-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jm+wsgs3nEh2EgUEatxat/IPUwAsA6nK0C9CADjfpY+KvpB/faxhLVOZsVSw6k3b nMGSJ8J64OIyAx1EqN+Mgw== 0001036050-98-000324.txt : 19980309 0001036050-98-000324.hdr.sgml : 19980309 ACCESSION NUMBER: 0001036050-98-000324 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980306 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN CO INC CENTRAL INDEX KEY: 0000095304 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 231743282 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06841 FILM NUMBER: 98558791 BUSINESS ADDRESS: STREET 1: TEN PENN CENTER STREET 2: 1801 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19103-1699 BUSINESS PHONE: 2159773000 FORMER COMPANY: FORMER CONFORMED NAME: SUN OIL CO DATE OF NAME CHANGE: 19760608 10-K 1 FORM 10-K 1997 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 1-6841 SUN COMPANY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-1743282 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) TEN PENN CENTER 19103-1699 1801 MARKET STREET, PHILADELPHIA, PA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (215) 977-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED ------------------- ---------------------------- Depositary Shares, each share representing One- New York Stock Exchange Half of a Share of Series A Cumulative Preference Stock, no par value Common Stock, $1 par value New York Stock Exchange Philadelphia Stock Exchange Convertible Subordinated Debentures 6 3/4%, Due New York Stock Exchange June 15, 2012 Sinking Fund Debentures 9 3/8%, Due June 1, New York Stock Exchange 2016 Notes 7.95%, Due December 15, 2001 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments of this Form 10-K. [X] At January 30, 1998, the aggregate market value of voting stock held by nonaffiliates was $3,574 million. At January 30, 1998, there were 70,753,859 shares of Common Stock, $1 par value and 12,043,130 shares of Cumulative Preference Stock--Series A, no par value, outstanding. Selected portions of the Sun Company, Inc. Annual Report to Shareholders for the Fiscal Year Ended December 31, 1997 are incorporated by reference in Parts I, II and IV of this Form 10-K. Selected portions of the Sun Company, Inc. definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1997, are incorporated by reference in Part III of this Form 10-K. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES Those statements in the Business and Properties discussion that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1997 Annual Report to Shareholders for a discussion of the factors which could cause actual results to differ materially from those projected in such statements. GENERAL Sun Company, Inc.* was incorporated in Pennsylvania in 1971. It or its predecessors have been active in the petroleum industry since 1886. Its principal executive offices are located at 1801 Market Street, Philadelphia, PA 19103-1699, and its telephone number is (215) 977-3000. The Company, through its subsidiaries, is principally a petroleum refiner and marketer with interests in cokemaking and coal mining. Sun's petroleum refining and marketing operations include the manufacturing and marketing of a full range of petroleum products, including fuels, lubricants and petrochemicals, and the transportation of crude oil and refined products. These operations are conducted principally in the eastern half of the United States. Sun's cokemaking and coal mining operations are conducted in Virginia, Indiana and Kentucky. Sun also has an investment in real estate operations in the United States which is subject to a plan of disposition. The Company's operations are organized into seven business units plus a holding company and a shared services organization. The accompanying discussion of the Company's business and properties reflects this organizational structure. For additional information regarding these business units, see Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1997 Annual Report to Shareholders. Additional business segment information is presented in Note 18 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders. REFINING AND MARKETING The Company's refining and marketing operations consist of the manufacturing and marketing of fuels, lubricants and petrochemicals and the transportation of crude oil and refined products. These operations are conducted principally through Sun Company, Inc. (R&M), a wholly owned subsidiary of the Company, and are classified into the following six business units: Sun Northeast Refining; Sunoco Northeast Marketing; Sunoco Chemicals; Sun Lubricants; Sunoco MidAmerica Marketing & Refining; and Sunoco Logistics. Sun owns and operates five domestic refineries which are located in Marcus Hook, PA, Philadelphia, PA, Toledo, OH, Tulsa, OK and Yabucoa, Puerto Rico. The refineries in Marcus Hook, Philadelphia and Toledo produce principally fuels and petrochemicals while the refineries in Tulsa and Puerto Rico emphasize lubricants production with related fuels being sold in the wholesale market. - -------- *In this report, the terms "Company" and "Sun" are used interchangeably to mean Sun Company, Inc. or collectively, Sun Company, Inc. and its subsidiaries. The use of these terms is for convenience of discussion and is not intended to be a precise description of corporate relationships. References in this Annual Report on Form 10-K to material in the Company's 1997 Annual Report to Shareholders and in the Company's definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1997, mean that such material is incorporated herein by reference; other material in those documents is not deemed to be filed as part of this Annual Report on Form 10-K. 1 The following table sets forth certain consolidated information concerning Sun's refining and marketing operations (in thousands of barrels daily). Additional information is set forth on page 60 in the Company's 1997 Annual Report to Shareholders. Products Manufactured
1997 1996 ----- ----- Crude Unit Capacity............................................. 692.0* 777.0 ===== ===== Input to Crude Units............................................ 696.0* 721.0 ===== ===== Products Manufactured: Gasoline....................................................... 348.8 339.7 Middle Distillates............................................. 224.8 206.5 Residual Fuel.................................................. 67.9 67.3 Petrochemicals................................................. 34.8 29.7 Lubricants..................................................... 22.0 21.2 Asphalt**...................................................... -- 16.2 Other.......................................................... 67.4 70.4 ----- ----- 765.7 751.0 ===== =====
- -------- *Sun's crude unit capacity decreased 85 thousand barrels per day in the first quarter of 1997 in connection with a project to reconfigure the Puerto Rico refinery to process reduced crude oil instead of conventional crude oil. Reduced crude oil, which amounted to approximately 30,000 barrels per day at the Puerto Rico refinery, is excluded from the input to crude units in the table above (see "Sun Lubricants" below). Effective January 1, 1998, Sun's crude oil processing capacity increased 5 thousand barrels per day due to an increase at the Toledo refinery. **Sun ceased producing asphalt in December 1996. Supply and Distribution Sun's crude oil requirements during the 1995-97 period were met largely by purchases from foreign national oil companies, independent exploration and production companies, integrated oil companies, crude oil trading companies and major international financial institutions. There is an ample supply of crude oil available to meet worldwide refining needs, and Sun has been able to supply its refineries with the proper mix and quality of crude oils without disruption. Sun's refineries processed approximately 80 percent light sweet crude oil during 1997. The Company believes that ample supplies of light sweet crude oil will continue to be available. The following table sets forth the net sources of crude oil for Sun's refineries (in percentages):
1997 1996 ---- ---- Africa............................................................. 53 41 United States...................................................... 20 20 North Sea.......................................................... 16 21 Canada............................................................. 7 7 South and Central America.......................................... 2 7 Arabian Gulf....................................................... 1 4 Russia............................................................. 1 -- --- --- 100 100 === ===
2 The following table sets forth summary information concerning the supply and distribution of crude oil and refined products at Sun's refineries (in thousands of barrels daily):
1997 1996 ----- ----- Supply: Crude oil purchases........................................... 701.7* 686.1 Crude oil inventory change.................................... .4 5.3 Refined product purchases (including feedstocks).............. 116.3 120.8 ----- ----- 818.4 812.2 ===== ===== Distribution: Refined product sales......................................... 809.6 794.8 Refined product inventory change.............................. (4.0) (2.8) Internal consumption and other................................ 12.8 20.2 ----- ----- 818.4 812.2 ===== =====
- -------- *Includes purchases of reduced crude oil. Refined Product Sales Sun sells fuels through retail and wholesale channels principally in the Northeast and upper Midwest and sells petrochemicals and lubricants on a worldwide basis. The following table sets forth Sun's consolidated refined product sales (in thousands of barrels daily):
1997 1996 ----- ----- Gasoline: Wholesale....................................................... 170.2 167.0 Retail.......................................................... 201.8 205.7 Middle Distillates............................................... 248.8 219.9 Residual Fuel.................................................... 80.1 82.4 Petrochemicals................................................... 35.2 31.5 Lubricants....................................................... 25.1 23.9 Asphalt.......................................................... -- 18.3 Other............................................................ 48.4 46.1 ----- ----- 809.6 794.8 ===== =====
As of December 31, 1997 and 1996, branded fuels sales were made through 3,789 and 3,806 retail gasoline outlets, respectively. Of these outlets, 376 were Company operated at December 31, 1997. The following is a discussion of the six business units which comprise Sun's refining and marketing operations. SUN NORTHEAST REFINING The Sun Northeast Refining business consists of the manufacture of petroleum products, including gasoline, middle distillates (including jet fuel, heating oil and diesel fuel), residual fuel oil and petrochemical feedstocks at Sun's Marcus Hook and Philadelphia refineries and the sale of these products to other Sun business units and to wholesale and industrial customers. (See "Sunoco MidAmerica Marketing & Refining" and "Sun Lubricants" below, for a discussion of operations at Sun's Toledo, Tulsa and Puerto Rico refineries.) 3 The following table sets forth information concerning operations at Sun's Marcus Hook and Philadelphia refineries (in thousands of barrels daily):
1997 1996 --------------------------------- --------------------------------- TOTAL TOTAL MARCUS PHILADELPHIA, NORTHEAST MARCUS PHILADELPHIA, NORTHEAST HOOK, PA PA REFINERIES HOOK, PA PA REFINERIES -------- ------------- ---------- -------- ------------- ---------- Crude Unit Capacity..... 175.0 307.0 482.0 175.0 307.0 482.0 ===== ===== ===== ===== ===== ===== Input to Crude Units.... 165.7 314.4 480.1 151.5 295.9 447.4 ===== ===== ===== ===== ===== ===== Conversion Capacity*.... 86.0 105.0 191.0 86.0 105.0** 191.0 ===== ===== ===== ===== ===== ===== Conversion Capacity Uti- lized.................. 88.7 94.7 183.4 65.3 86.6** 151.9 ===== ===== ===== ===== ===== ===== Products Manufactured: Gasoline............... 88.4 154.1 242.5 83.6 147.6 231.2 Middle Distillates..... 65.3 103.6 168.9 54.3 85.0 139.3 Residual Fuel.......... 10.7 42.6 53.3 11.1 38.4 49.5 Petrochemical Feedstocks***......... 18.7 5.4 24.1 11.9 7.0 18.9 Asphalt+............... -- -- -- -- 13.7 13.7 Other.................. 16.0 23.8 39.8 12.9 26.3 39.2 ----- ----- ----- ----- ----- ----- 199.1 329.5 528.6 173.8 318.0 491.8 ===== ===== ===== ===== ===== =====
- -------- *Represents Sun's capacity to upgrade low-value petroleum products into higher-value products through catalytic cracking and hydrocracking processes. **In December 1996, Sun mothballed a 28 thousand barrels-per-day hydrocracker unit as part of the Philadelphia refinery reconfiguration. This unit, which was utilized at approximately 23 thousand barrels-per-day during 1996, has been excluded from the conversion capacity and utilization amounts in the above table. ***Petrochemical feedstocks are utilized by the Sunoco Chemicals business to produce petrochemicals at these facilities. (See "Sunoco Chemicals" below.) +Sun ceased producing asphalt in December 1996. During the fourth quarter of 1996, Sun reconfigured the Philadelphia refinery to process only sweet crude oil and to cease asphalt production. With this change, Sun's Philadelphia and Marcus Hook refineries now process predominantly light sweet crude oils, which have been supplied from foreign sources. Previously, the Point Breeze facility processed a substantial quantity of heavy sour crude oil and purchased gas oils. The reconfiguration continues the integration of the Point Breeze and Girard Point facilities at the Philadelphia refinery and resulted in the elimination of approximately 125 positions (both employees and independent contractors) and the shutdown or mothballing of redundant and/or unprofitable processing units. These units consisted of a reformer, a sulfur plant, a hydrocracker, a hydrogen plant and asphalt and alkylation units. The reconfiguration to date has resulted in a substantial improvement in the efficiency, flexibility and reliability of the Philadelphia refinery and in a reduction in its overall cost structure. Sun continues to implement other infrastructure consolidation opportunities at this facility. The reconfiguration and extensive refinery maintenance turnarounds completed during the 1996-97 period resulted in higher overall production for Sun Northeast Refining in 1997. Record levels of high-value gasoline, middle distillates and petrochemical feedstock production more than offset the elimination of low-value asphalt production. 4 The following table sets forth information concerning the crude oil purchased during 1997 for processing at the Marcus Hook and Philadelphia refineries (in thousands of barrels daily):
TOTAL MARCUS PHILADELPHIA, NORTHEAST HOOK, PA PA REFINERIES -------- ------------- ---------- Crude Type: North Sea................................. 94.8 8.3 103.1 West African Light........................ 39.1 203.2 242.3 West African Heavy........................ 19.5 101.3 120.8 South American Light...................... 12.0 .9 12.9 ----- ----- ----- 165.4 313.7 479.1 ===== ===== =====
Sun's Philadelphia and Marcus Hook refineries are connected by pipeline, barge, truck and rail. The inter-refinery pipeline allows transfer of unfinished stocks, including butanes, naphtha, distillate blendstocks and gasoline blendstocks. Finished products are delivered to customers via Sun's pipeline and terminal network, third-party pipelines and barges. Total fuels products sold to third parties at wholesale by Sun Northeast Refining in 1997 were 358.4 thousand barrels daily compared to 322.2 thousand barrels daily in 1996. Sales to other Sun business units by Sun Northeast Refining (primarily gasoline, middle distillates and chemical feedstocks) totalled 182.9 thousand barrels daily in 1997 versus 188.3 thousand barrels daily in 1996. Environmental laws require Sun to make significant expenditures at its refineries of both a capital and expense nature. During the 1995-97 period, approximately $59 million was spent for environmental capital projects and compliance activities at Sun's northeast refineries. In addition, the Company continues to comply with the reformulated gasoline regulations set forth in the Clean Air Act of 1990, as amended (the "Clean Air Act") and expects to implement the next phases of these regulations in 1998 and 2000 with modest capital investment. SUNOCO NORTHEAST MARKETING The Sunoco Northeast Marketing business consists of the retail sale of gasoline and middle distillates and the operation of convenience stores in the New England and Mid-Atlantic states. These activities are conducted in a 12- state region from Maine through northern Virginia, with the highest concentration of outlets in Connecticut, Massachusetts, New Jersey, New York, Pennsylvania and Rhode Island. (See "MidAmerica Marketing & Refining" below for a discussion of similar operations conducted in the midwestern U.S.) 5 The following table sets forth Sun's retail gasoline outlets in the New England and Mid-Atlantic states at December 31, 1997 and 1996:
1997 1996* ----- ----- Direct outlets: Company owned or leased: Company-operated: Traditional.................................................. 124 128 APlus(R) convenience stores.................................. 154 168 ----- ----- 278 296 Dealer-operated: Traditional.................................................. 351 344 APlus(R) convenience stores.................................. 250 240 Ultra(R) Service Centers..................................... 239 249 ----- ----- 840 833 Total Company owned or leased**................................ 1,118 1,129 Dealer owned***................................................ 373 397 ----- ----- Total direct outlets............................................ 1,491 1,526 Distributor outlets............................................. 1,330 1,354 ----- ----- 2,821 2,880 ===== =====
- -------- *Reclassified to conform to the 1997 presentation. **Gasoline throughput per Company owned or leased outlet averaged 98.7 and 103.1 thousands of gallons monthly during 1997 and 1996, respectively. ***Primarily traditional outlets. Sunoco Northeast Marketing's portfolio of outlets is designed to provide optimal profit potential in each of its marketing areas. These sites differ in various ways including: product distribution to the outlets; site ownership and operation; and types of products and services provided. Direct outlets are sites at which fuel products are delivered directly to the site. Investment in the property, through ownership or lease, may be held by either the Company or an independent dealer. These sites may be traditional locations that sell almost exclusively fuel products or may include APlus(R) convenience stores or Ultra(R) Service Centers that provide state-of-the-art automotive diagnosis and repair. Included among Sunoco Northeast Marketing's outlets at December 31, 1997 were 55 outlets on limited access highways in Pennsylvania, New Jersey, New York and Maryland. Of these outlets, 37 were company-operated sites providing gasoline, diesel fuel and convenience store merchandise. Distributor outlets are sites in which the distributor takes delivery at a terminal where Sunoco(R) products are available. Although these sites market under the Sunoco(R) brand, Sun does not own or operate these retail locations. Sun's APlus(R) convenience stores are located principally in Pennsylvania, New York and Massachusetts. These stores supplement sales of fuel products with a broad mix of high-margin merchandise such as groceries, health and beauty aids, fast foods and beverages. Sunoco Northeast Marketing is also adding to its one-stop shopping concept at selected sites by partnering with various fast food chains. The following table sets forth information concerning Sun's convenience store locations in the Northeast:
1997 1996 ----- ----- Number of stores (Company operated and dealer operated).......... 404 408 Merchandise sales (M$/store/month)............................... $47.8 $44.9 Merchandise margin (% of sales).................................. 29.3% 27.4%
6 Sunoco Northeast Marketing offers four grades of gasoline at its retail locations, consisting of the highest octane premium gasoline commercially available in the United States (Ultra(R) 94) and 93, 89 and 87 octanes. Branded fuels sales by Sunoco Northeast Marketing averaged 169.6 thousand barrels daily in 1997 compared to 175.2 thousand barrels daily in 1996. Premium gasoline accounted for approximately 24 percent of Sun's retail gasoline sales in the Northeast in 1997. In 1997, excluding environmental outlays, capital expenditures for branded marketing activities in the Northeast totalled $43 million. Most of these outlays were to upgrade and modernize the retail service station network. These efforts are designed to improve appearances and to create a uniform look easily recognizable by customers. Exterior improvements generally include the installation of new price signs, lighting and canopies over the gasoline dispensing areas. Sunoco Northeast Marketing also continued the expansion of its pay-at-the-pump program in 1997 with the installation of CardMatic(R), its credit card activated gasoline dispensing system, at 131 additional high- volume service stations. This brings the total number of outlets offering this convenience to 1,226, or 43 percent of total retail marketing outlets in the Northeast. Environmental capital spending totalled $3 million during 1997, largely for the ongoing underground storage tank replacement program and for tank top upgrades. At December 31, 1997, the tank replacement program was substantially complete. SUNOCO CHEMICALS The Sunoco Chemicals business consists of the manufacturing, distribution and marketing of base commodity and intermediate petrochemicals. These chemicals are comprised principally of olefins and their derivatives (ethylene, ethylene oxide and propylene) and aromatics (benzene, cumene, cyclohexane, toluene and xylenes). As a partner in a joint venture, Sunoco Chemicals also produces MTBE which is utilized by Sun Northeast Refining in manufacturing reformulated gasolines. Petrochemicals are manufactured by Sunoco Chemicals at Sun's Marcus Hook and Philadelphia refineries, at an ethylene/ethylene oxide facility in Brandenburg, Kentucky and at the joint venture MTBE facility in Mont Belvieu, Texas. (See "Sunoco MidAmerica Marketing & Refining" for a discussion of the petrochemicals produced at the Toledo refinery.) The following table sets forth information concerning petrochemicals production by Sunoco Chemicals (in thousands of barrels daily):
PRODUCTION CAPACITY AT ----------- DECEMBER 31, 1997* 1997 1996 ----------------- ----- ----- Benzene**.................................... 1.5 .9 .6 Toluene...................................... 2.0 1.5 1.0 Xylene....................................... .5 .5 .5 Cumene....................................... 4.5 5.2 4.3 Cyclohexane.................................. 2.5 2.1 1.4 ---- ----- ----- Total Aromatics............................ 11.0 10.2 7.8 Ethylene..................................... 1.7 1.2 1.1 Ethylene oxide............................... 1.8 1.7 1.4 Propylene: Polymer-grade***............................ 10.5 10.6 5.3 Refinery-grade.............................. .5 .4 1.8 ---- ----- ----- Total Olefins.............................. 14.5 13.9 9.6 Other........................................ -- -- 1.5+ ---- ----- ----- Total Petrochemicals....................... 25.5 24.1 18.9 ==== ===== =====
- -------- *Reflected on a calendar-day basis. **Excludes benzene production utilized in the manufacture of cumene and cyclohexane. ***Reflects an increase of 4,500 barrels daily in production capacity in the fourth quarter of 1996 as a result of the expansion of the propylene unit at the Marcus Hook refinery. +Consists of refining by-products, principally carbon dioxide and sulfur. In December 1996, Sun ceased producing these by-products in connection with the reconfiguration of the Philadelphia refinery. 7 Sun's petrochemical products are distributed and sold on a worldwide basis. Sales of petrochemicals to third parties by Sunoco Chemicals totalled 24.4 thousand barrels daily in 1997 versus 20.2 thousand barrels daily in 1996, a 21 percent increase. The record levels of both sales and production volumes in 1997 were largely a result of successful refinery maintenance turnarounds completed in the 1996-97 period at the Philadelphia and Marcus Hook refineries and the expansion of polymer-grade propylene production capacity at the Marcus Hook refinery (see below). Sales volumes during 1997 were distributed through the following channels: . Benzene and Benzene Derivatives (including Cyclohexane and Cumene)-- Customers for these products are large manufacturers of fibers and polymers who buy a significant percentage of their requirements from Sunoco Chemicals under long-term contracts; . Bulk Toluene and Xylenes--Buyers generally procure large volumes for fibers, film and urethane products. These sales are made in both the contract and spot markets and tend to be international in scope; . Solvents--Customers and distributors take individually small volumes for paints, coatings, solvents and a variety of specialty applications; . Propylene--Sales are primarily made pursuant to a long-term contract to a large customer who manufactures polypropylene; and . Specialty Ethylene and Ethylene Oxide--Sales are primarily to intermediate-size specialty chemical companies that make diverse products such as surfactants, co-polymer resins and emulsions, and additives. During the fourth quarter of 1996, Sunoco Chemicals completed a project to expand its polymer-grade propylene production capacity and delivery systems at the Marcus Hook refinery from 400 to 700 million pounds per year (6,000 to 10,500 barrels per day). Most of Sunoco Chemicals' polymer-grade propylene production is sold pursuant to a long-term supply agreement with Epsilon Products Co., a polypropylene manufacturer, which also completed a major expansion of its production facilities in late 1996. At the end of 1994, Sunoco Chemicals completed a project (the "Northeast Aromatics and Cyclohexane Project"), which included the expansion of benzene extraction capacity by 60 million gallons per year and construction of a 34- million-gallon-per-year cyclohexane plant at the Marcus Hook refinery. During the fourth quarter of 1996, Sunoco Chemicals installed a new hydrogen purification unit at the cyclohexane plant to provide a consistent source of high-quality hydrogen. This enhancement has enabled the plant to increase cyclohexane production levels. Benzene, extracted at Sun's Marcus Hook and Girard Point facilities, is combined with refinery-grade propylene to produce cumene at Girard Point. The cumene is then sold primarily to AlliedSignal Inc. pursuant to a long-term contract. In 1996, Sunoco Chemicals began a project to expand its cumene production capacity at Girard Point from 500 to 850 million pounds per year (4,500 to 7,700 barrels per day). The expanded facility, which will utilize new catalyst technology, is expected to be operational in mid-1998. A significant portion of the incremental production from this facility will also be sold to AlliedSignal Inc. under a long-term contract. SUN LUBRICANTS The Sun Lubricants business is comprised of the manufacturing, blending, packaging and marketing of a broad line of paraffinic and aromatic lubricating and specialty oils produced at the Tulsa and Puerto Rico refineries as well as the related manufacturing and wholesale marketing of the fuels produced at these facilities. 8 Base oils are sold to domestic and international customers who manufacture their own finished transportation and industrial lubricants. Sun Lubricants also upgrades a significant portion of its base oil production into specialty oils at its blending and packaging facilities. Blending and packaging operations are conducted principally at lube service centers located at the Marcus Hook and Tulsa refineries. Specialty oil production is comprised principally of transportation and industrial lubricants. Sun Lubricants also produces other specialty lube products such as horticultural and agricultural oils, aromatic and paraffinic rubber oils, paper defoamer oils, asphalt recycling extracts, textile oils and finished waxes. These finished products are marketed under the Sunoco(R), Kendall(R) and Archer(R) brand labels directly by Sun or through distributors to a wide variety of domestic and foreign customers. The following table sets forth information concerning operations at Sun's Tulsa and Puerto Rico refineries (in thousands of barrels daily):
1997 1996 -------------------- -------------------- TULSA PUERTO TULSA PUERTO OK RICO* TOTAL OK RICO TOTAL ----- ------ ----- ----- ------ ----- Crude Unit Capacity................... 85.0 -- 85.0 85.0 85.0 170.0 ==== ==== ===== ==== ==== ===== Input to Crude Units.................. 82.9 -- 82.9 85.0 63.1 148.1 ==== ==== ===== ==== ==== ===== Base Oil Lubes Capacity............... 8.1 9.3 17.4 8.1 9.3 17.4 ==== ==== ===== ==== ==== ===== Products Manufactured: Lubricants: Base Oils........................... 8.1 7.8 15.9 7.9 8.1 16.0 Waxes and Other Lubricants.......... 2.4 3.7 6.1 2.2 3.0 5.2 Gasoline............................. 17.0 .5 17.5 16.5 8.7 25.2 Middle Distillates................... 27.0 4.5 31.5 27.6 19.1 46.7 Residual Fuel........................ .1 11.0 11.1 -- 14.1 14.1 Other................................ 25.2** 5.4 30.6 28.5** 9.9 38.4 ---- ---- ----- ---- ---- ----- 79.8 32.9 112.7 82.7 62.9 145.6 ==== ==== ===== ==== ==== =====
- -------- *The crude unit at the Puerto Rico refinery was shut down on March 6, 1997 in connection with the project to reconfigure this refinery to process reduced crude oil instead of conventional crude oil. During the 65-day period in 1997 when the crude unit was operational, input to the unit totalled 50.8 thousand barrels daily. The crude inputs prior to March 6, 1997 and the approximately 30,000 barrels per day of reduced crude oil processed at this facility after the reconfiguration are excluded from the 1997 amounts in the table above (see below). **Includes 20.7 and 23.2 thousand barrels daily in 1997 and 1996, respectively, of "lubes-extracted" feedstocks which are transported to the Toledo refinery for further processing or are sold to third parties. In the first quarter of 1997, Sun Lubricants initiated the reconfiguration of the Puerto Rico refinery to eliminate the processing of conventional crude oil and to process, instead, approximately 30,000 barrels per day of reduced crude oil. This change significantly reduced the amount of unprofitable fuels produced at this refinery while fully maintaining the volume and quality of lubricants production. As a result, the atmospheric crude tower, the gas oil desulfurizer and the gasoline reformer were shut down and approximately 100 positions were eliminated. The streamlining of the Puerto Rico refining operation has improved operating efficiency, lowered fixed costs and reduced ongoing capital spending and working capital requirements. In 1998, Sun will continue to focus on enhancing productivity at this facility. 9 In November 1996, Sun Lubricants acquired the Kendall lubricants blending, packaging and marketing business. This acquisition has increased the amount of base oil production upgraded into transportation lubricants at Sun facilities and has enabled Sun Lubricants to increase its specialty oil lubricants sales. Kendall sales, which totalled 2.9 thousand barrels per day in 1997, are made primarily through supply contracts with more than 300 distributors in the United States. Sales of specialty oil lubricant products totalled 11.7 thousand barrels daily in 1997 versus 9.3 thousand barrels daily in 1996 while sales of base oils, waxes and other lubricants totalled 13.4 thousand barrels daily in 1997 versus 14.6 thousand barrels daily in 1996. The 26 percent increase in specialty oil sales reflects the Kendall acquisition and an expansion in Sun Lubricants' contract customer base and volumes. The 8 percent decrease in base oil, waxes and other lubricant sales reflects planned reductions in contract and spot base oil sales concurrent with the increased usage of produced base oils in Sunoco(R) and Kendall(R) brand specialty oils. Fuels sold to third parties from the Tulsa and Puerto Rico refineries totalled 93.2 thousand barrels per day in 1997 compared to 124.3 thousand barrels per day in 1996. The 25 percent decline in wholesale fuels sales reflects the Company's strategy to significantly reduce fuels production at the Puerto Rico refinery. The following table sets forth information concerning the feedstocks purchased during 1997 for processing at the Tulsa and Puerto Rico refineries (in thousands of barrels daily):
TULSA PUERTO OK RICO TOTAL ----- ------ ----- Feedstock Type: West Texas Intermediate.................................. 79.3 -- 79.3 Reduced Crude Oil........................................ -- 27.6 27.6 Other.................................................... -- 3.6 3.6 ---- ---- ----- 79.3 31.2 110.5 ==== ==== =====
The lubricants manufacturing facilities at the Tulsa and Puerto Rico refineries, as well as Sun's lube blending and packaging facilities, are ISO certified indicating they have passed the International Standards Organization's standards for quality management and oversight. SUNOCO MIDAMERICA MARKETING & REFINING The Sunoco MidAmerica Marketing & Refining ("Sunoco MidAmerica") business consists of the retail sale of gasoline and middle distillates and the operation of convenience stores in the Midwest as well as the manufacturing, distribution and wholesale marketing of fuels and petrochemicals produced at Sun's Toledo refinery. Retail Marketing Sunoco MidAmerica markets, through direct and distributor channels, five grades of retail gasoline products under the Sunoco(R) brand ranging from Ultra(R) 94 to an 86 octane grade of gasoline. These outlets are located in Indiana, Kentucky, Michigan, Ohio and West Virginia with the strongest market presence in Michigan and Ohio. Sunoco MidAmerica is also the sole supplier to all 16 gasoline outlets on the Ohio turnpike. 10 The following table sets forth Sun's retail gasoline outlets in the Midwest at December 31, 1997 and 1996:
1997 1996 ---- ---- Direct outlets: Company owned or leased: Company-operated: Traditional..................................................... 19 22 Sunoco Food Market(R) convenience stores........................ 79 88 --- --- 98 110 Dealer-operated: Traditional..................................................... 77 57 Sunoco Food Market(R) convenience stores........................ 26 22 Ultra(R) Service Centers........................................ 15 48 --- --- 118 127 Total Company owned or leased..................................... 216 237 Dealer owned*..................................................... 126 138 --- --- Total direct outlets............................................... 342 375 Distributor outlets................................................ 626 551 --- --- 968 926 === ===
