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Sunoco 10-Q 2011 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2011 OR
For the transition period from to Commission file number 1-6841
SUNOCO, INC. (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (215) 977-3000 (Former name, former address and former fiscal year, if changed since last report): Not Applicable
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x At September 30, 2011, there were 106,757,344 shares of Common Stock, $1 par value outstanding.
Table of ContentsSUNOCO, INC. INDEX
Table of ContentsPART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Millions of Dollars and Shares, Except Per-Share Amounts)
(See Accompanying Notes)
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Table of ContentsCONDENSED CONSOLIDATED BALANCE SHEETS (Millions of Dollars)
(See Accompanying Notes)
2
Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars)
(See Accompanying Notes)
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Table of ContentsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and U.S. generally accepted accounting principles for interim financial reporting. They do not include all disclosures normally made in financial statements contained in Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the periods shown have been made. All such adjustments are of a normal recurring nature, except for the gain on divestment of discontinued chemicals operations and related inventory, the gain on divestment of the Toledo refinery and related inventory, the gain resulting from the reduction of crude oil and refined product inventories at the Toledo refinery prior to its sale, the gain on remeasurement of pipeline equity interests and the provision for asset write-downs and other matters (Notes 2, 3, 6 and 13). Results for the three and nine months ended September 30, 2011 are not necessarily indicative of results for the full-year 2011.
Discontinued Chemicals Operations In July 2011, Sunoco, Inc. (“Sunoco” or the “Company”) completed the sale of its phenol and acetone chemicals manufacturing facility in Philadelphia, PA (“Frankford Facility”) and related inventory to an affiliate of Honeywell International Inc. In connection with this agreement, Sunoco recorded a $118 million provision ($70 million after tax) to write down Frankford Facility assets to their estimated fair values during the second quarter of 2011. Sunoco received total cash proceeds of $88 million in the third quarter of 2011 and recognized a $14 million gain ($8 million after tax) on the divestment. Sunoco is currently party to a cumene supply agreement with the Frankford Facility which may be terminated, upon six months prior notice, on or after July 1, 2012. Based on the Company’s decision to exit its refining business (Note 3), it is anticipated that this agreement will either be assumed by a buyer of the Philadelphia refinery or terminated with proper notice. In October 2011, Sunoco completed the sale of its phenol manufacturing facility in Haverhill, OH (“Haverhill Facility”) and related inventory to an affiliate of Goradia Capital LLC. Sunoco received total cash proceeds of $100 million in the fourth quarter of 2011 which is subject to an inventory adjustment subsequent to closing. Sunoco recorded a $169 million provision ($101 million after tax) to write down Haverhill Facility assets to their estimated fair values during the second quarter of 2011. At September 30, 2011, certain Haverhill Facility and related assets have been classified as held for sale in the condensed consolidated balance sheet. The fair value measurements in connection with asset write-downs at the Frankford and Haverhill facilities were determined based upon an evaluation of discounted expected future operating cash flows and offers by potential purchasers. Since these fair values were estimated primarily based upon unobservable inputs, they were determined to be level 3 fair value measurements within the fair value hierarchy under current accounting guidance. The following table sets forth the components of the Haverhill Facility and related assets held for sale at September 30, 2011 (in millions of dollars):
On March 31, 2010, Sunoco completed the sale of the common stock of its polypropylene chemicals business to Braskem S.A. The assets sold as part of this transaction included the polypropylene manufacturing facilities in LaPorte, TX, Neal, WV, and Marcus Hook, PA, a propylene supply agreement and related inventory. Sunoco recognized a net loss of $169 million ($44 million after tax) in the first quarter of 2010 related to the divestment. Cash proceeds from this divestment of $348 million were received in the second quarter of 2010. As a result of these transactions, the results of operations of the Frankford Facility, the Haverhill Facility and the polypropylene chemicals business, including related charges for asset write-downs and other matters and gains (losses) recognized in connection with such divestments, have been classified as discontinued operations for all periods presented in the condensed consolidated statements of operations and related footnotes.
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Table of ContentsDiscontinued Tulsa Refining Operations In the third quarter of 2011, Sunoco recorded an $18 million gain ($11 million after tax) attributable to a partial settlement of a low sulfur diesel credit liability related to the Company’s discontinued Tulsa refining operations which was sold in 2009. The following is a summary of the income (loss) from discontinued operations which was recognized during the three and nine months ended September 30, 2011 and 2010 (in millions of dollars):
Sales and other operating revenue (including consumer excise taxes) from discontinued operations totaled $295 and $261 million for the three months ended September 30, 2011 and 2010, respectively, and $924 and $1,101 million, respectively, for the nine-month periods then ended.
Acquisitions In January 2011, SunCoke Energy, Inc. (“SunCoke Energy”) acquired Harold Keene Coal Co., Inc. (“HKCC”), based in Honaker, VA, for $52 million. The purchase price included a net cash payment of $38 million and contingent consideration totaling $14 million primarily related to the estimated fair value of contingent royalty payments to the seller if certain minimum production levels are met for a period of up to 20 years. The assets acquired, which are adjacent to SunCoke Energy’s existing mining operations, include two active underground mines and one active surface and highwall mine currently producing between 250 and 300 thousand tons of coal annually. Proven and probable coal reserve estimates for this acquisition total approximately 21 million tons. In May 2011, Sunoco Logistics Partners L.P. (the “Partnership”) obtained a controlling financial interest in Inland Corporation (“Inland”) through a series of transactions involving Sunoco and a third party. Sunoco exercised its rights to acquire additional ownership interests in Inland for $56 million, net of cash received, and the Partnership purchased additional ownership interests from a third party for $30 million. The Partnership’s total ownership interest in Inland increased to 84 percent after it purchased all of Sunoco’s interests. As a result of these transactions, Inland became a consolidated subsidiary of Sunoco and, in connection therewith, Sunoco recognized a $9 million gain ($6 million after tax) from the remeasurement of its pre-acquisition equity interests in Inland to fair value upon consolidation. This gain is reported separately in the condensed consolidated statements of operations. In August 2011, the Partnership acquired a crude oil purchasing and marketing business from Texon L.P. (“Texon”) for $222 million including $17 million attributable to the fair value of its crude oil inventory. The purchase consists of a lease crude business and gathering assets in 16 states, primarily in the western United States. The current crude oil volume of the business is approximately 75 thousand barrels per day at the wellhead. The purchase was financed with a portion of the net proceeds from the Partnership’s senior notes offering in July 2011 (Note 8). In August 2011, the Partnership acquired a refined products terminal located in East Boston, MA (“East Boston Terminal”) from affiliates of ConocoPhillips for $73 million including $17 million attributable to the fair value of inventory. The terminal is the sole service provider of Logan International Airport under a long-term contract. The purchase was financed with a portion of the net proceeds from the Partnership’s senior notes offering in July 2011 (Note 8). In July 2010, the Partnership acquired a butane blending business from Texon for $152 million including inventory. The acquisition includes patented technology for blending butane into gasoline, contracts with customers currently utilizing the patented technology, butane inventories and other related assets. The Partnership also increased its ownership interest in a pipeline joint venture for $6 million in July 2010. This interest continues to be accounted for as an equity method investment.
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Table of ContentsThe Partnership also exercised its rights to acquire additional ownership interests in Mid-Valley Pipeline Company (“Mid-Valley”) and West Texas Gulf Pipe Line Company (“WTG”) for a total of $85 million during the third quarter of 2010, increasing its ownership interests in Mid-Valley and WTG to 91 and 60 percent, respectively. Since the Partnership obtained a controlling financial interest in both Mid-Valley and WTG, the joint ventures were both reflected as consolidated subsidiaries of Sunoco from the dates of their respective acquisitions. In connection with these acquisitions, Sunoco recognized a $128 million pretax gain ($37 million after tax attributable to Sunoco shareholders) from the remeasurement of the pre-acquisition equity interests in Mid-Valley and WTG to fair value upon consolidation. The fair value of such interests was determined based on the amounts paid by the Partnership in connection with the exercise of its acquisition rights. This gain is reported separately in the condensed consolidated statements of operations. The following tables summarize the effects of Sunoco’s acquisitions during the first nine months of 2011 and 2010 on its consolidated financial position (including the consolidation of Inland, Mid-Valley and WTG and the recognition of the related gains from the remeasurement of the pre-acquisition equity interests) (in millions of dollars):
No pro forma information has been presented since the impact of these acquisitions was not material in relation to Sunoco’s consolidated financial position and results of operations.
