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| SUN > SEC Filings for SUN > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
RESULTS OF OPERATIONS
Earnings Profile of Sunoco Businesses (after tax)
Three Months
Ended
March 31
2009 2008 Variance
(Millions of Dollars)
Refining and Supply $ 23 $ (123 ) $ 146
Retail Marketing 6 26 (20 )
Chemicals (4 ) 18 (22 )
Logistics 30 15 15
Coke 25 25 -
Corporate and Other:
Corporate expenses (11 ) (17 ) 6
Net financing expenses and other (10 ) (3 ) (7 )
Asset write-downs and other matters (47 ) - (47 )
Net income (loss) attributable to Sunoco, Inc. shareholders $ 12 $ (59 ) $ 71
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Analysis of Earnings Profile of Sunoco Businesses
In the three-month period ended March 31, 2009, the net income attributable to Sunoco Inc. shareholders was $12 million, or $.10 per share of common stock on a diluted basis versus a net loss attributable to Sunoco, Inc. shareholders of $59 million, or $.50 per share, in the first quarter of 2008.
The $71 million increase in results attributable to Sunoco, Inc. shareholders in the first quarter of 2009 was primarily due to higher margins in Sunoco's Refining and Supply business ($151 million), lower expenses ($42 million), higher income attributable to the Logistics business ($15 million) and the absence of an unfavorable income tax consolidation adjustment that was recorded in 2008 ($9 million). Partially offsetting these positive factors were a provision for asset write-downs and other matters ($47 million), lower production of refined products ($46 million), lower average retail gasoline margins ($31 million), and lower results attributable to Sunoco's Chemicals business ($22 million).
Included in the provision for asset write-downs and other matters is a $34 million after-tax charge attributable to a previously announced business improvement initiative to reduce costs and improve business processes that was approved by management in March 2009. Implementation of the first phase of the initiative is underway. The goal of the business improvement initiative is to reduce pretax costs by more than $300 million on an annualized basis by year-end 2009. The reduced costs are attributable to a workforce reduction of approximately 750 positions, or approximately 20 percent of the salaried workforce, as well as expected savings in energy costs, and the use of materials, equipment and contract services. This phase of the review included all business and operations support functions, as well as operations at the Philadelphia and Marcus Hook refineries. (See Note 2 to the condensed consolidated financial statements.)
Refining and Supply
For the Three
Months Ended
March 31
2009 2008
Income (loss) (millions of dollars) $ 23 $ (123 )
Wholesale margin* (per barrel):
Total Refining and Supply $ 6.69 $ 3.43
Northeast Refining $ 6.48 $ 3.50
MidContinent Refining $ 7.34 $ 3.21
Crude inputs as percent of crude unit rated capacity 74 % 85 %
Throughputs (thousands of barrels daily):
Crude oil 669.6 777.9
Other feedstocks 67.6 78.3
Total throughputs 737.2 856.2
Products manufactured (thousands of barrels daily):
Gasoline 358.2 393.5
Middle distillates 250.0 298.6
Residual fuel 61.1 56.3
Petrochemicals 25.7 32.8
Lubricants 7.2 12.2
Other 65.0 95.3
Total production 767.2 888.7
Less: Production used as fuel in refinery operations 36.5 40.4
Total production available for sale 730.7 848.3
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* Wholesale sales revenue less related cost of crude oil, other feedstocks, product purchases and terminalling and transportation divided by production available for sale.
Refining and Supply earned $23 million in the current quarter versus a loss of $123 million in the first quarter of 2008. The $146 million increase in results was due to higher realized margins ($151 million) and lower expenses ($41 million), partially offset by lower production volumes ($46 million). Production volumes decreased in the first quarter of 2009 compared to the year-ago period, as market-driven rate reductions reduced production throughout the refining system. During the first quarter of 2009, Sunoco continued its efforts to optimize its production slate and run a broader mix of lower-cost crude oil grades resulting in an overall crude utilization rate of 74 percent for the quarter.
