation Program. Settlement discussions are
being held.
Many other legal and administrative proceedings are pending against Sun.
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 Sun. Management of Sun believes that any liabilities which may
arise from such proceedings would not be material in relation to the
consolidated financial position of Sun at December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF SUN COMPANY, INC.
NAME, AGE AND PRESENT
POSITION WITH
SUN COMPANY, INC. BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- --------------------- ------------------------------------------
Robert M. Aiken, Jr., 54 Mr. Aiken was elected to his present position in November
Executive Vice 1996. From May 1992 until November 1996, he was Senior Vice
President and Chief President and Chief Financial Officer and from September
Financial Officer 1990 until May 1992, he was Senior Vice President, Finance.
Robert H. Campbell, 59 Mr. Campbell was elected Chairman of the Board in May 1992
Chairman of the Board and Chief Executive Officer in September 1991. He also held
and Chief Executive the additional positions of President and Chief Operating
Officer Officer from February 1991 until November 1996. He has been
a Director since November 1988.
John G. Drosdick, 53 Mr. Drosdick was elected a Director and President and Chief
President and Chief Operating Officer in December 1996. He was President and
Operating Officer Chief Operating Officer of Ultramar Corporation (which re-
cently merged with Diamond Shamrock, Inc. to become Ultramar
Diamond Shamrock Corporation) from June 1992 to August 1996
and from 1990 to June 1992, he was President of its U.S. re-
fining and marketing business.
18
NAME, AGE AND PRESENT
POSITION WITH
SUN COMPANY, INC. BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- --------------------- ------------------------------------------
Jack L. Foltz, 61 Mr. Foltz was elected to his present position in October
Vice President and 1992, and from December 1991 to October 1992 he was Assis-
General Counsel tant General Counsel, Refining and Marketing.
Deborah M. Fretz, 48 Ms. Fretz was elected Senior Vice President, Logistics in
Senior Vice President, August 1994. She assumed the additional position of Senior
Lubricants and Vice President, Lubricants in January 1997. In addition, she
Logistics has been President of Sun Pipe Line Company, a subsidiary,
since October 1991.
Thomas W. Hofmann, 45 Mr. Hofmann was elected to his present position in July
Comptroller 1995. From September 1994 to July 1995, he served as Direc-
tor, Performance Analysis, and from October 1991 to Septem-
ber 1994, Director, Tax Administration.
David E. Knoll, 53 Mr. Knoll was elected to his present position in August
Senior Vice President, 1994. From October 1992 to August 1994, he was Senior Vice
Northeast Refining President, Marketing and Logistics and from October 1991 to
and Chemicals October 1992, Group Vice President, Refining and Marketing.
Robert W. Owens, 43 Mr. Owens was elected to his present position in February
Vice President and 1997. He was Vice President, Marketing and Services of
General Manager, Ultramar Diamond Shamrock Corporation from 1996 to 1997 and
Sunoco Northeast of Ultramar Corporation from 1994 to 1996. From 1989 to
Marketing 1994, he was Manager, East Coast Branded Marketing of
Amerada Hess Corporation.
Malcolm I. Ruddock, 54 Mr. Ruddock was elected to his present position in 1989.
Treasurer
David C. Shanks, 57 Mr. Shanks was elected to his present position in February
Vice President, Human 1997. He also has additional responsibilities for Strategic
Resources Planning and Public Affairs. Previously, he was a Corporate
Vice President and Director of Arthur D. Little, Inc.
Sheldon L. Thompson, 58 Mr. Thompson was elected to his present position in October
Senior Vice President 1992. From 1991 to October 1992, he was Vice President,
and Chief Chemicals, Lubricants and Technology.
Administrative Officer
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 54 of the
Company's 1996 Annual Report to Shareholders. The market exchanges on which
the Company's stock is traded are listed on the cover page of this Annual
Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference to
the Selected Financial Data on page 22 of the Company's 1996 Annual Report to
Shareholders.