- -------- *Primarily traditional outlets. Branded fuels sales averaged 54.1 thousand barrels daily in 1997 compared to 51.0 thousand barrels daily in 1996. Premium gasoline accounted for approximately 22 percent of Sun's retail gasoline sales in the Midwest in 1997. As part of the strategy to increase the overall level of branded gasoline sales, primarily through the distributor channel, in 1996 and 1997, Sunoco MidAmerica entered into numerous supply agreements. These supply agreements contributed to the increase in retail gasoline volumes sold by Sunoco MidAmerica in 1997. Sales under these agreements are expected to increase further in 1998, in part due to an expected increase in the number of outlets rebranding to Sunoco(R) pursuant to these agreements. Sunoco MidAmerica also expects to increase branded sales in 1998 by increasing the volumes sold through its current direct outlets and by obtaining new direct locations. The following table sets forth information concerning Sun's convenience stores in the Midwest:
1997 1996 ----- ----- Number of stores (Company operated and dealer operated).......... 105 110 Merchandise sales (M$/store/month)............................... $43.0 $39.8 Merchandise margin (% of sales).................................. 30.6% 28.7%
11 Refining and Wholesale Marketing The following table sets forth information concerning operations at Sun's Toledo refinery (in thousands of barrels daily):
1997 1996 ----- ----- Crude Unit Capacity............................................. 125.0* 125.0 ===== ===== Input to Crude Units............................................ 133.0 125.5 ===== ===== Conversion Capacity............................................. 86.0 86.0 ===== ===== Conversion Capacity Utilized.................................... 83.1 77.4 ===== ===== Products Manufactured: Gasoline....................................................... 88.8 83.3 Middle Distillates............................................. 24.4 20.5 Residual Fuel.................................................. 3.5 3.7 Petrochemicals................................................. 10.7 10.8 Other.......................................................... 17.7 18.5 ----- ----- 145.1 136.8 ===== =====
- -------- *Effective January 1, 1998, the rated capacity of the crude unit at the Toledo refinery increased to 130 thousand barrels daily. Fuels products sold at wholesale to third parties from Sun's Toledo refinery in 1997 averaged 74.0 thousand barrels daily compared to 66.7 thousand barrels daily in 1996. Sales of petrochemicals to third parties by Sunoco MidAmerica totalled 10.8 thousand barrels daily in 1997 versus 11.3 thousand barrels daily in 1996. Sun's Toledo refinery is a relatively complex, high conversion refinery that refines predominantly light, low-sulfur crude oil. The following table sets forth information concerning the feedstocks purchased during 1997 for processing at this facility (in thousands of barrels daily): Crude Type: West Texas Intermediate............................................... 59.1 Canadian.............................................................. 53.0 "Lubes-Extracted" Gasoil/Naphtha Intermediate Feedstock............... 20.3 ----- 132.4 =====
In April 1996, a 25-day turnaround of certain components of the hydrocracker unit was completed. Subsequent to the turnaround, Sunoco MidAmerica increased its input to crude units to over 100 percent of rated capacity. In March 1997, planned maintenance turnarounds at the refinery's hydrogen unit (16 days) and vacuum tower (10 days) necessitated a temporary reduction of refinery throughput. The 5 thousand barrels-per-day increase in crude unit capacity noted above resulted from the elimination of various refinery throughput bottlenecks at a minimal cost. In addition, ethanol blending, which was introduced at Sunoco MidAmerica's terminals in 1996, continues to be employed in order to reduce octane costs, simplify the product slate and enhance the storage and transportation of gasoline products. Chemicals Sunoco MidAmerica chemical operations consist of the manufacturing of base commodity and intermediate petrochemicals. These chemicals are comprised of aromatics (including benzene, toluene and xylene), spirits, nonene and tetramer. All of these products are sold under a marketing agreement 12 with Suncor Inc., through a joint venture partnership that is managed by Sunoco Chemicals. Almost all of the nonene and tetramer production is sold under a long-term contract and a significant portion of the aromatics and spirits production is sold into the solvents channel and/or higher-end derivative markets. SUNOCO LOGISTICS The Sunoco Logistics business consists of crude oil and refined product pipeline operations; domestic lease crude oil acquisition and related trucking operations; crude oil terminalling; and product terminalling and transport operations. These operations are conducted primarily in the Northeast, Midwest and South Central regions of the United States. Pipeline operations are conducted through wholly-owned subsidiaries and through other pipelines in which Sun has an ownership interest. The pipelines are principally common carriers and, as such, are regulated by the Federal Energy Regulatory Commission for interstate movements and by state regulatory agencies for intrastate movements. The tariff rates charged, while regulated by the governing agencies, are based upon competition from other pipelines or alternate modes of transportation. Sunoco Logistics crude oil pipeline operations, located primarily in the South Central United States, transport crude oil produced in Oklahoma, Texas, New Mexico and Louisiana to refiners (including Sun's Tulsa refinery) or to local trade points. The refined product pipeline operations, located primarily in the Northeast and Midwest, transport gasoline, jet fuel, diesel fuel, home heating oil and other products for Sun's other businesses and for third-party integrated petroleum companies, independent marketers and distributors. At December 31, 1997, Sunoco Logistics had an equity interest in 5,120 miles of crude oil pipelines and 4,552 miles of refined product pipelines. In 1997, crude oil and refined product shipments, including Sun's share of shipments in which it had an ownership interest, totalled 58.9 and 29.7 billion barrel miles, respectively, as compared to 56.3 and 28.8 billion barrel miles in 1996. Sunoco Logistics' crude oil pipeline operations in the South Central United States are complemented by lease crude oil acquisition and related trucking operations. Approximately 171 thousand barrels daily of crude oil were purchased from third-party leases during 1997. This crude oil is delivered to various pipelines either directly from the wellhead or utilizing Sunoco Logistics' fleet of 85 trucks. During 1997, Sun completed its withdrawal from marine shipping and tug/barge operations with the sale of its remaining 2 ocean-going tankers and its fleet of 15 coastal distribution tankers, tugs and barges. Third-party charters are now utilized to satisfy the Company's marine transportation requirements. Sun maintains an extensive vessel inspection review and evaluation program to assure the vessels chartered into Sun service are of appropriate quality. Product terminalling and transport operations include 39 terminals in the Northeast and Midwest that support Sun's branded and wholesale marketing operations, 120 trucks that transport gasoline and distillates and a railroad fleet of 120 owned and 1,950 leased tank cars that primarily support the Sunoco Chemicals and Sun Lubricants businesses. Sun's Nederland, TX terminal provides approximately ten million barrels of storage and provides terminalling throughput capacity exceeding one million barrels per day. Its Gulf Coast location provides local and midwestern refiners access to increasing volumes of foreign and offshore domestic crude oil. The facility is also a key link in the distribution system for United States Government purchases for and sales from the Strategic Petroleum Reserve storage facilities. 13 SUN COKE Sun Coke's business consists of blast furnace coke manufacturing at the Company's facilities in Vansant, VA and East Chicago, IN and coal production from mines in Virginia and Kentucky. Such operations are conducted by Sun Coal Company and its affiliates. Sun Coke produces high-quality coke at its 685 thousand ton-per-year Vansant, VA cokemaking facility using its proprietary heat-recovery cokemaking technology. This technology, which is environmentally and economically superior to the chemical by-product technology currently used by other coke producers, is currently being marketed outside North America through an exclusive license with Raytheon Engineers and Constructors, Inc. In 1997, Sun Coke completed construction of 35 coke ovens as the final part of a program to replace all existing coke ovens in Vansant, VA, with 142 new ovens. This program has resulted in an improvement in overall cost efficiencies and an enhancement in coke quality. In 1995, Sun Coke transferred an interest in the Vansant, VA cokemaking operations to a third party in exchange for $95 million in cash. The transferee is entitled to a preferential return from the cash flows of the cokemaking operations until certain cumulative return targets have been met. In November 1996, Sun Coke entered into an agreement to construct, own and operate a $195 million cokemaking facility in East Chicago, IN, which will produce coke for Inland Steel Company ("Inland") for use at Inland's Indiana Harbor Works steel plant located adjacent to the new cokemaking facility. The agreement requires Inland to buy 1.2 million tons of coke annually on a take- or-pay basis for a period of 15 years commencing after the cokemaking facility's scheduled first quarter 1998 start-up date. Additional production of up to 150,000 tons per year will be sold either to Inland or to other steel producers. The plant will utilize Sun Coke's proprietary heat-recovery cokemaking technology. In early 1998, Sun transferred an interest in this operation to a third party in exchange for $200 million in cash. The transferee is entitled to a preferential return from the cash flows of this cokemaking operation until certain cumulative return targets have been met. Sun Coke's principal market for both metallurgical coal and coke is the domestic steel industry. In 1997, 68 percent of Sun Coke's metallurgical coal production was converted into coke at its Vansant, VA, cokemaking facility and 32 percent was sold in spot market transactions. During 1997, 89 percent of Sun Coke's coke sales were made under a long-term contract with a domestic steel producer which provides for delivery of Sun Coke's entire coke production from the Vansant, VA cokemaking facility. Coke production totalled 664 thousand tons in 1997, compared to 648 thousand tons in 1996. In 1997, approximately 91 percent of Sun Coke's bituminous steam coal was sold under long-term contracts, with the remainder sold in spot market transactions. Sun Coke's total coal production in 1997 was 3.3 million tons, compared to 4.4 million tons in 1996. Sun Coke's long-term coal and coke sales contracts generally provide for the periodic adjustment of prices to reflect the changing costs of labor, equipment and services. At December 31, 1997, Sun Coke had 124 million tons of estimated coal reserves classified as proven and probable compared to 132 million tons at December 31, 1996. Of the reserves at December 31, 1997, 92 percent were metallurgical coal located in Virginia and 8 percent were bituminous steam coal located in Kentucky. Additional information concerning Sun Coke's operations is set forth on page 60 in the Company's 1997 Annual Report to Shareholders. REAL ESTATE Sun's real estate business is conducted through Radnor Corporation and its subsidiaries (collectively, "Radnor"). As of December 31, 1997, Radnor's remaining portfolio of real estate was located in 6 states and consisted principally of single-family home, condominium, residential land and business park developments. 14 As a result of Sun's decision to sell its real estate business through a program of controlled disposition, such operations have been classified as operations held for sale in Sun's consolidated financial statements. Since adoption of the disposition plan in October 1991, Radnor has divested 70 commercial properties, completed 28 housing and land developments and reduced its total assets by $984 million. Proceeds from these divestments have enabled Radnor to repay $852 million of related debt during this period, the final $109 million of which was repaid in 1997. At December 31, 1997, Radnor's total assets were $73 million. Divestment activities in 1997 included the sale of a resort hotel located in Florida, a mixed-use development located in New Jersey, two retail centers located in California and one in Arizona and four commercial land parcels located in Arizona, Georgia, Pennsylvania and Virginia. The disposition of Sun's real estate business is expected to be substantially completed by the end of 1999. For additional information regarding Sun's real estate operations held for sale, see Note 2 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders. SUN INTERNATIONAL PRODUCTION During 1996, Sun sold its international oil and gas production business. Information concerning this sale is presented in Note 2 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders. CANADA (SUNCOR) During 1995, Sun completed the divestment of its remaining 55-percent interest in Suncor Inc., a Canadian integrated oil company. Information concerning this divestment is presented in Note 2 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders. COMPETITION The refining and marketing business is very competitive. Sun competes with other domestic refiners and marketers in the northeastern United States and U.S. Gulf coast, with foreign refiners who import products into the United States and with producers and marketers in other industries supplying other forms of energy and fuels to consumers. Several of Sun's principal competitors are integrated multi-national oil companies that are larger and have substantially greater resources than Sun. Because of their integrated operations and larger capitalization, such major oil companies may have greater flexibility than Sun in responding to volatile industry or market conditions, such as shortages of feedstocks or intense price fluctuations. Unlike certain of its competitors that have access to proprietary sources of controlled crude oil production, Sun must obtain all of its feedstocks from unaffiliated sources. Most of the crude oils processed in Sun's refining system are light sweet crude oils, which historically have been priced higher than alternative heavy sour crude oils. However, management believes that any potential competitive impact of Sun's inability to process significant quantities of less expensive heavy sour crude oils will likely be mitigated by: the higher-value product slate obtained from light sweet crude oils; the higher cost to process heavy sour crude oils; and the continued availability of ample quantities of light sweet crude oils. Sun believes that it is in a position to compete effectively as a marketer of refined products because of its strong marketing presence in its principal markets and its considerable distribution flexibility resulting from the location of its northeast and midwest refineries and retail network which are well integrated with its distribution system. Coal mining and cokemaking operations are also highly competitive. Demand for coke has fallen as domestic steelmaking capacity has declined and steelmakers have switched to electric arc furnaces and coal injection production methods. However, Sun anticipates that the supply of coke will decrease at a faster rate than demand as the inability to meet increasingly stringent environmental regulations 15 will lead steelmakers and other coke producers to close plants. Sun believes it is well-positioned to compete with other merchant coke producers since Sun's proprietary technology allows Sun to construct coke ovens that, compared to conventional coke ovens, are more environmentally benign, are generally less costly to build, and can be operated with fewer workers. Sun does not consider one or a small group of competitors to be dominant in the refining and marketing and coal and cokemaking industries. The availability of a ready market for Sun's refined products, as well as its coal and coke production, depends on numerous external factors, including: the level of consumer demand; the extent of industry production of refined products and coal and coke; the import levels of refined products and coal and coke; the cost and availability of alternative fuels; the cost and proximity of refineries, pipelines and other transportation facilities that support the retail gasoline marketing infrastructure; and regulations by federal, state, local and foreign authorities including those imposed by or resulting from compliance with applicable environmental laws. RESEARCH AND DEVELOPMENT In recent years, Sun's research and development activities have focused on applied research, process and product development, and engineering and technical services related to fuels, lubricants and chemicals. Sun spent $5, $6 and $5 million on research and development activities in 1997, 1996 and 1995, respectively. As of December 31, 1997, approximately 110 scientists, engineers, technicians and support personnel participated in these activities. Sun owns or has made application for numerous patents in the U.S. EMPLOYEES As of December 31, 1997, Sun had approximately 10,900 employees compared to approximately 12,150 employees as of December 31, 1996. The decrease in 1997 is primarily attributable to the implementation of an employee termination program and a decline in the number of individuals employed in company- operated convenience stores and service stations. The employee terminations were throughout the organization and included senior management, support staff and operations personnel. Approximately 40 percent of Sun's employees are employed in company-operated convenience stores and service stations. The above amounts exclude employees of real estate operations held for sale totalling 39 in 1997 and 337 in 1996. Approximately 25 percent of Sun's employees were covered by 42 collective bargaining agreements as of December 31, 1997. The collective bargaining agreements have various terms and dates of expiration. In management's opinion, Sun's relationship with its employees is generally satisfactory. ENVIRONMENTAL MATTERS Sun is subject to numerous federal, state and local laws which regulate the discharge of materials into, or otherwise relate to the protection of, the environment. These laws have required, and are expected to continue to require, Sun to make significant expenditures of both a capital and expense nature. The following table summarizes Sun's expenditures for environmental projects and compliance activities (in millions of dollars):
1997 1996 1995 ---- ---- ---- Pollution Abatement Capital*................................. $ 23 $ 29 $ 60 Remediation.................................................. 38 37 48 Operations, Maintenance and Administration................... 188 185 238 ---- ---- ---- $249 $251 $346 ==== ==== ====
- -------- *Capital expenditures for pollution abatement are expected to approximate $35 and $34 million in 1998 and 1999, respectively. 16 The Clean Air Act establishes stringent criteria for regulating air toxics at operating facilities by mandating major reductions in allowable emissions and establishing a more comprehensive list of substances deemed to be air toxics. The Clean Air Act also requires refiners to market cleaner-burning gasoline that reduces emissions of certain toxics and conventional pollutants. The Company has implemented the first phase of the reformulated gasoline regulations which requires an increase in the minimum quantity of oxygen for certain non-attainment areas, a reduction in benzene content, and a reduction in summertime Reid Vapor Pressure ("RVP"). Sun expects to implement the next more stringent phases of these regulations in 1998 and 2000 with modest capital investment. The Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") and the Solid Waste Disposal Act as amended by the Resource Conservation and Recovery Act ("RCRA"), and related federal and state laws subject Sun to the potential obligation to remove or mitigate the environmental effects of the disposal or release of certain pollutants at Sun's facilities and at third-party or formerly-owned sites. Under CERCLA, Sun is subject to potential joint and several liability for the costs of remediation at sites at which it has been identified as a "potentially responsible party" ("PRP"). As of December 31, 1997, Sun had been named as a PRP at 44 sites identified or potentially identifiable as "Superfund" sites under CERCLA. Sun has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon the other parties involved or Sun's negligible participation therein, believes that its potential liability associated with such sites will not be significant. Under various environmental laws, including RCRA, Sun has initiated corrective remedial action at Sun's facilities, formerly-owned facilities and third-party sites and could be required to undertake similar actions at various other sites. The cost of such remedial actions could be significant but is expected to be incurred over an extended period of time. Sun establishes accruals related to environmental remediation activities for work at identified sites where an assessment has indicated that cleanup costs are probable and reasonably estimable. For a discussion of the accrued liabilities and charges against income related to these activities, see Note 13 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders. On October 4, 1996, Sun filed a complaint in Los Angeles County Superior Court, Jalisco Corporation, Inc., et al. v. Argonaut Insurance Company, et al. (Case No. BC 158441), naming more than 45 insurance companies as defendants and seeking recovery under numerous insurance policies for certain environmental expenditures of Sun, including its predecessor companies and subsidiaries, arising from the ownership and operation of its business and properties. The Company cannot quantify the ultimate outcome of this litigation, which may be protracted. Total future costs for environmental remediation activities will depend upon, among other things, the identification of any additional sites, the determination of the extent of the contamination of each site, the timing and nature of required remedial actions, the technology available and needed to meet the various existing legal requirements, the nature and extent of future environmental laws, inflation rates and the determination of Sun's liability at multi-party sites, if any, in light of the number, participation level and financial viability of other parties. Management believes that the overall expenditures for environmental activities are likely to be significant but are expected to be incurred over an extended period of time and to be funded from Sun's net cash provided by operating activities. Although potentially significant with respect to results of operations or cash flows for any one year, management believes that such costs will not have a material impact on Sun's consolidated financial position or, over an extended period of time, on Sun's cash flows or liquidity. 17 ITEM 3. LEGAL PROCEEDINGS In December 1997, Sun Company, Inc. (R&M) agreed to make combined payments of $500,000 to the City of Philadelphia and certain community environmental projects, pursuant to a Consent Decree lodged in the United States District Court for the Eastern District of Pennsylvania. This Consent Decree settles allegations, made by the Community/Labor Refinery Tracking Committee under the citizen suit provisions of the Clean Air Act, of violations of various federal, state, and local clean air regulations. In December 1997, Sun Company, Inc. (R&M) agreed to pay $100,000 in civil fines and to undertake certain corrective actions pursuant to a Consent Order entered by the United States District Court for the Northern District of Oklahoma. This agreement between Sun Company, Inc. (R&M) and the United States Environmental Protection Agency (acting through the United States Department of Justice) stems from alleged violations of the Clean Air Act and the Oklahoma State Implementation Program. Many other legal and administrative proceedings are pending against Sun. 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 Sun. Management of Sun believes that any liabilities which may arise from such proceedings would not be material in relation to the consolidated financial position of Sun at December 31, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF SUN COMPANY, INC.
NAME, AGE AND PRESENT POSITION WITH SUN COMPANY, INC. BUSINESS EXPERIENCE DURING PAST FIVE YEARS - ----------------- ------------------------------------------ Robert M. Aiken, Jr., 55 Mr. Aiken was elected to his present position in November Executive Vice 1996. From May 1992 until November 1996, he was Senior Vice President and Chief President and Chief Financial Officer. Financial Officer Robert H. Campbell, 60 Mr. Campbell was elected Chairman of the Board in May 1992 Chairman of the Board and Chief Executive Officer in September 1991. He also held and Chief Executive the additional positions of President and Chief Operating Officer Officer from February 1991 until November 1996. He has been a Director since November 1988. John G. Drosdick, 54 Mr. Drosdick was elected a Director and President and Chief President and Chief Operating Officer in December 1996. He was President and Operating Officer Chief Operating Officer of Ultramar Corporation (prior to its merger with Diamond Shamrock, Inc. to become Ultramar Diamond Shamrock Corporation) from June 1992 to August 1996. Jack L. Foltz, 62 Mr. Foltz was elected to his present position in October Vice President and 1992. General Counsel Deborah M. Fretz, 49 Ms. Fretz was elected Senior Vice President, Logistics in Senior Vice President, August 1994. She assumed the additional position of Senior Lubricants and Vice President, Lubricants in January 1997. In addition, she Logistics has been President of Sun Pipe Line Company, a subsidiary, since October 1991.
18
NAME, AGE AND PRESENT POSITION WITH SUN COMPANY, INC. BUSINESS EXPERIENCE DURING PAST FIVE YEARS - ----------------- ------------------------------------------ Thomas W. Hofmann, 46 Mr. Hofmann was elected to his present position in July Comptroller 1995. From September 1994 to July 1995, he served as Direc- tor, Performance Analysis, and from October 1991 to Septem- ber 1994, Director, Tax Administration. David E. Knoll, 54 Mr. Knoll was elected to his present position in August Senior Vice President, 1994. He was Senior Vice President, Marketing and Logistics Northeast Refining and from October 1992 to August 1994. Chemicals Robert W. Owens, 44 Mr. Owens was elected to his present position in February Vice President and 1997. He was Vice President, Marketing and Services of General Manager, Ultramar Diamond Shamrock Corporation from 1996 to 1997 and Sunoco Northeast of Ultramar Corporation from 1994 to 1996. From 1989 to Marketing 1994, he was Manager, East Coast Branded Marketing of Amerada Hess Corporation. Malcolm I. Ruddock, 55 Mr. Ruddock was elected to his present position in 1989. Treasurer David C. Shanks, 58 Mr. Shanks was elected to his present position in February Vice President, Human 1997. Previously, he was a Corporate Vice President of Ar- Resources, Public thur D. Little, Inc. Affairs & Strategic Planning Sheldon L. Thompson, 59 Mr. Thompson was elected to his present position in October Senior Vice President 1992. and Chief Administrative Officer
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated herein by reference to the Quarterly Financial and Stock Market Information on page 61 of the Company's 1997 Annual Report to Shareholders. The market exchanges on which the Company's stock is traded are listed on the cover page of this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated herein by reference to the Selected Financial Data on page 27 of the Company's 1997 Annual Report to Shareholders. 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 28-40 in the Company's 1997 Annual Report to Shareholders. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information in the Company's 1997 Annual Report to Shareholders is incorporated herein by reference: the Consolidated Financial Statements on pages 41-44; the Notes to Consolidated Financial Statements on pages 45-58; the Report of Independent Auditors on page 59; the Coal and Cokemaking Data on page 60; and the Quarterly Financial and Stock Market Information on page 61. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information on directors required by Items 401 and 405 of Regulation S-K is incorporated herein by reference to 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, 1997. Information concerning the Company's executive officers appears in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K is incorporated herein by reference to the Company's Proxy Statement which will be filed with the SEC within 120 days after December 31, 1997, 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K is incorporated herein by reference to the Company's Proxy Statement which will be filed with the SEC within 120 days after December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 404 of Regulation S-K is incorporated herein by reference to the Company's Proxy Statement which will be filed with the SEC within 120 days after December 31, 1997. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1. Consolidated Financial Statements: The information appearing in the Company's 1997 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 26 of this Form 10-K. Other schedules are omitted because the required information is shown elsewhere in this report, is not required or is not applicable. 3. Exhibits: 3.(i) --Articles of Incorporation of Sun Company, Inc., as amended and restated effective as of February 1, 1996 (incorporated by reference to Exhibit 3.(i) of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841). 3.(ii) --Sun Company, Inc. Bylaws, as amended and restated effective as of February 1, 1996 (incorporated by reference to Exhibit 3.(ii) of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841). 4.1 --Instruments defining the rights of security holders of long- term debt of the Company and its subsidiaries are not being filed since the total amount of securities authorized under each such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will provide the SEC a copy of any instruments defining the rights of holders of long-term debt of the Company and its subsidiaries upon request. 4.2 --Amendment to Rights Agreement dated as of July 3, 1997 between Sun Company, Inc. and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 of the Company's Current Report on Form 8-K dated July 8, 1997, File No. 1- 6841). 4.3 --Rights Agreement between Sun Company, Inc. and First Chicago Trust Company of New York dated as of February 1, 1996 (incorporated by reference to Exhibit 99(b) of the Company's Current Report on Form 8-K dated February 2, 1996, File No. 1- 6841). 10.1* --Sun Company, Inc. Long-Term Performance Enhancement Plan, as amended and restated effective as of December 3, 1997. 10.2* --Sun Company, Inc. Executive Long-Term Stock Investment Plan, as amended and restated effective as of December 3, 1997. 10.3* --Sun Company, Inc. Long-Term Incentive Plan, as amended and restated effective as of December 3, 1997. 10.4* --Sun Company, Inc. Directors' Deferred Compensation Plan, as amended and restated effective as of October 2, 1997. 10.5* --Sun Company, Inc. Deferred Compensation Plan, as amended and restated effective as of March 4, 1998.
21 10.6* --Amendment No. 1997-1 to the Sun Company, Inc. Pension Restoration Plan, effective September 1, 1997. The Sun Company, Inc. Pension Restoration Plan (prior to Amendment No. 1997-1) is incorporated by reference to Exhibit 10.5 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841. 10.7* --Amendment No. 1997-1 to the Sun Company, Inc. Savings Restoration Plan, effective September 1, 1997. The Sun Company Inc. Savings Restoration Plan (prior to Amendment No. 1997-1) is incorporated by reference to Exhibit 10.7 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841. 10.8* --Sun Company, Inc. Executive Incentive Plan, as amended and restated effective March 4, 1998. 10.9* --Amendment No. 1997-1 to the Sun Company, Inc. Executive Retirement Plan, effective September 1, 1997. The Sun Company, Inc. Executive Retirement Plan (prior to Amendment No. 1997-1) is incorporated by reference to Exhibit 10(d) of the Company's Form SE filed March 13, 1992, File No. 1-6841. 10.10* --Sun Company, Inc. Special Executive Severance Plan, effective as of September 4, 1997. 10.11* --Sun Company, Inc. Executive Involuntary Severance Plan, as amended and restated effective as of September 4, 1997. 10.12* --Sun Company, Inc. Retainer Stock Plan for Outside Directors (incorporated by reference to Exhibit 10.9 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841). 10.13* --Amended Schedule to the Form of Indemnification Agreement, individually entered into between Sun Company, Inc. and certain officers and directors of the Company. The Form of Indemnification Agreement is incorporated by reference to Exhibit 10.15 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841). 10.14* --Deposit Agreement for Series A Cumulative Preference Stock (incorporated by reference to Exhibit 99(g)(4) of the Sun Company, Inc. Schedule 13E-4 filed June 13, 1995, File No. 1- 6841). 10.15* --Trust Under Sun Company, Inc. Directors' Deferred Compensation Plan dated as of February 1, 1996 (incorporated by reference to Exhibit 10.12 of the Company's 1996 Form 10-K filed March 7, 1997, File No. 1-6841). 10.16* --Sun Company, Inc. Deferred Compensation and Benefits Trust dated as of February 1, 1996 (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K filed March 7, 1997, File No. 1-6841). 10.17* --Agreement of employment entered November 15, 1996 by and between Sun Company, Inc. and John G. Drosdick (incorporated by reference to Exhibit 10.14 of the Company's 1996 Form 10-K filed March 7, 1997, File No. 1-6841). 10.18* --Amendment No. 1998-1 to the Sun Company, Inc. Executive Retirement Plan, effective January 1, 1998. 10.19* --Amendment No. 1998-2 to the Sun Company, Inc. Executive Retirement Plan, effective March 1, 1998. 12 --Statement re Sun Company, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges for the Year Ended December 31, 1997. 13 --Sun Company, Inc. 1997 Annual Report to Shareholders Financial Section. 21 --Subsidiaries of Sun Company, Inc. 23.1 --Consent of Ernst & Young LLP.
