ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and governmental proceedings arising in the ordinary course of business are pending against the Company, as well as the lawsuits and proceedings discussed below:
Administrative Proceedings
In 1994, pursuant to amendments to the Clean Air Act, Pennsylvania promulgated reasonably available control technology (“RACT”) regulations to control emissions of nitrogen oxide (“NOx”) and volatile organic compounds (“VOC”) from regulated facilities. In the same year, Sunoco, Inc. (R&M), a subsidiary of Sunoco, Inc., submitted a proposal designating its preferred RACT for each affected source in its Marcus Hook refinery. Two boilers were subject to the regulations. In June 1995, the Pennsylvania Department of Environmental Protection (“PaDEP”) issued a RACT Plan Approval and Compliance Permit for both boilers with a compliance deadline of 1996. While Sunoco, Inc. (R&M) disagreed with PaDEP’s RACT determination and engaged in an ongoing dialogue with the agency as to the best way to comply, the Company did not file an administrative appeal of the Plan Approval and
Compliance Permit. Thereafter, in 1997, PaDEP issued a Notice of Violation to Sunoco, Inc. (R&M) alleging failure to comply with the 1995 Plan Approval and Compliance Permit. In 1998, PaDEP issued an Abatement Order to Sunoco, Inc. (R&M) to comply with the 1995 Plan Approval and Compliance Permit. After lengthy negotiations with PaDEP, Sunoco, Inc. (R&M) and PaDEP agreed on the appropriate RACT equipment for both boilers and the designated control equipment was installed. PaDEP imposed a civil penalty in the amount of $3.5 million on Sunoco, Inc. (R&M) for failure to timely comply with the 1995 Plan Approval and Compliance Permit. (See the Company’s Form 10-Q for the quarterly periods ended June 30, 2000 and June 30, 2002.) Sunoco, Inc. (R&M) appealed the civil penalty to the Pennsylvania Environmental Hearing Board, and in April 2004, the Hearing Board dismissed the appeal. The Company filed a motion for reconsideration with the Hearing Board, which was denied. (See the Company’s Form 10-Q for the quarterly period ended March 31, 2004.) The Company filed an appeal before the Commonwealth Court of Pennsylvania, and the Court assigned the appeal to mandatory, non-binding mediation. (See the Company’s Form 10-Q for the quarterly period ended June 30, 2004.) Oral argument took place in November 2004. In January 2005, the Commonwealth Court upheld the $3.5 million fine against Sunoco.
With respect to a pipeline release of crude oil in February 2000 in the John Heinz National Wildlife Refuge in Philadelphia, the Company completed remedial activities and restoration efforts at the release area. The Company has reached agreements in principle with the U. S. Department of the Interior to settle certain natural resource damage claims and with the U.S. Environmental Protection Agency and the Department of Justice to settle certain alleged Clean Water Act violations in amounts in excess of $100,000. (See also the Company’s Annual Reports on Form 10-K for the fiscal years ended December 31, 2001 and December 31, 2002.)
MTBE Litigation
Sunoco is a defendant in cases in over 60 lawsuits pending in 17 states which involve the manufacture and use of MTBE in gasoline and MTBE contamination in groundwater. The lawsuits are substantially identical and the plaintiffs are generally water providers, governmental authorities and private well owners alleging that refiners and suppliers of gasoline containing MTBE are responsible for manufacturing and distributing a defective product. Many other refiners and suppliers of gasoline are defendants in some or all of these cases. Most of the cases brought by water providers that were filed in state courts have been removed to federal court by motion of the defendants and consolidated for pre-trial purposes in the U. S. District Court, Southern District of New York by the Judicial Panel on Multidistrict Litigation. Motions to remand these cases to their respective state courts have been denied. Joint motions to dismiss all or a portion of the cases have been filed, and decisions are pending, except for County of Suffolk and Suffolk County Water Authority v. Sunoco, et al, where such motion was denied. The cases allege product liability/defective product, public and private nuisance, failure to warn, negligence, civil conspiracy, and violation of state environmental laws, and violation of state deceptive business practices acts. Plaintiffs are seeking compensatory damages, and in some cases injunctive relief and punitive damages. The cases include the following:
County of Suffolk and Suffolk County Water Authority v. Sunoco, et al, (Supreme Court of the State of New York, County of Suffolk), was filed in March 2003.
County of Nassau v. Sunoco, et al. (Supreme Court of the State of New York, County of New York), was served in October 2003.
Long Island Water Corporation v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau), was served in October 2003.
Water Authority of Great Neck North v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau), was served in November 2003.
