Sunoco 2006 Annual Report Download

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2006 Annual Report

Table of contents

  • Page 1
    2006 Annual Report

  • Page 2
    ... patented technology, Sunoco also has the capacity to manufacture over 2.5 million tons annually of highquality metallurgical-grade coke for use in the steel industry. Contents: Letter to Shareholders ...1 Health, Environment and Safety Report ...3 About Sunoco ...4 Financial Section ...6 Directors...

  • Page 3
    ...the 2006 transition from MTBE to ethanol-based gasoline, also benefited earnings. Sunoco's non-refining business earnings totaled $205 million, up 6 percent from 2005. Retail Marketing, Logistics and Coke each improved; but rising feedstock prices and weak demand growth resulted in lower Chemicals...

  • Page 4
    ... the upgrade projects at the Philadelphia and Toledo refineries; progress towards new Coke plants; and productivity programs in our Retail Marketing and Chemicals businesses. We believe that realizing the full value of our existing asset portfolio offers significant opportunity in the coming year...

  • Page 5
    ... in the Sun Coke business was the best in its history and there were no contractor recordable injuries during the year. • The Eagle Point refinery received the Chairman's Award for HES Excellence. Sunoco's complete 2006 Health, Environment and Safety Review and CERES Report will be published in...

  • Page 6
    ... Refining and Supply business manufactures refined products (primarily gasoline, diesel, jet fuel and residual fuels) and commodity petrochemicals. It consists of Northeast Refining (comprised of the Philadelphia and Marcus Hook, PA refineries and the Eagle Point refinery in Westville, NJ) and...

  • Page 7
    ..., of Sunoco Logistics Partners L.P . (NYSE: SXL), a publicly traded master limited partnership. Coke Sun Coke Company manufactures high-quality coke for use by steel manufacturers in the production of blast-furnace steel. Aggregate annual production from its Indiana Harbor, Jewell and Haverhill...

  • Page 8
    ...Total debt Shareholders' equity Capital employed $10,982 $1,987 $2,075 $4,062 $9,931 $1,411 $2,051 $3,462 $8,079 $1,482 $1,607 $3,089 $7 ,053 $1,601 $1,556 $3,157 $6,441 $1,455 $1,394 $2,849 Per Share Data Net income (loss) - diluted Cash dividends on common stock* Shareholders' equity Market price...

  • Page 9
    ... premiums for ethanol-blended gasoline in 2006, strong refined product demand as a result of improving U.S. and global economies which led to reductions in spare industry refining capacity and generally tight industry refined product inventory levels on a days-supply basis. Chemical margins improved...

  • Page 10
    ...of 340 Mobil® retail outlets located primarily in Delaware, Maryland, Virginia and Washington, D.C. • During the second quarter of 2004, Sunoco sold its private label consumer and commercial credit card business and related accounts receivable to Citibank, generating $100 million of cash proceeds...

  • Page 11
    ... first half of 2007. • During 2006, the Company continued its Retail Portfolio Management program which selectively reduced its invested capital in Company-owned or leased sites, while retaining most of the gasoline sales volumes attributable to the divested sites. During the 2004-2006 period, the...

  • Page 12
    ... margins in Sunoco's Retail Marketing business ($52 million); and lower chemical sales volumes ($13 million). 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...

  • Page 13
    Northeast Refining (the Marcus Hook, Philadelphia and Eagle Point refineries) and MidContinent Refining (the Toledo and Tulsa refineries). 2006 2005 2004 Income (millions of dollars) Wholesale margin* (per barrel): Total Refining and Supply Northeast Refining MidContinent Refining Throughputs (...

  • Page 14
    ... with the refinery which Sunoco subsequently sold in March 2004 to Sunoco Logistics Partners L.P., the consolidated master limited partnership that is 43 percent owned by Sunoco. (See Note 2 to the consolidated financial statements.) Retail Marketing The Retail Marketing business sells gasoline and...

  • Page 15
    ..., 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, NJ. In addition, propylene is upgraded and polypropylene is produced at the Marcus Hook, PA Epsilon Products Company, LLC joint venture...

  • Page 16
    ... interest in several refined product and crude oil pipeline joint ventures. Substantially all logistics operations are conducted through Sunoco Logistics Partners L.P., a consolidated master limited partnership. Sunoco has a 43 percent interest in Sunoco Logistics Partners L.P., which includes its...

  • Page 17
    ... logistics assets that had previously been acquired by Sunoco with the Eagle Point refinery for $20 million; in April, ConocoPhillips' Baltimore, MD and Manassas, VA refined product terminals for $12 million; in June, an additional one-third interest in the Harbor Pipeline from El Paso Corporation...

