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2003 Annual Report
S,I .2003 A R

Table of contents

  • Page 1
    2003 Annual Report

  • Page 2
    Sunoco, Inc., headquartered in Philadelphia, PA, is a leading manufacturer and marketer of petroleum and petrochemical products. With 890,000 barrels per day of refining capacity, 4,528 retail sites selling gasoline and convenience items, over 4,500 miles of crude oil and refined product owned and ...

  • Page 3
    ... Cash dividends on common stock Shareholders' equity Market price of common stock at December 31 $4.03 $1.025* $20.64 $51.15 $(.62) $1.00 $18.24 $33.18 $4.85 $1.00 $21.74 $37.34 $4.82 $1.00 $20.06 $33.69 $1.07 $1.00 $16.76 $23.50 Other Data, Year End Return on average capital employed (based on net...

  • Page 4
    ... Philadelphia refinery, should substantially improve our performance in the coming year. Income before special items* for 2003 was $335 million ($4.32 per diluted share) versus a 2002 loss of $25 million. Earnings from each of our core businesses, Refining and Supply, Retail Marketing and Chemicals...

  • Page 5
    ...Sunoco 2003 Financial Highlights • Income before special items* of $335 million or $4.32 per diluted share • Sector-leading Return on Capital Employed of 13.8 percent (based on income before special items)* * • Share price increase of 54 percent, reaching new record highs • Increased annual...

  • Page 6
    ..., Sunoco 2003-2004 Strategic Actions Refining and Supply • Acquired 150,000 barrels-per-day Eagle Point refinery for $235 m illion, including inventory, and increased total refining capacity by over 20 percent (January 2004) Retail Marketing • Acquired 193 Speedway retail gasoline sites...

  • Page 7
    ... we spend to meet new C lean Fuels specifications, complete the construction of the Haverhill coke plant and fund our refining and retail marketing acquisitions, we expect to follow the same model - strong operating cash flow, prudent divestments and effective management of working capital - to fund...

  • Page 8
    ... enduring value for our shareholders - achieving a higher, lessvolatile share price. We have had some notable success in this regard over the past few years and are determined to continually strive for "higher-highs" and "higher-lows" in S unoco's share price across our business cycles. A special...

  • Page 9
    ...four refineries for the production of low-sulfur gasoline. S unoco is committed to outs tanding performance in the area of HES management. We will continue to improve current operations, bring new assets into compliance with S unoco's high standards and meet new environmental and safety regulations...

  • Page 10
    ... S upply business manufactures refined products (primarily gasoline, diesel, jet fuel and residual fuels) and commodity petrochemicals at its Northeast Refining C omplex (comprised of refineries in Philadelphia and Marcus Hook, PA and the recently acquired Eagle Point refinery in Westville, NJ) and...

  • Page 11
    ... XL), a publicly traded master limited partnership. S unoco Logistics Partners aims to grow distributable cash flow through organic growth and acquisitions. Coke S un C oke C ompany manufactures high-quality coke for use in the production of blast furnace steel. From facilities in East Chicago, IN...

  • Page 12
    ...: Cash and cash equivalents Total assets Short-term borrowings and current portion of long-term debt Long-term debt Shareholders' equity Shareholders' ...oil and gas production operations. *** Commencing with the fourth quarter of 2003, the Company increased the quarterly dividend paid on common stock...

  • Page 13
    ... factors in the global marketplace including: crude oil, natural gas and other feedstock price levels and availability; crude oil, petroleum and chemical product inventory levels; product demand; refinery and chemical plant utilization rates; and geopolitical events. T he Company expects 2004...

  • Page 14
    ... the sale of its plasticizer business to BASF, generating approximately $90 million of cash proceeds. • In January 2004, Sunoco agreed to purchase from ConocoPhillips 385 retail outlets located primarily in Delaware, Maryland, Virginia and Washington, D.C. for $187 million, plus related inventory...