Water Authority of Western Nassau County v. Sunoco, et al. (Supreme Court of the State of New York, County of New York), was served in November 2003.
Port Washington, NY, et al. v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau), was served in March 2004.
Incorporated Village of Sands Point v. Sunoco, et al. (Supreme Court of the State of New York), was served in January 2004.
Hicksville Water District v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau), was served in April 2004.
Roslyn Water District v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau), was served in May 2004.
Franklin Square Water District v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau) was served in April 2004.
Town of Wappinger v. Sunoco, et al. (Supreme Court of the State of New York, County of Duchess), was served in April 2004.
United Water New York, Inc. v. Sunoco, et al. (Supreme Court of the State of New York, County of Rockland), was served in April 2004.
Village of Pawling v. Sunoco, et al. (Supreme Court of the State of New York, County of Duchess), was served in April 2004.
Town of Duxbury, et al. v. Sunoco, et al. (U.S. D. C., District of Massachusetts, E. D.), was served in December 2003.
Escambia County Utilities Authority v. Sunoco, Inc., et al. (Florida Circuit Court for Escambia County), was served in November 2003.
The following cases were brought by private well owners and contain similar allegations and remain in state court:
Armstrong, et al. v Sunoco, et al. (Supreme Court of the State of New York, County of Orange), was filed in June 2003.
Abrevaya, et al v. Sunoco, et al. (Supreme Court of the State of New York, County of Orange), was served in November 2003.
Up to this point, for the group of MTBE cases currently pending, there has been little information developed about the plaintiffs’ legal theories or the facts that would be relevant to an analysis of potential exposure. Based on the current law and facts available at this time, Sunoco believes that these cases will not have a material adverse effect on its consolidated financial position.
Many other legal and administrative proceedings are pending or possible against Sunoco from its current and past operations, including proceedings 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 cannot be ascertained at this time, it is reasonably possible that some of them could be resolved unfavorably to Sunoco. Management of Sunoco believes that any liabilities that may arise from such proceedings would not be material in relation to Sunoco’s business or consolidated financial position at December 31, 2004.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of Sunoco, Inc.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides a summary of all repurchases by the Company of its common stock during the three-month period ended December 31, 2004:
*
All of the shares repurchased during the three-month period ended December 31, 2004 were acquired pursuant to the repurchase programs that Sunoco publicly announced on July 9, 2001 and on September 2, 2004 (see below), except for 54 thousand shares acquired in November 2004 and 151 thousand shares acquired in December 2004, which were purchased from employees. These shares were acquired in connection with stock swap transactions related to the exercise of stock options and with the settlement of tax withholding obligations arising from payment of common stock unit awards.
**
In July 2001, the Company’s Board of Directors (“Board”) approved a $500 million share repurchase program with no stated expiration date. On September 2, 2004, Sunoco publicly announced that its Board approved an additional $500 million share repurchase program with no stated expiration date. On March 3, 2005, Sunoco publicly announced that its Board approved another $500 million share repurchase program with no stated expiration date, which is not reflected in the table above.
The other information required by this Item is incorporated herein by reference to the Quarterly Financial and Stock Market Information on page 75 of the Company’s 2004 Annual Report to Shareholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference to the Selected Financial Data on page 8 of the Company’s 2004 Annual Report to Shareholders.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference to pages 9-42 in the Company’s 2004 Annual Report to Shareholders.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by this Item is incorporated herein by reference to the Quantitative and Qualitative Disclosures about Market Risk on page 35 in the Company’s 2004 Annual Report to Shareholders.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information in the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference: the Report of Independent Registered Public Accounting Firm on Financial Statements on page 45; the Consolidated Financial Statements on pages 46-49, the Notes to Consolidated Financial Statements on pages 50-73; and the Quarterly Financial and Stock Market Information on page 75.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chairman, Chief Executive Officer and President and the Company’s Senior Vice President and Chief Financial Officer. Based upon that evaluation, the Company’s Chairman, Chief Executive Officer and President and the Company’s Senior Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chairman, Chief Executive Officer and President and the Company’s Senior Vice President and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and assessing the effectiveness of such controls. Management’s Report on Internal Control Over Financial Reporting in the Company’s 2004 Annual Report to Shareholders
on page 43 and the Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting in the Company’s 2004 Annual Report to Shareholders on page 44 are incorporated herein by reference.
There have been no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on directors required by Item 401 of Regulation S-K appearing under the heading “Nominees for the Board of Directors” and the section entitled “Board and Committee Membership,” under the heading “Governance of the Company,” and the information required by Item 405 of Regulation S-K appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement (“Proxy Statement”), which will be filed with the Securities and Exchange Commission (“SEC”) within 120 days after December 31, 2004, is incorporated herein by reference.