  • Page 18
    ...loss is included in Net Financing Expenses and Other under Corporate and Other in the Earnings Profile of Sunoco Businesses. The preferential returns of the investors in the Indiana Harbor cokemaking operations are currently equal to 98 percent of the cash flows and tax benefits from such cokemaking...

  • Page 19
    ... benefit Coke's future annual income by approximately $8 million after tax. These tax credits are not subject to any phase-out based upon crude oil prices. Substantially all coke sales from the Indiana Harbor, Jewell and Haverhill plants are made pursuant to long-term contracts with Mittal Steel USA...

  • Page 20
    ...increase in total revenues in 2005 were higher refined product sales volumes, in part due to the acquisition of the Mobil® retail sites from ConocoPhillips in April 2004, higher crude oil sales in connection with the crude oil gathering and marketing activities of the Company's Logistics operations...

  • Page 21
    ... capital sources in 2004 included $100 million of proceeds attributable to the sale of the Company's private label credit card program. Increases in crude oil prices typically increase cash generation as the payment terms on Sunoco's crude oil purchases are generally longer than the terms on product...

  • Page 22
    ... discounts and offering expenses, totaled approximately $173 and $110 million, respectively. These proceeds were used by the Partnership in part to repay the outstanding borrowings under its revolving credit facility with the balance used to fund a portion of the Partnership's 2006 growth capital...

  • Page 23
    ... being used to support $275 million of commercial paper and $103 million of floating-rate notes due in 2034. Sunoco Logistics Partners L.P. has a $300 million revolving credit facility, which matures in November 2010. This facility is available to fund the Partnership's working capital requirements...

  • Page 24
    ... to make payment. Sunoco, Inc., Epsilon and the Epsilon joint-venture partners are currently in litigation to resolve this matter. In September 2004, the Company repurchased long-term debt with a par value of $352 million through a series of tender offers and open market purchases utilizing the net...

  • Page 25
    ... the Company's significant contractual obligations: Payment Due Dates (Millions of Dollars) Total 2007 2008-2009 2010-2011 Thereafter Total debt: Principal Interest Operating leases* Purchase obligations: Crude oil, other feedstocks and refined products** Convenience store items*** Transportation...

  • Page 26
    ... 2007 (see "Financial Capacity" above). Capital Expenditures and Acquisitions The Company expects capital expenditures to be approximately $3.5 billion over the 2006-2008 period. Approximately $700-$800 million annually is anticipated to be spent in Refining and Supply, including a total of $800...

  • Page 27
    ...the consolidated financial statements) are included as footnotes to the table so that total capital outlays for each business unit can be determined. (Millions of Dollars) 2007 Plan 2006 2005 2004 Refining and Supply Retail Marketing Chemicals Logistics Coke Consolidated capital expenditures $ 792...

  • Page 28
    ...Eagle Point refinery. The income improvement spending consisted of $128 million towards the construction of the Haverhill cokemaking facility, $45 million for various growth opportunities in the Logistics business, including the acquisition of refined product terminals in Baltimore, MD, Manassas, VA...

  • Page 29
    ...192) $(223) Management currently anticipates making up to $100 million of voluntary contributions to its funded defined benefit plans in 2007. Management believes that the pension plans can be funded over time without a significant impact on liquidity. Future changes in the financial markets and/or...

  • Page 30
    ... 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, maintain...

  • Page 31
    ... 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, 2003 Accruals Payments Acquisitions and...

  • Page 32
    ..." ("PRP"). As of December 31, 2006, Sunoco had been named as a PRP at 36 sites identified or potentially identifiable as "Superfund" sites under federal and state law. The Company is usually one of a number of companies identified as a PRP at a site. Sunoco has reviewed the nature and extent of its...

  • Page 33
    ... effect on prices created by the changes in the level of off-road diesel fuel production. In connection with the phase in of these new off-road diesel fuel specifications, Sunoco is evaluating its alternatives for its Tulsa refinery, including consideration of significant capital expenditures which...

  • Page 34
    ... also 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 in...

  • Page 35
    ... on the cash and cash equivalents. Sunoco also has market risk exposure for changes in interest 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...

  • Page 36
    ... $943 million of Company common stock from time to time depending on prevailing market conditions and available cash. Critical Accounting Policies A summary of the Company's significant accounting policies is included in Note 1 to the consolidated financial statements. Management believes that the...

  • Page 37
    ...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 duration of Sunoco's pension and other postretirement benefit obligations. The present values of Sunoco...

  • Page 38
    ... in Millions) Change in Rate Expense Benefit Obligations* Pension benefits: Decrease in the discount rate Decrease in the long-term expected rate of return on plan assets Increase in rate of compensation Postretirement benefits: Decrease in the discount rate Increase in the annual health care cost...