  • Page 15
    ... of its Puerto Rico refinery, lubricants blending and packaging facilities and lubricants branded marketing assets (collectively, "Value Added and Eastern Lubricants"), those operations are reported as a separate item. Analysis of Earnings Profile of Sunoco Businesses In 2003, Sunoco, Inc. and...

  • Page 16
    ... the process oil, wholesale base oil and wax markets. A refinery in Westville, NJ (also known as the Eagle Point refinery), which manufactures petroleum products and commodity petrochemicals, was acquired in January 2004 (see below). Refining operations are organized into two refining centers. T he...

  • Page 17
    ... for sale to their estimated fair values less costs to sell. In connection with this decision, Sunoco sold its lubricants marketing assets in March 2001, closed its lubricants blending plants in Marcus Hook, PA, T ulsa, OK and Richmond, CA in July 2001 and sold the Puerto Rico refinery in December...

  • Page 18
    ... Chemicals business manufactures phenol and related products at chemical plants in Philadelphia, PA and Haverhill, OH; polypropylene at facilities in La Porte, T X, Neal, WV and Bayport, T X; and cumene at the Philadelphia, PA refinery and the recently acquired Eagle Point refinery in Westville, NJ...

  • Page 19
    ... fair values less costs to sell and to establish accruals for employee terminations under a postemployment plan and other required exit costs. Sunoco sold this business and related inventory in January 2004 to BASF for approximately $90 million in cash. T he sale included the Company's plasticizer...

  • Page 20
    ...several refined product and crude oil pipeline joint ventures. Logistics operations are conducted primarily through Sunoco Logistics Partners L.P., the master limited partnership that is 75.3 percent owned by Sunoco (see "Capital Resources and Liquidity-Other Cash Flow Information" below). 2003 2002...

  • Page 21
    ...8, 2002 initial public offering, partially offset by higher income from terminal facility operations. During 2002, Sunoco recorded a $3 million after-tax charge to reflect the Partnership's write-off of a pipeline located in Pennsylvania and New York and a related refined products terminal that were...

  • Page 22
    ... period for the Indiana Harbor operation is expected to end in 2007. T he estimated lengths of these preferential return periods are based upon the Company's current expectations of future operations, including sales volumes and prices, raw material and operating costs and capital expenditure levels...

  • Page 23
    ... business refined products pipeline and terminal; and established a $3 million after-tax accrual relating to a lawsuit concerning the Puerto Rico refinery, which was divested in 2001. During 2001, Sunoco recorded a $23 million after-tax charge for employee terminations and other required exit costs...

  • Page 24
    ... cost of higher merchandise sales at the Company's convenience store outlets. Partially offsetting these increases were lower operating costs due to a decline in refinery fuel costs. Financial Condition Capital Resources and Liquidity Cash and Working Capital -At December 31, 2003, Sunoco had cash...

  • Page 25
    ... public offering at a price of $20.25 per unit. Proceeds from the offering, which totaled approximately $96 million net of underwriting discounts and offering expenses, were used by the Partnership to establish working capital that was not contributed to the Partnership by Sunoco. Sunoco liquidated...

  • Page 26
    ... (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 cash generation due to various factors including reductions in margins for products sold and...

  • Page 27
    ... based upon the number of Company-operated convenience stores and the level of purchases. *** Represents fixed and determinable obligations to secure wastewater treatment services at the Toledo refinery and coal handling services at the Indiana Harbor cokemaking facility. Sunoco's operating leases...

  • Page 28
    ... Eagle Point refinery and related pipeline assets in January 2004 and the agreement, subject to regulatory approval and the completion of due diligence, to purchase 385 retail outlets in Delaware, Maryland, Virginia and Washington, D.C., the 2004 planned capital outlays include $297 million for base...

  • Page 29
    ... sites acquired in 2003 to Sunoco branded outlets. With respect to clean fuels spending, the Company estimates that total capital outlays to comply with T ier II gasoline and diesel specifications will be in the range of $400-$500 million, including amounts attributable to the Eagle Point refinery...

  • Page 30
    ... in interest rates used in pension funding calculations. Congress is currently considering legislation that would extend interest rate relief beyond 2003. T he planned employer contributions for 2004 for the Company's funded benefit plans, which are estimated to be $50 million, are based on the...