22 23.2 --Consent of Coopers & Lybrand L.L.P. 23.3 --Report of Coopers & Lybrand L.L.P. 24.1 --Power of Attorney executed by certain officers and directors of Sun Company, Inc. 24.2 --Certified copy of the resolution authorizing certain officers to sign on behalf of Sun Company, Inc. 27 --Article 5 of Regulation S-X, Financial Data Schedule.
- -------- *These exhibits constitute the Executive Compensation Plans and Arrangements of the Company. (b) Reports on Form 8-K: On October 15, 1997, a report on Form 8-K was filed to disclose under Item 5--"Other Events" and Item 7--"Financial Statements and Exhibits," a press release issued by the Company on October 14, 1997 projecting an increase in third quarter 1997 operating income and reporting the results of a previously announced share repurchase program. Note: Copies of each Exhibit to this Form 10-K are available upon request, at $2 per copy. 23 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. Sun Company, Inc. By /s/ Robert M. Aiken, Jr. Robert M. Aiken, Jr. Executive Vice President and Chief Financial Officer Date March 6, 1998 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 6, 1998: SIGNATURES TITLES Robert M. Aiken, Jr.* Executive Vice President and --------------------- Chief Financial Officer Robert M. Aiken, Jr. (Principal Financial Officer) Robert H. Campbell* Chairman of the Board, Chief ------------------- Executive Officer and Director Robert H. Campbell (Principal Executive Officer) Raymond E. Cartledge* Director --------------------- Raymond E. Cartledge Robert E. Cawthorn* Director ------------------- Robert E. Cawthorn John G. Drosdick* President, Chief Operating ----------------- Officer and Director John G. Drosdick Mary J. Evans* Director -------------- Mary J. Evans Thomas P. Gerrity* Director ------------------ Thomas P. Gerrity Thomas W. Hofmann* Comptroller ------------------ (Principal Accounting Thomas W. Hofmann Officer) James G. Kaiser* Director ---------------- James G. Kaiser 24 SIGNATURES TITLES Robert D. Kennedy* Director ------------------ Robert D. Kennedy R. Anderson Pew* Director ---------------- R. Anderson Pew William F. Pounds* Director ------------------ William F. Pounds Alexander B. Trowbridge* Director ------------------------ Alexander B. Trowbridge *By /s/Robert M. Aiken, Jr. Individually and as Attorney-in-Fact ----------------------- Robert M. Aiken, Jr. 25 SUN COMPANY, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (MILLIONS OF DOLLARS)
ADDITIONS ------------------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ---------- ---------- -------- ---------- --------- For the year ended December 31, 1997: Deducted from asset in balance sheet--allowance for doubtful accounts and notes receivable.... $ 8 $ 6 $-- $ 8 $ 6 === === === === === For the year ended December 31, 1996: Deducted from asset in balance sheet--allowance for doubtful accounts and notes receivable.... $18 $ 8 $-- $18 $ 8 === === === === === For the year ended December 31, 1995: Deducted from asset in balance sheet--allowance for doubtful accounts and notes receivable.... $10 $ 8 $11(A) $11(B) $18 === === === === ===
- -------- Notes: (A) Represents the account balance, at June 30, 1995, of Sun's coal and cokemaking operations which previously had been accounted for as an investment held for sale. Effective June 30, 1995, this business became one of Sun's ongoing business units and is no longer held for sale. (See Note 2 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders.) (B) Includes a $4 million deduction attributable to the refining and marketing operations of Suncor Inc., a Canadian integrated oil company, reflecting the divestment of Suncor on June 8, 1995. (See Note 2 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders.) 26 EXHIBIT INDEX Exhibit Number Exhibit - ------- 3.(i) - Articles of Incorporation of Sun Company, Inc., as amended and restated effective as of February 1, 1996 (incorporated by reference to Exhibit 3.(i) of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841). 3.(ii) - Sun Company, Inc. Bylaws, as amended and restated effective as of February 1, 1996 (incorporated by reference to Exhibit 3.(ii) of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1- 6841). 4.1 - Instruments defining the rights of security holders of long-term debt of the Company and its subsidiaries are not being filed since the total amount of securities authorized under each such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will provide the SEC a copy of any instruments defining the rights of holders of long-term debt of the Company and its subsidiaries upon request. 4.2 - Amendment to Rights Agreement dated as of July 3, 1997 between Sun Company, Inc and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 of the Company's Current Report on Form 8-K dated July 8, 1997, File No. 1-6841). 4.3 - Rights Agreement between Sun Company, Inc. and First Chicago Trust Company of New York dated as of February 1, 1996 (incorporated by reference to Exhibit 99(b) of the Company's Current Report on Form 8-K dated February 2, 1996, File No. 1- 6841). 10.1* - Sun Company, Inc. Long-Term Performance Enhancement Plan, as amended and restated effective as of December 3, 1997. 10.2* - Sun Company, Inc. Executive Long-Term Stock Investment Plan, as amended and restated effective as of December 3, 1997. 10.3* - Sun Company, Inc. Long-Term Incentive Plan, as amended and restated effective as of December 3, 1997. 10.4* - Sun Company, Inc. Directors' Deferred Compensation Plan, as amended and restated effective as of October 2, 1997. 10.5* - Sun Company, Inc. Deferred Compensation Plan, as amended and restated effective as of March 4, 1998. 2 Exhibit Number Exhibit - ------- ------- 10.6* - Amendment No. 1997-1 to the Sun Company, Inc. Pension Restoration Plan, effective September 1, 1997. The Sun Company, Inc. Pension Restoration Plan (prior to Amendment No. 1997-1) is incorporated by reference to Exhibit 10.5 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841. 10.7* - Amendment No. 1997-1 to the Sun Company, Inc. Savings Restoration Plan, effective September 1, 1997. The Sun Company Inc. Savings Restoration Plan (prior to Amendment No. 1997-1) is incorporated by reference to Exhibit 10.7 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841. 10.8* - Sun Company, Inc. Executive Incentive Plan, as amended and restated effective March 4, 1998. 10.9* - Amendment No. 1997-1 to the Sun Company, Inc. Executive Retirement Plan, effective September 1, 1997. The Sun Company, Inc. Executive Retirement Plan (prior to Amendment No. 1997-1) is incorporated by reference to Exhibit 10(d) of the Company's Form SE filed March 13, 1992, File No. 1-6841. 10.10* - Sun Company, Inc. Special Executive Severance Plan, effective as of September 4, 1997. 10.11* - Sun Company, Inc. Executive Involuntary Severance Plan, as amended and restated effective as of September 4, 1997. 10.12* - Sun Company, Inc. Retainer Stock Plan for Outside Directors (incorporated by reference to Exhibit 10.9 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841). 10.13* - Amended Schedule to the Form of Indemnification Agreement, individually entered into between Sun Company, Inc. and certain officers and directors of the Company. The Form of Indemnification Agreement is incorporated by reference to Exhibit 10.15 of the Company's 1995 Form 10-K filed March 7, 1996, File No. 1-6841). 10.14* - Deposit Agreement for Series A Cumulative Preference Stock (incorporated by reference to Exhibit 99(g)(4) of the Sun Company, Inc. Schedule 13E-4 filed June 13, 1995, File No. 1- 6841). 3 Exhibit Number Exhibit - ------- ------- 10.15* - Trust Under Sun Company, Inc. Directors' Deferred Compensation Plan dated as of February 1, 1996 (incorporated by reference to Exhibit 10.12 of the Company's 1996 Form 10-K filed March 7, 1997, File No. 1-6841). 10.16* - Sun Company, Inc. Deferred Compensation and Benefits Trust dated as of February 1, 1996 (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K filed March 7, 1997, File No. 1- 6841). 10.17* - Agreement of employment entered November 15, 1996 by and between Sun Company, Inc. and John G. Drosdick (incorporated by reference to Exhibit 10.14 of the Company's 1996 Form 10-K filed March 7, 1997, File No. 1-6841). 10.18* - Amendment No. 1998-1 to the Sun Company, Inc. Executive Retirement Plan, effective January 1, 1998. 10.19* - Amendment No. 1998-2 to the Sun Company, Inc. Executive Retirement Plan, effective March 1, 1998. 12 - Statement re Sun Company, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges for the Year Ended December 31, 1997. 13 - Sun Company, Inc. 1997 Annual Report to Shareholders Financial Section. 21 - Subsidiaries of Sun Company, Inc. 23.1 - Consent of Ernst & Young LLP. 23.2 - Consent of Coopers & Lybrand L.L.P. 23.3 - Report of Coopers & Lybrand L.L.P. 24.1 - Power of Attorney executed by certain officers and directors of Sun Company, Inc. 24.2 - Certified copy of the resolution authorizing certain officers to sign on behalf of Sun Company, Inc. 27 - Article 5 of Regulation S-X, Financial Data Schedule. - ------------ *These exhibits constitute the Executive Compensation Plans and Arrangements of the Company. EX-10.1 2 LONG-TERM PERFORMANCE ENHANCEMENT PLAN Exhibit 10.1 ================================================================================ SUN COMPANY, INC. LONG-TERM PERFORMANCE ENHANCEMENT PLAN ================================================================================ 2 ARTICLE I Definitions As used in this Plan, the following terms shall have the meanings herein specified: 1.1 Affiliate - shall mean any person or entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Sun Company, Inc. 1.2 Board of Directors - shall mean the Board of Directors of Sun Company, Inc. 1.3 Change in Control - shall mean the occurrence of any of the following events or transactions: (a) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets), or (b) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially more than twenty percent (20%) of the outstanding voting shares. 1.4 Code - shall mean the Internal Revenue Code of 1986, as amended. 1.5 Committee - shall mean the committee appointed to administer this Plan by the Board of Directors of the Company, as constituted from time to time. The Committee shall consist of at least two (2) members of the Board of Directors, each of whom shall meet applicable requirements set forth in the pertinent regulations under Section 16 of the Securities Exchange Act of 1934, as amended, and Section 162(m) of the Code. 1.6 Common Stock - shall mean the authorized and unissued or treasury shares of common stock of Sun Company, Inc. 1.7 Common Stock Units - shall have the meaning provided herein at Section 6.1. 1.8 Company - shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any Subsidiary or Affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any Subsidiary or Affiliate by merger, consolidation, liquidation or purchase of assets or stock or similar transaction. 1.9 Continuing Director - shall mean a Director who was a member of the Board of Directors immediately prior to a Control Transaction which results in a Change in Control. 1.10 Control Transaction - shall mean any of the following transactions or any combination thereof: (a) any tender offer for or acquisition of capital stock of Sun Company, Inc.; (b) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc.; or (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or a Group of shareholders in a proxy solicitation or otherwise. 3 1.11 CSU Payout Date - shall have the meaning provided herein at Section 6.9 1.12 Disability - shall mean any illness, injury or incapacity of such duration and type as to render a Participant eligible to receive long-term disability benefits under the applicable broad-based long-term disability program of the Company. 1.13 Dividend Equivalents - shall have the meaning provided herein at Section 6.3. 1.14 Dividend Equivalent Account - shall have the meaning provided herein at Section 6.3. 1.15 Employment Termination Date - shall mean the date on which the employment relationship between the Participant and the Company is terminated. 1.16 Exercise Period - shall have the meaning provided herein at Section 5.3. 1.17 Fair Market Value - shall mean, as of any date and in respect of any share of Common Stock, the opening price on such date of a share of Common Stock (which price shall be the closing price on the previous trading day of a share of Common Stock as reported on the New York Stock Exchange Composite Transactions Tape, and as reflected in the consolidated trading tables of the Wall Street Journal or any other publication selected by the Committee). If there is no sale of shares of Common Stock on the New York Stock Exchange for more than ten (10) days immediately preceding such date, or if deemed appropriate by the Committee for any other reason, the fair market value of the shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. 1.18 Group - shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. 1.19 Incentive Stock Options - shall have the meaning provided herein at Article IV. 1.20 Just Cause - shall mean: (a) a judicial determination that the Participant has committed fraud, misappropriation, or embezzlement against the Company; or (b) a non-appealable conviction of, or entry of a plea of nolo contendere for, an act by the Participant constituting a felony which, as determined by the Company in good faith, constitutes a crime involving moral turpitude and has resulted in material harm to the Company, its subsidiaries and affiliates taken as a whole. 4 No termination of employment shall be deemed an effective termination for Just Cause unless accompanied by a copy of a resolution duly adopted by the affirmative vote of not less a majority of the Continuing Directors at a meeting of the Board of Directors which was called and held for the purpose of considering such termination, or if there are no Continuing Directors, then by at least three quarters (3/4) of the entire Board of Directors (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the Participant was guilty of conduct set forth in the preceding sentence, and specifying the particulars thereof in detail. In any deliberations or votes by the Board of Directors concerning a determination under this Section, the Participant shall recuse himself from such deliberations and votes. 1.21 Limited Rights - shall have the meaning provided herein at Article V. 1.22 Option - shall mean Stock Option and/or Incentive Stock Option. 1.23 Option Price - shall mean the purchase price per share of Common Stock deliverable upon the exercise of an Option. 1.24 Optionee - shall mean the holder of an Option. 1.25 Participant - shall have the meaning provided herein at Section 2.4(a). 1.26 Performance Factors - shall mean the various payout percentages related to the attainment levels of one or more Performance Goals, as determined by the Committee. 1.27 Performance Goals - shall mean the specific targeted amounts of, or changes in, financial or operating goals including: revenues; expenses; net income; operating income; equity; return on equity, assets or capital employed; working capital; shareholder return; operating capacity utilized; production or sales volumes; or throughput. Other financial or operating goals may also be used as determined by the Committee. Such goals may be applicable to the Company as a whole or one or more of its business units and may be applied in total or on a per share, per barrel or percentage basis and on an absolute basis or relative to other companies, industries or indices or any combination thereof, as determined by the Committee. 1.28 Performance Period - shall have the meaning provided herein at Section 6.4. 1.29 Potential Change in Control - shall mean the occurrence of any of the following events or transactions: (a) any person (other than Sun Company, Inc., or any affiliate or subsidiary thereof) makes a tender offer for capital stock of Sun Company, Inc.; (b) any person becomes the beneficial owner, directly or indirectly, of capital stock of Sun Company, Inc. in an amount which requires the filing of Schedule 13D or its equivalent form pursuant to the Rules and Regulations under the Securities Exchange Act of 1934 as from time to time amended; 5 (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or Group of shareholders in a proxy solicitation or otherwise which, in its judgment, the Board of Directors determines by adoption of a resolution within thirty (30) days of such submission, might result in a Change in Control of Sun Company, Inc.; (d) any person files a pre-merger notification for the acquisition of capital stock of Sun Company, Inc. pursuant to the Hart-Scott-Rodino Act; or (e) the Board of Directors in its judgment determines by adoption of a resolution that a Potential Change in Control of Sun Company, Inc. for purposes of this Plan has occurred. 1.30 Qualifying Termination - shall mean, with respect to the employment of any Participant, the following: (a) a termination of employment by the Company within seven (7) months after a Change in Control, other than for Just Cause, death or Disability; (b) a termination of employment by the Participant within seven (7) months after a Change in Control for one or more of the following reasons: (1) the assignment to such Participant of any duties inconsistent in a way adverse to such Participant, with such Participant's positions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a reduction in the duties and responsibilities held by the Participant immediately prior to the Change in Control; a change in the Participant's reporting responsibilities, title or offices as in effect immediately prior to the Change in Control that is adverse to the Participant; or any removal of the Participant from or any failure to re-elect the Participant to any position with the Company that such Participant held immediately prior to the Change in Control except in connection with such Participant's: (i) assignment to a new position at a higher combined annual base salary and guideline (target) bonus; or (ii) termination of employment by the Company for Just Cause; or (2) with respect to any Participant who is a member of the Board of Directors immediately prior to the Change in Control, any failure of the shareholders of the Company to elect or reelect, or of the Company to appoint or reappoint, the Participant as a member of the Board of Directors; 6 (3) a reduction by the Company in either of the Participant's annual base salary or guideline (target) bonus as in effect immediately prior to the Change in Control; the failure by the Company to continue in effect, or the taking of any action by the Company that would adversely affect such Participant's participation in or significantly reduce such Participant's benefits under, any employee benefit plan or compensation plan in which such Participant was participating immediately prior to the Change in Control, provided, however, that in the aggregate such actions by the Company significantly reduce the Participant's total compensation (i.e., the sum of Participant's annual base salary, guideline (target) bonus, and the aggregate value to the Participant of all employee benefit and compensation plans); or the failure by the Company, without the Participant's consent, to pay to the Participant any portion of the Participant's current compensation, or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of the Company; or (4) The Company requires the Participant to be based anywhere other than the Participant's present work location or a location within thirty-five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantially more burdensome than such Participant's travel obligations during the period of twelve (12) consecutive months immediately preceding the Change in Control; provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not be deemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason for the termination; or (c) a termination of employment by the Company other than a termination for Just Cause, or a termination of employment by the Participant for one of the reasons set forth in (b) above, following a Potential Change in Control, if the Participant can demonstrate that such termination or circumstance in (b) above leading to termination: (1) was at the request of a third party with which the Company had entered into negotiations or an agreement with regard to a Change in Control; or (2) otherwise occurred in connection with, or in anticipation of, a Change in Control; provided, however, that in either such case, such Change in Control actually occurs within one (1) year following the Employment Termination Date. 1.31 Stock Options - shall have the meaning provided herein at Section 3.1. 1.32 Subsidiary - shall mean any corporation of which, at the time more than fifty percent (50%) of the shares entitled to vote generally in an election of directors are owned directly or indirectly by Sun Company, Inc. or any subsidiary thereof. 7 ARTICLE II Background, Purpose and Term of Plan; Participation & Eligibility for Benefits 2.1 Background. Effective on December 31, 1996, no further awards shall be made under the Sun Company, Inc. Executive Long-Term Stock Investment Plan adopted in May, 1991 provided, however, that any rights theretofore granted under that plan shall not be affected. 2.2 Purpose of the Plan. The purposes of this Sun Company, Inc. Long-Term Performance Enhancement Plan (the "Plan") are to: (a) better align the interests of shareholders and management of the Company by creating a direct linkage between Participants' rewards and shareholders' gains; (b) provide management with the ability to increase equity ownership in Sun Company, Inc.; (c) provide competitive compensation opportunities which can be realized through attainment of performance goals; and (d) provide an incentive to management for continuous employment with the Company. It is intended that most awards made under the Plan will qualify as performance-based compensation under Section 162(m) of the Code. 2.3 Term of the Plan. This Plan shall become effective upon approval by the holders of a majority of the votes present, in person or represented by proxy, at the 1997 Annual Meeting of Shareholders of Sun Company, Inc. No awards will be made under the Plan after December 31, 2001, unless the Board of Directors extends this date to a date no later than December 31, 2006. The Plan and all awards made under the Plan prior to such date (or extended date) shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. 2.4 Administration. The Plan shall be administered by the Committee which shall have the authority, in its sole discretion and from time to time to: (a) designate the employees or classes of employees eligible to participate in the Plan (each such employee being, a "Participant"); (b) grant awards provided in the Plan in such form and amount as the Committee shall determine; (c) impose such limitations, restrictions and conditions upon any such award as the Committee shall deem appropriate; and (d) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. The decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or not taken or decision made or not made in good faith relating to the Plan or any award thereunder. 8 2.5 Eligibility for Participation. Participants in the Plan shall be the officers and other key employees of the Company who occupy responsible managerial or professional positions and who have the capability of making a substantial contribution to the success of the Company. In making this selection and in determining the amount of awards, the Committee shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company and past and potential contributions to its profitability and sound growth. 2.6 Types of Awards Under the Plan. Awards under the Plan may be in the form of any one or more of the following: (a) Stock Options, as described in Article III; (b) Incentive Stock Options, as described in Article IV; (c) Limited Rights, as described in Article V; and/or (d) Common Stock Units, as described in Article VI. 2.7 Aggregate Limitation on Awards. Shares of stock which may be issued under the Plan shall be Common Stock. The maximum number of shares of Common Stock which may be issued under the Plan shall be four million (4,000,000). For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan: (a) all the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted when cash is used as full payment for shares issued upon exercise of an Option; (b) only the shares issued (including the shares, if any, withheld for tax withholding requirements) net of shares of Common Stock used as full or partial payment for such shares upon exercise of an Option; (c) only the shares issued (including the shares, if any, withheld for tax withholding) upon vesting and payment of the Common Stock Units, shall be counted. In addition to shares of Common Stock actually issued pursuant to the exercise of Options, there shall be deemed to have been issued a number of shares equal to the number of shares of Common Stock in respect of which Limited Rights (as described in Article V) shall have been exercised. Shares tendered by a Participant as payment for shares issued upon exercise of an Option, shall be available for issuance under the Plan. Any shares of Common Stock subject to an Option, which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan, but shares subject to an Option which are not issued as a result of the exercise of Limited Rights shall not be available for issuance under the Plan. (d) The maximum number of Options that shall be granted with respect to each calendar year to a Participant shall be two-hundred thousand. (e) The maximum number of Common Stock Units granted with respect to each calendar year to a Participant shall be fifty thousand. (f) The maximum number of Common Stock Units granted under the Plan will be one million. 9 The share limits set forth in this Section 2.7 shall be adjusted to reflect any capitalization changes as discussed in Section 7.8. ARTICLE III Stock Options 3.1 Award of Stock Options. The Committee, from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, may grant to any Participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of options to a Participant pursuant to the Plan. 3.2 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Stock Option Agreement, executed by the Company and the holder of a Stock Option, stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 3.3 Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of a Stock Option shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date the Stock Option is granted. 3.4 Term and Exercise. The term and the vesting schedule of the Stock Options shall be determined by the Committee. However, no Stock Option may be exercisable before the second anniversary of the date of grant or after the tenth anniversary of such date. No Stock Option shall be exercisable after the expiration of its term. 3.5 Manner of Payment. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the Option Price for such shares with cash or with Common Stock. All shares of Common Stock issued under the Sun Company, Inc. Long-Term Incentive Plan, the Sun Company, Inc. Executive Long-Term Stock Investment Plan or this Plan must be held at least six months before they may be used as payment of the Option Price. 3.6 Issuance and Delivery of Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a shareholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder. 3.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may, within sixty (60) months from the date of termination, exercise any Stock Options to the extent such options are exercisable during such 60-month period. 10 3.8 Termination for Other Reasons. Except as provided in Sections 3.7 and 3.9, or except as otherwise determined by the Committee, all Stock Options shall terminate upon the termination of the Optionee's employment; provided, however, that the Limited Rights awarded in tandem with such Stock Options shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 3.9 Death of Optionee. Any rights in respect of Stock Options to the extent exercisable on the date of the Optionee's death may be exercised by the Optionee's estate or by any person that acquires the legal right to exercise such Stock Option by bequest, inheritance, or otherwise by reason of the death of the Optionee. Any such exercise to be valid must occur within the remaining option term of the Stock Option. The foregoing provisions of this Section 3.9 shall apply to an Optionee who dies while employed by the Company and to an Optionee whose employment may have terminated prior to death; provided, however, that: (a) an Optionee who dies while employed by the Company will be treated as if the Optionee had retired on the date of death. Accordingly, the Optionee's estate or a person who acquires the right to exercise such Stock Option by bequest or inheritance will have the right to exercise the Stock Option in accordance with Section 3.7; or (b) the estate or a person who acquires the right to exercise a stock option by bequest or inheritance from an Optionee who dies after terminating employment with the Company will have the remainder of any exercise period provided under Sections 3.7 and 3.8. 3.10 Acceleration of Options. Notwithstanding any provisions to the contrary in agreements evidencing Options granted thereunder, each outstanding Option shall become immediately and fully exercisable upon the occurrence of any Change in Control of Sun Company, Inc. 3.11 Effect of Exercise. The exercise of any Stock Options shall cancel that number of related Limited Rights, if any, which is equal to the number of shares of Common Stock purchased pursuant to said options. ARTICLE IV Incentive Stock Options 4.1 Award of Incentive Stock Options. The Committee, from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any Participant in the Plan one or more "incentive Stock Options" (intended to qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986, (the "Code") as amended ("Incentive Stock Options")) to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of options to a Participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of ten percent (10%) or more of the total combined voting power of the Company and its subsidiaries. 4.2 Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Incentive Stock Option Agreement, executed by the Company and the holder of an Incentive Stock Option stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 11 4.3 Incentive Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted. 4.4 Term and Exercise. The term and the vesting schedule of the Incentive Stock Option shall be determined by the Committee. However, no Incentive Stock Option may be exercisable before the second anniversary of the date of grant or after the tenth anniversary of such date. No Incentive Stock Option shall be exercisable after the expiration of its term. 4.5 Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of grant with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year, under this Plan or any other stock option plan of the Company exceeds One Hundred Thousand Dollars ($100,00.00), then the option, as to the excess shall be treated as a non- qualified stock option. An incentive Stock Option shall not be granted to any person who is not an "employee" of the Company (within the meaning of Section 424(f) of the Code). 4.6 Retirement or Disability. Upon the termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may, within sixty (60) months from the date of such termination of employment, exercise any Incentive Stock Options to the extent such Incentive Stock Options are exercisable during such 60-month period. Notwithstanding the foregoing, the tax treatment available pursuant to Section 422 of the Internal Revenue Code of 1986 upon the exercise of an Incentive Stock Option will not be available to an Optionee who exercises any Incentive Stock Option more than: (a) twelve (12) months after the date of termination of employment due to permanent disability; or (b) three (3) months after the date of termination of employment due to retirement. 4.7 Termination for Other Reasons. Except as provided in Sections 4.6 and 4.8 or except as otherwise determined by the Committee, all Incentive Stock Options shall terminate upon the termination of the Optionee's employment; provided, however, that the Limited Rights awarded in tandem with such Incentive Stock Options shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 4.8 Death of Optionee. Any rights in respect of Incentive Stock Options to the extent exercisable on the date of the Optionee's death may be exercised by the Optionee's estate or by any person that acquires the legal right to exercise such Stock Option by bequest, inheritance, or otherwise by reason of the death of the Optionee. Any such exercise to be valid must occur within the remaining option term of the Incentive Stock Option. The foregoing provisions of this Section 4.8 shall apply to an Optionee who dies while employed by the Company and to an Optionee whose employment may have terminated prior to death; provided, however, that: (a) an Optionee who dies while employed by the Company will be treated as if the Optionee had retired on the date of death. Accordingly, the Optionee's estate or a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance will have the right to exercise the Incentive Stock Option in accordance with Section 4.6; or 12 (b) the estate or a person who acquires the right to exercise a stock option by bequest or inheritance from an Optionee who dies after terminating employment with the Company will have the remainder of any exercise period provided under Section 4.6 and 4.7. 4.9 Applicability of Stock Options Selections. Section 3.5, Manner of Payment, Section 3.6, Issuance and Delivery of Shares, Section 3.10, Acceleration of Options and Section 3.11, Effect of Exercise, applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated by reference in this Article IV as though fully set forth herein. ARTICLE V Limited Rights 5.1 Award of Limited Rights. Concurrently with or subsequent to the award of any Option, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each Option, a related limited right permitting the Optionee, during a specified limited time period, to be paid the appreciation on the Option in lieu of exercising the Option ("Limited Right"). 5.2 Limited Rights Agreement. Limited Rights granted under the Plan shall be evidenced by written agreements in such form as the Committee may from time to time determine. 5.3 Exercise Period. Limited Rights are immediately exercisable in full upon grant for a period of up to seven (7) months following the date of a Change in Control (the "Exercise Period"). 5.4 Amount of Payment. The amount of payment to which an Optionee shall be entitled upon the exercise of each Limited Right shall be equal to 100% of the amount, if any, which is equal to the difference between the Option Price of the related Option and the Market Price of a share of such Common Stock. Market Price is defined to be the greater of: (a) the highest price per share of Common Stock paid in connection with any Change in Control; and (b) the highest price per share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the New York Stock Exchange Composite Transactions quotations) during the 60-day period prior to the Change in Control. 5.5 Form of Payment. Payment of the amount to which an Optionee is entitled upon the exercise of Limited Rights, as determined pursuant to Section 5.4, shall be made solely in cash. 5.6 Effect of Exercise. If Limited Rights are exercised, the Stock Options, if any, related to such Limited Rights cease to be exercisable to the extent of the number of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Options, if any, related to such Limited Rights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Options were exercised or terminated; provided, however, that with respect to Options that are terminated as a result of the termination of the Optionee's employment status, the Limited Rights awarded in tandem therewith shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 13 5.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of permanent disability or retirement (as each is determined by the Committee), the Optionee may, within six (6) months from the date of termination, exercise any Limited Rights to the extent such Limited Right is exercisable during such six-month period. 5.8 Death of Optionee or Termination for Other Reasons. Except as provided in Sections 5.7 and 5.9 or except as otherwise determined by the Committee, all Limited Rights granted under the Plan shall terminate upon the termination of the Optionee's employment or upon the death of the Optionee. 