  • Page 39
    ... owned facilities and third-party sites. At the Company's major manufacturing facilities, Sunoco has consistently assumed continued industrial use and a containment/remediation strategy focused on eliminating unacceptable risks to human health or the environment. The remediation accruals for these...

  • Page 40
    .... New Accounting Pronouncements For a discussion of recently issued accounting pronouncements requiring adoption subsequent to December 31, 2006, see Note 1 to the consolidated financial statements. Forward-Looking Statements Some of the information included in this Annual Report to Shareholders...

  • Page 41
    ...• Changes in financial markets impacting pension expense and funding requirements; • Risks related to labor relations and workplace safety; • Nonperformance or force majeure by, or disputes with, major customers, suppliers, dealers, distributors or other business partners; • General economic...

  • Page 42
    ... in this Annual Report to Shareholders are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligation to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future...

  • Page 43
    ... 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, 2006. In making this assessment, the Company's management used the criteria set forth in Internal Control-Integrated...

  • Page 44
    ... the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable...

  • Page 45
    ... benefit pension and other postretirement plans in 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sunoco, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2006...

  • Page 46
    ... debt expense Interest capitalized Income before income tax expense Income tax expense (Note 4) Net Income Earnings Per Share of Common Stock (Note 16): Basic Diluted Weighted-Average Number of Shares Outstanding (Notes 5 and 16): Basic Diluted Cash Dividends Paid Per Share of Common Stock (Note 16...

  • Page 47
    ...,000 shares; Issued, 2006-280,746,662 shares; Issued, 2005-279,988,625 shares Capital in excess of par value Earnings employed in the business Accumulated other comprehensive loss Common stock held in treasury, at cost 2006-159,445,766 shares; 2005-146,838,655 shares Total Shareholders' Equity Total...

  • Page 48
    ... 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 in financing activities Net increase (decrease) in cash and cash equivalents Cash...

  • Page 49
    ... 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 50
    ... 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 passes, while service revenues...

  • Page 51
    ... accumulated benefit obligation relating to these plans that existed at that time. Effective December 31, 2006, the Company adopted SFAS No. 158, which amended Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," and Statement of Financial Accounting Standards...

  • Page 52
    ... will be settled. Consequently, the retirement obligations for these assets cannot be measured at this time. Stock-Based Compensation Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), utilizing...

  • Page 53
    ...have convenience stores, are located primarily in Delaware, Maryland, Virginia and Washington, D.C. These sites have been re-branded to Sunoco® gasoline and APlus® convenience stores. This acquisition fits the Company's long-term strategy of building a retail and convenience store network designed...

  • Page 54
    ... logistics assets previously purchased by Sunoco with the Eagle Point refinery for $20 million; in April, two ConocoPhillips refined product terminals located in Baltimore, MD and Manassas, VA for $12 million; in June, an additional one-third interest in the Harbor Pipeline from El Paso Corporation...

  • Page 55
    ... by FPL at Sunoco's Marcus Hook refinery. Under the restructured terms, FPL surrendered its easement interest in land adjacent to the power plant on which four auxiliary boilers were constructed, thereby transferring ownership of the auxiliary boilers with an estimated fair market value of $33...

  • Page 56
    ... Investments and Long-Term Receivables December 31 (Millions of Dollars) 2006 2005 Investments in affiliated companies: Pipeline joint ventures (Notes 2 and 3) Other Accounts and notes receivable $ 85 24 109 20 $129 $ 86 38 124 19 $143 Dividends received from affiliated companies amounted to $41...

  • Page 57
    ... Annual future minimum rentals due Sunoco, as lessor, on noncancelable operating leases at December 31, 2006 for retail sites are as follows (in millions of dollars): Net Investment (Millions of Dollars) December 31 2006 Refining and supply Retail marketing* Chemicals Logistics Coke 2005 Refining...

  • Page 58
    ... weighted-average assumptions were used to determine defined benefit plans and postretirement benefit plans expense: Defined Benefit Plans (In Percentages) 2006 2005 2004 Postretirement Benefit Plans 2006 2005 2004 Discount rate Long-term expected rate of return on plan assets Rate of compensation...

  • Page 59
    ... long-term total return within prudent levels of risk through a combination of income and capital appreciation. Management currently anticipates making up to $100 million of voluntary contributions to the Company's funded defined benefit plans in 2007. The expected benefit payments through 2016...

  • Page 60
    ...December 31, 2006, the Company's tangible net worth was $2.5 billion and its targeted tangible net worth was $1.5 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
    ... of the notes. In the event the notes are not remarketed, the Company can refinance them on a longterm basis utilizing its revolving credit facility (Note 11). Cash payments for interest related to short-term borrowings and long-term debt (net of amounts capitalized) were $84, $67 and $98 million in...

  • Page 62
    ...at December 31, 2006. At this time, management does not believe that it is likely that the Company will have to perform under any of these guarantees. Over the years, Sunoco has sold thousands of retail gasoline outlets as well as refineries, terminals, coal mines, oil and gas properties and various...