19
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 23-32 in the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information in the Company's 1996 Annual Report to
Shareholders is incorporated herein by reference: the Consolidated Financial
Statements on pages 33-36; the Notes to Consolidated Financial Statements on
pages 37-50; the Report of Independent Auditors on page 51; the Supplemental
Financial and Operating Information on page 53 (excluding the sections on
Throughput per Direct Outlet and Pipeline Mileage); and the Quarterly
Financial and Stock Market Information on page 54.
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, 1996.
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, 1996, except that the Report of the
Compensation Committee and the Stock Performance Graphs contained in the Proxy
Statement are specifically excluded from incorporation by reference herein.
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, 1996.
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, 1996.
20
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 1996 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 25 of this Form
10-K. Other schedules are omitted because the required information is
shown elsewhere in this report, is not required or is not applicable.
3.Exhibits:
3.(i) --Articles of Incorporation of Sun Company, Inc., as amended and
restated effective as of February 1, 1996 (incorporated by
reference to Exhibit 3.(i) of the Company's 1995 Form 10-K
filed March 7, 1996, File No. 1-6841).
3.(ii) --Sun Company, Inc. Bylaws, as amended and restated effective as
of February 1, 1996 (incorporated by reference to Exhibit
3.(ii) of the Company's 1995 Form 10-K filed March 7, 1996,
File No. 1-6841).
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 --Rights Agreement between Sun Company, Inc. and First Chicago
Trust Company of New York 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* --Sun Company, Inc. Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 of the Company's 1995 Form 10-K filed
March 7, 1996, File No. 1-6841).
10.2* --Sun Company, Inc. Executive Retirement Plan (incorporated by
reference to Exhibit 10(d) of the Company's Form SE filed March
13, 1992, File No. 1-6841).
10.3* --Sun Company, Inc. Directors' Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 of the Company's
1995 Form 10-K filed March 7, 1996, File No. 1-6841).
10.4* --Sun Company, Inc. Deferred Compensation Plan (incorporated by
reference to Exhibit 10.4 of the Company's 1995 Form 10-K filed
March 7, 1996, File No. 1-6841).
10.5* --Sun Company, Inc. Pension Restoration Plan (incorporated by
reference to Exhibit 10.5 of the Company's 1995 Form 10-K filed
March 7, 1996, File No. 1-6841).
21
10.6* --Sun Company, Inc. Executive Incentive Plan (incorporated by
reference to Exhibit 10.9 of the Company's Form SE filed March
11, 1993, File No. 1-6841).
10.7* --Amendment No. 1996-1 to the Sun Company, Inc. Savings
Restoration Plan, effective April 1, 1996. The Sun Company Inc.
Savings Restoration Plan (prior to Amendment No. 1996-1) is
incorporated by reference to Exhibit 10.7 of the Company's 1995
Form 10-K filed March 7, 1996, File No. 1-6841.
10.8* --Sun Company, Inc. Retainer Stock Plan for Outside Directors
(incorporated by reference to Exhibit 10.9 of the Company's 1995
Form 10-K filed March 7, 1996, File No. 1-6841).
10.9* --Sun Company, Inc. Executive Long-Term Stock Investment Plan, as
amended effective as of December 4, 1996.
10.10 --Deposit Agreement for Series A Cumulative Preference Stock
(incorporated by reference to Exhibit 99(g)(4) of the Sun
Company, Inc. Schedule 13E-4 filed June 13, 1995, File No. 1-
6841).
10.11* --Form of Indemnification Agreement as of February 1, 1996,
individually entered into between Sun Company, Inc. and various
directors and officers as set forth more fully in the schedule
attached therein (incorporated by reference to Exhibit 10.15 of
the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-
6841).
10.12* --Trust Under Sun Company, Inc. Directors' Deferred Compensation
Plan, dated as of February 1, 1996.
10.13* --Sun Company, Inc. Deferred Compensation and Benefits Trust,
dated as of February 1, 1996.
10.14* --Agreement of employment entered November 15, 1996 by and
between the Company and John G. Drosdick.
11 --Statements re Sun Company, Inc. and Subsidiaries Computation of
Per Share Earnings for the Years Ended December 31, 1996, 1995
and 1994.