  • 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, 2000 Accruals Payments Acquisitions Other* At...

  • Page 32
    ...costs for environmental remediation activities at the Company's marketing sites will also be influenced by the extent of MT BE contamination of groundwater aquifers, the cleanup of which will be driven by thresholds based on drinking water protection. T hough not all groundwater is used for drinking...

  • Page 33
    ... that the total capital outlays to comply with the new gasoline and diesel requirements will be in the range of $400-$500 million, including amounts attributable to the recently acquired Eagle Point refinery. Spending to meet these requirements totaled $23 million in 2003. T he ultimate impact...

  • Page 34
    ... its Marcus Hook, Philadelphia, T oledo and T ulsa refineries, the Puerto Rico refinery divested in 2001 and its phenol facility in Philadelphia, PA. Sunoco has completed its responses to the EPA . In 2003, Sunoco received an additional information request at its phenol plant in Philadelphia. Sunoco...

  • Page 35
    ...prices, to lock in what Sunoco considers to be acceptable margins for various refined products and to lock in a portion of the Company's electricity and natural gas costs. In addition, Sunoco uses derivative contracts from time to time to reduce foreign exchange risk relating to certain export sales...

  • Page 36
    ... and benefit obligations for Sunoco's postretirement health care plans. T he discount rates used to determine the present value of future pension payments and medical costs are based on the yields on high-quality, fixed income investments (such as Moody's Aa-rated long-term corporate bonds). T he...

  • Page 37
    ...concerning future returns in the marketplace for both equity and debt securities. In determining pension expense, the 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...

  • Page 38
    ... in Millions) Change in Rate Expense Benefit Obligations* Pension benefits: Decrease in the discount rate Decrease in the long-term 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 trend...

  • Page 39
    ... related to the shutdown of a polypropylene line at the Company's LaPorte, T X plant, an aniline and diphenylamine production facility in Haverhill, OH, certain processing units at the T oledo refinery and a refined products pipeline and terminal owned by Sunoco Logistics Partners L.P. T he chemical...

  • Page 40
    ... of the Private Securities Litigation Reform Act of 1995. T hese statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to the Company, based on current beliefs of management as well...

  • Page 41
    ...without limitation: • Changes in refining, marketing and chemical margins; • Variation in petroleum-based commodity prices and availability of crude oil and feedstock supply or transportation; • Volatility in the marketplace which may affect supply and demand for Sunoco's products; • Changes...

  • Page 42
    ... cost and debt expense Interest capitalized Income (loss) before income tax expense (benefit) Income tax expense (benefit) (Note 4) Net Income (Loss) Earnings (Loss) Per Share of Common Stock: Basic Diluted Weighted Average Number of Shares Outstanding (Note 5): Basic Diluted Cash Dividends...

  • Page 43
    ... 2003 2002 Assets Current Assets Cash and cash equivalents Accounts and notes receivable, net Inventories (Note 6) Deferred income taxes (Note 4) $ Total Current Assets Investments and long-term receivables (Note 7) Properties, plants and equipment, net (Note 8) Prepaid retirement costs...

  • Page 44
    ... income tax expense Payments in excess of expense for retirement plans Changes in working capital pertaining to operating activities, net of effect of acquisitions: Accounts and notes receivable Inventories Accounts payable and accrued liabilities Taxes payable Other Net cash provided by operating...

  • Page 45
    ... Par Value Capital in Excess of Par Value Earnings Employed in the Business Accumulated Other Comprehensive Loss Common Stock Held in Treasury Shares Cost Sunoco, Inc. and Subsidiaries At December 31, 2000 Net income Other comprehensive loss: Minimum pension liability adjustment (net of related tax...

  • Page 46
    ... and marketing activities of its logistics operations. In addition, the Company sells a broad mix of merchandise such as groceries, fast foods and beverages at its convenience stores and provides a variety of car care services at its retail gasoline outlets. Revenues related to the sale of products...

