Sunoco 2005 Annual Report Download

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2005 Annual Report

Table of contents

  • Page 1
    2005 Annual Report

  • Page 2
    ...products manufactured or sold, rates of return, income, cash ï¬,ow, earnings growth, capital spending, costs and plans could differ materially due to, for example, changes in market conditions, changes in refining, chemicals or marketing margins, crude oil and feedstock supply, changes in operating...

  • Page 3
    ...and Supply business. After many years of overcapacity, growing refined product demand is increasingly pushing the limits of U.S. and global refining capacity. Refined products, which in the oversupplied market of the 1980s and 90s were largely priced on a cost basis, are now selling more on value...

  • Page 4
    ... tipping point from good to poor markets in our businesses. The market values, and our shareholders expect, such behavior. Our success over the past few years could not have been achieved without the hard work and dedication of our employees. They remain the cornerstone of Sunoco and I thank them...

  • Page 5
    ...and contractor safety performance in the Sun Coke business, while better than the industry benchmark, did not meet Company expectations. Whether through the investment of capital, or in the daily production and distribution of fuels, chemicals and coke, excellence in Health, Environment, and Safety...

  • Page 6
    ... diesel, jet fuel and residual fuels) and commodity petrochemicals. The Refining and Supply business consists of Northeast Refining (comprised of the Philadelphia and Marcus Hook, PA refineries and the Eagle Point refinery in Westville, NJ) and MidContinent Refining (comprised of the Toledo, OH...

  • Page 7
    ..., phenol and bisphenol-A used in many consumer and industrial products. With production at nine plants and annual sales of approximately five billion pounds, Sunoco Chemicals is a major force in its markets. The primary focus of Sunoco Chemicals is to quickly adapt to the rapidly changing...

  • Page 8
    ..., Year End Return on average capital employed (based on net income (loss)) Shares outstanding Number of employees 31.3% 133.1 13,800 21.0% 138.7 14,200 12.4% 150.8 14,900 0.9% 152.9 14,000 15.4% 151.1 14,200 *Effective with the second quarter of 2006, Sunoco increased the quarterly dividend on its...

  • Page 9
    ... in Sunoco's principal refining centers in the Northeast and Midwest were very strong. Such margins benefited from low industry refined product inventory levels, stringent fuel specifications beginning in 2004 related to sulfur reductions in gasoline, supply disruptions in the Gulf Coast in 2005...

  • Page 10
    ...® retail gasoline sites located primarily in Florida and South Carolina. • In January 2004, Sunoco completed the acquisition from El Paso Corporation of the 150 thousand barrels-per-day Eagle Point refinery and related assets located near the Company's existing Northeast Refining operations for...

  • Page 11
    • During 2005, the Company continued its Retail Portfolio Management program to selectively reduce its invested capital in Company-owned or leased sites, while retaining most of the gasoline sales volumes attributable to the divested sites. During the 20032005 period, 323 sites have been divested,...

  • Page 12
    ...Profile of Sunoco Businesses (after tax) (Millions of Dollars) 2005 2004 2003 Refining and Supply Retail Marketing Chemicals Logistics Coke Corporate and Other: Corporate expenses Net financing expenses and other Income tax matters Midwest marketing divestment program Phenol supply contract dispute...

  • Page 13
    Refining and Supply The Refining and Supply business manufactures petroleum products and commodity petrochemicals at its Marcus Hook, Philadelphia, Eagle Point and Toledo refineries and petroleum and lubricant products at its Tulsa refinery and sells these products to other Sunoco businesses and to...

  • Page 14
    ... the refinery which Sunoco subsequently sold in March 2004 to Sunoco Logistics Partners L.P., the consolidated master limited partnership that is 47.9 percent owned by Sunoco. (See Note 2 to the consolidated financial statements.) Retail Marketing The Retail Marketing business sells gasoline and...

  • Page 15
    ... outlets. Chemicals The Chemicals business manufactures phenol and related products at chemical plants in Philadelphia, PA and Haverhill, OH; polypropylene at facilities in LaPorte, TX, Neal, WV and Bayport, TX; and cumene at the Philadelphia, PA refinery and the Eagle Point refinery in Westville...