5.9 Termination Related to a Change in Control. The requirement that an Optionee be terminated by reason of retirement or permanent disability or be employed by the Company at the time of exercise pursuant to Sections 5.7 and 5.8 respectively, is waived during the Exercise Period as to any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. ARTICLE VI Common Stock Units 6.1 Award of Common Stock Units. The Committee, from time to time, and subject to the provisions of the Plan, may grant to any Participant in the Plan rights to receive shares of Common Stock which are subject to a risk of forfeiture by the Participant ("Common Stock Units"). At the time it grants any Common Stock Units, the Committee shall determine whether the payment of such Common Stock Units shall be conditioned upon either: (a) the Participant's continued employment with the Company throughout a stated period (Section 6.4); or (b) the attainment of certain predetermined performance objectives during a stated period (Section 6.5). The date Common Stock Units are granted shall mean the date selected by the Committee as of which the Committee allots a specific number of Common Stock Units to a Participant pursuant to the Plan. 6.2 Common Stock Unit Agreements. Common Stock Units granted under the Plan shall be evidenced by written agreements stating the number of Common Stock Units evidenced thereby or in such form and as the Committee may from time to time determine. 6.3 Dividend Equivalents. A holder of Common Stock Units will be entitled to receive payment from the Company in an amount equal to each cash dividend ("Dividend Equivalent") the Company would have paid to such holder had he, on the record date for payment of such dividend, been the holder of record of shares of Common Stock equal to the number of Common Stock Units which had been awarded to such holder as of the close of business on such record date. The Company shall establish a bookkeeping account on behalf of each Participant in which the Dividend Equivalents that would have been paid to the holder of Common Stock Units ("Dividend Equivalent Account") shall be credited. The Dividend Equivalent Account will not bear interest. 6.4 Performance Period. Upon making an award, the Committee shall determine (and the Common Stock Unit Agreement shall state) the length of the applicable period during which employment must be maintained or certain performance targets must be attained (the "Performance Period"). Performance Periods will normally be from three (3) to five (5) years; however, the Committee at its sole discretion may establish other time periods. 14 6.5 Performance Goals. Common Stock Units and the related Dividend Equivalent Account earned may be based upon the attainment of Performance Goals established by the Committee in accordance with Section 162(m). Within the first ninety (90) days of the Performance Period, the Committee shall establish, in writing, the weighted Performance Goals and related Performance Factors for various goal achievement levels for the Company. In establishing the weighted Performance Goals, the Committee shall take the necessary steps to insure that the Company's ability to achieve the preestablished goals is uncertain at the time the goals are set. The established written Performance Goals, assigned weights, and Performance Factors shall be written in terms of an objective formula, whereby any third party having knowledge of the relevant Company performance results could calculate the amount to be paid. Such Performance Goals may vary by Participant and by grant. The number of Common Stock Units and Dividend Equivalents earned will be equal to the amounts awarded multiplied by the Performance Factor. However, the Committee shall have the discretion, by Participant and by grant, to reduce (but not to increase) some or all of the amount that would otherwise be payable by reason of the satisfaction of the Performance Goals. In making any such determination, the Committee is authorized to take into account any such factor or factors it determines are appropriate, including but not limited to Company, business unit and individual performance. 6.6 Payment of Common Stock Units and Dividend Equivalent Account. Payment in respect of Common Stock Units earned (as determined under Sections 6.4 and 6.5) shall be made to the holder thereof within ninety (90) days after the Performance Period for such units has ended, but only to the extent the Committee determines that the continuing employment and/or any applicable performance targets have been met. Payment for Common Stock Units earned shall be made in shares of Common Stock, except as provided in Section 6.9. The number of shares paid shall be equal to the number of Common Stock Units earned. The holder may elect to reduce this amount by the number of shares of Common Stock which have, on the date the Common Stock Units are paid, a fair market value equal to the applicable federal, state and local withholding tax due on the receipt of Common Stock, in lieu of making a cash payment equal to the amount of such withholding tax due. A holder of Common Stock Units will be entitled to receive payment from the Company at the end of the Performance Period an amount in cash equal to the Dividend Equivalent Account earned (as determined under Sections 6.4 and 6.5) by the holder minus applicable federal, state and local withholding tax due. 6.7 Death, Disability or Retirement. A portion of the Common Stock and the Dividend Equivalent Account shall be forfeited upon the death of a Participant or the termination of a Participant's employment by reason of retirement or permanent disability (as each is determined by the Committee) prior to the end of the Performance Period. The number of Common Stock Units forfeited will be equal to the remaining number of months in the Performance Period divided by the total number of months in the Performance Period times the number of Common Stock Units outstanding and will be rounded down to the next lowest whole amount. The Dividend Equivalent account will be reduced in a similar fashion. The Common Stock Units and the Dividend Equivalent Account retained will remain subject to adjustment for any Performance Factors in accordance with Section 6.5. 15 6.8 Termination of Employment. Except as provided in Sections 6.7 and 6.9, or as determined by the Committee, 100% of all Common Stock Units of a Participant under the Plan shall be forfeited and the Dividend Equivalent Account shall be forfeited upon termination of the Participant's employment with the Company prior to the end of the Performance Period, and in such event the Participant shall not be entitled to receive any Common Stock or any payment of the Dividend Equivalent Account regardless of the level of Performance Goals achieved for the respective Performance Periods. 6.9 Change in Control. In the event of a Change in Control, all the Participant's outstanding Common Stock Units shall be payable to the Participant in cash or stock, as follows: (a) if pooling of interests accounting treatment is to be used with respect to such Change in Control, the Participant will receive shares of Common Stock equal in number to the total number of Common Stock Units granted to such Participant; or (b) if pooling of interests accounting treatment is not to be used with respect to such Change in Control, the Participant will be paid an amount in cash equal to the number of Common Stock Units outstanding multiplied by the Market Price as defined in Section 5.4. Such amount will be reduced by the applicable federal, state and local withholding taxes due. The cash or stock, as the case may be, shall be paid out to the Participant no later than ninety (90) days following the date of occurrence of such Change in Control (the "CSU Payout Date"), regardless of whether the applicable Performance Period has expired or whether performance targets have been met. There will be no adjustment for any Performance Factors described in Section 6.5. On or before the CSU Payout Date, and regardless of whether pooling of interests accounting treatment is to be used with respect to such Change in Control, the Participant will be paid an amount in cash equal to the value of the amounts accrued in the Participant's Dividend Equivalent Account immediately preceding the Change in Control. Payout of Common Stock Units and the Dividend Equivalent Account shall be made to each Participant: (c) who is employed by the Company on the CSU Payout Date; or (d) whose employment relationship with the Company is terminated: (1) as a result of any Qualifying Termination prior to the CSU Payout Date; or (2) as a result of death or Disability following the occurrence of any Change in Control but prior to the CSU Payout Date. The Committee may establish, at the time of the grant of Common Stock Units, other conditions which must be met for payout to occur. These conditions shall be set forth in the Committee's resolution granting the Common Stock Units and in the Agreement with the holder. 16 ARTICLE VII Miscellaneous 7.1 General Restriction. Each award under the Plan shall be subject to the requirement that if, at any time, the Committee shall determine that: (a) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law; or, (b) the consent or approval of any government regulatory body; or (c) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of shares of Common Stock thereunder, then such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 7.2 Accounting and Tax Treatment for Change in Control. Notwithstanding anything in this Plan to the contrary, in the event of a Change in Control, the Committee shall not have the right to take any actions described in the Plan that would make the Change in Control ineligible for pooling of interests accounting treatment or that would make the Change in Control ineligible for desired tax treatment if, in the absence of such right, the Change in Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change in Control. 7.3 Non-Assignability. Awards under the Plan shall not be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution except as otherwise determined by the Committee. Accordingly, during the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative, unless the Committee determines otherwise. 7.4 Right to Terminate Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any Participant the right to continue in the employment of the Company or effect any right which the Company may have to terminate the employment of such Participant. 7.5 Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation, determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards, and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 7.6 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued on behalf of such recipient. 7.7 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any 17 award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leaves of absence. 7.8 Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period. 7.9 Adjustments. In any event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plan, the number of Common Stock Units theretofore awarded under the Plan and any and all other matters deemed appropriate by the Committee. 7.10 Amendment of the Plan. (a) The Committee may, without further action by the shareholders and without receiving further consideration from the Participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time, and from time to time, modify or amend the Plan in any respect, except that without shareholder approval the Committee may not: (1) increase the maximum award levels established in Section 2.7, including the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 7.9); (2) extend the term during which an Option may be exercised beyond ten years from the date of grant; or (3) extend the term of the Plan, except that the Board may extend the period during which awards may be made in accordance with Section 2.3. The termination or any modification or amendment of the Plan, except as provided in Section 7.10(a) above, shall not without the consent of a Participant, affect the Participant's rights under an award previously granted. EX-10.2 3 EXECUTIVE LONG-TERM STOCK INVESTMENT PLAN Exhibit 10.2 ======================================================================== SUN COMPANY, INC. EXECUTIVE LONG-TERM STOCK INVESTMENT PLAN (Amended and Restated as of December 3, 1997) ======================================================================== 2 ARTICLE I Definitions As used in this Plan, the following terms shall have the meanings herein specified: 1.1 Affiliate - shall mean any person or entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Sun Company, Inc. 1.2 Alternate Appreciation Rights - shall have the meaning provided herein at Section 6.1. 1.3 Board of Directors - shall mean the Board of Directors of Sun Company, Inc. 1.4 Change in Control - shall mean the occurrence of any of the following events or transactions: (a) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets), or (b) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially more than twenty percent (20%) of the outstanding voting shares. 1.5 Code - shall mean the Internal Revenue Code of 1986, as amended. 1.6 Committee - shall mean the committee appointed to administer this Plan by the Board of Directors of the Company, as constituted from time to time. The Committee shall consist of at least two (2) members of the Board of Directors, each of whom shall meet applicable requirements set forth in the pertinent regulations under Section 16 of the Securities Exchange Act of 1934, as amended, and Section 162(m) of the Code. 1.7 Common Stock - shall mean the authorized and unissued or treasury shares of common stock of Sun Company, Inc. 1.8 Common Stock Units - shall have the meaning provided herein at Section 8.1. 1.9 Company - shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any Subsidiary or Affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any Subsidiary or Affiliate by merger, consolidation, liquidation or purchase of assets or stock or similar transaction. 1.10 Continuing Director - shall mean a Director who was a member of the Board of Directors immediately prior to a Control Transaction which results in a Change in Control. 1.11 Control Transaction - shall mean any of the following transactions or any combination thereof: (a) any tender offer for or acquisition of capital stock of Sun Company, Inc.; 3 (b) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc.; or (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or a Group of shareholders in a proxy solicitation or otherwise. 1.12 CSU Payout Date - shall have the meaning provided herein at Section 8.9. 1.13 Disability - shall mean any illness, injury or incapacity of such duration and type as to render a Participant eligible to receive long-term disability benefits under the applicable broad-based long-term disability program of the Company. 1.14 Dividend Equivalents - shall have the meaning provided herein at Section 8.3. 1.15 Dividend Equivalent Account - shall have the meaning provided herein at Section 8.3. 1.16 Employment Termination Date - shall mean the date on which the employment relationship between the Participant and the Company is terminated. 1.17 Exercise Period - shall have the meaning provided herein at Section 7.3. 1.18 Fair Market Value - shall mean, as of any date and in respect of any share of Common Stock, the opening price on such date of a share of Common Stock (which price shall be the closing price on the previous trading day of a share of Common Stock as reported on the New York Stock Exchange Composite Transactions Tape, and as reflected in the consolidated trading tables of the Wall Street Journal or any other publication selected by the Committee). If there is no sale of shares of Common Stock on the New York Stock Exchange for more than ten (10) days immediately preceding such date, or if deemed appropriate by the Committee for any other reason, the fair market value of the shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. 1.19 Group - shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. 1.20 Incentive Stock Options - shall have the meaning provided herein at Article IV. 1.21 Just Cause - shall mean: (a) a judicial determination that the Participant has committed fraud, misappropriation, or embezzlement against the Company; or (b) a non-appealable conviction of, or entry of a plea of nolo contendere for, an act by the Participant constituting a felony which, as determined by the Company in good faith, constitutes a crime involving moral turpitude and has resulted in material harm to the Company, its subsidiaries and affiliates taken as a whole. 4 No termination of employment shall be deemed an effective termination for Just Cause unless accompanied by a copy of a resolution duly adopted by the affirmative vote of not less a majority of the Continuing Directors at a meeting of the Board of Directors which was called and held for the purpose of considering such termination, or if there are no Continuing Directors, then by at least three quarters (3/4) of the entire Board of Directors (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the Participant was guilty of conduct set forth in the preceding sentence, and specifying the particulars thereof in detail. In any deliberations or votes by the Board of Directors concerning a determination under this Section, the Participant shall recuse himself from such deliberations and votes. 1.22 Limited Rights - shall have the meaning provided herein at Article VII. 1.23 Market Price - shall have the meaning provided herein at Section 7.4. 1.24 Option - shall mean Stock Option, Incentive Stock Option and/or Reload Option. 1.25 Option Price - shall mean the purchase price per share of Common Stock deliverable upon the exercise of an Option. 1.26 Optionee - shall mean the holder of an Option. 1.27 Participant - shall have the meaning provided herein at Section 2.4(a). 1.28 Performance Factors - shall mean the various payout percentages related to the attainment levels of one or more Performance Goals, as determined by the Committee. 1.29 Performance Goals - shall mean the specific targeted amounts of, or changes in, financial or operating goals including: revenues; expenses; net income; operating income; equity; return on equity, assets or capital employed; working capital; shareholder return; operating capacity utilized; production or sales volumes; or throughput. Other financial or operating goals may also be used as determined by the Committee. Such goals may be applicable to the Company as a whole or one or more of its business units and may be applied in total or on a per share, per barrel or percentage basis and on an absolute basis or relative to other companies, industries or indices or any combination thereof, as determined by the Committee. 1.30 Performance Period - shall have the meaning provided herein at Section 8.4. 1.31 Potential Change in Control - shall mean the occurrence of any of the following events or transactions: (a) any person (other than Sun Company, Inc., or any affiliate or subsidiary thereof) makes a tender offer for capital stock of Sun Company, Inc.; 5 (b) any person becomes the beneficial owner, directly or indirectly, of capital stock of Sun Company, Inc. in an amount which requires the filing of Schedule 13D or its equivalent form pursuant to the Rules and Regulations under the Securities Exchange Act of 1934 as from time to time amended; (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or Group of shareholders in a proxy solicitation or otherwise which, in its judgment, the Board of Directors determines by adoption of a resolution within thirty (30) days of such submission, might result in a Change in Control of Sun Company, Inc.; (d) any person files a pre-merger notification for the acquisition of capital stock of Sun Company, Inc. pursuant to the Hart-Scott-Rodino Act; or (e) the Board of Directors in its judgment determines by adoption of a resolution that a Potential Change in Control of Sun Company, Inc. for purposes of this Plan has occurred. 1.32 Qualifying Termination - shall mean, with respect to the employment of any Participant, the following: (a) a termination of employment by the Company within seven (7) months after a Change in Control, other than for Just Cause, death or Disability; (b) a termination of employment by the Participant within seven (7) months after a Change in Control for one or more of the following reasons: (1) the assignment to such Participant of any duties inconsistent in a way adverse to such Participant, with such Participant's positions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a reduction in the duties and responsibilities held by the Participant immediately prior to the Change in Control; a change in the Participant's reporting responsibilities, title or offices as in effect immediately prior to the Change in Control that is adverse to the Participant; or any removal of the Participant from or any failure to re-elect the Participant to any position with the Company that such Participant held immediately prior to the Change in Control except in connection with such Participant's: (i) assignment to a new position at a higher combined annual base salary and guideline (target) bonus; or (ii) termination of employment by the Company for Just Cause; or (2) with respect to any Participant who is a member of the Board of Directors immediately prior to the Change in Control, any failure of the shareholders of the Company to elect or reelect, or of the Company to appoint or reappoint, the Participant as a member of the Board of Directors; 6 (3) a reduction by the Company in either of the Participant's annual base salary or guideline (target) bonus as in effect immediately prior to the Change in Control; the failure by the Company to continue in effect, or the taking of any action by the Company that would adversely affect such Participant's participation in or significantly reduce such Participant's benefits under, any employee benefit plan or compensation plan in which such Participant was participating immediately prior to the Change in Control, provided, however, that in the aggregate such actions by the Company significantly reduce the Participant's total compensation (i.e., the sum of Participant's annual base salary, guideline (target) bonus, and the aggregate value to the Participant of all employee benefit and compensation plans); or the failure by the Company, without the Participant's consent, to pay to the Participant any portion of the Participant's current compensation, or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of the Company; or (4) The Company requires the Participant to be based anywhere other than the Participant's present work location or a location within thirty-five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantially more burdensome than such Participant's travel obligations during the period of twelve (12) consecutive months immediately preceding the Change in Control; provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not be deemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason for the termination; or (c) a termination of employment by the Company other than a termination for Just Cause, or a termination of employment by the Participant for one of the reasons set forth in (b) above, following a Potential Change in Control, if the Participant can demonstrate that such termination or circumstance in (b) above leading to termination: (1) was at the request of a third party with which the Company had entered into negotiations or an agreement with regard to a Change in Control; or (2) otherwise occurred in connection with, or in anticipation of, a Change in Control; provided, however, that in either such case, such Change in Control actually occurs within one (1) year following the Employment Termination Date. 1.33 Reload Options - shall have the meaning provided herein at Section 5.1. 1.34 Stock Options - shall have the meaning provided herein at Section 3.1. 7 1.35 Subsidiary - shall mean any corporation of which, at the time more than fifty percent (50%) of the shares entitled to vote generally in an election of directors are owned directly or indirectly by Sun Company, Inc. or any subsidiary thereof. ARTICLE II Background, Purpose and Term of Plan; Participation & Eligibility for Benefits 2.1 Background. Effective on December 31, 1991, no further awards shall be made under the Sun Company, Inc. Long-Term Incentive Plan adopted in June, 1986; provided, however, that any rights theretofore granted under that plan shall not be affected. 2.2 Purpose of the Plan. The purposes of this Sun Company, Inc. Long-Term Performance Enhancement Plan (the "Plan") are to: (a) better align the interests of shareholders and management of the Company by creating a direct linkage between Participants' rewards and shareholders' gains; (b) provide management with an equity ownership in Sun Company, Inc. commensurate with Company performance, as reflected in increased shareholder value; (c) maintain competitive compensation levels; and (d) provide an incentive to management for continuous employment with the Company. It is intended that most awards made under the Plan will qualify as performance-based compensation under Section 162(m) of the Code. 2.3 Term of the Plan. This Plan became effective upon approval by the holders of a majority of the votes present, in person or represented by proxy, at the 1991 Annual Meeting of Shareholders of Sun Company, Inc. No awards will be made under the Plan after December 31, 1996. The Plan and all awards made under the Plan prior to such date shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. 2.4 Administration. The Plan shall be administered by the Committee which shall have the authority, in its sole discretion and from time to time to: (a) designate the employees or classes of employees eligible to participate in the Plan (each such employee being, a "Participant"); (b) grant awards provided in the Plan in such form and amount as the Committee shall determine; (c) impose such limitations, restrictions and conditions upon any such award as the Committee shall deem appropriate; and (d) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. 8 The decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or not taken or decision made or not made in good faith relating to the Plan or any award thereunder. 2.5 Eligibility for Participation. Participants in the Plan shall be the officers and other key employees of the Company who occupy responsible managerial or professional positions and who have the capability of making a substantial contribution to the success of the Company. In making this selection and in determining the amount of awards, the Committee shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company and past and potential contributions to its profitability and sound growth. 2.6 Types of Awards Under the Plan. Awards under the Plan may be in the form of any one or more of the following: (a) Stock Options, as described in Article III; (b) Incentive Stock Options, as described in Article IV; (c) Reload Options, as described in Article V; (d) Alternate Appreciation Rights, as described in Article VI; (e) Limited Rights, as described in Article VII; and/or (f) Common Stock Units, as described in Article VIII. 2.7 Aggregate Limitation on Awards. Shares of stock which may be issued under the Plan shall be Common Stock. The maximum number of shares of Common Stock which may be issued under the Plan shall be 5.8 million. For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan: (a) all the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted when cash is used as full payment for shares issued upon exercise of an Option; (b) only the shares issued (including the shares, if any, withheld for tax withholding requirements) as a result of an exercise of Alternate Appreciation Rights shall be counted; (c) only the shares issued (including the shares, if any, withheld for tax withholding requirements) net of shares of Common Stock used as full or partial payment for such shares upon exercise of an Option; and (d) only the shares issued (including the shares, if any, withheld for tax withholding) upon vesting and payment of the Common Stock Units, shall be counted. 9 In addition to shares of Common Stock actually issued pursuant to the exercise of Options, there shall be deemed to have been issued a number of shares equal to the number of shares of Common Stock in respect of which Limited Rights (as described in Article VII) shall have been exercised. Shares tendered by a Participant as payment for shares issued upon exercise of an Option, shall be available for issuance under the Plan. Any shares of Common Stock subject to an Option, which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan, but shares subject to an Option which are not issued as a result of the exercise of Limited Rights shall not be available for issuance under the Plan. ARTICLE III Stock Options 3.1 Award of Stock Options. The Committee, from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, may grant to any Participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of options to a Participant pursuant to the Plan. 3.2 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Stock Option Agreement, executed by the Company and the holder of a Stock Option, stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 3.3 Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of a Stock Option shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date the Stock Option is granted. 3.4 Term and Exercise. Each Stock Option shall be fully exercisable six (6) months from the date of its grant or such longer period as the Committee shall determine in its discretion and, unless a shorter period is provided by the Committee or by another Section of this Plan, may be exercised during a period of ten (10) years from the date of grant thereof. No Stock Option shall be exercisable after the tenth anniversary of the date of its grant. 3.5 Manner of Payment. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the Option Price for such shares with cash or with Common Stock. All shares of Common Stock issued under the Sun Company, Inc. Long-Term Incentive Plan, this Plan, or any similar executive stock option plan must be held at least six (6) months before they may be used as payment of the Option Price. 3.6 Issuance and Delivery of Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a shareholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder. 10 3.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of retirement or Disability (as each is determined by the Committee), the Optionee may, within sixty (60) months from the date of termination, exercise any Stock Options to the extent such options are exercisable during such 60-month period. 3.8 Termination for Other Reasons. Except as provided in Sections 3.7 and 3.9, or except as otherwise determined by the Committee, all Stock Options shall terminate upon the termination of the Optionee's employment; provided, however, that the Limited Rights awarded in tandem with such Stock Options shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 3.9 Death of Optionee. Any rights in respect of Stock Options to the extent exercisable on the date of the Optionee's death may be exercised by the Optionee's estate or by any person that acquires the legal right to exercise such Stock Option by bequest, inheritance, or otherwise by reason of the death of the Optionee. Any such exercise to be valid must occur within the remaining option term of the Stock Option. The foregoing provisions of this Section 3.9 shall apply to an Optionee who dies while employed by the Company and to an Optionee whose employment may have terminated prior to death; provided, however, that: (a) an Optionee who dies while employed by the Company will be treated as if the Optionee had retired on the date of death. Accordingly, the Optionee's estate or a person who acquires the right to exercise such Stock Option by bequest or inheritance will have the right to exercise the Stock Option in accordance with Section 3.7; or (b) the estate or a person who acquires the right to exercise a Stock Option by bequest or inheritance from an Optionee who dies after terminating employment with the Company will have the remainder of any exercise period provided under Sections 3.7 and 3.8. 3.10 Acceleration of Options. Notwithstanding any provisions to the contrary in agreements evidencing Options granted thereunder, each outstanding Option shall become immediately and fully exercisable upon the occurrence of any Change in Control of Sun Company, Inc. 3.11 Effect of Exercise. The exercise of any Stock Options shall cancel that number of related Limited Rights, if any, which is equal to the number of shares of Common Stock purchased pursuant to said options. ARTICLE IV Incentive Stock Options 4.1 Award of Incentive Stock Options. The Committee, from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any Participant in the Plan one or more incentive stock options ("Incentive Stock Options") (intended to qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")) to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of options to a Participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of ten percent (10%) or more of the total combined voting power of the Company and its subsidiaries. 11 4.2 Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Incentive Stock Option Agreement, executed by the Company and the holder of an Incentive Stock Option stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 4.3 Incentive Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted. 4.4 Term and Exercise. Each Incentive Stock Option shall be fully exercisable six (6) months from the date of its grant and unless a shorter period is provided by the Committee or another Section of this Plan, may be exercised during a period of ten (10) years from the date of grant thereof. No Incentive Stock Option shall be exercisable after the tenth anniversary of the date of its grant. 4.5 Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of grant with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year, under this Plan or any other stock option plan of the Company exceeds One Hundred Thousand Dollars ($100,00.00), then the option, as to the excess shall be treated as a non- qualified stock option. An Incentive Stock Option shall not be granted to any person who is not an "employee" of the Company (within the meaning of Section 424(f) of the Code). 4.6 Retirement or Disability. Upon the termination of the Optionee's employment by reason of retirement or Disability (as each is determined by the Committee), the Optionee may, within sixty (60) months from the date of such termination of employment, exercise any Incentive Stock Options to the extent such Incentive Stock Options are exercisable during such 60-month period. Notwithstanding the foregoing, the tax treatment available pursuant to Section 422 of the Internal Revenue Code of 1986 upon the exercise of an Incentive Stock Option will not be available to an Optionee who exercises any Incentive Stock Option more than: (a) twelve (12) months after the date of termination of employment due to Disability; or (b) three (3) months after the date of termination of employment due to retirement. 4.7 Termination for Other Reasons. Except as provided in Sections 4.6 and 4.8 or except as otherwise determined by the Committee, all Incentive Stock Options shall terminate upon the termination of the Optionee's employment; provided, however, that the Limited Rights awarded in tandem with such Incentive Stock Options shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 12 4.8 Death of Optionee. Any rights in respect of Incentive Stock Options to the extent exercisable on the date of the Optionee's death may be exercised by the Optionee's estate or by any person that acquires the legal right to exercise such Stock Option by bequest, inheritance, or otherwise by reason of the death of the Optionee. Any such exercise to be valid must occur within the remaining option term of the Incentive Stock Option. The foregoing provisions of this Section 4.8 shall apply to an Optionee who dies while employed by the Company and to an Optionee whose employment may have terminated prior to death; provided, however, that: (a) an Optionee who dies while employed by the Company will be treated as if the Optionee had retired on the date of death. Accordingly, the Optionee's estate or a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance will have the right to exercise the Incentive Stock Option in accordance with Section 4.6; or (b) the estate or a person who acquires the right to exercise a Stock Option by bequest or inheritance from an Optionee who dies after terminating employment with the Company will have the remainder of any exercise period provided under Section 4.6 and 4.7. 4.9 Applicability of Stock Options Selections. The following Sections of this Plan that apply to Stock Options shall apply equally to Incentive Stock Options: (a) Section 3.5 (Manner of Payment); (b) Section 3.6 (Issuance and Delivery of Shares); (c) Section 3.10 (Acceleration of Options); and (d) Section 3.11 (Effect of Exercise). Said Sections are incorporated by reference in this Article IV as though fully set forth herein. ARTICLE V Reload Options 5.1 Authorization of Reload Options. Concurrently with the award of Stock Options and/or the award of Incentive Stock Options to any Participant in the Plan, the Committee may authorize reload options ("Reload Options") to purchase for cash or shares a number of shares of Common Stock. The number of Reload Options shall equal: (a) the number of shares of Common Stock used to exercise the underlying Stock Options or Incentive Stock Options; and (b) to the extent authorized by the Committee, the number of shares of Common Stock used to satisfy any tax withholding requirement incident to the exercise of the underlying Stock Options or Incentive Stock Options. The grant of a Reload Option will be effected upon the exercise of underlying Stock Options, Incentive Stock Options or Reload Options through the use of shares of Common Stock held by the Optionee for at least twelve (12) months. Notwithstanding the fact that the underlying Option may be an Incentive Stock Option, a Reload Option is not intended to qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986. 