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Table of ContentsDivestments On March 1, 2011, Sunoco completed the sale of its Toledo refinery and related crude and refined product inventories to a wholly owned subsidiary of PBF Holding Company LLC. The Company received $1,037 million in net proceeds consisting of $546 million in cash at closing, a $200 million two-year note receivable of which $18 million was repaid during the third quarter of 2011, and a $285 million note receivable and $6 million in cash related to working capital adjustments subsequent to closing which were both paid in May 2011. In addition, the purchase agreement also includes a participation payment of up to $125 million based on the future profitability of the refinery. Sunoco has not recorded any amount related to the contingent consideration in accordance with its accounting policy election on such amounts. The Company expects to receive a significant portion of the $125 million participation payment in 2012 based on the Toledo refinery’s 2011 year-to-date operating results. In connection with this transaction, the Company recognized a $4 million net pretax gain ($3 million loss after tax) in the first nine months of 2011 which is included in other income, net, in the condensed consolidated statements of operations. This gain includes a pretax gain of $535 million attributable to the sale of crude and refined product inventories. The results of operations for the Toledo refinery have not been classified as discontinued operations due to Sunoco’s expected continuing involvement with the Toledo refinery through a three-year agreement for the purchase of gasoline and distillate to supply Sunoco retail sites in this area. Asset Write-Downs and Other Matters The following table summarizes information regarding the provision for asset write-downs and other matters recognized during the first nine months of 2011 and 2010 (in millions of dollars):
In September 2011, Sunoco announced its decision to exit its refining business and initiated a process to sell its refineries located in Philadelphia and Marcus Hook, PA (together, the “Northeast Refineries”). In connection with this decision, Sunoco recorded a $1,959 million provision ($1,175 million after tax) in the third quarter of 2011 to write down long-lived assets at the Northeast Refineries to their estimated fair values. After the write-down, the assets are recorded at $425 million which represents a value near the bottom of the range of estimated values for the assets. The fair values were determined based upon a combination of discounted projected cash flows and an analysis of sales of comparable refineries. Since these fair values were estimated primarily based upon unobservable inputs, they were determined to be level 3 fair value measurements within the fair value hierarchy under current accounting guidance. Sunoco expects to idle the main processing units at the Northeast Refineries in July 2012 if an acceptable sales transaction cannot be completed. If such units are idled, additional provisions of up to $500 million, primarily related to contract terminations, shutdown expenses and severance and pension costs, would be incurred. Upon a sale or idling of the main processing units, Sunoco expects to record a pretax gain related to the liquidation of all of its crude oil and a significant portion of its refined product inventories at the Northeast Refineries totaling approximately $2,000 million based on current market prices. The actual amount of this gain will depend upon the market value of crude and refined products and the volumes on hand at the time of liquidation. In connection with ongoing business improvement initiatives to reduce costs and improve business processes, the Company recorded provisions of $13 and $47 million ($8 and $28 million after tax) during the first nine months of 2011 and 2010, respectively, primarily for pension settlement losses and employee terminations and related costs. As a result of the permanent shutdown of the Eagle Point refinery in December 2009, Sunoco established a $33 million accrual ($20 million after tax) primarily for contract losses in connection with excess barge capacity during the first half of 2010. Sunoco also recorded a $5 million provision ($3 million after tax) to write down certain Eagle Point storage assets which were taken out of service in the second quarter of 2011. During the third quarter of 2010, the Company recognized a $16 million gain ($9 million after tax) on an insurance settlement related to MTBE coverage.
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Table of ContentsThe following table summarizes the changes in the liability for employee terminations and other exit costs (in millions of dollars):
The following tables summarize the components of pretax income (loss) and income tax expense (benefit) from continuing operations (in millions of dollars):
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Table of ContentsThe following table reconciles the U.S. statutory rate to the effective tax rates applicable to income (loss) from continuing operations attributable to Sunoco, Inc. shareholders before discrete items:
In the third quarter of 2011, Sunoco recorded a $13 million increase (net of federal income tax benefit) in the valuation allowance on state net operating loss carryforwards in connection with the decision to exit its refining business. The Company received federal income tax refunds totaling $526 million in the first nine months of 2010 for the carryback of its 2009 net operating loss.
The following table sets forth the reconciliation of the weighted-average number of common shares used to compute basic earnings per share (“EPS”) to those used to compute diluted EPS (in millions):
Inventories, excluding amounts included in assets held for sale, consisted of the following components (in millions of dollars):
Sunoco reduced crude oil and refined product inventory quantities at the Toledo refinery prior to the sale which resulted in LIFO inventory profits of $42 million ($26 million after tax) during the first quarter of 2011. The gain on the sale of the Toledo refinery (Note 3) includes LIFO inventory profits of $535 million ($321 million after tax) and the gain on the sale of the discontinued Frankford chemicals operations (Note 2) includes LIFO inventory profits of $34 million ($20 million after tax).
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Commitments Over the years, 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 the periods prior to the transaction dates. In most cases, the effect of these arrangements was to afford protection for the purchasers with respect to obligations for which the Company was already primarily liable. While some of these indemnities have spending thresholds which must be exceeded before they become operative, or limit Sunoco’s maximum exposure, they generally are not limited. The Company recognizes the fair value of the obligations undertaken for all guarantees entered into or modified after January 1, 2003. In addition, the Company accrues for any obligations under these agreements when a loss is probable and reasonably estimable. The Company cannot reasonably estimate the maximum potential amount of future payments under these agreements. Environmental Remediation Activities Sunoco is subject to extensive and frequently changing federal, state and local laws and regulations, including, but not limited to, those relating to the discharge of materials into the environment or that otherwise relate to 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 remediation, operating costs and capital costs to construct, maintain and upgrade equipment and facilities. Existing laws and regulations result in liabilities and loss contingencies for remediation at Sunoco’s facilities and at formerly owned or third-party sites. The accrued liability for environmental remediation is classified in the condensed consolidated balance sheets as follows (in millions of dollars):
The following table summarizes the changes in the accrued liability for environmental remediation activities which is largely attributable to activities at Sunoco’s retail sites (in millions of dollars):
Sunoco’s accruals for environmental remediation activities reflect management’s estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are both probable and reasonably estimable. Engineering studies, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated accruals for environmental remediation activities. Losses attributable to unasserted claims are also reflected in the accruals to the extent they are probable of occurrence and reasonably estimable. Total future costs for the environmental remediation activities identified above will depend upon, among other things, the identification of any additional sites, the determination of the extent of the contamination at each site, the timing and nature of required remedial actions, the nature of operations at each site, the technology available and needed to meet the various existing legal requirements, the nature and terms of cost-sharing arrangements with other potentially responsible parties, the availability of insurance coverage, the nature and extent of future environmental laws and regulations, inflation
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Table of Contentsrates, terms of consent agreements or remediation permits with regulatory agencies and the determination of Sunoco’s liability at the sites, if any, in light of the number, participation level and financial viability of the other parties. Management believes it is reasonably possible (i.e., less than probable but greater than remote) that additional environmental remediation losses will be incurred. At September 30, 2011, the aggregate of the estimated maximum additional reasonably possible losses, which relate to numerous individual sites, totaled approximately $90 million. However, the Company believes it is very unlikely that it will realize the maximum reasonably possible loss at every site. Furthermore, the recognition of additional losses, if and when they were to occur, would likely extend over many years and, therefore, likely would not have a material impact on the Company’s financial position. Under various environmental laws, including the Resource Conservation and Recovery Act (“RCRA”) (which relates to solid and hazardous waste treatment, storage and disposal), Sunoco has initiated corrective remedial action at its facilities, formerly owned facilities and third-party sites. At the Company’s major manufacturing and storage 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 strategy. Accruals include amounts to prevent off-site migration and to contain the impact on the facility property, as well as to address known, discrete areas requiring remediation within the plants. Activities include closure of RCRA solid waste management units, recovery of hydrocarbons, handling of impacted soil, mitigation of surface water impacts and prevention of off-site migration. 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. The obligation for Sunoco to remediate this type of contamination varies, depending on the extent of the release and the applicable laws and regulations. A portion of the remediation costs may be recoverable from the reimbursement fund of the applicable state, after any deductible has been met. The accrued liability for hazardous waste sites is attributable to potential obligations to remove or mitigate the environmental effects of the disposal or release of certain pollutants at third-party sites pursuant to the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) (which relates to releases and remediation of hazardous substances) and similar state laws. Under CERCLA, Sunoco is potentially subject to joint and several liabilities for the costs of remediation at sites at which it has been identified as a “potentially responsible party” (“PRP”). As of September 30, 2011, Sunoco had been named as a PRP at 32 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 involvement at each site and other relevant circumstances and, based upon the other parties involved or Sunoco’s level of participation therein, believes that its potential liability associated with such sites will not be significant. Management believes that none of the current remediation locations, which are in various stages of ongoing remediation, are individually material to Sunoco as its largest accrual for any one Superfund site, operable unit or remediation area was less than $9 million at September 30, 2011. As a result, Sunoco’s exposure to adverse developments with respect to any individual site is not expected to be material. However, if changes in environmental laws or regulations occur, such changes could impact multiple Sunoco facilities, formerly owned facilities and third-party sites at the same time. As a result, from time to time, significant charges against income for environmental remediation may occur. The Company maintains insurance programs that cover certain of its existing or potential environmental liabilities, which programs vary by year, type and extent of coverage. For underground storage tank remediation, the Company can also seek reimbursement through various state funds of certain remediation costs above a deductible amount. For certain acquired properties, the Company has entered into arrangements with the sellers or others that allocate environmental liabilities and provide indemnities to the Company for remediating contamination that occurred prior to the acquisition dates. Some of these environmental indemnifications are subject to caps and limits. No accruals have been recorded for any potential contingent liabilities that will be funded by the prior owners as management does not believe, based on current information, that it is likely that any of the former owners will not perform under any of these agreements. Other than the preceding arrangements, the Company has not entered into any arrangements with third parties to mitigate its exposure to loss from environmental contamination. Claims for recovery of environmental liabilities that are probable of realization totaled $12 million at September 30, 2011 and are included principally in deferred charges and other assets in the condensed consolidated balance sheet.