  • Page 16
    ... of Sunoco Businesses. Sunoco is contesting the finding of liability and the determination of damages as well as the arbitrator's authority to establish 2005 pricing. The phenol supply agreement provides for a reopener for pricing on and after January 1, 2005 and sets forth specific standards for...

  • Page 17
    ... refined product and crude oil pipeline joint ventures. Substantially all logistics operations are conducted through Sunoco Logistics Partners L.P., the consolidated master limited partnership that is 47.9 percent owned by Sunoco (see "Capital Resources and Liquidity-Other Cash Flow Information...

  • Page 18
    ... in the Harbor Pipeline from El Paso Corporation for $7 million; and in November, a refined product terminal located in Columbus, OH from a subsidiary of Certified Oil Company for $8 million. During September 2003, the Partnership acquired an additional 3.1 percent interest in West Shore Pipe...

  • Page 19
    ... expiration or any phase out of the tax credits with respect to coke sold under long-term contracts from the Indiana Harbor and Haverhill plants. The Company also could be required to make cash payments to the third-party investors if the tax credit is reduced as a result of increased domestic crude...

  • Page 20
    ...more parties. The steel company customers would be expected to purchase the coke production on a take-or-pay or equivalent basis. Corporate and Other Corporate Expenses-Corporate administrative expenses increased $17 million in 2005 primarily due to higher employee-related expenses and a $6 million...

  • Page 21
    ... higher refined product and chemical prices and to significantly higher refined product sales volumes, largely attributable to the acquisitions of the Mobil® sites as well as the Eagle Point refinery from El Paso Corporation in January 2004 and the Speedway® retail sites from Marathon in...

  • Page 22
    ... crude oil as well as petroleum and chemical products, are readily marketable at their current replacement values. Management believes that the current levels of cash and working capital are adequate to support Sunoco's ongoing operations. Cash Flows from Operating Activities-In 2005, Sunoco's cash...

  • Page 23
    ...revolving credit facility, which had been used to partially fund its $100 million acquisition of the crude oil pipeline system and related storage facilities located in Texas from ExxonMobil. Upon completion of these transactions, Sunoco's interest in the Partnership, including its 2 percent general...

  • Page 24
    ...will be sufficient to satisfy Sunoco's ongoing capital requirements, to fund its pension obligations (see "Pension Plan Funded Status" below) and to pay the current level of cash dividends on Sunoco's common stock. However, from time to time, the Company's short-term cash requirements may exceed its...

  • Page 25
    ... October 2005. Management believes there is sufficient financial capacity available to pursue strategic opportunities as they arise. In addition, the Company has the option of issuing additional common or preference stock or selling an additional portion of its Sunoco Logistics Partners L.P. common...

  • Page 26
    ... 31, 2005. At this time, management does not believe that it is likely that the Company will have to perform under any of these guarantees. A wholly owned subsidiary of the Company, Sunoco Receivables Corporation, Inc., is a party to an accounts receivable securitization facility that terminates in...

  • Page 27
    ...acquisition from El Paso Corporation of the Eagle Point refinery and related chemical and logistics assets, which includes inventory. The $250 million purchase price is comprised of $190, $40 and $20 million attributable to Refining and Supply, Chemicals and Logistics, respectively. ** Excludes $181...

  • Page 28
    ... the construction of a sulfur plant at the Marcus Hook refinery. Pension Plan Funded Status The following table sets forth the components of the change in market value of the investments in Sunoco's defined benefit pension plans: December 31 (Millions of Dollars) 2005 2004 Balance at beginning of...

  • Page 29
    ... with the protection of the environment, waste management and the characteristics and composition of fuels. As with the industry generally, compliance with existing and anticipated laws and regulations increases the overall cost of operating Sunoco's businesses, including capital costs to construct...

  • Page 30
    ... table summarizes the changes in the accrued liability for environmental remediation activities by category: (Millions of Dollars) Refineries Marketing Sites Chemicals Facilities Pipelines and Terminals Hazardous Waste Sites Other Total At December 31, 2002 Accruals Payments Other At December...

  • Page 31
    ... addressed with the above containment/ remediation strategy. At some smaller or less impacted facilities and some previously divested terminals, the focus is on remediating discrete interior areas to attain regulatory closure. Sunoco owns or operates certain retail gasoline outlets where releases...