12 --Statements re Sun Company, Inc. and Subsidiaries Computation of
Ratio of Earnings to Fixed Charges for the Years Ended December
31, 1996, 1995, 1994, 1993 and 1992.
13 --Sun Company, Inc. 1996 Annual Report to Shareholders Financial
Section.
21 --Subsidiaries of Sun Company, Inc.
23.1 --Consent of Ernst & Young LLP.
23.2 --Consent of Coopers & Lybrand L.L.P.
23.3 --Report of Coopers & Lybrand L.L.P.
24.1 --Power of Attorney executed by certain officers and directors of
Sun Company, Inc.
24.2 --Certified copy of the resolution authorizing certain officers
to sign on behalf of Sun Company, Inc.
27 --Article 5 of Regulation S-X, Financial Data Schedule.
- --------
*These exhibits constitute the Executive Compensation Plans and Arrangements of
the Company.
(b) Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the quarter ended
December 31, 1996.
Note: Copies of each Exhibit to this Form 10-K are available upon request, at
$2 per copy.
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.
Sun Company, Inc.
By /s/Robert M. Aiken, Jr.
Robert M. Aiken, Jr.
Executive Vice President and Chief Financial Officer
Date March 7, 1997
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, 1997:
SIGNATURES TITLES
Robert M. Aiken, Jr.* Executive Vice President and Chief Financial
--------------------- Officer (Principal Financial Officer)
Robert M. Aiken, Jr.
Robert H. Campbell* Chairman of the Board, Chief Executive
------------------- Officer and Director (Principal Executive
Robert H. Campbell Officer)
Raymond E. Cartledge* Director
---------------------
Raymond E. Cartledge
Robert E. Cawthorn* Director
-------------------
Robert E. Cawthorn
John G. Drosdick* President, Chief Operating Officer and
----------------- Director
John G. Drosdick
Mary J. Evans* Director
--------------
Mary J. Evans
Thomas P. Gerrity* Director
------------------
Thomas P. Gerrity
Thomas W. Hofmann* Comptroller (Principal Accounting Officer)
------------------
Thomas W. Hofmann
James G. Kaiser* Director
----------------
James G. Kaiser
23
SIGNATURES TITLES
Robert D. Kennedy* Director
------------------
Robert D. Kennedy
Thomas W. Langfitt* Director
-------------------
Thomas W. Langfitt
R. Anderson Pew* Director
----------------
R. Anderson Pew
William F. Pounds* Director
------------------
William F. Pounds
Alexander B. Trowbridge* Director
------------------------
Alexander B. Trowbridge
*By /s/Robert M. Aiken, Jr. Individually and as Attorney-in-Fact
-----------------------
Robert M. Aiken, Jr.
24
SUN COMPANY, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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, 1996:
Deducted from asset in
balance sheet--allowance
for doubtful accounts
and notes receivable.... $18 $ 8 $-- $18 $ 8
=== === === === ===
For the year ended
December 31, 1995(A):
Deducted from asset in
balance sheet--allowance
for doubtful accounts
and notes receivable.... $10 $ 8 $11(B) $11(C) $18
=== === === === ===
For the year ended
December 31, 1994(A):
Deducted from asset in
balance sheet--allowance
for doubtful accounts
and notes receivable.... $11 $-- $-- $ 1 $10
=== === === === ===
- --------
Notes:
(A) Restated to exclude amounts related to international production and
Canadian upstream petroleum operations as these operations are now
presented as discontinued operations. (See Note 2 to the Consolidated
Financial Statements in the Company's 1996 Annual Report to Shareholders.)
(B) Represents the account balance, at June 30, 1995, of Sun's coal and
cokemaking operations which previously had been accounted for as an
investment held for sale. Effective June 30, 1995, this business became
one of Sun's ongoing business units and is no longer held for sale. (See
Note 2 to the Consolidated Financial Statements in the Company's 1996
Annual Report to Shareholders.)
(C) Includes a $4 million deduction attributable to the refining and marketing
operations of Suncor Inc., a Canadian integrated oil company, reflecting
the divestment of Suncor on June 8, 1995. (See Note 2 to the Consolidated
Financial Statements in the Company's 1996 Annual Report to Shareholders.)
25
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