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Table of ContentsRegulatory Matters Under a 2005 Consent Decree which settled certain alleged violations under the Clean Air Act, Sunoco was required to make capital outlays totaling approximately $150-$200 million related to projects at the Marcus Hook refinery prior to June 30, 2013. During the first quarter of 2011, the Company requested an extension from the U.S. Environmental Protection Agency (“EPA”), Pennsylvania Department of Environmental Protection, and Philadelphia Air Management Services which extended the terms of the capital requirements at Marcus Hook for two years. This extension was granted in an Amended Consent Decree in September 2011. In connection with the decision to exit its refining business, Sunoco will not make these capital outlays. Through the operation of its refining and chemical facilities, marketing facilities, coke plants and coal mines, Sunoco’s operations emit greenhouse gases (“GHG”), including carbon dioxide. There are various legislative and regulatory measures to address GHG emissions which are in various stages of review, discussion or implementation. Current proposals being considered by Congress include cap and trade legislation and carbon taxation legislation. One current cap and trade bill proposes a system that would begin in 2012 which would require the Company to provide carbon emission allowances for emissions at its manufacturing facilities as well as emissions caused by the use of fuels it sells. The cap and trade program would require affected businesses to buy emission credits from the government, other businesses or through an auction process. The exact amount of such costs, as well as those that could result from any carbon taxation would not be established until the future. However, the Company believes that these costs could be material, and there is no assurance that the Company would be able to recover them in the sale of its products. Other federal and state actions to develop programs for the reduction of GHG emissions are also being considered. In addition, during 2009, the EPA indicated that it intends to regulate carbon dioxide emissions. While it is currently not possible to predict the impact, if any, that these issues will have on the Company or the industry in general, they could result in increases in costs to operate and maintain the Company’s facilities, as well as capital outlays for new emission control equipment at these facilities. In addition, regulations limiting GHG emissions or carbon content of products, which target specific industries such as petroleum refining or chemical or coke manufacturing, and proposals to significantly increase automobile fleet efficiency and potentially eliminate the ethanol tax credit are also under consideration. If enacted, such proposals could adversely affect the Company’s ability to conduct its business and also may reduce demand for its products. National Ambient Air Quality Standards (“NAAQS”) for ozone and fine particles promulgated by the EPA have resulted in identification of non-attainment areas throughout the country, including Texas, Pennsylvania, and Ohio, where Sunoco operates facilities. Areas designated by the EPA as “moderate” non-attainment for ozone, including Philadelphia and the Houston/Galveston/Brazoria area, were required to meet the ozone requirements by 2010 before currently mandated federal control programs were to take effect. In January 2009, the EPA issued a finding that the Pennsylvania and Texas State Implementation Plans (“SIPs”) failed to demonstrate attainment for the Philadelphia and Houston/Galveston/Brazoria airsheds by the 2010 deadline. This finding is expected to result in more stringent offset requirements and could result in other negative consequences. Texas petitioned the EPA to redesignate the Houston area as “severe” non-attainment for ozone and in 2009 the EPA granted the petition. Under this designation, Houston’s SIP was due in 2010 and attainment must be achieved by 2019. In September 2006, the EPA issued a final rule tightening the standard for fine particles. This standard is currently being challenged in federal court by various states and environmental groups. In March 2007, the EPA issued final rules to implement the 1997 fine particle matter (PM 2.5) standards. States had until April 2008 to submit plans to the EPA demonstrating attainment by 2010 or, at the latest, 2015. However, the March 2007 rule does not address attainment of the September 2006 standard. In March 2008, the EPA promulgated a new, more stringent ozone standard, which was challenged in a lawsuit in May 2008 by environmental organizations. Regulatory programs, when established to implement the EPA’s air quality standards, could have an impact on Sunoco and its operations. However, the potential financial impact cannot be reasonably estimated until the lawsuit is resolved, the EPA promulgates regulatory programs to attain the standards, and the states, as necessary, develop and implement revised SIPs to respond to the new regulations. MTBE Litigation Sunoco, along with other refiners, manufacturers and sellers of gasoline, is a defendant in lawsuits alleging MTBE contamination of groundwater. The plaintiffs include water purveyors and municipalities responsible for supplying drinking water and governmental authorities. The plaintiffs are asserting primarily product liability claims and additional claims including nuisance, trespass, negligence, violation of environmental laws and deceptive business practices. The plaintiffs in all of the cases are seeking to recover compensatory damages, and in some cases, injunctive relief, punitive damages and attorneys’ fees.
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Table of ContentsAs of September 30, 2011, Sunoco was a defendant in approximately 11 lawsuits involving eight states and Puerto Rico. Ten of the cases are venued in a multidistrict proceeding in a New York federal court. The remaining lawsuit is pending in a New Hampshire state court. Three of the cases assert natural resource damage claims. In addition, Sunoco received notice from another state that it intends to file an MTBE lawsuit in the near future asserting natural resource damages claims. Discovery is proceeding in all of these cases and accruals have been established where the losses are probable and reasonably estimable. However, there has been insufficient information developed about the plaintiffs’ legal theories or the facts in the natural resource damage cases that would be relevant to an analysis of the ultimate liability of Sunoco in these matters. Sunoco does not believe that the cases will have a material adverse effect on its consolidated financial position. Conclusion Many other legal and administrative proceedings are pending or may be brought against Sunoco arising out of its current and past operations, including matters related to commercial and tax disputes, product liability, antitrust, employment claims, leaks from pipelines and underground storage tanks, natural resource damage claims, premises-liability claims, allegations of exposures of third parties to toxic substances (such as benzene or asbestos) and general environmental claims. Although the ultimate outcome of these proceedings and other matters identified above cannot be ascertained at this time, it is reasonably possible that some of these matters could be resolved unfavorably to Sunoco. Management believes that these matters could have a significant impact on results of operations for any future period. However, management does not believe that any additional liabilities which may arise pertaining to such matters would be material in relation to the consolidated financial position of Sunoco at September 30, 2011.
In July 2011, the Partnership issued $600 million of long-term debt, consisting of $300 million of 4.65 percent notes due in 2022 and $300 million of 6.10 percent notes due in 2042. Also in July 2011, concurrent with its initial public offering (“SunCoke IPO”), SunCoke Energy issued $400 million aggregate principal of 7.625 percent notes which mature in 2019. Concurrent with its IPO, SunCoke Energy also borrowed $300 million under a senior secured term loan credit facility which matures in 2018 and entered into a $150 million senior secured revolving credit facility which expires in July 2016. There were no borrowings under the senior secured revolving credit facility at September 30, 2011. The term loan credit facility will amortize in quarterly installments equal to 0.25 percent of the original principal amount of the term loan credit facility with the balance payable at maturity and bears interest at a rate based on SunCoke Energy’s election of available alternatives which includes LIBOR (with a floor of 1.00 percent) plus 3.00 percent. These facilities are secured on a first priority basis by a perfected security interest in substantially all of SunCoke Energy’s and each SunCoke Energy subsidiary guarantor’s tangible and intangible assets (subject to certain exceptions). SunCoke Energy used a portion of the proceeds from borrowings to repay $575 million of intercompany debt payable to a subsidiary of Sunoco in the third quarter of 2011. Sunoco, Inc. has a $1.2 billion revolving credit facility with a syndicate of 17 participating banks (the “Facility”) which matures in August 2012. The Facility provides the Company with access to short-term financing and is intended to support the issuance of commercial paper, letters of credit and other debt. The Company also can borrow directly from the participating banks under the Facility. The Facility is subject to commitment fees, which are not material. The Facility is also subject to certain covenants (as defined in the Facility) including the requirement that Sunoco maintain tangible net worth (as defined in the Facility) in an amount greater than or equal to targeted tangible net worth (as defined in the Facility) for each quarter ended after March 31, 2004. In September 2011, Sunoco obtained a 90-day consent and waiver from the participating banks related to this covenant as the reduction in net worth resulting from charges to be taken by the Company in the third quarter of 2011 for asset write-downs of the Company’s refineries was expected to result in a violation of this covenant. Sunoco is currently negotiating an asset-backed facility that would be secured by certain Company assets as a source of liquidity. In August 2011, the Partnership replaced its existing $458 million of credit facilities with two new credit facilities totaling $550 million. The Partnership’s new credit facilities consist of a five-year $350 million unsecured credit facility and a $200 million 364-day unsecured credit facility which is available to fund certain crude oil inventory activities.
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The following tables set forth the components of defined benefit plans and postretirement benefit plans expense (in millions of dollars):
In the first quarter of 2010, the Company contributed $233 million to its funded defined benefit plans consisting of $143 million of cash and 3.59 million shares of Sunoco common stock valued at $90 million. There were no contributions during the first nine months of 2011.