  • Page 32
    ... refineries. The Tier II capital spending is expected to be essentially completed in 2006, while the higher operating costs will be incurred when the low-sulfur fuels are produced. The Company's estimate of total capital outlays to comply with the Tier II low-sulfur gasoline and on-road diesel fuel...

  • Page 33
    ... could have a significant impact on market conditions and the profitability of Sunoco and the industry in general. MTBE Litigation Sunoco, along with other refiners, manufacturers and sellers of gasoline, owners and operators of retail gasoline sites, and manufacturers of MTBE, are defendants...

  • Page 34
    ... rates relating to its retirement benefit plans (see "Critical Accounting Policies- Retirement Benefit Liabilities" below). Sunoco generally does not use derivatives to manage its market risk exposure to changing interest rates. Dividends and Share Repurchases On July 7, 2005, the Company's Board...

  • Page 35
    ...the determination of expense and benefit obligations for Sunoco's postretirement health care plans. The discount rates used to determine the present value of future pension payments and medical costs are based on a portfolio of high-quality (AA rated) corporate bonds with maturities that reflect the...

  • Page 36
    ...Company applies the expected rate of return to the market-related value of plan assets at the beginning of the year, which is determined using a quarterly average of plan assets from the preceding year. The expected rate of return on plan assets is designed to be a long-term assumption. It generally...

  • Page 37
    ...: operating losses; unused capacity; market value declines; technological developments resulting in obsolescence; changes in demand for the Company's products or in end-use goods manufactured by others utilizing the Company's products as raw materials; changes in the Company's business plans or...

  • Page 38
    ... impact on the Company's financial position. Management believes that none of the current remediation locations, which are in various stages of ongoing remediation, is individually material to Sunoco as its largest accrual for any one Superfund site, operable unit or remediation area was less than...

  • Page 39
    ... addressed with the above containment/ remediation strategy. At some smaller or less impacted facilities and some previously divested terminals, the focus is on remediating discrete interior areas to attain regulatory closure. Sunoco owns or operates certain retail gasoline outlets where releases...

  • Page 40
    ... and inflation); • Changes in product specifications; • Availability and pricing of oxygenates such as MTBE and ethanol; • Phase-outs or restrictions on the use of MTBE; • Political and economic conditions in the markets in which the Company, its suppliers or customers operate, including the...

  • Page 41
    • Nonperformance by or disputes with major customers, suppliers, dealers, distributors or other business partners; • General economic, financial and business conditions which could affect Sunoco's financial condition and results of operations; • Changes in applicable statutes and government ...

  • Page 42
    ... statements in accordance with generally accepted accounting principles. The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making this assessment, the Company's management used the criteria set forth in Internal...

  • Page 43
    ... reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company...

  • Page 44
    ... the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence...

  • Page 45
    ... cost and debt expense Interest capitalized Income before income tax expense Income tax expense (Note 4) Net Income Earnings Per Share of Common Stock (Note 14): Basic Diluted Weighted-Average Number of Shares Outstanding (Notes 5 and 14): Basic Diluted Cash Dividends Paid Per Share of Common Stock...

  • Page 46
    ... Current Assets Investments and long-term receivables (Note 7) Properties, plants and equipment, net (Note 8) Prepaid retirement costs (Note 9) Deferred charges and other assets (Note 2) Total Assets Liabilities and Shareholders' Equity Current Liabilities Accounts payable Accrued liabilities Short...

  • Page 47
    ...13) Cash distributions to investors in cokemaking operations Cash distributions to investors in Sunoco Logistics Partners L.P. Cash dividend payments Purchases of common stock for treasury Proceeds from issuance of common stock under management incentive and employee option plans Other Net cash used...

  • Page 48
    ... tax benefit of $6) Cash dividend payments Purchases for treasury Issued under management incentive and employee option plans Net increase in equity related to unissued shares under management incentive plans Other Total At December 31, 2004 Net income Other comprehensive income: Minimum pension...

  • Page 49
    ... and beverages at its convenience stores, operates common carrier pipelines through a publicly traded limited partnership, provides terminalling services and provides a variety of car care services at its retail gasoline outlets. Revenues related to the sale of products are recognized when title...