13 5.2 Reload Option Amendment. Each Stock Option Agreement and Incentive Stock Option Agreement shall state whether the Committee has authorized Reload Options with respect to the underlying Stock Options and/or Incentive Stock Options. Upon the exercise of an underlying Stock Option, Incentive Stock Option or other Reload Option, the Reload Option will be evidenced by an amendment to the underlying Stock Option Agreement or Incentive Stock Option Agreement. 5.3 Reload Option Price. The Option Price per share of Common Stock deliverable upon the exercise of a Reload Option shall be the Fair Market Value of a share of Common Stock on the date of grant of the Reload Option. 5.4 Term and Exercise. Each Reload Option is fully exercisable six (6) months from the effective date of grant. The term of each Reload Option shall be equal to the remaining option term of the underlying Stock Option and/or Incentive Stock Option. No additional Reload Options may be authorized in connection with the award of Stock Options or Incentive Stock Options on or after October 1, 1996. 5.5 Termination of Employment. No additional Reload Options shall be granted to an Optionee when Stock Options, Incentive Stock Options and/or Reload Options are exercised pursuant to the terms of this Plan following termination of such Optionee's employment. 5.6 Applicability of Stock Options Sections. The following Sections of this Plan that apply to Stock Options shall apply equally to Reload Options : (a) Section 3.5 (Manner of Payment); (b) Section 3.6 (Issuance and Delivery of Shares); (c) Section 3.7 (Retirement or Disability); (d) Section 3.8 (Termination for Other Reasons); (e) Section 3.9 (Death of Optionee); and (f) Section 3.11 (Effect of Exercise). Said Sections are incorporated by reference in this Article V as though fully set forth herein. ARTICLE VI Alternate Appreciation Rights 6.1 Award of Alternate Appreciation Rights. Concurrently with or subsequent to the award of any Stock Option, Incentive Stock Option or Reload Option to purchase one or more shares of Common Stock, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each share of Common Stock, a related stock appreciation right ("Alternate Appreciation Right"), permitting the Optionee to be paid the appreciation on the Option in lieu of exercising the Option. 6.2 Alternate Appreciation Rights Agreement. Alternate Appreciation Rights shall be evidenced by written agreements in such form as the Committee may from time to time determine. 14 6.3 Exercise. An Optionee who has been granted Alternate Appreciation Rights may, from time to time, in lieu of the exercise of an equal number of Options, elect to exercise one or more Alternate Appreciation Rights and thereby become entitled to receive from the Company payment in Common Stock the number of shares determined pursuant to Sections 6.4 and 6.5 hereof. Alternate Appreciation Rights shall be exercisable only to the same extent and subject to the same conditions as the Options related thereto are exercisable, as provided in this Plan. The Committee may, in its discretion, prescribe additional conditions to the exercise of any Alternate Appreciation Rights. 6.4 Amount of Payment. The amount of payment to which an Optionee shall be entitled upon the exercise of each Alternate Appreciation Right shall be equal to 100% of the amount, if any, by which the Fair Market Value of a share of Common Stock on the exercise date exceeds the Fair Market Value of a share of Common Stock on the date the Option related to said Alternate Appreciation Right was granted. 6.5 Form of Payment. The number of shares to be paid shall be determined by dividing the amount of payment determined pursuant to Section 6.4 by the Fair Market Value of a share of Common Stock on the exercise date of such Alternate Appreciation Rights. As soon as practicable after exercise, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. All such shares shall be issued with the rights and restrictions specified in Section 3.6 of this Plan. 6.6 Effect of Exercise. The exercise of any Alternate Appreciation Rights shall cancel an equal number of Stock Options, Incentive Stock Options, Reload Options and Limited Rights, if any, related to said Alternate Appreciation Rights. 6.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of retirement or Disability (as each is determined by the Committee), the Optionee may, within six (6) months from the date of such termination, exercise any Alternate Appreciation Rights to the extent such Alternate Appreciation Rights are exercisable during such six-month period. 6.8 Death of Optionee or Termination for Other Reasons. Except as provided in Section 6.7, or except as otherwise determined by the Committee, all Alternate Appreciation Rights shall terminate upon the termination of the Optionee's employment or upon the death of the Optionee. ARTICLE VII Limited Rights 7.1 Award of Limited Rights. Concurrently with or subsequent to the award of any Option, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each Option, a related limited right permitting the Optionee, during a specified limited time period, to be paid the appreciation on the Option in lieu of exercising the Option ("Limited Right"). 7.2 Limited Rights Agreement. Limited Rights granted under the Plan shall be evidenced by written agreements in such form as the Committee may from time to time determine. 15 7.3 Exercise Period. Limited Rights are immediately exercisable in full upon grant for a period of up to seven (7) months following the date of a Change in Control (the "Exercise Period"). 7.4 Amount of Payment. The amount of payment to which an Optionee shall be entitled upon the exercise of each Limited Right shall be equal to 100% of the amount, if any, which is equal to the difference between the Option Price of the related Option and the Market Price of a share of such Common Stock. Market Price is defined to be the greater of: (a) the highest price per share of Common Stock paid in connection with any Change in Control; and (b) the highest price per share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the New York Stock Exchange Composite Transactions quotations) during the 60-day period prior to the Change in Control. 7.5 Form of Payment. Payment of the amount to which an Optionee is entitled upon the exercise of Limited Rights, as determined pursuant to Section 7.4, shall be made solely in cash. 7.6 Effect of Exercise. If Limited Rights are exercised, the Options and Alternate Appreciation Rights, if any, related to such Limited Rights cease to be exercisable to the extent of the number of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Options and Alternate Appreciation Rights, if any, related to such Limited Rights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Options and/or Alternate Appreciation Rights were exercised or terminated; provided, however, that with respect to Options and/or Alternate Appreciation Rights that are terminated as a result of the termination of the Optionee's employment status, the Limited Rights awarded in tandem therewith shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 7.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of Disability or retirement (as each is determined by the Committee), the Optionee may, within six (6) months from the date of termination, exercise any Limited Rights to the extent such Limited Right is exercisable during such six-month period. 7.8 Death of Optionee or Termination for Other Reasons. Except as provided in Sections 7.7 and 7.9 or except as otherwise determined by the Committee, all Limited Rights granted under the Plan shall terminate upon the termination of the Optionee's employment or upon the death of the Optionee. 7.9 Termination Related to a Change in Control. The requirement that an Optionee be terminated by reason of retirement or Disability or be employed by the Company at the time of exercise pursuant to Sections 7.7 and 7.8 respectively, is waived during the Exercise Period as to any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 16 ARTICLE VIII Common Stock Units 8.1 Award of Common Stock Units. The Committee, from time to time, and subject to the provisions of the Plan, may grant to any Participant in the Plan rights to receive shares of Common Stock which are subject to a risk of forfeiture by the Participant ("Common Stock Units"). At the time it grants any Common Stock Units, the Committee shall determine whether the payment of such Common Stock Units shall be conditioned upon either: (a) the Participant's continued employment with the Company throughout a stated period (Section 8.4); or (b) the attainment of certain predetermined performance objectives during a stated period (Section 8.5). The date Common Stock Units are granted shall mean the date selected by the Committee as of which the Committee allots a specific number of Common Stock Units to a Participant pursuant to the Plan. 8.2 Common Stock Unit Agreements. Common Stock Units granted under the Plan shall be evidenced by written agreements stating the number of Common Stock Units evidenced thereby or in such form and as the Committee may from time to time determine. 8.3 Dividend Equivalents. A holder of Common Stock Units will be entitled to receive payment from the Company in an amount equal to each cash dividend ("Dividend Equivalent") the Company would have paid to such holder had he, on the record date for payment of such dividend, been the holder of record of shares of Common Stock equal to the number of Common Stock Units which had been awarded to such holder as of the close of business on such record date. The Company shall establish a bookkeeping account on behalf of each Participant in which the Dividend Equivalents that would have been paid to the holder of Common Stock Units ("Dividend Equivalent Account") shall be credited. The Dividend Equivalent Account will not bear interest. 8.4 Performance Period. Upon making an award, the Committee shall determine (and the Common Stock Unit Agreement shall state) the length of the applicable period during which employment must be maintained or certain performance targets must be attained (the "Performance Period"). Performance Periods will normally be from three to five years; provided, however, the Committee at its sole discretion may establish other time periods. 8.5 Performance Goals. Common Stock Units and the related Dividend Equivalent Account earned may be based upon the attainment of Performance Goals established by the Committee in accordance with Section 162(m). Within the first ninety (90) days of the Performance Period, the Committee shall establish, in writing, the weighted Performance Goals and related Performance Factors for various goal achievement levels for the Company. In establishing the weighted Performance Goals, the Committee shall take the necessary steps to insure that the Company's ability to achieve the pre-established goals is uncertain at the time the goals are set. The established written Performance Goals, assigned weights, and Performance Factors shall be written in terms of an objective formula, whereby any third party having knowledge of the relevant Company performance results could calculate the amount to be paid. Such Performance Goals may vary by Participant and by grant. 17 The number of Common Stock Units and Dividend Equivalents earned will be equal to the amounts awarded multiplied by the Performance Factor. However, the Committee shall have the discretion, by Participant and by grant, to reduce (but not to increase) some or all of the amount that would otherwise be payable by reason of the satisfaction of the Performance Goals. In making any such determination, the Committee is authorized to take into account any such factor or factors it determines are appropriate, including but not limited to Company, business unit and individual performance. 8.6 Payment of Common Stock Units and Dividend Equivalent Account. Payment in respect of Common Stock Units earned (as determined under Sections 8.4 and 8.5) shall be made to the holder thereof within ninety (90) days after the Performance Period for such units has ended, but only to the extent the Committee determines that the continuing employment and/or any applicable performance targets have been met. Payment for Common Stock Units earned shall be made in shares of Common Stock, except as provided in Section 8.9. The number of shares paid shall be equal to the number of Common Stock Units earned. The holder may elect to reduce this amount by the number of shares of Common Stock which have, on the date the Common Stock Units are paid, a fair market value equal to the applicable federal, state and local withholding tax due on the receipt of Common Stock, in lieu of making a cash payment equal to the amount of such withholding tax due. A holder of Common Stock Units will be entitled to receive payment from the Company at the end of the Performance Period an amount in cash equal to the Dividend Equivalent Account earned (as determined under Sections 8.4 and 8.5) by the holder minus applicable federal, state and local withholding tax due. 8.7 Death, Disability or Retirement. A portion of the Common Stock and the Dividend Equivalent Account shall be forfeited upon the death of a Participant or the termination of a Participant's employment by reason of retirement or Disability (as each is determined by the Committee) prior to the end of the Performance Period. The number of Common Stock Units forfeited will be equal to the remaining number of months in the Performance Period divided by the total number of months in the Performance Period times the number of Common Stock Units outstanding and will be rounded down to the next lowest whole amount. The Dividend Equivalent account will be reduced in a similar fashion. The Common Stock Units and the Dividend Equivalent Account retained will remain subject to adjustment for any Performance Factors in accordance with Section 8.5. 8.8 Termination of Employment. Except as provided in Sections 8.7 and 8.9, or as determined by the Committee, 100% of all Common Stock Units of a Participant under the Plan shall be forfeited and the Dividend Equivalent Account shall be forfeited upon termination of the Participant's employment with the Company prior to the end of the Performance Period, and in such event the Participant shall not be entitled to receive any Common Stock or any payment of the Dividend Equivalent Account regardless of the level of Performance Goals achieved for the respective Performance Periods. 8.9 Change in Control. The number of Common Stock Units earned by the Participant shall be determined by multiplying: (a) the total number of all the Participant's granted and outstanding Common Stock Units; by 18 (b) a percentage equal to: (1) the number of full and partial calendar months which the Common Stock Units have been outstanding as of the date of the Change in Control; divided by (2) the number of full and partial calendar months in the applicable Performance Period. In the event of a Change in Control, the Common Stock Units earned by the Participant shall be payable to the Participant in cash or stock, as follows: (c) if pooling of interests accounting treatment is to be used with respect to such Change in Control, the Participant will receive shares of Common Stock equal in number to the number of Common Stock Units earned by such Employee; or (d) if pooling of interests accounting treatment is not to be used with respect to such Change in Control, the Participant will be paid an amount in cash equal to the number of Common Stock Units earned by such Participant outstanding multiplied by the Market Price as defined in Section 7.4. Such amount will be reduced by the applicable federal, state and local withholding taxes due. The cash or stock, as the case may be, shall be paid out to the Participant no later than ninety (90) days following the date of occurrence of such Change in Control (the "CSU Payout Date"), regardless of whether the applicable Performance Period has expired or whether performance targets have been met. There will be no adjustment for any Performance Factors described in Section 8.5. On or before the CSU Payout Date, and regardless of whether pooling of interests accounting treatment is to be used with respect to such Change in Control, the Participant will be paid an amount in cash equal to the value of the amounts accrued in the Participant's Dividend Equivalent Account immediately preceding the Change in Control. Payout of Common Stock Units and the Dividend Equivalent Account shall be made to each Participant: (e) who is employed by the Company on the CSU Payout Date; or (f) whose employment relationship with the Company is terminated: (1) as a result of any Qualifying Termination prior to the CSU Payout Date; or (2) as a result of death or Disability following the occurrence of any Change in Control but prior to the CSU Payout Date. The Committee may establish, at the time of the grant of Common Stock Units, other conditions which must be met for payout to occur. These conditions shall be set forth in the Committee's resolution granting the Common Stock Units and in the Agreement with the holder. 19 ARTICLE IX Miscellaneous 9.1 General Restriction. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that: (a) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law; or (b) the consent or approval of any government regulatory body; or (c) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of shares of Common Stock thereunder, then such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 9.2 Accounting and Tax Treatment for Change in Control. Notwithstanding anything in this Plan to the contrary, in the event of a Change in Control, the Committee shall not have the right to take any actions described in the Plan that would make the Change in Control ineligible for pooling of interests accounting treatment or that would make the Change in Control ineligible for desired tax treatment if, in the absence of such right, the Change in Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change in Control. 9.3 Non-Assignability. Awards under the Plan shall not be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution except as otherwise determined by the Committee. Accordingly, during the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative, unless the Committee determines otherwise. 9.4 Right to Terminate Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any Participant the right to continue in the employment of the Company or effect any right which the Company may have to terminate the employment of such Participant. 9.5 Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation, determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards, and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 9.6 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued on behalf of such recipient. 20 9.7 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine: (a) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan; and (b) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leaves of absence. 9.8 Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period. 9.9 Adjustments. In any event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plan, the number of Common Stock Units theretofore awarded under the Plan and any and all other matters deemed appropriate by the Committee. 9.10 Amendment of the Plan. (a) The Committee may, without further action by the shareholders and without receiving further consideration from the Participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements; (b) The Committee may at any time, and from time to time, modify or amend the Plan in any respect, except that without shareholder approval the Committee may not: (1) increase the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 9.9); (2) extend the term during which any award may be granted or exercised; or (3) extend the term of the Plan. The termination or any modification or amendment of the Plan, except as provided in Section 9.10(a) above, shall not without the consent of a Participant, affect the Participant's rights under an award previously granted. EX-10.3 4 LONG-TERM INCENTIVE PLAN Exhibit 10.3 ======================================================================== SUN COMPANY, INC. LONG-TERM INCENTIVE PLAN (Amended and Restated as of December 3, 1997) ======================================================================== 2 ARTICLE I Definitions As used in this Plan, the following terms shall have the meanings herein specified: 1.1 Affiliate - shall mean any person or entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Sun Company, Inc. 1.2 Alternate Appreciation Rights - shall have the meaning provided herein at Section 4.1. 1.3 Board of Directors - shall mean the Board of Directors of Sun Company, Inc. 1.4 Change in Control - shall mean the occurrence of any of the following events or transactions: (a) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets), or (b) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially more than 20% of the outstanding voting shares. 1.5 Code - shall mean the Internal Revenue Code of 1986, as amended. 1.6 Committee - shall mean the committee appointed to administer this Plan by the Board of Directors of the Company, as constituted from time to time. The Committee shall consist of at least two (2) members of the Board of Directors, each of whom shall meet applicable requirements set forth in the pertinent regulations under Section 16 of the Securities Exchange Act of 1934, as amended, and Section 162(m) of the Code. 1.7 Common Stock - shall mean the authorized and unissued or treasury shares of common stock of Sun Company, Inc. 1.8 Company - shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any Subsidiary or Affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any Subsidiary or Affiliate by merger, consolidation, liquidation or purchase of assets or stock or similar transaction. 1.9 Continuing Director - shall mean a Director who was a member of the Board of Directors immediately prior to a Control Transaction which results in a Change in Control. 1.10 Control Transaction - shall mean any of the following transactions or any combination thereof: (a) any tender offer for or acquisition of capital stock of Sun Company, Inc.; 3 (b) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc.; or (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or a Group of shareholders in a proxy solicitation or otherwise. 1.11 Disability - shall mean any illness, injury or incapacity of such duration and type as to render a Participant eligible to receive long-term disability benefits under the applicable broad-based long-term disability program of the Company. 1.12 Dividend Equivalents - shall have the meaning provided herein at Section 6.5. 1.13 Employment Termination Date - shall mean the date on which the employment relationship between the Participant and the Company is terminated. 1.14 Exercise Period - shall have the meaning provided herein at Section 5.3. 1.15 Fair Market Value - shall mean, as of any date and in respect of any share of Common Stock, the opening price on such date of a share of Common Stock (which price shall be the closing price on the previous trading day of a share of Common Stock as reported on the New York Stock Exchange Composite Transactions Tape, and as reflected in the consolidated trading tables of the Wall Street Journal or any other publication selected by the Committee). If there is no sale of shares of Common Stock on the New York Stock Exchange for more than ten (10) days immediately preceding such date, or if deemed appropriate by the Committee for any other reason, the fair market value of the shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. 1.16 Group - shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. 1.17 Just Cause - shall mean: (a) a judicial determination that the Participant has committed fraud, misappropriation, or embezzlement against the Company; or (b) a non-appealable conviction of, or entry of a plea of nolo contendere for, an act by the Participant constituting a felony which, as determined by the Company in good faith, constitutes a crime involving moral turpitude and has resulted in material harm to the Company, its subsidiaries and affiliates taken as a whole. 4 No termination of employment shall be deemed an effective termination for Just Cause unless accompanied by a copy of a resolution duly adopted by the affirmative vote of not less a majority of the Continuing Directors at a meeting of the Board of Directors which was called and held for the purpose of considering such termination, or if there are no Continuing Directors, then by at least three quarters (3/4) of the entire Board of Directors (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the Participant was guilty of conduct set forth in the preceding sentence, and specifying the particulars thereof in detail. In any deliberations or votes by the Board of Directors concerning a determination under this Section, the Participant shall recuse himself from such deliberations and votes. 1.18 Limited Rights - shall have the meaning provided herein at Article V. 1.19 Option Price - shall mean the purchase price per share of Common Stock deliverable upon the exercise of an Option. 1.20 Optionee - shall mean the holder of an Option. 1.21 Participant - shall have the meaning provided herein at Section 2.4(a). 1.22 Plan - shall have the meaning provided herein at Section 2.2. 1.23 Potential Change in Control - shall mean the occurrence of any of the following events or transactions: (a) any person (other than Sun Company, Inc., or any affiliate or subsidiary thereof) makes a tender offer for capital stock of Sun Company, Inc.; (b) any person becomes the beneficial owner, directly or indirectly, of capital stock of Sun Company, Inc. in an amount which requires the filing of Schedule 13D or its equivalent form pursuant to the Rules and Regulations under the Securities Exchange Act of 1934 as from time to time amended; (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or Group of shareholders in a proxy solicitation or otherwise which, in its judgment, the Board of Directors determines by adoption of a resolution within thirty (30) days of such submission, might result in a Change in Control of Sun Company, Inc.; (d) any person files a pre-merger notification for the acquisition of capital stock of Sun Company, Inc. pursuant to the Hart-Scott-Rodino Act; or (e) the Board of Directors in its judgment determines by adoption of a resolution that a Potential Change in Control of Sun Company, Inc. for purposes of this Plan has occurred. 5 1.24 Qualifying Termination - shall mean, with respect to the employment of any Participant, the following: (a) a termination of employment by the Company within seven (7) months after a Change in Control, other than for Just Cause, death or Disability; provided, however, that any Participant who also is eligible to receive benefits under the Sun Company, Inc. Executive Involuntary Severance Plan shall not receive benefits thereunder, but shall instead receive the Benefits provided under this Plan; (b) a termination of employment by the Participant within two (2) years after a Change in Control for one or more of the following reasons: (1) the assignment to such Participant of any duties inconsistent in a way adverse to such Participant, with such Participant's positions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a reduction in the duties and responsibilities held by the Participant immediately prior to the Change in Control; a change in the Participant's reporting responsibilities, title or offices as in effect immediately prior to the Change in Control that is adverse to the Participant; or any removal of the Participant from or any failure to re-elect the Participant to any position with the Company that such Participant held immediately prior to the Change in Control except in connection with such Participant's: (i) assignment to a new position at a higher combined annual base salary and guideline (target) bonus; or (ii) termination of employment by the Company for Just Cause; or (2) with respect to any Participant who is a member of the Board of Directors immediately prior to the Change in Control, any failure of the shareholders of the Company to elect or reelect, or of the Company to appoint or reappoint, the Participant as a member of the Board of Directors; (3) a reduction by the Company in either of the Participant's annual base salary or guideline (target) bonus as in effect immediately prior to the Change in Control; the failure by the Company to continue in effect, or the taking of any action by the Company that would adversely affect such Participant's participation in or significantly reduce such Participant's benefits under, any employee benefit plan or compensation plan in which such Participant was participating immediately prior to the Change in Control, provided, however, that in the aggregate such actions by the Company significantly reduce the Participant's total compensation (i.e., the sum of Participant's annual base salary, guideline (target) bonus, and the aggregate value to the Participant of all employee benefit and compensation plans); or the failure by the Company, without the Participant's consent, to pay to the Participant any portion of the Participant's current compensation, or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of the Company; or 6 (4) The Company requires the Participant to be based anywhere other than the Participant's present work location or a location within thirty-five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantially more burdensome than such Participant's travel obligations during the period of twelve (12) consecutive months immediately preceding the Change in Control; provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not be deemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason for the termination; or (c) a termination of employment by the Company other than a termination for Just Cause, or a termination of employment by the Participant for one of the reasons set forth in (b) above, following a Potential Change in Control, if the Participant can demonstrate that such termination or circumstance in (b) above leading to termination: (1) was at the request of a third party with which the Company had entered into negotiations or an agreement with regard to a Change in Control; or (2) otherwise occurred in connection with, or in anticipation of, a Change in Control; provided, however, that in either such case, such Change in Control actually occurs within one (1) year following the Employment Termination Date. 1.25 Restricted Stock Unit - shall have the meaning provided herein at Section 6.1. 1.26 Restriction Period - shall have the meaning provided herein at Section 6.4. 1.27 RSU Payout Date - shall have the meaning provided herein at Section 6.11. 1.28 Stock Option - shall have the meaning provided herein at Section 3.1. 1.29 Subsidiary - shall mean any corporation of which, at the time more than fifty percent (50%) of the shares entitled to vote generally in an election of directors are owned directly or indirectly by Sun Company, Inc. or any subsidiary thereof. ARTICLE II Background, Purpose and Term of Plan; Participation & Eligibility for Benefits 2.1 Background. Effective on December 31, 1986, no further awards shall be made under the Sun Company, Inc. Executive Long-Term Incentive Plan adopted in June, 1978 provided, however, that any rights theretofore granted under that plan shall not be affected. 7 2.2 Purpose of the Plan. The purposes of this Sun Company, Inc. Long-Term Incentive Plan (the "Plan") are to: (a) more closely associate the interests of the Company with the shareholders by relating capital accumulation with increases in shareholder value; (b) encourage management success by providing capital accumulation as an incentive; (c) maintain competitive compensation levels; and (d) provide an incentive to management for continuous employment with the Company. It is intended that most awards made under the Plan qualify as performance- based compensation under Section 162(m) of the Code. 2.3 Term of the Plan. This Plan became effective upon approval by the holders of a majority of the votes present, in person or represented by proxy, at the 1986 Annual Meeting of Shareholders of Sun Company, Inc. No awards will be made under the Plan after December 31, 1991. The Plan and all awards made under the Plan prior to such date shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. 2.4 Administration. The Plan shall be administered by the Committee which shall have the authority, in its sole discretion and from time to time to: (a) designate the employees or classes of employees eligible to participate in the Plan (each such employee being, a "Participant"); (b) grant awards provided in the Plan in such form and amount as the Committee shall determine; (c) impose such limitations, restrictions and conditions upon any such award as the Committee shall deem appropriate; and (d) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. The decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or not taken or decision made or not made in good faith relating to the Plan or any award thereunder. 2.5 Eligibility for Participation. Participants in the Plan shall be the officers and other key employees of the Company who occupy responsible managerial or professional positions and who have the capability of making a substantial contribution to the success of the Company. In making this selection and in determining the amount of awards, the Committee shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company and past and potential contributions to its profitability and sound growth. 8 2.6 Types of Awards Under the Plan. Awards under the Plan may be in the form of any one or more of the following: (a) Stock Options, as described in Article III; (b) Alternate Appreciation Rights, as described in Article IV; (c) Limited Rights, as described in Article V; and/or (d) Restricted Stock Units, as described in Article VI. 2.7 Aggregate Limitation on Awards. Shares of stock which may be issued under the Plan shall be Common Stock. The maximum number of shares of Common Stock which may be issued under the Plan shall be three million (3,000,000). For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan: (a) all the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted when cash is used as full payment for shares issued upon exercise of a Stock Option; (b) only the shares issued (including the shares, if any, withheld for tax withholding requirements) net of shares of Common Stock used as full or partial payment for such shares upon exercise of a Stock Option, shall be counted; and (c) only the shares issued (including the shares, if any, withheld for tax withholding) upon vesting and payment of the Restricted Stock Units, shall be counted. In addition to shares of Common Stock actually issued pursuant to the exercise of Stock Options, there shall be deemed to have been issued a number of shares equal to the number of shares of Common Stock in respect of which Alternate Appreciation Rights and Limited Rights shall have been exercised. Shares tendered by a Participant as payment for shares issued upon exercise of a Stock Option, shall be available for issuance under the Plan. Any shares of Common Stock subject to a Stock Option, which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan, but shares subject to a Stock Option which are not issued as a result of the exercise of Alternate Appreciation Rights or Limited Rights shall not be available for issuance under the Plan. ARTICLE III Stock Options 3.1 Award of Stock Options. The Committee, from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, may grant to any Participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of options to a Participant pursuant to the Plan. 9 3.2 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Stock Option Agreement, executed by the Company and the holder of a Stock Option, stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 3.3 Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of a Stock Option shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date the Stock Option is granted. 3.4 Term and Exercise. Except as provided in Section 3.10 hereof, and unless otherwise determined by the Committee, each Stock Option granted under the Plan shall become exercisable with respect to twenty-five percent (25%) of the shares subject thereto on the first anniversary of the date of grant thereof, and with respect to an additional twenty-five percent (25%) of such shares on each of the second, third and fourth anniversaries of such date of grant. Stock Options may be partially exercised from time to time within such percentage limitations. Stock Options granted under the Plan shall be exercisable during such period or periods as the Committee shall determine; provided, however, that no Stock Option shall be exercisable more than ten (10) years after the date of grant thereof. 3.5 Manner of Payment. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the Option Price for such shares with cash or with previously owned Common Stock. Notwithstanding the foregoing, if previously owned Common Stock is used in payment of the Option Price, the Optionee may not use the shares received upon such exercise to immediately satisfy the exercise price of additional Stock Options. 3.6 Issuance and Delivery of Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a shareholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder. 3.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of retirement or Disability (as each is determined by the Committee), the Optionee may, within sixty (60) months from the date of termination, exercise any Stock Options to the extent such options are exercisable during such 60-month period. 3.8 Termination for Other Reasons. Except as provided in Sections 3.7 and 3.9, or except as otherwise determined by the Committee, all Stock Options shall terminate upon the termination of the Optionee's employment; provided, however, that the Limited Rights awarded in tandem therewith, shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 10 3.9 Death of Optionee. Any rights in respect of Stock Options to the extent exercisable on the date of the Optionee's death may be exercised by the Optionee's estate or by any person that acquires the legal right to exercise such Stock Option by bequest, inheritance, or otherwise by reason of the death of the Optionee. Any such exercise to be valid must occur within the remaining option term of the Stock Option. The foregoing provisions of this Section 3.9 shall apply to an Optionee who dies while employed by the Company and to an Optionee whose employment may have terminated prior to death; provided, however, that: (a) an Optionee who dies while employed by the Company will be treated as if the Optionee had retired on the date of death. Accordingly, the Optionee's estate or a person who acquires the right to exercise such Stock Option by bequest or inheritance will have the right to exercise the Stock Option in accordance with Section 3.7; or (b) the estate or a person who acquires the right to exercise a stock option by bequest or inheritance from an Optionee who dies after terminating employment with the Company will have the remainder of any exercise period provided under Sections 3.7 and 3.8. 3.10 Acceleration of Options. Notwithstanding any provisions to the contrary in agreements evidencing Options granted thereunder, each outstanding Option shall become immediately and fully exercisable upon the occurrence of any Change in Control of Sun Company, Inc. 3.11 Effect of Exercise. The exercise of any Stock Options shall cancel that number of related Alternate Appreciation Rights, if any, and Limited Rights, if any, which is equal to the number of shares of Common Stock purchased pursuant to said options. ARTICLE IV Alternate Appreciation Rights 4.1 Award of Alternate Appreciation Rights. Concurrently with or subsequent to the award of any Stock Option to purchase one or more shares of Common Stock, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each share of Common Stock, a related stock appreciation right ("Alternate Appreciation Right"), permitting the Optionee to be paid the appreciation on the Stock Option in lieu of exercising the Stock Option. 4.2 Alternate Appreciation Rights Agreement. Alternate Appreciation Rights shall be evidenced by written agreements in such form as the Committee may from time to time determine. 4.3 Exercise. An Optionee who has been granted Alternate Appreciation Rights may, from time to time, in lieu of the exercise of an equal number of Stock Options, elect to exercise one or more Alternate Appreciation Rights and thereby become entitled to receive from the Company payment in Common Stock the number of shares determined pursuant to Sections 4.4 and 4.5 hereof. Alternate Appreciation Rights shall be exercisable only to the same extent and subject to the same conditions as the Stock Options related thereto are exercisable, as provided in this Plan. The Committee may, in its discretion, prescribe additional conditions to the exercise of any Alternate Appreciation Rights. 11 4.4 Amount of Payment. The amount of payment to which an Optionee shall be entitled upon the exercise of each Alternate Appreciation Right shall be equal to 100% of the amount, if any, by which the Fair Market Value of a share of Common Stock on the exercise date exceeds the Fair Market Value of a share of Common Stock on the date the Stock Option related to said Alternate Appreciation Right was granted. 4.5 Form of Payment. The number of shares to be paid shall be determined by dividing the amount of payment determined pursuant to Section 4.4 by the Fair Market Value of a share of Common Stock on the exercise date of such Alternate Appreciation Rights. As soon as practicable after exercise, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. All such shares shall be issued with the rights and restrictions specified in Section 3.6 of this Plan. 4.6 Effect of Exercise. The exercise of any Alternate Appreciation Rights shall cancel an equal number of Stock Options and Limited Rights, if any, related to said Alternate Appreciation Rights. 4.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of retirement or Disability (as each is determined by the Committee), the Optionee may, within six (6) months from the date of such termination, exercise any Alternate Appreciation Rights to the extent such Alternate Appreciation Rights are exercisable during such six-month period. 4.8 Death of Optionee or Termination for Other Reasons. Except as provided in Section 4.7, or except as otherwise determined by the Committee, all Alternate Appreciation Rights shall terminate upon the termination of the Optionee's employment or upon the death of the Optionee. ARTICLE V Limited Rights 5.1 Award of Limited Rights. Concurrently with or subsequent to the award of any Stock Option and Alternate Appreciation Rights, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each Stock Option, a related limited right permitting the Optionee, during a specified limited time period, to be paid the appreciation on the Stock Option in lieu of exercising the Stock Option ("Limited Right"). 5.2 Limited Rights Agreement. Limited Rights granted under the Plan shall be evidenced by written agreements in such form as the Committee may from time to time determine. 5.3 Exercise Period. Limited Rights are immediately exercisable in full upon grant for a period of up to seven (7) months following the date of a Change in Control (the "Exercise Period"). 12 5.4 Amount of Payment. The amount of payment to which an Optionee shall be entitled upon the exercise of each Limited Right shall be equal to 100% of the amount, if any, which is equal to the difference between the Option Price of the related Stock Option and the Market Price of a share of such Common Stock. Market Price is defined to be the greater of: (a) the highest price per share of Common Stock paid in connection with any Change in Control; and (b) the highest price per share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the New York Stock Exchange Composite Transactions quotations) during the 60-day period prior to the Change in Control. 5.5 Form of Payment. Payment of the amount to which an Optionee is entitled upon the exercise of Limited Rights, as determined pursuant to Section 5.4, shall be made solely in cash. 5.6 Effect of Exercise. If Limited Rights are exercised, the Stock Options, if any, related to such Limited Rights cease to be exercisable to the extent of the number of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Stock Options, if any, related to such Limited Rights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Stock Options were exercised or terminated; provided, however, that with respect to Stock Options that are terminated as a result of the termination of the Optionee's employment status, the Limited Rights awarded in tandem therewith shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 5.7 Retirement or Disability. Upon termination of the Optionee's employment by reason of Disability or retirement (as each is determined by the Committee), the Optionee may, within six (6) months from the date of termination, exercise any Limited Rights to the extent such Limited Right is exercisable during such six-month period. 5.8 Death of Optionee or Termination for Other Reasons. Except as provided in Sections 5.7 and 5.9 or except as otherwise determined by the Committee, all Limited Rights granted under the Plan shall terminate upon the termination of the Optionee's employment or upon the death of the Optionee. 5.9 Termination Related to a Change in Control. The requirement that an Optionee be terminated by reason of retirement or permanent disability or be employed by the Company at the time of exercise pursuant to Sections 5.7 and 5.8 respectively, is waived during the Exercise Period as to any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination. 13 ARTICLE VI Restricted Stock Units 6.1 Award of Restricted Stock Units. The Committee may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any Participant in the Plan rights to receive shares of Common Stock which are subject to a risk of forfeiture by the Participant ("Restricted Stock Units"). At the time it grants any Restricted Stock Units, the Committee shall determine whether the payment of such Restricted Stock Units shall be conditioned solely upon the Participant's continued employment with the Company throughout the Restriction Period or upon the attainment of certain performance targets. 6.2 Restricted Stock Unit Agreements. Restricted Stock Units granted under the Plan shall be evidenced by written agreements in such form as the Committee may from time to time determine. 6.3 Number of Restricted Stock Units. Upon making an award, the Committee shall determine (and the Restricted Stock Unit Agreement shall state) the number of Restricted Stock Units granted to the grantee. The initial number of Restricted Stock Units granted may be adjusted by a performance factor, in accordance with Section 6.8, to be applied at the conclusion of the Restriction Period to determine the final number of Restricted Stock Units to be paid. 6.4 Length of Restriction Period. Upon making an award, the Committee shall determine (and the Restricted Stock Unit Agreement shall state) the length of the Restriction Period. Restriction Periods will normally be from three (3) to five (5) years; however, the Committee may establish other time periods in its sole discretion. 6.5 Dividend Equivalents. At the Committee's discretion, each holder of Restricted Stock Units will be entitled to receive payment from the Company in an amount equal to each cash dividend ("Dividend Equivalent") the Company would have paid to such holder had he or she, on the record date for payment of such dividend, been the holder of record of shares of Common Stock equal to the number of Restricted Stock Units which had been awarded to such holder as of the close of business on such record date. Payment of Dividend Equivalents is expressly conditioned on continued employment with the Company at the time of payment. Each such payment shall be made by the Company on the payment date of the cash dividend in respect of which it is to be made, or as soon as practicable thereafter. 6.6 Payment of Restricted Stock Units. (a) Payment in respect of Restricted Stock Units conditioned solely upon the Participant's continued employment with the Company throughout the Restriction Period shall be made within ninety (90) days after the Restriction Period for such Restricted Stock Units has ended; (b) Payment in respect of Restricted Stock Units conditioned upon the attainment of performance targets shall be made to the grantee thereof within ninety (90) days after the Restriction Period for such Restricted Stock Units has ended, but only to the extent the Committee determines that the applicable performance targets have been met and subject to any adjustment made to the number of Restricted Stock Units which shall be paid, pursuant to Section 6.8(b) hereof. 14 6.7 Form of Payment. Payment for Restricted Stock Units shall be made in shares of Common Stock, except as provided in Section 6.11 hereof. The number of shares paid shall be equal to the number of Restricted Stock Units earned. The holder may elect to reduce this amount by the number of shares of Common Stock which have, on the date the Restricted Stock Units are paid, a fair market value equal to the applicable federal, state and local withholding tax due on the receipt of Common Stock, in lieu of making a cash payment equal to the amount of such withholding tax due. 6.8 Performance Targets. (a) Upon the award of Restricted Stock Units, the Committee may establish (and the Restricted Stock Unit Agreement shall state) the performance targets to be attained within the Restriction Period as a condition of such Restricted Stock Units being earned out. Performance targets may be based entirely on each participant's business unit goals, or partially on business unit goals and partially on corporate goals, or entirely on corporate goals. Goals may include qualitative as well as quantitative measures. Performance targets may be adjusted during the Restriction Period, at the Committee's sole discretion, to reflect extraordinary events beyond management's control; (b) Attainment by the participant of performance targets in respect of a Restriction Period will result in 100% of the Restricted Stock Units being earned out. Attainment of performance below the performance targets in respect of a Restriction Period shall result in a proportionate amount of the value of the Restricted Stock Units (on a scale from 0 to 100%) being earned out, as determined by the Committee. 6.9 Termination of Employment. Except as provided in Sections 6.10 and 6.11, or except as otherwise determined by the Committee, all Restricted Stock Units granted to a Participant under the Plan shall terminate upon termination of the Participant's employment with the Company prior to the end of the Restriction Period applicable to such Restricted Stock Units, and in such event the Participant shall not be entitled to receive any payment in respect thereof. 6.10 Death, Disability or Retirement. In the event that the employment of a Participant who has been granted Restricted Stock Units under the Plan shall terminate during a Restriction Period by reason of death, Disability (as determined by the Committee), or retirement, such Participant shall be entitled, in the sole discretion of the Committee, to receive upon the expiration of the Restriction Period payment in respect of said Restricted Stock Units; provided, however, that such Restricted Stock Units shall be adjusted by multiplying the amount thereof by a fraction, the numerator of which shall be the number of full and partial calendar months between the date of award of the Restricted Stock Units and the date that employment terminated, and the denominator of which shall be the number of full and partial calendar months from the date of award to the end of the Restriction Period. 6.11 Change in Control. In the event of a Change in Control, all the Participant's outstanding Restricted Stock Units shall be payable to the Participant in cash or stock, as follows: (a) if pooling of interests accounting treatment is to be used with respect to such Change in Control, the Participant will receive shares of Common Stock equal in number to the total number of Restricted Stock Units granted to such Participant; or 15 (b) if pooling of interests accounting treatment is not to be used with respect to such Change in Control, the Participant will be paid an amount in cash equal to the number of Restricted Stock Units outstanding multiplied by the Market Price as defined in Section 5.4. Such amount will be reduced by the applicable federal, state and local withholding taxes due. The cash or stock, as the case may be, shall be paid out to the Participant no later than ninety (90) days following the date of occurrence of such Change in Control (the "RSU Payout Date"), regardless of whether the applicable Restriction Period has expired or whether performance targets have been met. There will be no adjustment for any performance factors described in Section 6.8. On or before the RSU Payout Date, and regardless of whether pooling of interests accounting treatment is to be used with respect to such Change in Control, the Participant will be paid an amount in cash equal to the value of the related accrued Dividend Equivalents immediately preceding the Change in Control. Payout of Restricted Stock Units and the related Dividend Equivalents shall be made to each Participant: (c) who is employed by the Company on the RSU Payout Date; or (d) whose employment relationship with the Company is terminated: (1) as a result of any Qualifying Termination prior to the RSU Payout Date; or (2) as a result of death or Disability following the occurrence of any Change in Control but prior to the RSU Payout Date. The Committee may establish, at the time of the grant of Common Stock Units, other conditions which must be met for payout to occur. These conditions shall be set forth in the Committee's resolution granting the Common Stock Units and in the Agreement with the holder. ARTICLE VII Miscellaneous 7.1 General Restriction. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that: (a) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law; or (b) the consent or approval of any government regulatory body, or (c) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of shares of Common Stock thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 16 7.2 Accounting and Tax Treatment for Change in Control. Notwithstanding anything in this Plan to the contrary, in the event of a Change in Control, the Committee shall not have the right to take any actions described in described in the Plan that would make the Change in Control ineligible for pooling of interests accounting treatment or that would make the Change in Control ineligible for desired tax treatment if, in the absence of such right, the Change in Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change in Control. 7.3 Non-Assignability. Awards under the Plan shall not be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative. 7.4 Right to Terminate Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any Participant the right to continue in the employment of the Company or effect any right which the Company may have to terminate the employment of such Participant. 7.5 Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation, determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards, and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 7.6 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued on behalf of such recipient. 7.7 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leaves of absence. 7.8 Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period. 7.9 Adjustments. In any event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Stock Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plan, the number of Restricted Stock Units theretofore awarded under the Plan and any and all other matters deemed appropriate by the Committee. 17 7.10 Amendment of the Plan. (a) The Committee may, without further action by the shareholders and without receiving further consideration from the Participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time, and from time to time, modify or amend the Plan in any respect, except that without shareholder approval the Committee may not: (1) increase the maximum award levels established in Section 2.7, including the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 7.9); (2) extend the term during which any Stock Option may be exercised beyond ten (10) years from the date of grant; or (3) extend the term of the Plan, except that the Board may extend the period during which awards may be made in accordance with Section 2.3. The termination or any modification or amendment of the Plan, except as provided in Section 7.10(a) above, shall not without the consent of a Participant, affect the Participant's rights under an award previously granted. 7.11 Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any Federal, state and/or local withholding tax requirements. EX-10.4 5 DIRECTORS' DEFERRED COMPENSATION PLAN Exhibit 10.4 ======================================================================== DIRECTORS' DEFERRED COMPENSATION PLAN Amended and restated as of October 2, 1997 ======================================================================== 2 ARTICLE I Definitions As used in this Plan, the following terms shall have the meanings herein specified: 1.1 Cash Unit - shall mean the entry in a Deferred Compensation Account of a credit equal to One Dollar ($1.00). 1.2 Change in Control - shall mean the occurrence of any of the following events or transactions: (a) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets); or (b) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that results in such entity, person or Group directly or indirectly owning beneficially more than twenty percent (20%) of the outstanding voting shares of Sun Company, Inc. 1.3 Committee - shall mean the Governance Committee of the Board of Directors of Sun Company, Inc. 1.4 Company - shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any subsidiary or affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any subsidiary or affiliate by merger, consolidation, liquidation or purchase of assets or stock or similar transaction. 1.5 Compensation - shall mean those fees and retainers payable by the Company to a Director in consideration for his or her service as a Director. 1.6 Continuing Director - shall mean a director who was a member of the Board of Directors immediately prior to a Control Transaction which results in a Change in Control. 1.7 Control Transaction - shall mean any of the following transactions or any combination thereof: (a) any tender offer for or acquisition of capital stock of Sun Company, Inc.; (b) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc.; or (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or a Group of shareholders in a proxy solicitation or otherwise. 1.8 Deferred Compensation Account - shall mean, with respect to any Participant, the total amount of the Company's liability for payment of voluntary deferred compensation to the Participant under this Plan, including any accumulated interest and/or Dividend Equivalents. 1.9 Director - shall mean a member of the Board of Directors of Sun Company, Inc. 3 1.10 Dividend Equivalent - shall mean the entry in a Deferred Compensation Account or a Restricted Deferred Compensation Account of a dividend credit with respect to a Share Unit, each Dividend Equivalent being equal to the dividend paid from time to time on a Share. 1.11 Group - shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. 1.12 Interest Equivalent - shall mean the entry in a Deferred Compensation Account of an interest credit with respect to a Cash Unit, the interest factor being equal to the interest rate for ten-year U.S. Treasury Notes as of December 31 of the preceding year, to be compounded on the basis of the balance in the Participant's Deferred Compensation Account. 1.13 Participant - shall mean a Director who has elected to defer the receipt of compensation or a Director who is required to defer the receipt of the Restricted Share Units in accordance with the terms of this Plan. 1.14 Plan - shall mean this Directors' Deferred Compensation Plan, as it may be amended from time to time. 1.15 Restricted Deferred Compensation Account - shall mean, with respect to any Participant, the total amount of the Company's liability for payment of Restricted Share Units to the Participant under this Plan. 1.16 Restricted Share Unit - shall mean the entry in a Restricted Deferred Compensation Account of a credit equal to one Share that will be restricted until death, retirement or termination of Board service. 1.17 Share - shall mean a share of the Company's authorized voting Common Stock ($1.00 par value per share) and any share or shares of stock of the Company hereafter issued or issuable in substitution or exchange for each such share, except for the Company's Series A Preference Stock. 1.18 Share Unit - shall mean the entry in a Deferred Compensation Account of a credit equal to one Share. ARTICLE II Voluntary Deferral of Directors' Compensation 2.1 Election to Defer. A Director may elect to defer all or a portion of his or her Compensation by filing a written election with the Committee on forms prescribed by the Committee. Such election must include the following: (a) percentage of Compensation to be deferred; (b) the form of deferral, being either Cash Units, Share Units, or a combination of the two and the percentage allocations of such; (c) a designation of beneficiary as set forth in Article V; and (d) an irrevocable election of a method of payment as set forth in Article III. 4 Except as otherwise determined by the Committee in its sole discretion, any such election shall apply only to Compensation to be earned on or after the first day of the quarter following the calendar quarter in which the election is received by the Committee. Such election shall continue, and be effective, until revoked. 2.2 Amount of Deferral. The amount of Compensation to be deferred shall be designated by the Participant as a percentage of the Director's Compensation in multiples of five percent (5%) but shall not be less than ten percent (10%). Effective with the first quarter 1992, from time to time, but not more than once in any one quarter, a Participant may designate the portion of fees to be deferred and the fractions of such Compensation to be allocated to Share Units and Cash Units. Such a designation shall not apply to any previously credited balance in the Participant's Deferred Compensation Account, but is only applicable to Compensation to be earned on or after the first day of the quarter following the calendar quarter in which the designation request is received by the Committee. 2.3 Time of Election. Except as otherwise determined by the Committee in its sole discretion, an election to defer must be filed and received by the Committee by the end of the quarter preceding the quarter in which the Compensation is to be earned. A new Director may also elect to defer Compensation prior to the commencement of his or her term in office. Any election by a Participant with respect to Compensation to be earned in a given quarter will not preclude a different action with respect to Compensation to be earned in subsequent quarters, consistent with the provisions of this Article II with respect to the giving of notice of deferral election. ARTICLE III Voluntary Deferred Compensation Accounts 3.1 Creation of Voluntary Deferred Compensation Accounts. Compensation deferred hereunder shall be credited to a Deferred Compensation Account established by the Company for each Participant. The Participant must elect to convert the deferred compensation to either Cash Units or Share Units, which shall be credited to a Participant's Deferred Compensation Account as set forth in the Plan. 3.2 Crediting Share Units. Share Units shall be credited to a Participant's Deferred Compensation Account at the time the Compensation would otherwise have been paid had no election to defer been made. The number of Share Units to be credited to the Deferred Compensation Account shall be determined by dividing the Compensation by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to the day on which the Compensation would otherwise have been paid. Any fractional Share Units shall also be credited to a Participant's Deferred Compensation Account. The number of Share Units in a Deferred Compensation Account shall be appropriately adjusted by the Committee in the event of changes in the Company's outstanding common stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, and such adjustments shall be conclusive. Share Units shall not entitle any person to the rights of a stockholder. 3.3 Crediting Cash Units. Cash Units shall be credited to a Participant's Deferred Compensation Account at the time Compensation would otherwise have been paid had no election to defer been made. 5 3.4 Crediting Dividend Equivalents. For Share Units, the Company shall credit the Participant's Deferred Compensation Account with Dividend Equivalents being equal to the dividends declared on the Company's Shares. The crediting shall occur as of the date on which said dividends are paid. The number of Share Units to be credited to the Deferred Compensation Account shall be calculated by dividing the Dividend Equivalents by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the period of ten (10) trading days prior to the day on which the dividends are paid on the Company's Shares. Any fractional Share Units shall also be credited to a Participant's Deferred Compensation Account. 3.5 Crediting Interest Equivalents. For Cash Units credited to their Deferred Compensation Accounts, the Company shall credit the Participant's Deferred Compensation Account on a quarterly basis with an Interest Equivalent. 3.6 Share Unit Conversion. Immediately upon termination of Board service, and so prior to the commencement of any payout or distribution of any amounts hereunder, a Participant may make a one-time election to convert to Cash Units all or a portion of the balance of Share Units in such Participant's Deferred Compensation Account. Any Share Units so converted to Cash Units as a result of this one-time conversion election shall be valued at the average closing price for Shares as reported on the New York Stock Exchange - Composite Transactions for the ten (10) day period immediately prior to such one-time conversion election. 3.7 Time of Payment. Except as provided in Article VII hereof, all payments of a Participant's Deferred Compensation Account shall be made at, or shall commence on, the date selected by the Participant in accordance with the terms of this Article III. The date of payment or distribution must be irrevocably specified by the Participant in his or her written notice of election. The Participant may elect to defer the receipt of his or her Compensation to: (a) the first day of any calendar year, provided such date is at least six (6) months after the end of the quarter in which the Compensation is earned; or (b) the first day of the year following the date of: (1) retirement as a Director; (2) termination of Board membership; or (3) death. Upon the death of a Director or former Director, prior to the final payment of all amounts credited to his or her Deferred Compensation Account, the balance of the Deferred Compensation Account shall be paid in accordance with Article V, commencing on the first day of the calendar year following the year of death. Notwithstanding the foregoing provisions of this Section 3.7, and except as provided in Article VII, in no event shall any payment or distribution be made within six (6) months of the Compensation being earned or awarded. The benefit commencement date may not be later than the third calendar year following the attainment of mandatory retirement age for Directors. 6 3.8 Method of Payment. A Participant in this portion of the Deferred Compensation Plan shall have the option of: (a) selecting a lump-sum payment; (b) selecting a series of approximately equivalent annual installments (adjusted as necessary to reflect Dividend Equivalents and/or Interest Equivalents accrued during the installment payout period) in such number of installments as the Participant shall specify (not exceeding ten (10) installments); or (c) not selecting a method of payment at the time the Form for Deferred Payment Election/Designation of Beneficiary is prepared. If the Participant does not select a method of payment, he or she must, at least twelve months prior to the time the deferral amount is scheduled to be paid, notify the Corporate Secretary as to the specific method of payment which will be either in a lump sum or in approximately equivalent annual installments, and such election shall be subject to the consent of the Committee. Failure to provide appropriate notification to the Corporate Secretary will result in a lump sum payment on the deferral payment date. Participant shall receive in cash all deferred compensation credited to such Participant's Deferred Compensation Account. Share Units credited to the Participant's Deferred Compensation Account shall be valued at the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to each new calendar year. ARTICLE IV Restricted Deferred Compensation Accounts 4.1 Creation of Restricted Deferred Compensation Accounts. Compensation deferred under this Article IV shall be credited to a Restricted Deferred Compensation Account established by the Company for each Participant. The Restricted Deferred Compensation Accounts will be initialized as of February 15, 1996 by transferring to the Plan the present value of the accrued benefits of each Participant in the Non-Employee Directors' Retirement Plan. The present value of these accrued benefits will then be converted into Restricted Share Units. The number of Restricted Share Units to be credited to the Restricted Deferred Compensation Account of each Participant will be determined by using the average closing price for Shares as reported on the New York Stock Exchange- Composite Transactions for the ten (10) business days prior to February 15, 1996. Payout of these Restricted Share Units shall not commence until death, retirement or the termination of Board service. 4.2 Crediting Share Units. If the Committee elects to do so, each year in conjunction with either the Participant's election or re-election to the Board, a yearly dollar amount ("Yearly Credit") will be credited to a Participant's Restricted Deferred Compensation Account in the form of Restricted Share Units. The number of Restricted Share Units credited to a Participant's Restricted Deferred Compensation Account shall be determined by dividing the Yearly Credit by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to the 7 Company's annual meeting. Any fractional Restricted Share Units shall also be credited to a Participant's Restricted Deferred Compensation Account. The number of Restricted Share Units in a Restricted Deferred Compensation Account shall be appropriately adjusted by the Committee in the event of changes in the Company's outstanding common stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, and such adjustments shall be conclusive. Restricted Share Units shall not entitle any person to the rights of a stockholder. 4.3 Crediting Dividend Equivalents. The Company shall credit the Participant's Restricted Deferred Compensation Account with Dividend Equivalents being equal to the dividends declared on the Company's Shares. The crediting shall occur as of the date on which said dividends are paid. The number of Restricted Share Units to be credited to the Restricted Deferred Compensation Account shall be calculated by dividing the Dividend Equivalents by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the period of ten (10) trading days prior to the day on which the dividends are paid on the Company's Shares. Any fractional Restricted Share Units shall also be credited to a Participant's Restricted Deferred Compensation Account. 4.4 Restricted Share Unit Conversion. Immediately upon termination of Board service, and so prior to the commencement of any payout or distribution of any amounts hereunder, a Participant may make a one-time election to convert to Cash Units all or a portion of the balance of Restricted Share Units in such Participant's Restricted Deferred Compensation Account. Any Restricted Share Units so converted to Cash Units as a result of this one-time conversion election shall be valued at the average closing price for Shares as reported on the New York Stock Exchange - Composite Transactions for the ten (10) day period immediately prior to such one-time conversion election. 4.5 Time of Payment. All payments of a Participant's Restricted Deferred Compensation Account shall be made at, or shall commence on, the date selected by the Participant in accordance with the terms of this Article IV. The date of payment or distribution must be specified by the Director in his or her written Form of Continuing Deferral unless such election is revoked. A Participant's revocation must be submitted to the Corporate Secretary in writing. If the Participant selects a new election with regard to the date of payment or distribution, such election will apply only prospectively to any additional Restricted Share Units to be credited to a Director's Restricted Deferred Compensation Account. If the Participant fails to designate a time of payment, payment shall commence on the first day of the calendar year following termination of Board service. The Participant may elect to defer the receipt of his or her Compensation to the first day of the year following the date of: (a) retirement as a Director; (b) termination of Board service; or (c) death. Upon the death of a Director or former Director, prior to the final payment of all amounts credited to his or her Account, the balance of the Restricted Deferred Compensation Account shall be paid in accordance with Article V, commencing on the first day of the calendar year following the year of death. 