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The following tables set forth comprehensive income (loss) attributable to Sunoco, Inc. shareholders and the noncontrolling interests (in millions of dollars):
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The following table sets forth the components of equity (in millions of dollars):
Sunoco, Inc. Shareholders’ Equity In the third quarter of 2011, Sunoco repurchased 14.4 million shares of its outstanding common stock for $500 million pursuant to an existing authorization from its Board of Directors. As part of a $233 million contribution to its funded defined benefit plans in the first quarter of 2010, the Company contributed 3.59 million shares of Sunoco common stock out of treasury valued at $90 million. The remaining $143 million of the contribution was in the form of cash. The shares contributed to the defined benefit plans were removed from treasury on a last-in, first-out basis resulting in a $251 million reduction in treasury stock and a $161 million charge to capital in excess of par value. Noncontrolling Interests Logistics Operations In February 2010, Sunoco received $201 million in cash from the Partnership in connection with a modification of the incentive distribution rights and sold 2.20 million of its limited partnership units to the public, generating approximately $145 million of net proceeds. In August 2010, the Partnership issued 2.01 million limited partnership units in a public offering, generating $144 million of net proceeds. Since the modification of the incentive distribution rights and the sale and issuance of limited partnership units discussed above did not result in a loss of control of the Partnership, they have been accounted for as equity transactions. The modification of the incentive distribution rights resulted in a $121 million decrease in noncontrolling interests and a $75 million increase in capital in excess of par value, net of income taxes. Cash proceeds from the offerings in February and August 2010 resulted in increases in noncontrolling interests ($48 and $114 million, respectively) and capital in excess of par value ($58 and $18 million, respectively, net of income taxes). In the third quarter of 2010, the Partnership exercised its rights to acquire additional ownership interests in Mid-Valley and WTG, increasing its ownership interests to 91 and 60 percent, respectively. Since the Partnership obtained a controlling financial interest in both Mid-Valley and WTG, the joint ventures were both reflected as consolidated subsidiaries of Sunoco from the dates of their respective acquisitions. In connection with these acquisitions, the Partnership recorded an $80 million increase in noncontrolling interests upon consolidation of the joint ventures (Note 3). In May 2011, the Partnership obtained a controlling financial interest in Inland through a series of transactions involving Sunoco and a third party. As a result, Inland is recognized as a consolidated subsidiary of Sunoco and, in connection therewith, Sunoco recorded a $20 million increase in noncontrolling interests upon consolidation of the entity (Note 3). In July 2011, the Partnership issued 1.31 million deferred distribution units valued at $98 million and paid $2 million in cash to Sunoco in exchange for the tank farm and related assets located at the Eagle Point refinery. These units will not participate in Partnership distributions until they convert into common units on the one-year anniversary of their issuance. Upon completion of this transaction, Sunoco’s interest in the Partnership increased to 34 percent. Sunoco’s share of Partnership distributions is expected to be 47 percent at the Partnership’s current quarterly cash distribution rate. The exchange was accounted for as an equity transaction since the Partnership continues to be a consolidated subsidiary of Sunoco. The transaction resulted in a $12 million decrease in noncontrolling interests and a $7 million increase in capital in excess of par value, net of income taxes. Sunoco’s share of Partnership distributions is expected to increase to approximately 49 percent, assuming the Partnership’s current quarterly cash distribution rate and no additional unit issuances, when the new units convert to common units in the third quarter of 2012.
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Table of ContentsCokemaking Operations On July 12, 2011, Sunoco borrowed $300 million from an affiliate of one of SunCoke Energy’s IPO underwriters. On July 26, 2011, an IPO of 13.34 million shares of SunCoke Energy common stock was completed at an offering price of $16 per share. Sunoco’s $300 million borrowing was satisfied at the closing of the SunCoke IPO through an exchange of the 13.34 million shares of SunCoke Energy stock valued at $213 million and a cash payment of $87 million. Sunoco also incurred underwriters’ commissions and other expenses totaling $21 million in connection with the offering. Sunoco continues to maintain a controlling financial interest in SunCoke Energy through its ownership of 81 percent of the outstanding shares of SunCoke Energy common stock. In connection with the SunCoke IPO, Sunoco recorded a $112 million increase in noncontrolling interests and a $80 million increase in capital in excess of par value. The Company intends to complete the separation of SunCoke Energy from Sunoco by distributing its remaining shares of SunCoke Energy common stock to Sunoco shareholders by means of a spin-off that is intended to qualify as a tax-free transaction. The spin-off is expected to occur no later than one year after the SunCoke IPO. In September 2011, SunCoke Energy purchased a portion of the noncontrolling interest in its Indiana Harbor cokemaking operations for $34 million. The transaction was accounted for as an equity transaction and resulted in a $24 million decrease in noncontrolling interests and a $6 million decrease in capital in excess of par value, net of income taxes. The noncontrolling interest in the Indiana Harbor cokemaking operations declined from 34 percent to 15 percent as a result of this transaction. SunCoke Energy is subject to indemnity agreements with current and former third-party investors of Indiana Harbor and Jewell related to certain tax benefits that they earned as limited partners. Based on the partnership’s statute of limitations, as well as published filings of the limited partners, SunCoke Energy believes that tax audits for years 2006 and 2007, comprising tax credits of $53 million, may still be open for the limited partners and subject to examination. As of September 30, 2011, SunCoke Energy has not been notified by the limited partners that such items are under examination and further believes that the potential for any claims under the indemnity agreements is remote. Sunoco, Inc. also guarantees SunCoke Energy’s performance under the indemnification to the current third party investor of Indiana Harbor and the former investor at Jewell. The following table sets forth the noncontrolling interest balances and the changes to these balances (in millions of dollars):
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The Company’s cash equivalents, which amounted to $1,491 and $1,469 million at September 30, 2011 and December 31, 2010, respectively, were measured at fair value based on quoted prices in active markets for identical assets. The additional assets and liabilities that were measured at fair value on a recurring basis were not material to the Company’s condensed consolidated balance sheets. Sunoco’s other current assets (other than inventories, deferred income taxes and assets held for sale) and current liabilities (other than the current portion of retirement benefit liabilities) are financial instruments and most of these items are recorded at cost in the condensed consolidated balance sheets. The estimated fair values of these financial instruments approximate their carrying amounts. At September 30, 2011 and December 31, 2010, the estimated fair value of Sunoco’s long term debt was $3,654 and $2,379 million, respectively, compared to carrying amounts of $3,377 and $2,136 million, 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 at the respective balance sheet dates for similar issues. Sunoco also has a long-term note receivable from the sale of the Toledo refinery which bears interest at LIBOR plus 8 percent with a maximum interest rate of 10 percent (Note 3). The note may be repaid at any time without penalty. The estimated fair value of this financial instrument approximates its carrying value at September 30, 2011. From time to time, Sunoco uses swaps, options, futures, forwards and other derivative instruments to hedge a variety of price risks. Such derivative instruments are used to achieve ratable pricing of crude oil purchases, to convert certain expected refined product sales to fixed or floating prices, to lock in what Sunoco considers to be acceptable margins for various refined products and to lock in the price of a portion of the Company’s electricity and natural gas purchases or sales and transportation costs. Sunoco also uses interest rate swaps from time to time to manage interest costs and minimize the effects of interest rate fluctuation on cash flows associated with its credit facilities. Sunoco does not hold or issue derivative instruments for speculative purposes. While all of these derivative instruments represent economic hedges, certain of these derivatives are not designated as hedges for accounting purposes. Such derivatives include certain contracts that were entered into and closed during the same accounting period and contracts for which there is not sufficient correlation to the related items being economically hedged. All of these derivatives are recognized in the condensed consolidated balance sheets at their fair value. Changes in fair value of derivative instruments that have not been designated as hedges for accounting purposes are recognized in earnings as they occur. If the derivative instruments are designated as hedges for accounting purposes, depending on their nature, the effective portions of changes in their fair values are either offset in earnings against the changes in the fair values of the items being hedged or reflected initially as a separate component of shareholders’ equity and subsequently recognized in earnings when the hedged items are recognized in earnings. The ineffective portions of changes in the fair values of derivative instruments designated as hedges, if any, are immediately recognized in earnings. The amount of hedge ineffectiveness on derivative contracts during the first nine months of 2011 and 2010 was not material. Sunoco is exposed to credit risk in the event of nonperformance by counterparties on its derivative instruments. Management believes this risk is not significant as the Company has established credit limits with such counterparties which require the settlement of net positions when these credit limits are reached. The Company had open derivative contracts pertaining to 5.2 million barrels of crude oil and refined products, 5.8 million pounds of soy beans and 150 thousand MM BTUs of natural gas at September 30, 2011, which vary in duration but generally do not extend beyond one year. SunCoke Energy entered into three-year interest rate swap agreements with an aggregate notional amount of $125 million. Changes in the fair value of these agreements will be reflected in earnings as they occur as such agreements were not designated as hedge positions.
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Table of ContentsThe following tables set forth the impact of derivatives on the Company’s financial performance (in millions of dollars):
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The following tables set forth certain statement of operations information concerning Sunoco’s business segments (in millions of dollars):
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The following table sets forth the identifiable assets of Sunoco’s business segments (in millions of dollars):
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Strategy Update In the third quarter of 2011, Sunoco announced its decision to exit its refining business. The Company is pursuing all options to sell its refineries located in Philadelphia and Marcus Hook, PA. However, the main processing units at the facilities are expected to be idled in July 2012 if an acceptable sales transaction cannot be completed. Sunoco also completed the exit from its chemicals business in the fourth quarter of 2011 and is in the process of separating SunCoke Energy, Inc. from the remainder of the Company. Sunoco is continuing a fundamental shift away from manufacturing that will re-position the Company. In connection with these initiatives, Sunoco also announced that it is conducting a comprehensive strategic review of the company to determine the best way to deliver value to shareholders, including how best to utilize its strong cash position and maximize the potential for Sunoco’s logistics and retail businesses. Sunoco has retained a third party advisor to assist in this strategic review. The Company has not established a definitive timetable for completing the strategic review process and will provide further updates as appropriate.