  • Page 50
    ...line basis over their estimated useful lives. Gains and losses on the disposals of fixed assets are generally reflected in net income. Impairment of Long-Lived Assets Long-lived assets held for sale are recorded at the lower of their carrying amount or fair market value less cost to sell. Long-lived...

  • Page 51
    ...Sunoco also assumed certain environmental and other liabilities. The Eagle Point refinery is located in Westville, NJ, near the Company's existing Northeast Refining operations. Management believes the acquisition of the Eagle Point refinery complements and enhances the Company's refining operations...

  • Page 52
    ...® sites were re-branded as Sunoco® locations during the 2003-2004 period. The Company believes these acquisitions fit its long-term strategy of building a retail and convenience store network designed to provide attractive long-term returns. The purchase prices for the service stations acquired...

  • Page 53
    ..., VA for $12 million; in June, an additional one-third interest in the Harbor Pipeline from El Paso Corporation for $7 million; and in November, a refined product terminal located in Columbus, OH from a subsidiary of Certified Oil Company for $8 million. During September 2003, the Partnership...

  • Page 54
    ...summarizes the changes in the acfacility at a rate equivalent to that set forth in the origicrual for exit costs and terminations related to the sale of nal agreement. As part of the restructuring, Sunoco has the plasticizer business as well as for other exit costs and agreed to a long-term lease of...

  • Page 55
    ...in of Federal income tax effects 88 51 14 dispute, which increased net income by $5 million. In Dividend exclusion for affiliated companies (2) (3) (4) connection with this settlement, Sunoco received $9 milNonconventional fuel credit (1) (1) (1) lion of cash proceeds. Other 1 - 1 $606 $390 $183 53

  • Page 56
    ... December 31 Net Investment Weighted-average number of common shares outstanding-basic Add effect of dilutive stock incentive awards Weighted-average number of shares-diluted 136.6 .9 137.5 148.2 1.6 149.8 153.4 1.6 155.0 2005 Refining and supply Retail marketing* Chemicals Logistics Coke 2004...

  • Page 57
    ... provide retirement benefits for approximately one-half of its employees. Sunoco also has plans which provide health care benefits for substantially all of its retirees ("postretirement benefit plans"). The postretirement benefit plans are unfunded and the costs are shared by Sunoco and its retirees...

  • Page 58
    ...Postretirement Benefit Plans 2005 2004 Benefit obligations at beginning of year* Service cost Interest cost Actuarial losses (gains) Plan amendments Benefits paid Premiums paid by participants Benefit obligations at end of year* Fair value of plan assets at beginning of year** Actual return on plan...

  • Page 59
    ... used at December 31, 2005 and 2004 to determine benefit obligations for the plans: Defined Benefit Plans (In Percentages) 2005 2004 Postretirement Benefit Plans 2005 2004 Discount rate Rate of compensation increase 5.60% 4.00% 5.75% 4.00% 5.50% 5.50% The health care cost trend assumption used...

  • Page 60
    ...December 31, 2005, the Company's tangible net worth was $2.3 billion and its targeted tangible net worth was $1.3 billion. The Facility also requires that Sunoco's ratio of consolidated net indebtedness, including borrowings of Sunoco Logistics Partners L.P., to consolidated capitalization (as those...

  • Page 61
    ...can refinance them on a long-term basis utilizing its revolving credit facility (Note 10). In 2004, the Company also issued $100 million of commercial paper and used the proceeds to repay its maturing 7 1⁄ 8 percent notes. The commercial paper was repaid in 2005. Cash payments for interest related...

  • Page 62
    ..., Sunoco has sold thousands of retail gasoline outlets as well as refineries, terminals, coal mines, oil and gas properties and various other assets. In connection with these sales, the Company has indemnified the purchasers for potential environmental and other contingent liabilities related to...

  • Page 63
    ... table summarizes the changes in the accrued liability for environmental remediation activities by category: (Millions of Dollars) Refineries Marketing Sites Chemicals Facilities Pipelines and Terminals Hazardous Waste Sites Other Total At December 31, 2002 Accruals Payments Other At December...