In December 2008, Sunoco announced its intention to sell the Tulsa refinery or convert it to a terminal by the end of 2009 because it did not expect to achieve an acceptable return on investment on a capital project to comply with the new off-road diesel fuel requirements at this facility. As part of this strategy, during April 2009, Sunoco entered into an agreement in principle to sell its Tulsa refinery to Holly Corporation for $65 million in cash. The transaction will also include the sale of inventory attributable to the refinery which will be valued at market prices at closing. The transaction is subject to customary closing conditions, such as regulatory and other approvals, and is expected to close on June 1, 2009. The Tulsa refinery will be classified as a discontinued operation in the financial statements to be included in the Company's 2009 Second Quarter Form 10-Q for all periods presented therein up to the divestment date.
Retail Marketing
For the Three
Months Ended
March 31
2009 2008
Income (millions of dollars) $ 6 $ 26
Retail margin* (per barrel):
Gasoline $ 2.69 $ 4.68
Middle distillates $ 10.29 $ 7.12
Sales (thousands of barrels daily):
Gasoline 282.1 280.1
Middle distillates 36.6 37.7
318.7 317.8
Retail gasoline outlets 4,654 4,682
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* Retail sales price less related wholesale price, terminalling and transportation costs and consumer excise taxes per barrel. The retail sales price is the weighted-average price received through the various branded marketing distribution channels.
Retail Marketing earned $6 million in the current quarter versus $26 million in the first quarter of 2008. The $20 million decrease in earnings was primarily due to lower average retail gasoline margins ($31 million), partially offset by higher distillate margins ($7 million) and lower expenses ($4 million). Retail gasoline margins were negatively affected by periods of rising wholesale prices and a weak demand environment.
Chemicals
For the Three
Months Ended
March 31
2009 2008
Income (loss) (millions of dollars) $ (4 ) $ 18
Margin* (cents per pound):
All products** 7.7 ¢ 10.6 ¢
Phenol and related products 6.6 ¢ 9.2 ¢
Polypropylene** 8.6 ¢ 12.5 ¢
Sales (millions of pounds):
Phenol and related products 407 599
Polypropylene 514 569
Other 5 24
926 1,192
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* Wholesale sales revenue less the cost of feedstocks, product purchases and related terminalling and transportation divided by sales volumes.
** The polypropylene and all products margins include the impact of a long-term supply contract with Equistar Chemicals, L.P. which is priced on a cost-based formula that includes a fixed discount. These margins exclude a favorable lower of cost or market inventory adjustment totaling $17 million ($10 million after tax) for the three months ended March 31, 2009.
Chemicals had a loss of $4 million in the first quarter of 2009 versus income of $18 million in the first quarter of 2008. The $22 million decrease in results was due primarily to lower margins ($21 million) and sales volumes ($13 million), partially offset by a favorable lower of cost or market adjustment to its polypropylene inventory that had been previously written down in the fourth quarter of 2008 ($10 million). Sunoco permanently shut down its Bayport polypropylene facility in March 2009. Sunoco also intends to sell its Chemicals business if it can obtain an appropriate value.
Logistics
Logistics earned a record $30 million in the first quarter of 2009 versus $15 million in the first quarter of 2008. The $15 million increase was due to significantly higher lease acquisition results, increased crude oil pipeline and storage revenues, and earnings from a refined products pipeline and terminal system acquired in November 2008.
Coke
Coke earned $25 million in the first quarter of 2009, unchanged compared to the first quarter of 2008. The favorable impact of increased price realizations from coke production at Jewell was offset by higher operating expenses at Haverhill and higher minority interest and depreciation expense.
In February 2007, SunCoke Energy entered into an agreement with two affiliates of OAO Severstal under which a local affiliate of SunCoke Energy would build, own and operate an expansion of the Haverhill plant (that would double its cokemaking capacity to 1.1 million tons of coke per year) and a cogeneration power plant. Operations from this cokemaking facility commenced in July 2008 with full operations expected in the second quarter of 2009. Total capital outlays for the project are estimated at $265 million, of which $260 million has been spent through March 31, 2009. In connection with this agreement, two affiliates of OAO Severstal agreed to purchase on a take-or-pay basis, over a 15-year period, 550 thousand tons per year of coke from the cokemaking facility.
In February 2008, SunCoke Energy entered into an agreement with U.S. Steel under which SunCoke Energy will build, own and operate a 650 thousand tons-per-year cokemaking facility adjacent to U.S. Steel's steelmaking facility in Granite City, Illinois. Construction of this facility, which is estimated to cost approximately $315 million, is currently underway and is expected to be completed in the fourth quarter of 2009. Expenditures through March 31, 2009 totaled $213 million. In connection with this agreement, U.S. Steel has agreed to purchase on a take-or-pay basis, over a 15-year period, such coke production as well as the steam generated from the heat recovery cokemaking process at this facility.