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Table of ContentsRESULTS OF OPERATIONS - THREE MONTHS Earnings Profile of Sunoco Businesses
Analysis of Earnings Profile of Sunoco Businesses In the three-month period ended September 30, 2011, the net loss attributable to Sunoco, Inc. shareholders was $1,096 million, or $9.62 per share of common stock on a diluted basis, versus net income attributable to Sunoco, Inc. shareholders of $65 million, or $0.54 per share, in the third quarter of 2010. The $1,970 million decrease in pretax results attributable to Sunoco, Inc. shareholders in the third quarter of 2011 was primarily due to higher provisions for asset write-downs and other matters ($1,949 million), lower refined product production volumes ($87 million), the absence of the gain on remeasurement of pipeline equity interests ($59 million), and lower results from the Coke business ($20 million). Partially offsetting these negative factors were increased refined product margins ($63 million) and lower expenses ($71 million). The increase in the income tax benefit was primarily due to provisions for asset write-downs.
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Table of ContentsRefining and Supply
Refining and Supply had a pretax loss totaling $17 million in the current quarter versus $70 million in the third quarter of 2010. The $53 million improvement in results was primarily due to higher realized margins ($63 million) and lower expenses ($86 million). Partially offsetting these positive factors were lower refined products production volume ($87 million). The overall crude utilization rate was 90 percent for the quarter, up from 84 percent in the second quarter of 2011. On March 1, 2011, Sunoco completed the sale of its Toledo refinery and related crude and refined product inventories to a wholly owned subsidiary of PBF Holding Company LLC. The Company received $1,037 million in net proceeds consisting of $546 million in cash at closing, a $200 million two-year note receivable of which $18 million was repaid during the third quarter of 2011, and a $285 million note receivable and $6 million in cash related to working capital adjustments subsequent to closing which were both paid in May 2011. In addition, the purchase agreement also includes a participation payment of up to $125 million based on the future profitability of the refinery. Sunoco has not recorded any amount related to the contingent consideration in accordance with its accounting policy election on such amounts. The Company expects to receive a significant portion of the $125 million participation payment in 2012 based on the Toledo refinery’s 2011 year-to-date operating results. In connection with this transaction, the Company recognized a $4 million net pretax gain ($3 million loss after tax) in the first nine months of 2011 which includes a $2 million pretax loss ($2 million after tax) recognized in the third quarter. The gain includes a pretax gain of $535 million attributable to the sale of crude and refined product inventories and is reported separately in Corporate and Other in the Earnings Profile of Sunoco Businesses. The results of operations for the Toledo refinery have not been classified as discontinued operations due to Sunoco’s expected continuing involvement with the Toledo refinery through a three-year agreement for the purchase of gasoline and distillate to supply Sunoco retail sites in this area. In September 2011, Sunoco announced its intention to exit its refining business and initiated a process to sell its refineries located in Philadelphia and Marcus Hook, PA (together, the “Northeast Refineries”). In connection with this decision, Sunoco recorded a $1,959 million provision ($1,175 million after tax) in the third quarter of 2011 primarily to write down long-lived assets at the Northeast Refineries to their estimated fair values. This charge is included in asset write-downs and other matters in Corporate and Other in the Earnings Profile of Sunoco Businesses. Sunoco expects to idle the main processing units at the Northeast Refineries in July 2012 if an acceptable sales transaction cannot be completed. If such units are idled, additional provisions of up to $500 million, primarily related to contract terminations, shutdown expenses and severance and pension costs, would be incurred. Upon a sale or idling of the main processing units, Sunoco expects to record a pretax gain related to the liquidation of all of its crude oil and a significant portion of its refined product inventories at the Northeast Refineries totaling approximately $2,000 million based on current market prices. The actual amount of this gain will depend upon the market value of crude and refined products and the volumes on hand at the time of liquidation.
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Table of ContentsRetail Marketing
Retail Marketing had pretax income of $48 million in the third quarter of 2011 versus $68 million in the third quarter of 2010. The decrease in earnings was largely attributable to higher expenses resulting primarily from litigation charges and higher credit card fees. Lower gains on asset sales also contributed to the decline. Logistics
Logistics earned $53 million pretax in the third quarter of 2011 versus $40 million in the third quarter of 2010. The increase in earnings was primarily due to higher crude oil volumes and margins as a result of continuing strong demand for crude oil in West Texas. Higher earnings attributable to recent acquisitions and organic growth projects also contributed to the improved results. In May 2011, Sunoco Logistics Partners L.P. (the “Partnership”) obtained a controlling financial interest in Inland Corporation through a series of transactions involving Sunoco and a third party. Sunoco exercised its rights to acquire additional ownership interests in Inland for $56 million, net of cash received, and the Partnership purchased additional ownership interests from a third party for $30 million. The Partnership’s total ownership interest in Inland increased to 84 percent after it purchased all of Sunoco’s interests. As a result of these transactions, Inland became a consolidated subsidiary of Sunoco and, in connection therewith, Sunoco recognized a $9 million gain ($6 million after tax) from the remeasurement of its pre-acquisition equity interests in Inland to fair value upon consolidation. This gain is reported separately in Corporate and Other in the Earnings Profile of Sunoco Businesses. In July 2011, the Partnership issued 1.31 million deferred distribution units valued at $98 million and paid $2 million in cash to Sunoco in exchange for the tank farm and related assets located at the Eagle Point refinery. These units will not participate in Partnership distributions until they convert into common units on the one-year anniversary of their issuance. Upon completion of this transaction, Sunoco’s interest in the Partnership increased to 34 percent. Sunoco’s share of Partnership distributions is expected to increase to approximately 49 percent, assuming the Partnership’s current quarterly cash distribution rate and no additional unit issuances, when the new units convert to common units in the third quarter of 2012. In August 2011, the Partnership acquired a crude oil purchasing and marketing business from Texon L.P. for $222 million including $17 million attributable to the fair value of its crude oil inventory. The purchase consists of a lease crude
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Table of Contentsbusiness and gathering assets in 16 states, primarily in the western United States. The current crude oil volume of the business is approximately 75 thousand barrels per day at the wellhead. In August 2011, the Partnership acquired a refined products terminal located in East Boston, MA from affiliates of ConocoPhillips for $73 million including $17 million attributable to the fair value of inventory. The terminal has a storage capacity of approximately 1.2 million barrels and is the sole service provider of Logan International Airport under a long-term contract. Coke
Coke earned $24 million pretax in the third quarter of 2011 versus $44 million in the third quarter of 2010. The decrease in earnings was attributable to lower coke sales revenues as a result of the Jewell contract restructuring with ArcelorMittal in January 2011 and higher general and administrative costs largely associated with the relocation of SunCoke Energy’s corporate offices and additional staffing costs related to becoming a public company. Somewhat offsetting these factors were improved results from the company’s coal mining operations. An initial public offering (“SunCoke IPO”) of 13.34 million shares of SunCoke Energy, Inc. (“SunCoke Energy”) common stock was completed on July 26, 2011. Sunoco continues to maintain a controlling financial interest in SunCoke Energy through its ownership of 81 percent of the outstanding shares of SunCoke Energy common stock. Subsequent to the SunCoke IPO, 19 percent of SunCoke Energy’s earnings is allocated to the noncontrolling interest holders. The Company intends to complete the separation of SunCoke Energy from Sunoco by distributing its remaining shares of SunCoke Energy common stock to Sunoco shareholders by means of a spin-off that is intended to qualify as a tax-free transaction. The spin-off is expected to occur no later than one year after the SunCoke IPO. In September 2011, SunCoke Energy purchased a portion of the noncontrolling interest in its Indiana Harbor cokemaking operations for $34 million. The noncontrolling interest in the Indiana Harbor cokemaking operations declined from 34 percent to 15 percent as a result of this transaction. In January 2011, SunCoke Energy acquired Harold Keene Coal Co., Inc., based in Honaker, VA, for $52 million, consisting of a net cash payment of $38 million and contingent consideration totaling $14 million. For additional information concerning this acquisition, see Note 3 to the condensed consolidated financial statements. In March 2008, SunCoke Energy entered into a coke purchase agreement and related energy sales agreement with AK Steel under which SunCoke Energy will build, own and operate a cokemaking facility and associated cogeneration power plant adjacent to AK Steel’s Middletown, OH steelmaking facility. In February 2010, SunCoke Energy obtained the necessary permits to build and operate the plant, although some of them have been appealed. In October 2011, SunCoke Energy commenced operations at the Middletown facility. Total costs of the facility are expected to be approximately $425 million. The plant is expected to produce 550 thousand tons of coke per year and provide, on average, 44 megawatts of power. In connection with this agreement, AK Steel has agreed to purchase, over a 20-year period, all of the coke and available electrical power from these facilities. Expenditures through September 30, 2011 totaled $408 million. In May 2011, SunCoke Energy signed a memorandum of understanding to make a minority equity investment of approximately $30 million in Global Coke Limited (“Global Coke”), one of the leading metallurgical coke producers in India. In conjunction with this investment, SunCoke Energy would provide operations, engineering and technology support to Global Coke. SunCoke Energy has conducted due diligence in connection with the proposed transaction and is currently negotiating the proposed terms of the investment. Consummation of the transaction is subject to the satisfaction of customary closing conditions, including the execution of definitive agreements and the approval of management of the respective parties. In June 2011, SunCoke Energy entered into a series of coal transactions with Revelation Energy (“Revelation”). Under a contract mining agreement, Revelation will mine certain of SunCoke Energy’s coal reserves at the Jewell coal mining operations. This coal will be mined, subject to the satisfaction of certain conditions, over a three-year period beginning late in the fourth quarter of 2011 and is now expected to produce approximately 1.2 million tons of coal over such period. SunCoke