  • 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, 2003 Accruals Payments Acquisitions and...

  • Page 64
    ... and thirdparty sites. At the Company's major manufacturing facilities, Sunoco has consistently assumed continued industrial use and a containment/remediation strategy focused on eliminating unacceptable risks to human health or the environment. The remediation accruals for these sites reflect that...

  • Page 65
    .... 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 65 cases in 18 states involving the manufacture and use of MTBE in gasoline and MTBE contamination...

  • Page 66
    ... quarter of 2004, Sunoco Logistics Partners L.P., a master limited partnership in which Sunoco has an ownership interest, issued 3.4 million limited partnership units at a price of $39.75 per unit. Proceeds from the offering, net of underwriting discounts and offering expenses, totaled $129 million...

  • Page 67
    ... propylene operations at Sunoco's Marcus Hook, PA refinery and an adjacent polypropylene plant. The joint venture is a variable interest entity for which the Company is the primary beneficiary. As such, the accounts of Epsilon are included in Sunoco's consolidated financial statements. Epsilon was...

  • Page 68
    ...-Term Performance Enhancement Plan II ("LTPEP II"). The EIP provides for the payment of annual cash incentive awards while the LTPEP II provides for the award of stock options, common stock units and related rights to directors, officers and other key employees of Sunoco. LTPEP II authorizes the use...

  • Page 69
    ...-average fair value per option granted as of the date of grant. ** Cash received by the Company upon exercise totaled $7 million and the related tax benefit realized amounted to $8 million. *** The weighted-average remaining contractual term of outstanding options and exercisable options was 8.4 and...

  • Page 70
    ...fair value for expense purposes is based on the closing price of the Company's shares on the date of grant. The following tables set forth separately information with respect to common stock unit awards to be settled in cash and awards to be settled in stock under Sunoco's management incentive plans...

  • Page 71
    ... 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, PA Epsilon joint venture...

  • Page 72
    ... refined product and crude oil pipeline joint ventures. Substantially all logistics operations are conducted through Sunoco Logistics Partners L.P. (Note 15). The Coke segment makes high-quality, blast-furnace coke at facilities located in East Chicago, IN (Indiana Harbor), Vansant, VA (Jewell...

  • Page 73
    ... Information (Millions of Dollars) Refining and Supply Retail Marketing Chemicals Logistics Coke Corporate and Other Consolidated 2006 Sales and other operating revenue (including consumer excise taxes): Unaffiliated customers Intersegment Pretax segment income (loss) Income tax (expense) benefit...

  • Page 74
    ... Information (Millions of Dollars) Refining and Supply Retail Marketing Chemicals Logistics Coke Corporate and Other Consolidated 2004 Sales and other operating revenue (including consumer excise taxes): Unaffiliated customers Intersegment Pretax segment income (loss) Income tax (expense) benefit...

  • Page 75
    ... inventories produced at Sunoco's Marcus Hook, Philadelphia, Eagle Point and Toledo refineries, excluding cumene, which is included in the Chemicals segment. Terminal Throughputs* Refined product terminals Nederland, TX marine terminal Other terminals * Thousands of barrels daily. 2006 2005 2004...

  • Page 76
    ... Financial Data (Millions of Dollars or Shares, Except Per-Share Amounts) 2006 2005 2004 2003 2002 Statement of Income Data: Sales and other operating revenue (including consumer excise taxes) Net income (loss)* Per-Share Data**: Net income (loss): Basic Diluted Cash dividends on common stock...

  • Page 77
    ... Quarter 2005 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 per share of common stock†Common stock price†-high -low -end of period $8,569 $355 $79...

  • Page 78
    ...this graph compares Sunoco's cumulative total return (i.e., based on common stock price and dividends), plotted on an annual basis, with Sunoco's performance peer group's cumulative total returns and the S&P 500 Stock Index (a performance indicator of the overall stock market). ** Conoco merged with...

  • Page 79
    ... Incorporated; Former Member Financial Accounting Standards Board; Retired Chief Financial Officer Union Carbide Corporation Ann C. Mule ´ Chief Governance Officer, Assistant General Counsel and Corporate Secretary Rosemarie B. Greco Director, Governor's Office of Health Care Reform, Commonwealth...

  • Page 80
    ... name, address and phone number on voice mail at 215-977-6440. Health, Environment and Safety Sunoco's Health, Environment and Safety Review and CERES Report is available at our Web Site or by writing the Company. CustomerFirst For customer service inquiries, write the Company or call 1-800-SUNOCO1...

  • Page 81

  • Page 82
    Sunoco, Inc., 1735 Market Street, Suite LL, Philadelphia, PA 19103-7583