In March 2008, SunCoke Energy entered into an 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, Ohio steelmaking facility subject to resolution of all contingencies, including necessary permits. These facilities are expected to cost in aggregate approximately $350 million and be completed 15 to 18 months after resolution of the contingencies, which may move the targeted completion date beyond the previously announced 2010. The plant is expected to produce approximately 550 thousand tons of coke per year and provide, on average, 46 megawatts of power into the regional power market. 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 March 31, 2009 totaled $62 million, with additional funds committed of approximately $10 million. In the event contingencies (including permit issues) to constructing the project cannot be resolved, AK Steel is obligated to reimburse substantially all of these amounts to Sunoco.
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. SunCoke Energy's ability to enter into additional arrangements is dependent upon market conditions in the steel industry.
Corporate and Other
Corporate Expenses - Corporate administrative expenses were $11 million after tax in the first quarter of 2009 versus $17 million after tax in the first quarter of 2008. The $6 million decrease was primarily due to the absence of a $9 million unfavorable income tax consolidation adjustment that was recorded in the prior-year period.
Net Financing Expenses and Other - Net financing expenses and other were $10 million after tax in the first quarter of 2009 versus $3 million after tax in the first quarter of 2008. The $7 million increase was primarily due to lower interest income ($5 million) and higher interest expense ($2 million).
Asset Write-Downs and Other Matters - During the first quarter of 2009, Sunoco established a $34 million after-tax accrual for employee terminations and related costs in connection with a business improvement initiative; established a $4 million after-tax accrual for a take-or-pay contract loss, employee terminations and other exit costs in connection with the shutdown of the Bayport, TX polypropylene plant; and recorded a $9 million after-tax provision to write down to estimated fair value certain assets primarily in the Refining and Supply business.( See Note 2 to the condensed consolidated financial statements.)
Analysis of Condensed Consolidated Statements of Operations
Revenues - Total revenues were $6.44 billion in the first quarter of 2009 compared to $12.81 billion in the first quarter of 2008. The 50 percent decrease was primarily due to lower refined product prices and sales volumes. Also contributing to the decline were lower crude oil sales in connection with the crude oil gathering and marketing activities of the Company's Logistics operations.
Costs and Expenses - Total pretax costs and expenses were $6.39 billion in the current three-month period compared to $12.89 billion in the first quarter of 2008. The 50 percent decrease was primarily due to lower crude oil and refined product acquisition costs resulting from price declines and lower crude oil throughputs. Also contributing to the decline were lower crude oil costs in connection with the crude oil gathering and marketing activities of the Company's Logistics operations.
Cash and Working Capital
At March 31, 2009, Sunoco had cash and cash equivalents of $206 million compared to $240 million at December 31, 2008 and had a working capital deficit of $718 million compared to a working capital deficit of $1,102 million at December 31, 2008. The $34 million decrease in cash and cash equivalents was due to a $223 million net use of cash in investing activities and a $103 million net use of cash in operating activities, partially offset by $292 million of net cash provided by financing activities. The increase in working capital largely reflects a decrease in taxes payable. 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 most of the inventories reflected in the condensed consolidated balance sheets. The current replacement cost of all such inventories exceeded their carrying value at March 31, 2009 by $1,679 million. Inventories valued at LIFO, which consist of crude oil as well as petroleum and chemical products, are readily marketable at their current replacement values. Certain recent 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
In the first three months of 2009, Sunoco had a net use of cash in operating activities of $103 million compared to net cash provided by operating activities of $69 million in the first three months of 2008. This $172 million decrease in cash generation was primarily due to an increase in working capital levels pertaining to operating activities, partially offset by higher operating results.
Other Cash Flow Information
In April 2009, Sunoco Logistics Partners L.P. issued 2.25 million limited partnership units in a public offering, generating approximately $110 million of net proceeds before underwriting expenses. The net proceeds from this offering were used to reduce outstanding borrowings under the Partnership's revolving credit facility. Upon completion of this transaction, Sunoco's interest in the Partnership, including its 2 percent general partnership interest, decreased to 40 percent.