  • Page 64
    .... MTBE Litigation Sunoco, along with other refiners, manufacturers and sellers of gasoline, owners and operators of retail gasoline sites, and manufacturers of MTBE, are defendants in approximately 60 cases in 16 states involving the manufacture and use of MTBE in gasoline and MTBE contamination...

  • Page 65
    ... uncertainty. The estimated lengths of these preferential return periods are based upon the Company's current expectations of future cash flows and tax benefits, which are impacted by sales volumes and prices, raw material and operating costs, capital expenditure levels and the ability to recognize...

  • Page 66
    ... 2007. Logistics Operations The Partnership's issuance of common units to the public In the second quarter of 2004, Sunoco Logistics Partners has resulted in an increase in the value of Sunoco's proL.P., a master limited partnership in which Sunoco had a portionate share of the Partnership's equity...

  • Page 67
    ... various employee benefit plans were proportionally increased in accordance with the terms of those respective agreements and plans. Balance at beginning of year Net proceeds from public offerings Minority interest share of income* Increase attributable to Partnership management incentive plan Cash...

  • Page 68
    ... information with respect to common stock option awards under Sunoco's management incentive plans as well as the Employee Option Plan: Management Incentive Plans Shares Under Option WeightedAverage Option Price Per Share Employee Option Plan* Shares Under Option Option Price Per Share Outstanding...

  • Page 69
    ...units were payable in Company common stock. In December 2003, the Company changed the method of payment for certain outstanding common stock unit awards to cash. As a result, the Company recorded a $12 million charge to the capital in excess of par value component of shareholders' equity at December...

  • Page 70
    ... phenol and related products at chemical plants in Philadelphia, PA and Haverhill, OH; polypropylene at facilities in LaPorte, TX, Neal, WV and Bayport, TX; and cumene at the Philadelphia and Eagle Point refineries. In addition, propylene is upgraded and polypropylene is produced at the Marcus Hook...

  • Page 71
    ... Information (Millions of Dollars) Refining and Supply Retail Marketing Chemicals Logistics Coke Corporate and Other Consolidated 2005 Sales and other operating revenue (including consumer excise taxes): Unaffiliated customers Intersegment Pretax segment income (loss) Income tax (expense) benefit...

  • Page 72
    ... sales to unaffiliated customers and other operating revenue by product or service: (Millions of Dollars) 2005 2004 2003 18. Subsequent Events (Unaudited) In March 2006, Sunoco Logistics Partners L.P. purchased two separate crude oil pipeline systems and related storage facilities located in Texas...

  • Page 73
    ... produced at Sunoco's Marcus Hook, Philadelphia, Eagle Point and Toledo refineries, excluding cumene, which is included in the Chemicals segment. Other Data Crude oil inventory* * Millions of barrels at December 31. 2003 2005 2004 2003 2.0 2.0 2.0 Retail Sales* Gasoline Middle distillates...

  • Page 74
    ...)* Per-Share Data**: Net income (loss): Basic Diluted Cash dividends on common stock*** Balance Sheet Data: Cash and cash equivalents Total assets Short-term borrowings and current portion of long-term debt Long-term debt Shareholders' equity Outstanding shares of common stock** Shareholders' equity...

  • Page 75
    ...Prices) 2005 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter 2004 Third Quarter Fourth Quarter Sales and other operating revenue (including consumer excise taxes) Gross profit* Net income Net income per share of common stock††: Basic Diluted Cash dividends...

  • Page 76
    ... Treasurer Principal Officers Terence P. Delaney Vice President, Investor Relations and Planning Rolf D. Naku Senior Vice President Human Resources and Public Affairs Michael H. R. Dingus Senior Vice President, Sunoco, Inc. President, Sun Coke Company Marie A. Natoli General Auditor Committees...

  • Page 77
    Of Interest to Sunoco Shareholders Principal Office Annual Meeting Investor Relations 1735 Market Street Philadelphia, PA 19103-7583 215-977-3000 e-mail: [email protected] Web Site: www.SunocoInc.com Transfer Agent and Registrar Thursday, May 4, 2006, 9:30 a.m. Stewart Auditorium Moore...

  • Page 78
    Sunoco, Inc., 1735 Market Street, Suite LL, Philadelphia, PA 19103-7583