  • Page 47
    ...From time to time, Sunoco uses swaps, options, futures, forwards and other derivative instruments to hedge its exposure to crude oil, petroleum product, electricity and natural gas price volatility and to reduce foreign exchange risk relating to certain export sales denominated in foreign currencies...

  • Page 48
    ... at Sunoco's Marcus Hook, PA refinery and an adjacent polypropylene plant. Sunoco's maximum exposure to loss as a result of its involvement with Epsilon amounted to $224 million at December 31, 2003, consisting of its $49 million investment in Epsilon, $15 million of trade accounts receivable and...

  • Page 49
    ...-take agreement with BEF, which exemployee terminations under a postemployment plan and pires in 2004, whereby Sunoco agreed to purchase all of other required exit costs. Sunoco sold this business and the MT BE production from the plant. Sunoco's total related inventory in January 2004 to BASF for...

  • Page 50
    ..., Sunoco shut down a polypropylene line at its LaPorte, T X plant, an aniline and diphenylamine production facility in Haverhill, OH, certain processing units at its T oledo refinery and a pipeline located in Pennsylvania and New York and a related refined products terminal. T he chemical facilities...

  • Page 51
    ... is based on market prices. Sunoco also purchased Equistar's polypropylene facility in Bayport, T X. Sunoco paid $194 million in cash and borrowed $4 million from the seller to form the partnership and acquire the Bayport facility. T hrough the new partnership, the Company believes it has secured...

  • Page 52
    ... were Aristech's five chemical plants located at Neal, WV; Haverhill, OH; Neville Island, PA; and Pasadena and LaPorte, T X and a research center in Pittsburgh, PA. T hese facilities produce polypropylene, phenol and related derivatives (including biphenol-A) and plasticizers. T he facility in...

  • Page 53
    ...Investments in and advances to affiliated companies: Belvieu Environmental Fuels (Note 2) Epsilon Products Company, LLC (Notes 1, 2 and 12) Pipeline joint ventures (Notes 2 and 3) Other Accounts and notes receivable $ 25 49 85 12 171 21 $192 $ 51 50 81 16 198 22 $220 Cash payments for (refunds of...

  • Page 54
    ...Plants and Equipment Gross Investments, at Cost Accumulated Depreciation, Depletion and Amortization 9. Retirement Benefit Plans Defined Benefit Pension Plans and Postretirement Health Care Plans Net Investment (Millions of Dollars) December 31 2003 Refining and supply Retail marketing* Chemicals...

  • Page 55
    ... over a long-term period, the targeted allocation of plan assets and expectations concerning future returns in the marketplace for both equity and debt securities. T he following tables set forth the components of the changes in benefit obligations and fair value of plan assets during 2003 and 2002...

  • Page 56
    ... interest rates used in pension funding calculations. Congress is currently considering legislation that would extend interest rate relief beyond 2003. T he planned employer contributions for 2004 for the Company's funded defined benefit plans, which are estimated to be $50 million, are based on the...

  • Page 57
    ... point change each year in assumed health care cost trend rates would have the following effects at December 31, 2003: (Millions of Dollars) 1-Percentage Point Increase 1-Percentage Point Decrease Sunoco's ratio of consolidated net indebtedness, including borrowings of Sunoco Logistics Partners...

  • Page 58
    ...at December 31, 2003. 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 59
    ... credits and liabilities $ 44 102 $146 $ 43 116 $159 T he following table summarizes the changes in the accrued liability for environmental remediation activities by category: Chemicals Facilities Pipelines and Terminals Hazardous Waste Sites (Millions of Dollars) Refineries Marketing Sites...

  • Page 60
    ...Sunoco owns or operates certain retail gasoline outlets where releases of petroleum products have occurred. Federal and state laws and regulations require that contamination caused by such releases at these sites and at formerly owned sites be assessed and remediated to meet the applicable standards...