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Table of ContentsEnergy also intends to build a state-of-the-art rapid train coal loading facility in the proximity of its Jewell coal mining operations at an expected cost of approximately $20 million. SunCoke Energy is currently discussing other opportunities for developing new heat recovery cokemaking facilities with domestic and international steel companies. Such cokemaking facilities could be either wholly owned or developed through other business structures. As applicable, the steel company customers would be expected to purchase coke production under long-term contracts. The facilities would also generate steam, which would typically be sold to the steel customer, or electrical power, which could be sold to the steel customer or into the local power market. One such potential project is a facility with up to 200 ovens and 1.1 million tons of capacity which could serve multiple customers and may have a portion of its capacity reserved for coke sales in the spot market. SunCoke Energy is in the early stages of permitting for this potential facility in Kentucky, but it is also assessing alternative sites in other states. SunCoke Energy expects to defer seeking customer commitments for this potential facility until further progress is made on obtaining permits. SunCoke Energy’s ability to enter into additional arrangements is dependent upon market conditions in the steel industry. For additional information on SunCoke Energy’s IPO, see Other Cash Flow Information in the Financial Condition discussion in this report. Discontinued Chemicals Operations On March 31, 2010, Sunoco completed the sale of the common stock of its polypropylene chemicals business to Braskem S.A. The assets sold as part of this transaction included the polypropylene manufacturing facilities in LaPorte, TX, Neal, WV, and Marcus Hook, PA, a propylene supply agreement and related inventory. Sunoco recognized a net loss of $169 million ($44 million after tax) in the first quarter of 2010 related to the divestment which is reported separately in Corporate and Other in the Earnings Profile of Sunoco Businesses. Cash proceeds from this divestment of $348 million were received in the second quarter of 2010. In July 2011, Sunoco completed the sale of its phenol and acetone chemicals manufacturing facility in Philadelphia, PA (“Frankford Facility”) and related inventory to an affiliate of Honeywell International Inc. In connection with this agreement, Sunoco recorded a $118 million provision ($70 million after tax) to write down Frankford Facility assets to their estimated fair values during the second quarter of 2011. This charge is included in asset write-downs and other matters in Corporate and Other in the Earnings Profile of Sunoco Businesses. Sunoco received total cash proceeds of $88 million in the third quarter of 2011 and recognized a $14 million gain ($8 million after tax) on the divestment which is reported separately in Corporate and Other in the Earnings Profile of Sunoco Businesses. Sunoco is currently party to a cumene supply agreement with the Frankford Facility which may be terminated, upon six months prior notice, on or after July 1, 2012. Based on the Company’s decision to exit its refining business, it is anticipated that this agreement will either be assumed by a buyer of the Philadelphia refinery or terminated with proper notice. In October 2011, Sunoco completed the sale of its phenol manufacturing facility in Haverhill, OH (“Haverhill Facility”) and related inventory to an affiliate of Goradia Capital LLC. Sunoco received total cash proceeds of $100 million in the fourth quarter of 2011 which is subject to an inventory adjustment subsequent to closing. Sunoco recorded a $169 million provision ($101 million after tax) to write down Haverhill Facility assets to their estimated fair values during the second quarter of 2011. This charge is included in asset write-downs and other matters in Corporate and Other in the Earnings Profile of Sunoco Businesses. At September 30, 2011, certain Haverhill Facility and related assets have been classified as held for sale in the condensed consolidated balance sheet. Discontinued chemicals operations had pretax income of $1 million in the third quarter of 2011 versus $5 million in the third quarter of 2010. The decrease in results was driven by lower margins and sales volumes which were partially offset by lower expenses. Corporate and Other Corporate Expenses – Corporate administrative expenses were $23 million pretax in the third quarter of 2011 versus $28 million in the third quarter of 2010. The decrease was largely driven by lower staffing and stock compensation costs. Net Financing Expenses and Other – Net financing expenses and other were $29 million pretax in the third quarter of 2011 versus $28 million in the third quarter of 2010. Increased interest expense attributable to new borrowings of Sunoco Logistics Partners, L.P. and SunCoke Energy, Inc. was largely offset by higher interest income and capitalized interest. The increased interest income was primarily attributable to the note receivable balance resulting from the sale of the Toledo refinery and related inventory. The capitalized interest was largely attributable to construction of the Middletown cokemaking facility.
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Table of ContentsAsset Write-Downs and Other Matters – Continuing Operations – During the third quarter of 2011, Sunoco recorded a $1,959 million provision ($1,175 million after tax) to write down assets at the Philadelphia and Marcus Hook refineries to their estimated fair values in connection with Sunoco’s decision to exit its refining business and recorded a $5 million provision ($3 million after tax) for pension settlement and curtailment losses and employee terminations and related costs in connection with business improvement initiatives. During the third quarter of 2010, Sunoco recorded a $13 million provision ($8 million after tax) primarily for pension settlement losses and employee terminations and related costs in connection with business improvement initiatives and recognized a $16 million gain ($9 million after tax) on an insurance settlement related to MTBE coverage (see Note 3 to the condensed consolidated financial statements). Asset Write-Downs and Other Matters – Discontinued Operations – In the third quarter of 2011, Sunoco recorded an $18 million gain ($11 million after tax) attributable to a partial settlement of a low sulfur diesel credit liability related to the Company’s discontinued Tulsa refining operations (see Note 2 to the condensed consolidated financial statements). Sale of Toledo Refinery – During the third quarter of 2011, Sunoco recognized a $2 million pretax loss ($2 million after tax) largely related to pension settlement losses attributable to the divestment of its Toledo refinery (see Note 3 to the condensed consolidated financial statements). Sale of Discontinued Chemicals Operations – During the third quarter of 2011, Sunoco recognized a $14 million gain ($8 million after tax) related to the divestment of the discontinued Frankford chemicals facility (see Note 2 to the condensed consolidated financial statements). Gain on Remeasurement of Pipeline Equity Interests – During the third quarter of 2010, Sunoco recognized a $59 million gain attributable to Sunoco shareholders ($37 million after tax) from the remeasurement of its pre-acquisition equity interests to fair value upon consolidation (see Note 3 to the condensed consolidated financial statements). Income Taxes – The income tax benefit attributable to Sunoco, Inc. shareholders was $781 million in the third quarter of 2011 compared to income tax expense of $28 million in the third quarter of 2010. The decrease in income tax expense was primarily attributable to tax benefits on asset write-downs. The effective tax rates for each period were determined based upon the expected full year tax rates at the end of each period as adjusted for discrete items. Analysis of Condensed Consolidated Statements of Operations Revenues — Total revenues were $12.16 billion in the third quarter of 2011 compared to $9.22 billion in the third quarter of 2010. The 32 percent increase was primarily due to higher refined product prices and higher crude oil sales in connection with the crude oil gathering and marketing activities of the Company’s Logistics business. Partially offsetting these positive factors were lower refined product sales volumes largely attributable to the sale of the Toledo refinery in the first quarter of 2011. Costs and Expenses — Total costs and expenses were $14.00 billion in the third quarter of 2011 compared to $9.02 billion in the third quarter of 2010. The 55 percent increase was primarily due to higher provisions for asset write-downs and other matters, higher crude oil acquisition costs resulting from price increases, higher refined product acquisition volumes and higher crude oil costs in connection with the crude oil gathering and marketing activities of the Company’s Logistics business. Partially offsetting these negative factors were lower crude oil acquisition volumes largely attributable to the sale of the Toledo refinery in the first quarter of 2011.
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Table of ContentsRESULTS OF OPERATIONS - NINE MONTHS Earnings Profile of Sunoco Businesses
Analysis of Earnings Profile of Sunoco Businesses In the nine-month period ended September 30, 2011, the net loss attributable to Sunoco, Inc. shareholders was $1,322 million, or $11.15 per share of common stock on a diluted basis, versus net income attributable to Sunoco, Inc. shareholders of $147 million, or $1.22 per share, in the nine months ended September 30, 2010. The $2,323 million decrease in pretax results attributable to Sunoco, Inc. shareholders in the first nine months of 2011 was primarily due to higher provisions for asset write-downs and other matters ($2,182 million), lower refined product margins ($181 million) and production volumes ($178 million), lower results attributable to Sunoco’s Coke and discontinued chemicals businesses ($150 million) and lower gains related to the remeasurement of pipeline equity interests ($50 million). Partially offsetting these negative factors were lower expenses ($144 million), lower losses related to the divestment of discontinued chemicals operations ($183 million), LIFO gains in 2011 from the liquidation of crude oil and refined product inventories ($42 million), and higher results in Sunoco’s Logistics business ($41 million). The increase in the income tax benefit was primarily attributable to provisions for asset write-downs.