Information concerning the Company’s executive officers appears in Part I of this Annual Report on Form 10-K.
Sunoco, Inc. has adopted a Code of Business Conduct and Ethics (the “Code”) effective April 1, 2003 which applies to all officers, directors and employees and includes the Code of Ethics for the chief executive officer, the principal financial officer, the principal accounting officer and persons performing similar functions. A copy of the Code can be found on Sunoco’s website (www.SunocoInc.com). It is also available in printed form upon request. Sunoco intends to disclose on its website the nature of any future amendments to and waivers of the Code of Ethics that apply to the chief executive officer, the principal financial officer, the principal accounting officer or persons performing similar functions.
Sunoco’s Corporate Governance Guidelines and the Charters of its Audit, Compensation, Executive, Governance, and Public Affairs Committees are available on its website (www.SunocoInc.com), and are also available in printed form upon request.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K appearing under the heading “Executive Compensation,” including the sections entitled “Summary Compensation Table,” “Aggregated Option/SAR Exercises and Year-End Values,” “Option Grant Table,” and “Other Long-Term Incentive Awards,” and under the headings “Other Compensation,” “Pension Plans,” “Severance Plans,” and “Directors’ Compensation,” in the Company’s Proxy Statement, which will be filed with the SEC within 120 days after December 31, 2004, is incorporated herein by reference, except that the Report of the Compensation Committee and the Stock Performance Graph contained in the Proxy Statement are specifically excluded from incorporation by reference herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K appearing under the heading “Directors’ and Officers’ Ownership of Sunoco Stock” in the Company’s Proxy Statement and the information required by Item 201(d) of Regulation S-K appearing in the section entitled “Equity Compensation Plan Information” under the heading “Governance of the Company” in the Company’s Proxy Statement, which will be filed with the SEC within 120 days after December 31, 2004, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K appearing in the section entitled “Certain Relationships and Related Transactions” under the heading “Other Governance Matters” in the Company’s Proxy Statement, which will be filed with the SEC within 120 days after December 31, 2004, is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A appearing in the section entitled “Item 2. Ratification of the Appointment of Ernst & Young LLP as Independent Auditors for the Fiscal Year 2005” under the heading “Proposals on Which You May Vote” in the Company’s Proxy Statement, which will be filed with the SEC within 120 days after December 31, 2004, is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements:
The information appearing in the Company’s 2004 Annual Report to Shareholders as described in Item 8 is incorporated herein by reference.
2. Financial Statement Schedules:
Schedule II-Valuation Accounts is included on page 31 of this Form 10-K. Other schedules are omitted because the required information is shown elsewhere in this report, is not necessary or is not applicable.
3. Exhibits:
*These exhibits constitute the Executive Compensation Plans and Arrangements of the Company.
Note: Copies of each Exhibit to this Form 10-K are available upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date March 3, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by or on behalf of the following persons on behalf of the registrant and in the capacities indicated on March 3, 2005:
ROBERT J. DARNALL*
Robert J. Darnall, Director
ROBERT D. KENNEDY*
Robert D. Kennedy, Director
JOHN G. DROSDICK*
John G. Drosdick, Chairman,
Chief Executive Officer,
President and Director
(Principal Executive Officer)
URSULA O. FAIRBAIRN*
Ursula O. Fairbairn, Director
JOSEPH P. KROTT*
Joseph P. Krott, Comptroller
(Principal Accounting Officer)
RICHARD H. LENNY*
Richard H. Lenny, Director
NORMAN S. MATTHEWS*
THOMAS P. GERRITY*
Thomas P. Gerrity, Director
ROSEMARIE B. GRECO*
Rosemarie B. Greco, Director
Norman S. Matthews, Director
R. ANDERSON PEW*
R. Anderson Pew, Director
G. JACKSON RATCLIFFE*
G. Jackson Ratcliffe, Director
THOMAS W. HOFMANN*
Thomas W. Hofmann, Senior Vice
President and Chief Financial Officer
(Principal Financial Officer)
JAMES G. KAISER*
James G. Kaiser, Director
JOHN W. ROWE*
John W. Rowe, Director
JOHN K. WULFF*
John K. Wulff, Director
*By
/s/ THOMAS W. HOFMANN
Thomas W. Hofmann
Individually and as
Attorney-in-Fact
SUNOCO, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION ACCOUNTS
For the Years Ended December 31, 2004, 2003, and 2002
(Millions of Dollars)