8 Notwithstanding the foregoing provisions of this Section 4.4, in no event, however, shall any payment or distribution be made within the six (6) months of the Compensation being earned. The benefit commencement date may not be later than the third calendar year following the attainment of mandatory retirement age for Participants. 4.6 Method of Payment. Participant shall have the option of: (a) selecting a lump sum payment; (b) selecting a series of approximately equivalent annual installments (adjusted as necessary to reflect Dividend Equivalents and/or Interest Equivalents accrued during the installment payout period) in such number of installments as the Participant shall specify (not exceeding ten (10) installments); or (c) not selecting a method of payment at the time the Form for Continuing Deferral is prepared. If the Participant does not select a method of payment, he or she must, at least twelve months prior to the time the deferral amount is scheduled to be paid, notify the Corporate Secretary as to the specific method of payment which will be either in a lump sum or in approximately equivalent annual installments, and such election shall be subject to the consent of the Committee. Failure to provide appropriate notification to the Corporate Secretary will result in a lump sum payment on the deferral payment date. Share Units credited to the Participant's Restricted Deferred Compensation Account shall be valued at the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to each new calendar year. ARTICLE V Designation of Beneficiaries The Participant shall name a beneficiary and a contingent beneficiary to receive any payments due him or her at the time of his or her death, with the right to change such beneficiary at any time. In case of a failure of designation or the death of the designated beneficiary with a designated successor, distribution shall be made to the estate of the Participant. No designation of beneficiaries shall be valid unless in writing signed by the Participant, dated and filed with the Committee. Upon the Participant's death, any balance in the Participant's Deferred Compensation Account and Restricted Deferred Compensation Account is payable under the method and form elected by the Participant. ARTICLE VI Source of Payments All payments of deferred compensation shall be paid in cash from the general funds of the Company and the Company shall be under no obligation to segregate any assets in connection with the maintenance of a Deferred Compensation Account or Restricted Deferred Compensation Account, nor shall anything contained in this Plan nor any action taken pursuant to the Plan create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and Participant. Title to the beneficial ownership of any assets, whether cash or investments, which the Company may designate to pay the amount credited to the Deferred Compensation Account or a Restricted Deferred 9 Compensation Account shall at all times remain in the Company and Participant shall not have any property interest whatsoever in any specific assets of the Company. Participant's interest in the Deferred Compensation Account or a Restricted Deferred Compensation Account shall be limited to the right to receive payments pursuant to the terms of this Plan and such rights to receive shall be no greater than the right of any other unsecured general creditor of the Company. ARTICLE VII Change in Control 7.1 Acceleration of Payment Upon Change in Control. The terms of this Section 7.1 shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and control over any other provisions of this Plan. Upon the occurrence of a Change in Control, and for twelve (12) months thereafter, each Participant, whether or not he or she is still a Director, shall have the right to withdraw, in a single lump-sum cash payment, an amount equal to ninety-five percent (95%) of the balance of each of his or her Deferred Compensation Account and Restricted Deferred Compensation Account, as of the valuation date immediately preceding the date of withdrawal; provided, however, that if this option is exercised, such Participant will forfeit to the Company the remaining five percent (5%) of the balance of each such account (as of the valuation date immediately preceding the date of withdrawal) from which the funds are withdrawn as a penalty. Payments under this Section 7.1 shall be made as soon as practicable, but no later than thirty (30) days after the Participant notifies the Committee in writing that he/she is exercising his/her right to withdraw pursuant to this Section 7.1. 7.2 Amendment on or after Change in Control. On or after a Change in Control, no action, including by way of example and not of limitation, the amendment, suspension or termination of the Plan, shall be taken which would affect the rights of any Participant or the operation of this Plan with respect to the balance in the Participant's Accounts. 7.3 Attorney's Fees. The Company shall pay all legal fees and related expenses incurred by a Participant in seeking to obtain or enforce any payment, benefit or right such Participant may be entitled to under the plan after a Change in Control. The Participant shall reimburse the Company for such fees and expenses at such time as a court of competent jurisdiction, or another independent third party having similar authority, determines that the Participant's claim was frivolously brought without reasonable expectation of success on the merits thereof. ARTICLE VIII Nonalienation of Benefits Participant shall not have the right to sell, assign, transfer or otherwise convey or encumber in whole or in part the right to receive any payment under this Plan except in accordance with Article V. ARTICLE IX Acceptance of Terms The terms and conditions of this Plan shall be binding upon the heirs, beneficiaries and other successors in interest of Participant to the same extent that said terms and conditions are binding upon the Participant. 10 ARTICLE X Administration of the Plan The Plan shall be administered by the Committee which may make such rules and regulations and establish such procedures for the administration of this Plan as it deems appropriate. In the event of any dispute or disagreements as to the interpretation of this Plan or of any rule, regulation or procedure or as to any questioned right or obligation arising from or related to this Plan, the decision of the Committee shall be final and binding upon all persons. ARTICLE XI Termination and Amendment The Plan may be terminated at any time by the Board of Directors of Sun Company, Inc. and may be amended at any time by the Committee provided, however, that no such amendment or termination shall adversely affect the rights of Participants or their beneficiaries with respect to amounts credited to Deferred Compensation Accounts or Restricted Deferred Compensation Accounts prior to such amendment or termination, without the written consent of the Participant. ARTICLE XII Construction In the case any one or more of the provisions contained in this Plan shall be invalid, illegal or unenforceable in any respect the remaining provisions shall be construed in order to effectuate the purposes hereof and the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. ARTICLE XIII Governing Law This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. EX-10.5 6 DEFERRED COMPENSATION PLAN Exhibit 10.5 ============================================================================== SUN COMPANY, INC. DEFERRED COMPENSATION PLAN (Amended and Restated as of March 4, 1998) ============================================================================== 2 ARTICLE I Definitions 1.1 Cash Unit - shall mean the entry in a Deferred Compensation Account of a credit equal to One Dollar ($1.00). 1.2 Change in Control - shall mean the occurrence of any of the following events or transactions: (a) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets), or (b) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially more than 20% of the outstanding voting shares. 1.3 Committee - shall mean the Compensation Committee of the Board of Directors of Sun Company, Inc. 1.4 Company - shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any subsidiary or affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any subsidiary or affiliate by merger, consolidation, liquidation or purchase of assets or stock or similar transaction. 1.5 Continuing Director - shall mean a Director who was a member of the Board of Directors immediately prior to a Control Transaction which results in a Change in Control. 1.6 Control Transaction - shall mean any of the following transactions or any combination thereof: (a) any tender offer for or acquisition of capital stock of Sun Company, Inc.; (b) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc.; or (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or a group of shareholders in a proxy solicitation or otherwise. 1.7 Deferred Bonus Account - shall mean, with respect to any Participant, the total amount of the Company's liability for payment of deferred compensation to the Participant under this Plan, including any accumulated Interest Equivalents and/or Dividend Equivalents. 1.8 Dividend Equivalent - shall mean the entry in a Participant's Deferred Bonus Account of a dividend credit with respect to a Share Unit, each Dividend Equivalent being equal to the dividend paid from time to time on a Share. 1.9 Executive Resource Employee - shall mean any individual employed by the Company who has been designated by the Company as a member of the Company's executive resources group. Generally such group shall include employees in Grades 14-20 and all employees subject to Section 16 of the Securities Exchange Act of 1934, as amended. 3 1.10 Group - shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. 1.11 Incentive Plan - shall mean the Sun Company, Inc. Executive Incentive Plan. The Incentive Plan provides that the Board of Directors may pay bonuses annually, as additional compensation to such employees as the Board determines have principally contributed to the profitability of the Company. 1.12 Interest Equivalent - shall mean the entry in a Participant's Deferred Bonus Account of an interest credit with respect to a Cash Unit, the interest factor being equal to the interest rate for ten-year U.S. Treasury Notes as of December 31 of the preceding year, to be compounded on the basis of the balance in the Participant's Deferred Bonus Account. 1.13 Non-Cash Bonus - shall have the meaning set forth herein at Section 4.1. 1.14 Participant - shall mean any Executive Resource Employee who meets the eligibility requirements of the Incentive Plan and who is participating in this Plan. 1.15 Permanent and Total Disability - shall mean, with respect to any Participant, that such Participant is eligible to receive benefits under the applicable long-term disability plan of such Participant's employer. 1.16 Plan - shall mean the Deferred Compensation Plan set forth herein and as it may be amended from time to time. 1.17 Retirement - shall mean the date on which a Participant is retired in accordance with the applicable retirement plan, program, or policy of such Participant's employer. 1.18 Share - shall mean a share of the Company's authorized voting Common Stock ($1.00 par value per share) and any share or shares of stock of the Company hereafter issued or issuable in substitution or exchange for each such share, except for the Company's Series A Preference Stock. 1.19 Share Unit - shall mean the entry in a Participant's Deferred Bonus Account of a credit equal to one Share. 1.20 Subsidiaries - shall mean corporations in which the Company, directly or indirectly owns fifty percent (50%) or more of the outstanding voting stock. ARTICLE II Background and Purpose of Plan 2.1 Purpose. The Company has established this Deferred Compensation Plan to provide Executive Resource Employees who are participants in the Incentive Plan with the option to irrevocably defer the receipt of all or a portion of the bonus to which such participants would otherwise be entitled, subject to the terms and conditions hereinafter set forth. 4 2.2 Creation of Deferred Bonus Account. Each of the following shall be credited to a Deferred Bonus Account established by the Company for each Participant: (a) any bonus amounts voluntarily deferred by the Participant pursuant to Article III (Deferral of Bonuses by Participant) hereof; and/or (b) any Non-Cash Bonus amounts deferred in the discretion of the Committee pursuant to Article IV (Deferral of Bonuses by Committee) hereof. Any bonus amounts voluntarily deferred by the Participant will be credited to a Participant's Deferred Bonus Account in the form of Cash Units or Share Units, in the discretion of the Participant, as set forth in the Plan. The deferral of any Non-Cash Bonus amounts caused by action of the Committee will be credited to a Participant's Deferred Bonus Account in the form of Cash Units or Share Units as the Committee, in its sole discretion, may decide in accordance with the Plan. ARTICLE III Deferral of Bonuses by Participant 3.1 Participant's Election to Defer. A Participant voluntarily may elect to defer, in the form of Cash Units or Share Units, all or a portion of his or her bonus to be awarded under the Incentive Plan by filing a written election with the Committee on forms prescribed by the Committee. Such election must include the following: (a) percentage of bonus to be deferred; (b) the form of deferral, being either Cash Units, Share Units or a combination of the two and the percentage allocations of such; (c) a designation of beneficiary as set forth in Article VI (Designation of Beneficiaries); and (d) an irrevocable election of a method of payment as set forth in Section 3.10 hereof. Any such voluntary election by the Participant shall apply only to bonuses for the year specified in the election. 3.2 Amount of Deferral. The amount of bonus to be deferred in any year shall be designated by the Participant as a percentage of such Participant's bonus in multiples of five percent (5%) but shall not be less than ten percent (10%). 3.3 Time of Election. A separate election to defer must be filed for each year and must be received by the Company no later than forty-five (45) days before the end of the year in which the bonus is earned. Any election by a Participant with respect to a bonus in a given year will not preclude a different action with respect to bonuses in subsequent years, consistent with the provisions of this Article III with respect to the giving of notice of deferral election. 3.4 Crediting Share Units. Share Units shall be credited to a Participant's Deferred Bonus Account at the time the bonus otherwise would have been paid had no election to defer been made. The number of Share Units to be credited to the Deferred Bonus Account shall be determined by dividing the portion of the bonus to be deferred by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to the day on which the bonus otherwise would have been paid. Any fractional Share Units shall also be credited to a Participant's Deferred Bonus Account. Share Units shall not entitle any person to the rights of a shareholder. 5 3.5 Crediting Dividend Equivalents. For Share Units, the Company shall credit the Participant's Deferred Bonus Account with Dividend Equivalents being equal to the dividends declared on the Company's Shares. The crediting shall occur as of the date on which said dividends are paid. The number of Share Units to be credited to the Deferred Bonus Account shall be calculated by dividing the Dividend Equivalents by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the period of ten (10) trading days prior to the day on which the dividends are paid on the Company's Shares. Any fractional Share Units shall also be credited to a Participant's Deferred Bonus Account. 3.6 Crediting Cash Units. Cash Units shall be credited to a Participant's Deferred Bonus Account at the time the bonus would otherwise have been paid had no election to defer been made. 3.7 Crediting Interest Equivalents. For Cash Units credited to a Participant's Deferred Bonus Account, the Company shall credit such Participant's Deferred Bonus Account on a quarterly basis with an Interest Equivalent. 3.8 Share Unit Conversion. Immediately upon termination of the Participant's employment with the Company, and so prior to the commencement of any payout or distribution of any amounts hereunder, the Participant may make a one-time election to convert to Cash Units all or a portion of the balance of Share Units in such Participant's Deferred Bonus Account. Any Share Units so converted to Cash Units as a result of this one-time conversion election shall be valued at the average closing price for Shares as reported on the New York Stock Exchange - -Composite Transactions for the ten (10) day period immediately prior to such one-time conversion election. 3.9 Time of Payment. Except as provided in Article V (Change in Control) hereof, all payments of a Participant's Deferred Bonus Account shall be made at, or shall commence on, the date selected by the Participant in accordance with the terms of this Article III. The date of payment or distribution must be irrevocably specified by the Participant in his or her written notice of election. The Participant may elect to defer the receipt of all or a specified portion of such Participant's bonus to: (a) the first day of any calendar year, provided such date is at least six (6) months after the end of the quarter in which the bonus is earned; or (b) the first day of the year following the date of: (1) the Participant's retirement; (2) final determination that the Participant has a Permanent and Total Disability; (3) termination of the Participant's employment with the Company; or (4) death of the Participant. Upon the death of a Participant prior to the final payment of all amounts credited to his or her Deferred Bonus Account, the balance of the Deferred Bonus Account shall be paid in accordance with Article VI (Designation of Beneficiaries) hereof, commencing on the first day of the calendar year following the year of death. 6 Notwithstanding the foregoing provisions of this Section 3.9, and except as provided in Article V (Change in Control) hereof, in no event shall any payment or distribution be made within six (6) months of the bonus being earned or awarded. The benefit commencement date may not be later than the third calendar year following the date of: (i) Participant's retirement, or (ii) termination of Participant's employment. 3.10 Method of Payment. A Participant in this portion of the Deferred Compensation Plan shall have the option of: (a) selecting a lump-sum payment; (b) selecting a series of approximately equivalent annual installments (adjusted as necessary to reflect Dividend Equivalents and/or Interest Equivalents accrued during the installment payout period) in such number of installments as the Participant shall specify (not exceeding ten (10) installments); or (c) not selecting a method of payment at the time the Form for Deferred Payment Election/Designation of Beneficiary is prepared. If the Participant does not select a method of payment, he or she must, at least twelve (12) months prior to the time the deferral amount is scheduled to be paid, notify the Company as to the specific method of payment which will be either in a lump sum or in approximately equivalent annual installments. Failure to provide appropriate notification to the Company will result in a lump sum payment on the deferral payment date. Participant shall receive in cash all deferred compensation credited to such Participant's Deferred Compensation Account. Share Units credited to the Participant's Deferred Compensation Account shall be valued at the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to each new calendar year. 3.11 Hardship Distribution. Participant may request a modification in the payment terms hereunder only in the event of severe financial hardship and only to the extent reasonably necessary to eliminate the hardship. Such request shall specify in detail the grounds for the requested modification and shall be referred to the Committee. A qualifying severe financial hardship must be caused by accident, illness, or event beyond the control of the Participant. The decision of the Committee with respect to the requested modification shall be solely at the discretion of the Committee and in accordance with its evaluation of the exigencies of the situation. Such decision shall be binding on the Company and Participant. ARTICLE IV Deferral of Bonuses by Committee 4.1 Committee's Election to Defer. Each year in conjunction with the award of any bonus to the Participant, the Committee, in its sole discretion, may cause to be credited to a Participant's Deferred Bonus Account in the form of either Cash Units or Share Units, a specified dollar amount representing all or a portion of such Participant's bonus for that year (the "Non-Cash Bonus"). 7 4.2 Crediting Share Units. Share Units shall be credited to a Participant's Deferred Bonus Account at the time the bonus would otherwise have been paid had no Committee action to defer been taken. The number of Share Units credited to the Participant's Deferred Bonus Account shall be determined by dividing the Non-Cash Bonus by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to the date such bonus otherwise would have been paid had no Committee action been taken. Any fractional Share Units shall also be credited to such Participant's Deferred Bonus Account. Share Units shall not entitle any person to the rights of a stockholder. 4.3 Crediting Dividend Equivalents. The Company shall credit the Participant's Deferred Bonus Account with Dividend Equivalents being equal to the dividends declared on the Company's Shares. The crediting shall occur as of the date on which said dividends are paid. The number of Share Units to be credited to the Deferred Bonus Account shall be calculated by dividing the Dividend Equivalents by the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the period of ten (10) trading days prior to the day on which the dividends are paid on the Company's Shares. Any fractional Share Units shall also be credited to a Participant's Deferred Bonus Account. 4.4 Crediting Cash Units. Cash Units shall be credited to a Participant's Deferred Bonus Account at the time the bonus otherwise would have been paid had no Committee action to defer been taken. 4.5 Crediting Interest Equivalents. For Cash Units credited to a Participant's Deferred Bonus Account, the Company shall credit such Participant's Deferred Bonus Account on a quarterly basis with an Interest Equivalent. 4.6 Share Unit Conversion. Immediately upon termination of the Participant's employment with the Company, and so prior to the commencement of any payout or distribution of any amounts hereunder, the Participant may make a one-time election to convert to Cash Units all or a portion of the balance of Share Units in such Participant's Deferred Bonus Account. Any Share Units so converted to Cash Units as a result of this one-time conversion election shall be valued at the average closing price for Shares as reported on the New York Stock Exchange - -Composite Transactions for the ten (10) day period immediately prior to such one-time conversion election. 4.7 Time of Payment. The Committee will specify in writing its election of the earliest date of payment or distribution, and such election shall remain effective until revoked in writing by the Committee. If the Committee elects a new date with regard to payment or distribution, such election will apply only prospectively to any additional Share Units and/or Cash Units to be credited to such Participant's Deferred Bonus Account by Committee action in accordance with this Article IV. If the Committee fails to designate a time of payment, payment shall commence on the first day of the calendar year following the termination of such Participant's employment. Notwithstanding the foregoing provisions of this Section 4.7, in no event, however, shall the payment date be later than the third calendar year following the date of: (i) Participant's retirement, or (ii) termination of Participant's employment. 8 4.8 Method of Payment. The Participant must select a method of payment at least twelve (12) months prior to the time the deferral amount is scheduled to be paid, by notifying the Company as to whether the method of payment will be either: (a) a lump sum payment; or (b) a series of approximately equivalent annual installments (adjusted as necessary to reflect Dividend Equivalents accrued during the installment payout period), in such number of installments as the Participant shall specify (not exceeding ten (10) installments). If no election is made, payment or distribution of any amounts deferred by Committee action pursuant to this Article IV (together with the Dividend Equivalents and/or Interest Equivalents, as the case may be, accrued thereon) shall be made in a single lump sum on the earliest payment date permitted by the Committee as provided under Section 4.7 hereof. Share Units credited to the Participant's Deferred Bonus Account shall be valued at the average closing price for Shares as reported on the New York Stock Exchange-Composite Transactions for the ten (10) day period prior to each new calendar year. ARTICLE V Change in Control 5.1 Acceleration of Payment Upon Change in Control. The terms of this Section 5.1 shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and control over any other provisions of this Plan. Upon the occurrence of a Change in Control, and for twelve (12) months thereafter, each Participant, whether or not he or she is still an employee of the Company, shall have the right to withdraw, in a single lump-sum cash payment, an amount equal to ninety- five percent (95%) of the balance of such Participant's Deferred Bonus Account, as of the valuation date immediately preceding the date of withdrawal; provided, however, that if this option is exercised, such Participant will forfeit to the Company the remaining five percent (5%) of the balance of each such account (as of the valuation date immediately preceding the date of withdrawal) from which the funds are withdrawn as a penalty. Payments under this Section 5.1 shall be made as soon as practicable, but no later than thirty (30) days after the Participant notifies the Company in writing that he/she is exercising his/her right to withdraw pursuant to this Section 5.1. 5.2 Amendment on or after Change in Control. On or after a Change in Control, no action, including by way of example and not of limitation, the amendment, suspension or termination of the Plan, shall be taken which would affect the rights of any Participant or the operation of this Plan with respect to the balance in the Participant's Accounts. 5.3 Attorney's Fees. The Company shall pay all legal fees and related expenses incurred by a Participant in seeking to obtain or enforce any payment, benefit or right such Participant may be entitled to under the plan after a Change in Control. The Participant shall reimburse the Company for such fees and expenses at such time as a court of competent jurisdiction, or another independent third party having similar authority, determines that the Participant's claim was frivolously brought without reasonable expectation of success on the merits thereof. 9 ARTICLE VI Designation of Beneficiaries The Participant shall name a beneficiary to receive any payments due such Participant at the time of death, with the right to change such beneficiary at any time. In case of a failure of designation or the death of the designated beneficiary without a designated successor, distribution shall be made to the person or persons designated as beneficiary in the designation most recently filed under the Sun Company, Inc. Capital Accumulation Plan, or if no such designation has been made or the Participant is not participating in such plan, the surviving spouse of a deceased Participant, or, if there is no surviving spouse, the children of the Participant in equal shares (the share of any child who predeceases the Participant to go in equal shares to the issue of such deceased child), or if there is no surviving spouse, child, or issue of such children, the estate of the Participant. No designation of beneficiaries shall be valid unless in writing signed by the Participant, dated and filed with the Company. Upon the Participant's death, any balance in the Participant's Deferred Bonus Account is payable under the method elected by the Participant or in such other manner as the Committee may determine in its sole discretion. ARTICLE VII Miscellaneous 7.1 Source of Payments. All payments of deferred bonuses shall be paid in cash from the general funds of the Company and the Company shall be under no obligation to segregate any assets in connection with the maintenance of the Deferred Bonus Account, nor shall anything contained in this Plan nor any action taken pursuant to the Plan create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and Participant. Title to the beneficial ownership of any assets, whether cash or investments, which the Company may designate to pay the amount credited to the Deferred Bonus Account shall at all times remain in the Company and Participant shall not have any property interest whatsoever in any specific assets of the Company. Participant's interest in the Deferred Bonus Account shall be limited to the right to receive payments pursuant to the terms of this Plan and such rights to receive shall be no greater than the right of any other unsecured general creditor of the Company. 7.2 Nonalienation of Benefits. Participant shall not have the right to sell, assign, transfer or otherwise convey or encumber in whole or in part the right to receive any payment under this Plan except in accordance with Article VI (Designation of Beneficiaries) hereof. 7.3 Acceptance of Terms. The terms and conditions of this Plan shall be binding upon the heirs, beneficiaries, and other successors in interest of Participant to the same extent that said terms and conditions are binding upon the Participant. This Plan shall not be construed in any way as an employment contract requiring the Company or Participant to continue the employment relation. 7.4 Administration of the Plan. The Plan shall be administered by the Committee which may make such rules and regulations and establish such procedures for the administration of this Plan as it deems appropriate. In the event of any dispute or disagreements as to the interpretation of this Plan or of any rules, regulation, or procedure or as to any questioned right or obligation arising from or related to this Plan, the decision of the Committee shall be final and binding upon all persons. 10 7.5 Adjustments for Changes in Capitalization. The number of Share Units in the Participant's Deferred Bonus Account shall be appropriately adjusted by the Committee in the event of changes in the Company's outstanding common stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, and such adjustments shall be conclusive. 7.6 Termination and Amendment. The Plan may be terminated at any time by the Board of Directors of Sun Company, Inc., and may be amended at any time by the Committee provided, however, that no such amendment or termination shall adversely affect the rights of Participants or their beneficiaries with respect to amounts credited to Deferred Bonus Accounts prior to such amendment or termination, without the written consent of the Participant. 7.7 Notices. To be effective, all notices, requests and demands to or upon the Company or the Participant, as the case may be, shall be in writing, by facsimile, by overnight courier or by registered or certified mail, postage prepaid and return receipt requested, and shall be deemed to have been duly given or made upon: (a) delivery by hand; (b) one business day after being sent by overnight courier; (c) four business days after being deposited in the United States mail, postage prepaid; or (d) in the case of transmission by facsimile, when confirmation of receipt is obtained. Such communications shall be addressed and directed as listed below (or to such other address or recipient for a party as may be hereafter notified by such party hereunder), to the Company or the Participant, respectively: If to the Company, to: SUN COMPANY, INC. Human Resources Department Ten Penn Center - 20th Floor 1801 Market Street Philadelphia, PA 19103-1699 Attn: Director, Compensation & Benefits FAX : (215) 246-8498 Confirm: (215) 246-8392 If to Participant, to: The most recent address for Participant appearing in the books and records of the Company. 7.8 Construction. The captions and headings used for the various Articles and Sections of this Plan are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 7.9 Severability. In the case of any one or more of the provisions contained in this Plan shall be invalid, illegal, or unenforceable in any respect the remaining provisions shall be construed in order to effectuate the purposes hereof and the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 7.10 Governing Law. This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. EX-10.6 7 AMEND NO. 1 TO PENSION RESTORATION PLAN Exhibit 10.6 SUN COMPANY, INC. PENSION RESTORATION PLAN Amendment No. 1997-1 1. Sections 1.06A, 1.08A, 1.08B and 3.01A are deleted effective September 1, 1997. EX-10.7 8 AMEND NO. 1 TO SAVINGS RESTORATION PLAN Exhibit 10.7 SUN COMPANY, INC. SAVINGS RESTORATION PLAN Amendment No. 1997-1 There is added a new Section 3 to Article V of the Plan as follows: "3. Acceleration of Payment upon Change in Control. A. Right to Withdraw. The terms of this Section 3 of Article V shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and control over any other provisions of this Plan. Upon a Change in Control, and for twelve (12) months thereafter, each participant, whether or not he is still an employee of the Company, shall have the right to withdraw, in a single lump-sum cash payment, an amount equal to ninety-five percent (95%) of the value of his book accounts under the Plan; provided, however, that if this option is exercised, such participant will forfeit to the Company the remaining five percent (5%) of the value of his book accounts as of the time of the withdrawal. Payments under this Section 3 shall be made as soon as practicable, but no later than 30 days after the participant notifies the Plan that he is exercising his right to withdraw. (i) On or after a Change in Control, no action, including by way of example and not of limitation, the amendment, suspension or termination of the Plan, shall be taken which would affect the rights of any participant or the operation of the Plan with respect to all amounts credited to book accounts on behalf of participants on the date of the Change in Control. (ii) The Company shall pay all reasonable legal fees and related expenses incurred by a participant in seeking to obtain or enforce any payment, benefit or other right such participant may be entitled to under the Plan after a Change in Control; provided, however, that the participant shall be required to repay any such amounts to the Company to the extent a court of competent jurisdiction issues a final and non-appealable order setting forth the determination that the position taken by the participant was frivolous or advanced in bad faith. B. Definitions. 'Change in Control' shall be deemed to have occurred if: (i) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets) or (ii) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially more than twenty percent (20%) of the outstanding voting shares. 2 As used herein, 'Control Transaction' shall mean any of the following transactions or any combination thereof: (1) any tender offer for or acquisition of capital stock of Sun Company, Inc., (2) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc., or (3) the submission of a nominee or nominees for the position of director of the Company by a shareholder or a Group of shareholders in a proxy solicitation or otherwise. As used herein, 'Continuing Director' shall mean a Director who was a member of the Board of Directors of Sun Company, Inc. immediately prior to a Control Transaction which results in a Change in Control. As used herein, 'Group' shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended." EX-10.8 9 EXECUTIVE INCENTIVE PLAN AS AMENDED Exhibit 10.8 ================================================================================ SUN COMPANY, INC. EXECUTIVE INCENTIVE PLAN (As Amended and Restated Effective March 4, 1998) ================================================================================ 2 ARTICLE I Definitions As used in this Plan, the following terms shall have the meanings herein specified: 1.1 Board of Directors - shall mean the Board of Directors of the Company. 1.2 Business Unit/Team Performance Factor - shall mean the factor (expressed as a percentage) determined for the respective business unit and/or team of which the Participant is a member, pursuant to Section 4.2(b). 1.3 CEO - shall mean the Chief Executive Officer of the Company. 