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Table of ContentsRefining and Supply
Refining and Supply had a pretax loss totaling $199 million in the first nine months of 2011 versus $2 million in the first nine months of 2010. The $197 million decrease in results was primarily due to lower realized margins ($181 million) and production volumes ($178 million), partially offset by lower expenses ($170 million). Production volumes in 2011 were negatively impacted by significant unplanned maintenance activities at the Philadelphia and Marcus Hook refineries which limited utilization through April 2011. Retail Marketing
Retail Marketing had pretax income of $129 million in the first nine months of 2011 versus $175 million in the first nine months of 2010. The decrease in earnings was largely attributable to higher expenses resulting primarily from litigation charges, higher credit card fees and the absence of favorable settlements recognized during 2010. Lower retail gasoline margins and sales volumes (excluding recently acquired sites) and lower gains on asset sales also contributed to the decline.
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Table of ContentsLogistics
Logistics earned $138 million pretax in the first nine months of 2011 versus $97 million in the first nine months of 2010. The $41 million increase in earnings was primarily due to higher crude oil volumes and margins as a result of strong demand for crude oil in West Texas and higher earnings attributable to recent acquisitions and organic growth projects. Coke
Coke earned $53 million pretax in the first nine months of 2011 versus $151 million in the first nine months of 2010. The decrease in earnings was primarily attributable to lower coke sales revenues as a result of the Jewell contract restructuring with ArcelorMittal in January 2011 and the recognition of a $13 million contract loss in connection with agreements to purchase coke from third-parties to cover a projected 2011 production shortfall at the Indiana Harbor facility. The company now anticipates that coke production from Indiana Harbor will be sufficient to meet contractual requirements with ArcelorMittal. Higher general and administrative costs largely associated with the relocation of the corporate offices and additional staffing costs related to becoming a public company also contributed to the decline in earnings. These factors were somewhat offset by improved results from the company’s coal mining operations. Discontinued Chemicals Operations Discontinued chemicals operations had a pretax loss of $2 million in the first nine months of 2011 versus pretax income of $50 million in the first nine months of 2010. The decrease in results was primarily due to lower realized margins, sales volumes and the absence of results of the polypropylene business subsequent to its sale in the first quarter of 2010. Margins in 2010 include $10 million of pretax LIFO inventory profits. Corporate and Other Corporate Expenses – Corporate administrative expenses were $63 million pretax in the first nine months of 2011 versus $81 million in the first nine months of 2010. The decrease was largely driven by lower one-time project costs as well as lower staffing costs and accruals for performance-related incentive compensation. Net Financing Expenses and Other – Net financing expenses and other were $69 million pretax in the first nine months of 2011 versus $83 million in the first nine months of 2010. The decrease was primarily driven by higher interest income and capitalized interest, partially offset by increased interest expense attributable to new borrowings of Sunoco Logistics Partners, L.P. and SunCoke Energy, Inc. The increased interest income was primarily attributable to notes receivable balances resulting from the sale of the Toledo refinery and related inventory. The capitalized interest is largely attributable to construction of the Middletown cokemaking facility. Asset Write-Downs and Other Matters – Continuing Operations – During the first nine months of 2011, Sunoco recorded a $1,964 million provision ($1,178 million after tax) to write down assets at the Philadelphia and Marcus Hook refineries to their estimated fair values in connection with Sunoco’s decision to exit its refining business and certain Eagle Point storage
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Table of Contentsassets which were taken out of service and recorded a $13 million provision ($8 million after tax) primarily for pension settlement and curtailment losses and employee terminations and related costs in connection with business improvement initiatives. During the first nine months of 2010, Sunoco recorded a $33 million provision ($20 million after tax) primarily related to contract losses in connection with excess barge capacity resulting from the permanent shutdown of the Eagle Point refinery during 2009, recorded a $47 million provision ($28 million after tax) primarily for pension settlement losses and employee terminations and related costs in connection with business improvement initiatives and recognized a $16 million gain ($9 million after tax) on an insurance settlement related to MTBE coverage (see Note 3 to the condensed consolidated financial statements). Asset Write-Downs and Other Matters – Discontinued Operations – During the first nine months of 2011, Sunoco recorded a $287 provision ($171 million after tax) to write down assets at the discontinued Frankford and Haverhill chemicals facilities to their estimated fair values and recorded an $18 million gain ($11 million after tax) attributable to a partial settlement of a low sulfur diesel credit liability related to the Company’s discontinued Tulsa refining operations (see Note 2 to the condensed consolidated financial statements). Sale of Toledo Refinery – During the first nine months of 2011, Sunoco recognized a net gain of $4 million ($3 million loss after tax) related to the divestment of its Toledo refinery and related inventory (see Note 3 to the condensed consolidated financial statements). Sale of Discontinued Chemicals Operations – During the third quarter of 2011, Sunoco recognized a $14 million gain ($8 million after tax) related to the divestment of the discontinued Frankford chemicals facility. During the first quarter of 2010, Sunoco recognized a $169 million loss ($44 million after tax) related to the divestment of the discontinued polypropylene operations (see Note 2 to the condensed consolidated financial statements). LIFO Inventory Profits – During the first nine months of 2011, Sunoco recognized a $42 million gain ($26 million after tax) resulting from the reduction of crude oil and refined product inventories at the Toledo refinery prior to its divestment (see Notes 3 and 6 to the condensed consolidated financial statements). Gain on Remeasurement of Pipeline Equity Interests – During the first nine months of 2011 and 2010, Sunoco recognized gains attributable to Sunoco shareholders of $9 and $59 million, respectively, ($6 and $37 million, respectively, after tax) from the remeasurement of its pre-acquisition equity interests to fair value upon consolidation (see Note 3 to the condensed consolidated financial statements). Income Taxes – The income tax benefit attributable to Sunoco, Inc. shareholders was $868 million in the first nine months of 2011 compared to $14 million in the first nine months of 2010. The increase in the income tax benefit was primarily attributable to reductions in the income before discrete items and tax benefits on asset write-downs. The effective tax rates for each period were determined based upon the expected full year tax rates at the end of each period as adjusted for discrete items. Analysis of Condensed Consolidated Statements of Operations Revenues — Total revenues were $34.19 billion in the first nine months of 2011 compared to $26.47 billion in the first nine months of 2010. The 29 percent increase was primarily due to higher refined product prices and higher crude oil sales in connection with the crude oil gathering and marketing activities of the Company’s Logistics business. Partially offsetting these positive factors were lower refined product sales volumes largely attributable to the sale of the Toledo refinery in the first quarter of 2011 and operational issues. Costs and Expenses — Total costs and expenses were $35.98 billion in the first nine months of 2011 compared to $26.05 billion in the first nine months of 2010. The 38 percent increase was primarily due to higher crude oil and refined product acquisition costs resulting from price increases, higher refined product acquisition volumes, higher crude oil costs in connection with the crude oil gathering and marketing activities of the Company’s Logistics business and higher provisions for asset write-downs and other matters. Partially offsetting these negative factors were lower crude oil acquisition volumes largely attributable to the sale of the Toledo refinery in the first quarter of 2011.