Financial 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 "Pension Plan Funded Status" below) and to pay the current level of cash dividends on Sunoco's common stock. However, from time to time, the Company's short-term cash requirements may exceed its cash generation due to various factors including reductions in margins for products sold and 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.
The Company has a $1.3 billion revolving credit facility with a syndicate of 19 participating banks (the "Facility"), of which $1.2245 billion matures in August 2012 with the balance to mature in August 2011. 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. Under the terms of the Facility, Sunoco is required 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 $1.125 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). At March 31, 2009, the Company's tangible net worth was $3.1 billion and its targeted tangible net worth was $2.0 billion. The Facility also requires that Sunoco's ratio of consolidated net indebtedness, including borrowings of Sunoco Logistics Partners L.P., to consolidated capitalization (as those terms are defined in the Facility) not exceed .60 to 1. At March 31, 2009, this ratio was .42 to 1. At March 31, 2009, the Facility was being used to support $174 million of commercial paper.
Sunoco Logistics Partners L.P. has a $400 million revolving credit facility with a syndicate of 11 participating banks, which expires in November 2012. This facility is available to fund the Partnership's working capital requirements, to finance acquisitions, and for general partnership purposes. Amounts outstanding under this facility totaled $288 and $323 million at March 31, 2009 and December 31, 2008, respectively. The Partnership entered into an additional $100 million 364-day revolving credit facility in May 2008, which is available to fund the same activities as under its $400 million revolving credit facility. At March 31, 2009, there were no outstanding borrowings under the 364-day credit facility. In
March 2009, the Partnership entered into an additional $63 million revolving credit facility with two participating banks, which expires in September 2011. At March 31, 2009, there were no outstanding borrowings under this facility. The $400 and 100 million facilities contain covenants requiring the Partnership to maintain a ratio not to exceed 4.75 to 1 of its consolidated total debt (including letters of credit) to its consolidated EBITDA (each as defined in the facilities). The new $63 million facility contains a similar covenant but the ratio in this covenant may not exceed 4 to 1. At March 31, 2009, the Partnership's ratio of its consolidated debt to its consolidated EBITDA was 2.5 to 1.
In August 2008, a wholly owned subsidiary of the Company, Sunoco Receivables Corporation, Inc. ("SRC"), entered into a 364-day accounts receivable securitization facility, which permits borrowings and supports the issuance of letters of credit by SRC up to a total of $200 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 March 31, 2009, $100 million of borrowings were outstanding under the receivables facility.
The following table sets forth Sunoco's outstanding debt (in millions of dollars):
At At
March 31 December 31
2009 2008
Short-term debt $ 274 $ 310
Current portion of long-term debt 146 148
Long-term debt 2,093 1,705
Total debt* $ 2,513 $ 2,163
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* Includes $887 and $748 million at March 31, 2009 and December 31, 2008, respectively, attributable to Sunoco Logistics Partners L.P.
In March 2009, Sunoco issued $250 million of 9-5/8 percent notes due in 2015 under its shelf registration statement. In addition, in February 2009, Sunoco Logistics Partners L.P. issued $175 million of 8-3/4 percent notes due in 2014.
During April 2009, Sunoco issued $103 million of floating-rate notes due in 2034. These notes replaced $103 million of floating-rate notes that were redeemed during the first quarter of 2009. The Company remarketed the predecessor notes on a weekly basis and intends to remarket the new notes weekly as well. As a result, the notes will be classified as short-term borrowings in the condensed consolidated balance sheet at June 30, 2009. The new notes are supported by letters of credit.
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 an additional portion of its Sunoco Logistics Partners L.P. interests, and Sunoco Logistics Partners L.P. has the option of issuing additional common units.
Capital Expenditures
During the first quarter of 2009, the Company decreased its full-year 2009 capital spending plan from $1,249 million to approximately $1,050 million. The decreased capital outlays primarily reflect the deferral of spending at the Middletown, Ohio cokemaking construction project due to permitting delays and at certain other projects in Refining and Supply.
PENSION PLAN FUNDED STATUS
The following table sets forth the components of the change in market value of
the investments in Sunoco's defined benefit pension plans (in millions of
dollars):
Three Months
Ended Year Ended
March 31, 2009 December 31, 2008
Market value of investments at beginning
of period $ 837 $ 1,315
Increase (reduction) in market value of
investments resulting from:
. . .
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