  • Page 61
    ... its Marcus Hook, Philadelphia, T oledo and T ulsa refineries, the Puerto Rico refinery divested in 2001 and its phenol facility in Philadelphia, PA. Sunoco has completed its responses to the EPA . In 2003, Sunoco received an additional information request at its phenol plant in Philadelphia. Sunoco...

  • Page 62
    ... periods are based upon the Company's current expectations of future operations, including sales volumes and prices, raw material and operating costs and Balance at beginning of year Nonconventional fuel credit and other tax benefits* Preferential return* Additional cash investments by third-party...

  • Page 63
    ... million limited partnership units, representing a 24.8 percent interest in the Partnership, in an initial public offering at a price of $20.25 per unit. Proceeds from the offering were used by the Partnership to establish working capital that was not contributed to the Partnership by Sunoco. Sunoco...

  • Page 64
    ...Option Price Per Share Employee Option Plan* Shares Under Option Option Price Per Share Sunoco's principal management incentive plans are the Executive Incentive Plan ("EIP") and the Long-T erm Performance Enhancement Plan II ("LT PEP II"). T he EIP provides for the payment of annual cash incentive...

  • Page 65
    ... respectively. Long-term debt that is publicly traded was valued based on quoted market prices while the fair value of other debt issues was estimated by management based upon current interest rates available to Sunoco at the respective balance sheet dates for similar issues. T he Company guarantees...

  • Page 66
    ... manufactures phenol and related products at chemical plants in Philadelphia, PA and Haverhill OH; polypropylene at facilities in La Porte, T X, Neal, WV and Bayport, T X; and cumene at the Philadelphia refinery. In addition, propylene and polypropylene are produced at its Marcus Hook, PA, Epsilon...

  • Page 67
    ... by the Chemicals segment's one-third-owned BEF joint venture to write down its MTBE production facility to its estimated fair value (Note 2). *** Excludes $162 million purchase of 193 Speedway retail gasoline sites located primarily in Florida and South Carolina, including related inventory (Note...

  • Page 68
    ... to sell to Sunoco Logistics Partners L.P. In January 2004, Sunoco agreed to purchase 385 retail outlets currently operated under the Mobil® brand from ConocoPhillips for $187 million, plus inventory. T he acquisition consists of 114 Company-owned or leased outlets, 36 dealer-owned locations and...

  • Page 69
    ... fourteen times during 2003, is comprised only of directors who meet the independence requirements of the New York Stock Exchange and the rules and regulations of the Securities and Exchange Commission. It assists the Board of Directors in discharging its duties relating to accounting and reporting...

  • Page 70
    ... of the pipeline shipments of pipelines owned and operated by Sunoco Logistics Partners L.P., the master limited partnership that is 75.3 percent owned by Sunoco. Other Data Crude oil inventory* 2001 * Millions of barrels at December 31. 2003 2002 2001 Retail Sales* Gasoline Middle distillates...

  • Page 71
    ...Sales and other operating revenue (including consumer excise taxes) Gross profit* Net income (loss) Net income (loss) per share of common stock: Basic Diluted Cash dividends per share of common stock Common stock price#- high... equals sales and other operating revenue less cost of products sold and ...

  • Page 72
    ...Governance Committee Ro b er t D. Ken n ed y, Ch air Ro b er t J. Dar n all Thom as P. Ger r it y Ro sem ar ie B. Gr eco G. Jackson Rat clif f e Public Affairs Committee Jam es G. Kaiser , Ch air...v an i a Principal Officers Ter en ce P. Delan ...Valu t as Sen i o r Vi c e Pr es i d en t an d Ch i ef Ad...

  • Page 73
    Of Interest to Sunoco Shareholders Principal Office Annual Meeting Investor Relations Ten Penn Center 1801 Market Street Philadelphia, PA 19103-1699 215-977-3000 e-mail: [email protected] Web Site: www.SunocoInc.com Transfer Agent and Registrar Thursday, May 6, 2004, 9:30 a.m. Stewart ...

  • Page 74
    S U N O C O ,I N C . 2003 A N N U A L R E P O R T Sunoco, Inc. Ten Penn Center 1801 Market Street Philadelphia, PA 19103-1699