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Table of ContentsFINANCIAL CONDITION Cash and Working Capital At September 30, 2011, Sunoco had cash and cash equivalents of $1,656 million compared to $1,485 million at December 31, 2010. Including assets held for sale, Sunoco had a working capital surplus of $1,093 million at September 30, 2011 compared to $797 million at December 31, 2010. The $171 million increase in cash and cash equivalents was due to $588 million of net cash provided by financing activities and $21 million of net cash provided by investing activities, largely offset by $438 million of net cash used in operating activities. Management believes that the current levels of cash and working capital are adequate to support Sunoco’s ongoing operations. Sunoco’s working capital position is considerably stronger than indicated because of the relatively low historical costs assigned under the LIFO method of accounting for Sunoco’s crude oil, petroleum and chemical product inventories reflected in the condensed consolidated balance sheets. The current replacement cost of all such inventories, including inventories classified as assets held for sale, exceeded their carrying value at September 30, 2011 by approximately $2.97 billion. Inventories valued at LIFO are readily marketable at their current replacement values. The Company expects to realize approximately $2 billion of this value through the liquidation of crude and refined product inventories in connection with its exit from the refining business. Certain pending legislative and regulatory proposals effectively could limit, or even eliminate, use of the LIFO inventory method for financial and income tax purposes. Although the final outcome of these proposals cannot be ascertained at this time, the ultimate impact to Sunoco of the transition from LIFO to another inventory method could be material. Cash Flows from Operating Activities Sunoco’s net cash used in operating activities was $438 million in the first nine months of 2011 compared to $917 million in net cash provided by operating activities in the first nine months of 2010. This $1,355 million decrease in cash from operations was largely due to a decrease in operating results and a $1,203 million increase in cash used to fund working capital changes pertaining to operating activities, partially offset by an increase in noncash charges. An increase in working capital during 2011 was largely attributable to seasonal increases in refined product inventories, higher coal and coke inventories and the repayment of retained crude payables from the Toledo refinery. A decrease in working capital during 2010 was largely attributable to federal income tax refunds totaling $526 million and the absence of the collection of retained accounts receivable from the Company’s discontinued polypropylene operations. Both the 2011 and 2010 periods included increases in crude oil inventories as a result of contango inventory storage activities of the Partnership and sources of cash from increases in crude prices on Sunoco’s net payable from its refining activities. Other Cash Flow Information In February 2010, Sunoco received $201 million in cash from the Partnership in connection with a modification of the incentive distribution rights and sold 2.20 million of its limited partnership units to the public, generating approximately $145 million of net proceeds. In August 2010, the Partnership issued 2.01 million limited partnership units in a public offering, generating $144 million of net proceeds. Sunoco’s share of Partnership distributions is expected to increase to approximately 49 percent at the Partnership’s current quarterly cash distribution rate based on its ownership interest at September 30, 2011 (see Note 11 to the condensed consolidated financial statements for additional information on Sunoco’s expected share of future Partnership distributions). Sunoco received proceeds of $943 million from the sale of its Toledo refinery and the Frankford chemicals facility and their related inventories in the first nine months of 2011. Sunoco also received proceeds in the second quarter of 2010 of $348 million from the sale of its discontinued polypropylene operations. On July 12, 2011, Sunoco borrowed $300 million from an affiliate of one of SunCoke Energy’s IPO underwriters. On July 26, 2011, an IPO of 13.34 million shares of SunCoke Energy common stock was completed at an offering price of $16 per share. Sunoco’s $300 million borrowing was satisfied at the closing of the IPO through an exchange of the 13.34 million shares of SunCoke Energy stock valued at $213 million and a cash payment of $87 million. Sunoco incurred underwriters’ commissions and other expenses totaling $21 million in connection with the offering. Also in July 2011, concurrent with its IPO, SunCoke Energy issued $400 million aggregate principal of 7.625 percent senior notes which mature in 2019 and borrowed $300 million under a senior secured term loan credit facility which matures in July 2018. The principal amount of the term loan credit facility will amortize in quarterly installments equal to 0.25 percent of the original principal amount of the term loan credit facility with the balance payable at maturity. The term loan credit facility will bear interest at a rate based on SunCoke Energy’s election of available alternatives which includes LIBOR (with a floor of 1.00 percent) plus 3.00 percent. The senior notes and the term loan credit facility are guaranteed by each direct and indirect, existing and future, domestic material restricted subsidiary of SunCoke Energy. SunCoke Energy used a portion of the proceeds to repay $575 million of intercompany debt payable to a subsidiary of Sunoco.
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Table of ContentsFinancial Capacity Management currently believes that future cash generation is expected to be sufficient to satisfy Sunoco’s ongoing capital requirements, to fund its pension obligations (see “Retirement Benefit Plans” below) and to pay 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 increases in the levels of capital spending (including acquisitions) and working capital. During those periods, the Company may supplement its cash generation with proceeds from financing activities. Sunoco, Inc. has a $1.2 billion revolving credit facility with a syndicate of 17 participating banks (the “Facility”) which matures in August 2012. The Facility provides the Company with access to short-term financing and is intended to support the issuance of commercial paper, letters of credit and other debt. The Company also can borrow directly from the participating banks under the Facility. The Facility is subject to commitment fees, which are not material. The Facility requires that Sunoco’s ratio of consolidated net indebtedness, including borrowings of Sunoco Logistics Partners L.P. and SunCoke Energy (subsequent to its IPO), to consolidated capitalization (as those terms are defined in the Facility) not to exceed .60 to 1. At September 30, 2011, this ratio was .48 to 1. The Facility also requires Sunoco to maintain tangible net worth (as defined in the Facility) in an amount greater than or equal to targeted tangible net worth (targeted tangible net worth being determined by adding $1.1 billion and 50 percent of the excess of net income attributable to Sunoco, Inc. shareholders over share repurchases (as defined in the Facility) for each quarter ended after March 31, 2004). In September 2011, Sunoco obtained a 90-day consent and waiver from the participating banks related to the Facility’s tangible net worth covenant as the reduction in net worth resulting from charges to be taken by the Company in the third quarter of 2011 for asset write-downs of the Company’s refineries was expected to result in a violation of this covenant. Sunoco is currently negotiating an asset-backed facility that would be secured by certain Company assets as a source of liquidity. At September 30, 2011, the Facility was being used to support $115 million of floating-rate notes due in 2034. The Company remarkets the floating-rate notes on a weekly basis. However, any inability to remarket the floating-rate notes would have no impact on the Company’s liquidity as they currently represent a reduction in funds under the Facility which would be available for future borrowings if the notes were repaid. In August 2011, the Partnership replaced its existing $458 million of credit facilities with two new credit facilities totaling $550 million. The Partnership’s new credit facilities consist of a five-year $350 million unsecured credit facility and a $200 million 364-day unsecured credit facility which is available to fund certain crude oil inventory activities. There were no borrowings outstanding under the Partnership’s facilities at September 30, 2011. The $350 and $200 million credit facilities contain various covenants including the requirement that the Partnership’s total debt to EBITDA ratio (each as defined in the facilities) not exceed 5.00 to 1. This ratio can generally be increased to 5.50 to 1 during an acquisition period (as defined in the facilities). At September 30, 2011, the Partnership’s ratio of total debt to EBITDA was 3.24 to 1. Concurrent with its IPO in July 2011, SunCoke Energy entered into a $150 million senior secured revolving credit facility which expires in July 2016. There were no borrowings outstanding under SunCoke’s facility at September 30, 2011. The credit facility is secured on a first priority basis by a perfected security interest in substantially all of SunCoke Energy’s and each SunCoke Energy subsidiary guarantor’s tangible and intangible assets (subject to certain exceptions). Also in July 2011, a wholly owned subsidiary of the Company, Sunoco Receivables Corporation, Inc. (“SRC”), executed an agreement with four participating banks, extending its accounts receivable securitization facility that was scheduled to expire in August 2011 by an additional 364 days. The updated facility permits borrowings and supports the issuance of letters of credit by SRC up to a total of $250 million. Under the receivables facility, certain subsidiaries of the Company will sell their accounts receivable from time to time to SRC. In turn, SRC may sell undivided ownership interests in such receivables to commercial paper conduits in exchange for cash or letters of credit. The Company has agreed to continue servicing the receivables for SRC. Upon the sale of the interests in the accounts receivable by SRC, the conduits have a first priority perfected security interest in such receivables and, as a result, the receivables will not be available to the creditors of the Company or its other subsidiaries. At September 30, 2011, there was approximately $265 million of accounts receivable eligible to support this facility; however, there were no borrowings outstanding under the facility as of that date. The following table sets forth Sunoco’s cash and cash equivalents and outstanding debt (in millions of dollars):
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In July 2011, the Partnership issued $600 million of long-term debt, consisting of $300 million of 4.65 percent notes due in 2022 and $300 million of 6.10 percent notes due in 2042. Also in July 2011, concurrent with its IPO, SunCoke Energy issued $400 million aggregate principal of 7.625 percent notes which mature in 2019 and borrowed $300 million under a senior secured term loan credit facility which matures in July 2018. Management believes the Company can access the capital markets to pursue strategic opportunities as they arise. In addition, the Company has the option of selling a portion of its Sunoco Logistics Partners L.P. interests, and Sunoco Logistics Partners L.P. has the option of issuing additional common units. RETIREMENT BENEFIT PLANS The following table sets forth the components of the change in market value of the investments in Sunoco’s defined benefit pension plans (in millions of dollars):
As a result of the workforce reduction, divestments and the permanent shutdown of the Eagle Point refinery, the Company incurred noncash settlement, special termination and curtailment losses in these plans during the year ended December 31, 2010 and the first nine months of 2011 totaling approximately $30 and $25 million after tax, respectively. In 2010, the Company contributed $234 million to its funded defined benefit plans consisting of $144 million of cash and 3.59 million shares of Sunoco common stock valued at $90 million. The Company may make contributions to its funded defined benefit plans in 2011 with available cash.
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Table of ContentsDIVIDENDS AND SHARE REPURCHASES The Company’s management believes that Sunoco’s current dividend level of $0.15 per share ($0.60 per year) is sustainable under current conditions. In September 2011, the Company declared a $0.15 per share cash dividend to be paid in the fourth quarter of 2011 and, as a result, reflected this estimated $16 million dividend as a reduction in retained earnings at September 30, 2011. During the third quarter of 2011, the Company repurchased 14.4 million shares of its common stock for $500 million. At September 30, 2011, the Company had a remaining authorization from its Board to repurchase approximately $100 million of Company common stock (see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” below). FORWARD-LOOKING STATEMENTS Some of the information included in this report contains “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). These forward-looking statements discuss estimates, 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 as assumptions made by, and information currently available to, Sunoco. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “budget,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “scheduled,” “should,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. Although management 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. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those discussed in this report. In addition, statements in this report concerning future dividend declarations are subject to approval by the Company’s Board of Directors and will be based on circumstances then existing. Such risks and uncertainties include, without limitation:
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