1.4 Change in Control - shall mean the occurrence of any of the following events or transactions: (a) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets), or (b) Any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that results in such entity, person or Group directly or indirectly owning beneficially more than twenty percent (20%) of the outstanding voting shares of Sun Company, Inc. 1.5 CIC Incentive Award - shall mean the incentive award payable in cash following a Change in Control, as such award is described herein at Article VII. 1.6 CIC Participant - shall mean any Participant who: (a) was employed by the Company on the date of the Change in Control; (b) was eligible for a prorated award under the provisions of Section 5.2; or (c) following a Potential Change in Control, ceased to be an employee of the Company as a result of either a termination of employment by the Company other than for Just Cause or a termination of employment by the Participant for one of the following reasons: (1) The assignment to such Participant of any duties inconsistent in a way adverse to such Participant, with such Participant's positions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a reduction in the duties and responsibilities held by the Participant immediately prior to the Change in Control; a change in the Participant's reporting responsibilities, title or offices as in effect immediately prior to the Change in Control that is adverse to the Participant; or any removal of the Participant from or any failure to re-elect the Participant to any position with the Company that such Participant held immediately prior to the Change in Control except in connection with such Participant's: (i) assignment to a new position at a higher combined annual base salary and Guideline Incentive Award; or 3 (ii) termination of employment by the Company for Just Cause; or (2) With respect to any Participant who is a member of the Board of Directors immediately prior to the Change in Control, any failure of the shareholders of the Company to elect or reelect, or of the Company to appoint or reappoint, the Participant as a member of the Board of Directors; (3) A reduction by the Company in the Participant's annual base salary or Guideline Incentive Award as in effect immediately prior to the Change in Control; the failure by the Company to continue in effect, or the taking of any action by the Company that would adversely affect such Participant's participation in or materially reduce such Participant's benefits under any employee benefit plan or compensation plan in which such Participant was participating immediately prior to the Change in Control; provided, however, that in the aggregate such actions by the Company significantly reduce the Participant's total compensation (i.e., the sum of Participant's annual base salary, Guideline Incentive Award and the aggregate value to the Participant of all employee benefit and compensation plans); or the failure by the Company, without the Participant's consent, to pay to the Participant any portion of the Participant's current compensation, or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of the Company; or (4) The Company requires the Participant to be based anywhere other than the Participant's present work location or a location within thirty- five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantially more burdensome than such Participant's travel obligations during the period of twelve (12) consecutive months immediately preceding the Change in Control; provided, however, that the Participant can demonstrate that such termination or circumstance in subsections (1) through (4) herein leading to termination was at the request of a third party with which the Company had entered into negotiations or an agreement with regard to a Change in Control or otherwise occurred in connection with, or in anticipation of, a Change in Control, and also provided that in either such case, such Change in Control actually occurs within one (1) year following the date of termination. 1.7 CIC Short Period - shall mean the portion of the Plan Year from January 1 to the date of the occurrence of a Change in Control. 1.8 Common Stock Unit - shall mean a right to receive a share of Sun Stock subject to risk of forfeiture as provided under the LTPEP or any successor plan. 1.9 Company - shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any subsidiary or affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any subsidiary or affiliate, by merger, consolidation or liquidation or purchase of assets or stock or similar transaction. 1.10 Company Performance Factor - shall mean the factor (expressed as a percentage) which the Compensation Committee determines is indicative of the Company's attainment of certain predetermined annual performance goals, as determined under Section 4.1. 4 1.11 Compensation Committee - shall mean the Compensation Committee of the Board of Directors. 1.12 Continuing Director - shall mean a director who was a member of the Board of Directors immediately prior to a Control Transaction which results in a Change in Control. 1.13 Control Transaction - shall mean any of the following transactions or any combination thereof: (a) any tender offer for or acquisition of capital stock of Sun Company, Inc.; (b) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc.; or (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or a Group of shareholders in a proxy solicitation or otherwise. 1.14 Executive Resources Employee - shall mean any individual who has been designated by the Company as a member of the Company's Executive Resources group. Generally, such group shall include employees in Grades 14 through 20 and all other employees subject to Section 16 of the Securities and Exchange Act of 1934, as amended. 1.15 Executive Team - shall mean the senior executives who have significant operating and/or strategic responsibilities for the Company as designated by the CEO. 1.16 Group - shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. 1.17 Guideline Incentive Award - shall mean the result of the individual Participant's salary range midpoint multiplied by the guideline percentage, as determined under Article III. 1.18 Incentive Award - shall mean the award granted to a Participant. 1.19 Individual Performance Factor - shall mean factor (expressed as a percentage) as determined pursuant to Section 4.3. 1.20 Just Cause - shall mean: (a) a judicial determination that the Participant has committed fraud, misappropriation, or embezzlement against the Company; or (b) a non-appealable conviction of, or entry of a plea of nolo contendere for, an act by the Participant constituting a felony which, as determined by the Company in good faith, constitutes a crime involving moral turpitude and has resulted in material harm to the Company, its subsidiaries and affiliates taken as a whole. 5 A termination of employment pursuant to Just Cause shall not be effective unless accompanied by a copy of a resolution duly adopted by the affirmative vote of not less a majority of the Continuing Directors at a meeting of the Board of Directors which was called and held for the purpose of considering such termination, or if there are no Continuing Directors, when by at least three quarters (3/4) of the entire Board of Directors (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the Participant was guilty of conduct set forth in the preceding sentence, and specifying the particulars thereof in detail. In any Board deliberations or votes concerning a determination under this Section 1.20, the Participant shall recuse himself from such deliberations and votes. 1.21 LTPEP - shall mean the Sun Company, Inc. Long-Term Performance Enhancement Plan, as amended and in effect. 1.22 Participant - shall mean all persons participating or eligible to participate in the Plan, as determined under Section 2.4. 1.23 Plan - shall mean the Sun Company, Inc. Executive Incentive Plan as amended and restated effective as of March 4, 1998. 1.24 Plan Year - shall mean the performance (calendar) year. 1.25 Potential Change in Control - shall mean the occurrence of any of the following events or transactions: (a) any person (other than Sun Company, Inc., or any affiliate or subsidiary thereof) makes a tender offer for capital stock of Sun Company, Inc.; (b) any person becomes the beneficial owner, directly or indirectly, of capital stock of Sun Company, Inc. in an amount which requires the filing of Schedule 13D or its equivalent form pursuant to the Rules and Regulations under the Securities Exchange Act of 1934 as from time to time amended; (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or Group of shareholders in a proxy solicitation or otherwise which, in its judgment, the Board of Directors determines by adoption of a resolution within thirty (30) days of such submission, might result in a Change in Control of Sun Company, Inc.; (d) any person files a pre-merger notification for the acquisition of capital stock of Sun Company, Inc. pursuant to the Hart-Scott-Rodino Act; or (e) the Board of Directors in its judgment determines by adoption of a resolution that a Potential Change in Control of Sun Company, Inc. for purposes of this Plan has occurred. 1.26 Prior Plan - shall mean the Sun Company, Inc. Executive Incentive Plan as amended and restated effective January 1, 1992. 1.27 Sun Stock - shall mean the common stock of Sun Company, Inc. 6 ARTICLE II Background and Purpose 2.1 Purpose. The purpose of the Executive Incentive Plan is to promote the achievement of the Company's short-term, targeted business objectives by providing competitive incentive reward opportunities to those employees who can significantly impact the Company's performance. The Plan enhances the Company's ability to attract, develop and motivate individuals as members of a talented management team while aligning their interest with those of the shareholders. The awards made under the Plan will be made on the basis of Company performance. The award may also recognize business unit, team and individual performance. Effective March 4, 1998, the terms of the Plan replace those in effect under the Prior Plan. 2.2 Effective Date. The amendment and restatement of the Plan is effective March 4, 1998. 2.3 Administration. The Compensation Committee shall have full power and authority to construe, interpret and administer the Plan and to make rules and regulations subject to the provisions of the Plan. All decisions, actions, determinations or interpretations of the Compensation Committee shall be made in its sole discretion and shall be final, conclusive and binding on all parties. 2.4 Eligibility and Participation. Participation in the Plan is limited to Executive Resource Employees and other employees evaluated in positions with Grades 11, 12 and 13 at any time during the Plan Year. Article III Determination of Guideline Incentive Awards 3.1 Guideline Incentive Award - The Guideline Incentive Award is calculated for each Participant by multiplying the individual Participant salary range midpoint by the applicable guideline percentage, as determined below. Actual incentive awards to individual Participants may be greater or lesser than this guideline depending on Company and, as necessary, business unit, team and/or individual Participant performance. 3.2 Guideline Percentages. Incentive guideline percentages have been established for each eligible position to provide Participants with a competitive incentive reward opportunity. 7 Below are the guideline incentive opportunities as a percentage of salary range midpoints for Plan Years beginning on or after January 1, 1998: Guideline Incentive as a Percentage of Position Salary Range Midpoint* - ------------ ------------------------- CEO 75% COO 60% EVP 50% CFO 50% SVP 45% Grades 19 and 20 40% Grades 17 and 18 35% Grades 14, 15 and 16 30% Grade 13 25% Grade 12 20% Grade 11 15% - ------------------------------- *In all cases, the salary range midpoint used in determination of the individual Guideline Incentive Award is the midpoint of the Participant's Hay point/grade under the salary administration program in effect on the last day of the final pay period of the current Plan Year. ARTICLE IV Determination of Incentive Award For each Plan Year, the CEO, and if so delegated, other members of the Executive Team will determine the appropriate methodology for including Company, business unit, team and individual performance in the Incentive Award computations for such year. While Company Performance shall always be included in the computation, the other factors may or may not be included as deemed appropriate by the Executive Team. With respect to the CEO, the methodology to be used will be determined by the Compensation Committee. The Company and, as necessary, the Business Unit, Team and Individual Performance Factors shall be determined as follows: 4.1 Determination of Company Performance Factor. (a) Assessment Process. For each Plan Year, the Compensation Committee shall determine the annual performance goal(s) for the Company based on one or more factors, which the Compensation Committee, in its sole discretion, shall determine are applicable. (b) Determination of Performance Factor. After the end of each calendar year, the Compensation Committee shall determine the extent to which the performance goals have been met and the appropriate Company Performance Factor, from 0% to 200%, that is appropriate with the varying levels of performance for each goal. 4.2 Determination of Business Unit and Team Performance Factors. (a) Assessment Process. The CEO, and if so delegated, other members of the Executive Team shall determine the annual business unit performance goal(s) and the applicable levels of performance based on one or more factors. Business unit leaders will establish annual performance goal(s) for any teams within their respective business units. 8 (b) Determination of Performance Factors. After the end of each calendar year, the CEO, and if so delegated, other members of the Executive Team shall determine the extent to which the business unit performance goals have been met and the appropriate Business Unit Performance Factor, from 0% to 200%, that is appropriate with the varying levels of performance for each goal. Business unit leaders will similarly evaluate the performance of any teams to determine the appropriate Team Performance Factor. 4.3 Determination of Individual Performance Factors. (a) Recommended Assessment Process. The recommended individual performance assessment process is briefly outlined as follows: (1) Prior to the beginning of each calendar year or other appropriate time, each Participant and his/her manager will agree on major performance targets, goals or objectives to be attained during the calendar year. The targets, goals or objectives may also be related to an individual's participation on a work team. (2) Progress toward attainment of the targets, goals or objectives will be formally reviewed on a periodic basis. (3) At the end of the year, the manager will assess the degree to which the stated performance objectives have been achieved, keeping in mind environmental or circumstantial changes that may have affected the original targets, goals or objectives. Specifically consideration should be given to: (i) Level of contributions relative to peers. (ii) Degree of difficulty of performance targets. (iii) Reaction to unanticipated changes in the business environment. (iv) Unplanned contributions. (v) Team performance, as appropriate. (4) While the level of performance for the Plan should be based primarily on annual goals and objectives, the performance factors utilized for this program should be consistent with appraisals used for the purposes of salary administration as updated to reflect performance since the last appraisal. (5) The performance appraisal should be documented. The documentation should identify the performance targets, the assessment of individual performance against the targets, and any other significant information to support the recommendation. 9 (b) Determination of Performance Factor. Each Participant's Individual Performance Factor should be determined based upon the individual performance assessment as outlined below: Individual Performance Adjustment to Individual Assessments Performance Components ---------------------- ------------------------ Exceed all performance targets 150% to 200% Exceed most performance targets 115% to 145% Met most performance targets 90% to 110% Met some/few performance targets 50% to 85%* Completely unacceptable performance 0% ------------------------------------ *All assessments should be multiples of 5%. (c) Approval of Performance. Approval of Participant's individual performance shall be as follows: (1) The individual performance assessment of the CEO will be determined by the Compensation Committee and approved by the Board of Directors. (2) The individual performance assessment of each Executive Team member other than the CEO will be determined by his or her manager. Such assessments will be approved by the CEO and, where appropriate, the Chief Operating Officer of the Company. (3) The individual performance assessment of all other Participants will be determined by their manager and approved by the appropriate member of the Executive Team. ARTICLE V Forfeiture and/or Proration of Incentive Award 5.1 Forfeiture. If a Participant terminates employment with the Company before March 1 after the performance year for any reason other than retirement he or she will not receive an award for the preceding Plan Year. 5.2 Proration. An Incentive Award will be prorated to reflect participation for a portion of the Plan Year for a Participant whose employment status changed during the year due to retirement or an approved leave of absence. New hires and part-time employees also receive a prorated award. ARTICLE VI Timing, Form of Payment, and Deferral of Awards 6.1 Timing and Form of Payment. Upon approval of the individual Incentive Awards for the CEO and each other member of the Executive Team and the aggregate amount of all Incentive Awards for the Plan Year by the Board of Directors or, if so delegated, the Compensation Committee, and subject to Section 6.3 hereof, payment of the individual awards will be made in cash less the withholding of appropriate taxes. Payment will be made not later than March 15th of the calendar year following each Plan Year. 10 6.2 Deferral of Awards. (a) Deferral by Participant. Certain executives may elect to defer their Incentive Award under the terms of the Sun Company, Inc. Deferred Compensation Plan. (b) Deferral by Committee. Each year in conjunction with the granting of an Annual Incentive Award to a Participant in this Plan, the Compensation Committee, in its sole discretion, may cause all or a portion of such Annual Incentive Award to be deferred under the terms of the Sun Company, Inc. Deferred Compensation Plan. Any portion of the Annual Incentive Award which is deferred, shall be credited to a Participant's account under the Deferred Compensation Plan at the time the bonus would otherwise have been paid had no Compensation Committee action to defer been taken. 6.3 Awards of Common Stock Units. (a) At the direction of the Compensation Committee, a component of each Participant's Incentive Award may be paid in Common Stock Units. The number of Common Stock Units to be issued pursuant to this Section 6.3 shall be determined by dividing: (1) the amount of the Incentive Award to be paid in Sun Stock or Common Stock Units; by (2) the average closing price for Sun Stock as reported on the New York Stock Exchange - Composite Transactions for the ten (10) day period prior to the date the bonus is to be paid. (b) All tax withholding will be satisfied from the remaining portion of the Incentive Award which is paid in cash. ARTICLE VII Change in Control 7.1 Effect of Change in Control. The terms of this Article VII shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and control over any other provisions of this Plan. 7.2 Acceleration. Upon the occurrence of a Change in Control, the CIC Incentive Award shall be payable in cash within thirty (30) days of the occurrence of a Change in Control (or as soon as it is practicable to determine the appropriate performance factors under Subsection (a) below) to all CIC Participants. Such award shall be calculated according to the terms of the Plan, except as follows: (a) The Company and, as necessary, the Business Unit and Team Performance Factors shall be determined based upon the performance from January 1 through the end of the most recent quarter (prior to the Change in Control) for which the Company has reported its earnings to the public. Notwithstanding the methodology established by the CEO or the Compensation Committee for the Plan Year, there shall be no adjustment for Individual Performance Factors in the determination of the CIC Incentive Award. If a specified percentage of the Guideline Award was to be based upon individual performance, such percentage will be adjusted using the weighted average of the Company and, as necessary, Business Unit and Team Performance Factors which were used to determine the non-individual performance components of the CIC Participant's award. 11 (b) The amount of the CIC Incentive Award shall be equal to the respective annual Guideline Incentive Award adjusted to reflect Company and, as necessary, Business Unit and Team Performance Factors (calculated in accordance with subsection (a) herein), multiplied by the number of full and partial months in the CIC Short Period divided by twelve (12). Such result shall be further adjusted to reflect participation for only a portion of the CIC Short Period in accordance with Section 5.2. (c) Notwithstanding the provisions of Section 8.3 hereof, effective upon a Change in Control, no action by the Compensation Committee or the Board of Directors may terminate or reduce the benefits or prospective benefits of any CIC Participant on the date of reference without the express written consent of such CIC Participant. 7.3 Attorney's Fees. The Company shall pay all reasonable legal fees and related expenses incurred by a participant in seeking to obtain or enforce any payment, benefit or other right such participant may be entitled to under the Plan after a Change in Control; provided, however, that the participant shall be required to repay any such amounts to the Company to the extent a court of competent jurisdiction issues a final and non-appealable order setting forth the determination that the position taken by the participant was frivolous or advanced in bad faith. ARTICLE VIII Miscellaneous 8.1 Funding of Plan. In a meeting to be held not later than December 31st of each Plan Year, the Compensation Committee may determine, by appropriate resolution, an estimate of the amount of monies, if any, that should be set aside for the current Plan Year for payment to Participants in the following calendar year. 8.2 Construction. Nothing in this Plan or in any agreement or other instrument executed pursuant thereto shall be construed as conferring upon any Participant the right to receive executive incentive compensation or to be continued in the employ of the Company and any rights conferred by this Plan may not be transferred, sold, assigned, pledged, anticipated or otherwise disposed of other than by will or intestate laws. 8.3 Amendment. This Plan may be amended at any time by the Compensation Committee and may be terminated in whole or in part at any time by the Board of Directors (except as set forth in Section 7.2(c)). EX-10.9 10 AMEND NO. 1997-1 EXECUTIVE RETIREMENT PLAN Exhibit 10.9 SUN COMPANY, INC. EXECUTIVE RETIREMENT PLAN Amendment No. 1997-1 1. The second sentence of Section 1.01 is deleted. 2. There is added a new Section 1.07A as follows: "1.07A 'Cause' shall mean termination of a Participant's employment by the Company, due to: (a) the Participant's indictment for a criminal offense (other than a traffic offense) including, without limitation, a crime involving moral turpitude or common law fraud; (b) excessive absenteeism by the Participant, unrelated to any illness; or (c) the Company's reasonable determination that the Participant has either: (1) committed an act of fraud, embezzlement, theft, or misappropriation of funds in connection with such Participant's duties in the course of his employment with the Company; or (2) engaged in mismanagement, negligence, or misconduct in the course of his employment with the Company." 3. There is added a new Section 1.07B as follows: "1.07B 'Change in Control' shall be deemed to have occurred if: (a) Continuing Directors cease, within one year of such Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets) or (b) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially more than twenty percent (20%) of the outstanding voting shares." 4. There is added a new Section 1.09A as follows: "1.09A 'Continuing Director' shall mean a Director who was a member of the Board of Directors of Sun Company, Inc. immediately prior to a Control Transaction which results in a Change in Control." 2 5. There is added a new Section 1.09B as follows: "1.09B 'Control Transaction' shall mean any of the following transactions or any combination thereof: (i) any tender offer for or acquisition of capital stock of Sun Company, Inc., (ii) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc., or (iii) the submission of a nominee or nominees for the position of director of the Company by a shareholder or a Group of shareholders in a proxy solicitation or otherwise." 6. Section 1.11 is restated as follows: "1.11 'Earnings' means: (a) For periods beginning on or after September 1, 1997, the sum of (i) base salary paid or payable to a Participant by the Company or an Affiliated Company and (ii) the Participant's unadjusted annual guideline bonus in effect for the Participant under the Sun Company, Inc. Executive Incentive Plan or successor plans ("EIP") pro rated over the applicable period (e.g., for computation of Earnings for a one-month period, the unadjusted annual guideline bonus would be divided by 12); or (b) For periods ending prior to September 1, 1997, the sum of (i) base salary paid or payable to a Participant by the Company or an Affiliated Company (including an amount equal to the value on the date of grant of any restricted stock units ("RSUs") designated as base salary, and not as short-term or long-term incentives, under the Sun Company, Inc. Long-Term Incentive Plan or the Sun Company, Inc. Executive Long-Term Stock Investment Plan, provided that such RSUs become vested and payable) and (ii) the dollars represented by (I) the Participant's unadjusted guideline incentive percentage in effect under the EIP during such period, multiplied by (II) the Participant's base salary paid or payable (as defined in subsection (b)(i) herein)." 7. Section 1.16 is restated as follows: "1.16 'Final Average Earnings' means the arithmetic average of the Participant's aggregate Earnings during the 36 consecutive calendar months of the last 120-consecutive calendar month period of Service immediately preceding the earlier of actual retirement, Termination Date or the Participant's 62nd birthday (or the actual number of such months if less than 36) which produce the highest average." 3 8. There is added a new Section 1.16A as follows: "1.16A 'Group' shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended." 9. Section 1.19 is restated as follows: "1.19 'Participant' means any Employee who is a Participant in the Sun Company, Inc. Retirement Plan, who has not waived his rights to participate in this Plan, and who is either (a) an Executive or (b) designated as a Participant by the Board Committee. Except as provided in Sections 6.01, 6.02 or 6.04, if any Participant ceases to be an Executive, he will thereupon cease to be a Participant (unless otherwise designated by the Board Committee), and will forfeit all rights to benefits under this Plan." 10. There is added a new Section 1.22A as follows: "1.22A 'Potential Change in Control' shall mean the occurrence of any of the following events or transactions: (1) any person (other than Sun Company, Inc., or any affiliate or subsidiary thereof) makes a tender offer for capital stock of Sun Company, Inc.; (2) any person becomes the beneficial owner, directly or indirectly, of capital stock of Sun Company, Inc. in an amount which requires the filing of Schedule 13D or its equivalent form pursuant to the Rules and Regulations under the Securities Exchange Act of 1934 as from time to time amended; (3) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or Group of shareholders in a proxy solicitation or otherwise which, in its judgment, the Board of Directors determines by adoption of a resolution within thirty (30) days of such submission, might result in a Change in Control of Sun Company, Inc.; (4) any person files a pre-merger notification for the acquisition of capital stock of Sun Company, Inc. pursuant to the Hart- Scott-Rodino Act; or (5) The Board of Directors in its judgment determines by adoption of a resolution that a Potential Change in Control of Sun Company, Inc. for purposes of this Plan has occurred." 11. There is added a new Section 1.23A as follows: "1.23A 'Qualifying Termination' of the employment of a Participant shall mean any of the following: (a) a termination of employment by the Company within two (2) years after a Change in Control, other than for Just Cause, death or disability; 4 (b) a termination of employment by the Participant within two (2) years after a Change in Control for one or more of the following reasons: (1) the assignment to such Participant of any duties inconsistent in a way adverse to such Participant, with such Participant's positions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a reduction in the duties and responsibilities held by the Participant immediately prior to the Change in Control; a change in the Participant's reporting responsibilities, title or offices as in effect immediately prior to the Change in Control that is adverse to the Participant; or any removal of the Participant from or any failure to re-elect the Participant to any position with the Company that such Participant held immediately prior to the Change in Control except in connection with such Participant's: (i) assignment to a new position at a higher annual base salary and guideline bonus; or (ii) termination of employment by the Company for Just Cause; or (2) With respect to any Participant who is a member of the Board of Directors immediately prior to the Change in Control, any failure of the shareholders of the Company to elect or reelect, or of the Company to appoint or reappoint, the Participant as a member of the Board of Directors; (3) A reduction by the Company in the Participant's base annual salary or guideline (target) bonus as in effect immediately prior to the Change in Control; the failure by the Company to continue in effect, or the taking of any action by the Company that would adversely affect such Participant's participation in or materially reduce such Participant's benefits under, any employee benefit plan or compensation plan in which such Participant was participating immediately prior to the Change in Control; provided, however, that in the aggregate such actions by the Company significantly reduce the Participant's total compensation (i.e., the sum of Participant's annual base salary, guideline (target) bonus, and the aggregate value to the Participant of all employee benefit or compensation plans); or the failure by the Company, without the Participant's consent, to pay to the Participant any portion of the Participant's current compensation, or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of the Company; or (4) The Company requires the Participant to be based anywhere other than the Participant's present work location or a location within thirty-five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantially more burdensome than such Participant's travel obligations during the period of twelve (12) consecutive months immediately preceding the Change in Control; 5 provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not be deemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason for the termination; or (c) a termination of employment by the Company other than a termination for Just Cause, or a termination of employment by the Participant for one of the reasons set forth in (b) above, following a Potential Change in Control, if the Participant can demonstrate that such termination or circumstance in (b) above leading to termination (i) was at the request of a third party with which the Company had entered into negotiations or an agreement with regard to a Change in Control or (ii) otherwise occurred in connection with, or in anticipation of, a Change in Control, provided that, in either such case, such Change in Control actually occurs within one (1) year following the Employment Termination Date. (d) As used herein, 'Just Cause' shall mean: (i) a judicial determination that the Participant has committed fraud, misappropriation, or embezzlement against the Company; or (ii) a non-appealable conviction of, or entry of a plea of nolo contendere for, an act by the Participant constituting a felony which, as determined by the Company in good faith, constitutes a crime involving moral turpitude and has resulted in material harm to the Company, its subsidiaries and affiliates taken as a whole. A termination of employment pursuant to Just Cause shall not be considered to be effective unless accompanied by a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the Continuing Directors at a meeting of the Board of Directors which was called and held for the purpose of considering such termination, or if there are no Continuing Directors, then by at least three quarters of the entire Board of Directors (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the Participant was guilty of conduct set forth in the preceding sentence, and specifying the particulars thereof in detail. In any Board deliberations or votes concerning a determination under this Section, the Participant shall recuse himself from such deliberations and votes." 12. Section 6.01 is restated as follows: "6.01 Termination of Employment. (a) Voluntary Termination. A Participant whose employment is terminated for any reason other than death or retirement, including early retirement, will not be entitled to benefits under this Plan, except as provided in Subsection (b) and Section 6.04 hereof. 6 (b) Involuntary Termination. Notwithstanding any other provision of the Plan (and except as discussed herein), a Participant whose employment is involuntarily terminated prior to his Early Retirement Date, other than for Just Cause, and who executes a release and discharge of the Company from any and all claims, demands or causes of action other than as to amounts or benefits due to the Participant under any plan, program or contract provided by, or entered into with, the Company will be entitled to benefits in accordance with this Subsection (b). Such release and discharge shall be in such form as is prescribed by the Committee and shall be executed prior to the payment of any benefits due hereunder. In addition, no benefits due hereunder shall be paid to a Participant who is required by Company guidelines to execute an agreement governing the assignment of patents or the disclosure of confidential information unless an executed copy of such agreement is on file with the Company. The benefits under this Subsection (b) shall consist of a nonforfeitable percentage in the benefits calculated under Section 3.06 (including the minimum benefit defined under Section 3.04) equal to 1-2/3% times the number of completed months of Executive Service. Such benefits shall commence coincident with or next following the first day of the calendar month in which the Participant attains age 55, or if the Participant elects, the benefit will be paid no later than 30 days after the Termination Date, in a lump sum payment of the Actuarial Equivalent of the age 55 retirement income determined under Section 3.06, with an additional reduction of such benefit by discounting it to the date of payment using the interest rate used in Section 1.01. Any participant who also is eligible to receive benefits under Section 6.04 shall not receive benefits hereunder but shall instead receive the benefits under Section 6.04." 13. Section 6.04 is restated as follows: "6.04 Change in Control. (a) Notwithstanding any other provisions in the Plan, any Participant who terminates employment as a result of a Qualifying Termination shall become fully vested upon a Change in Control of the Company and shall be entitled to benefits calculated as follows: (1) Except for purposes of Section 1.10(b), Service and Credited Service shall be increased by 36 months, with the number of months credited under this Section 6.04(a)(1) reduced by one month for each completed month of Service of the Participant after the date of the Change in Control, but not below zero. (2) If at the Termination Date, the Participant has attained his Normal Retirement Date, he shall be entitled to a benefit calculated in accordance with Section 3.02. (3) If at the Termination Date, the Participant has not attained his Normal Retirement Date, or has not attained his Early Retirement Date, he shall be entitled to benefits calculated under Section 3.06 (including the minimum benefit defined under Section 3.04). 7 (4) Final Average Earnings shall be determined using the greater of: (i) the amount determined under Section 1.16 without reference to this Section 6.04(a)(4); (ii) Earnings for the first full calendar month preceding the Termination Date; or (iii) Earnings for the first full calendar month preceding the date of a Change in Control. (5) In the case of a Participant who has not attained his Early Retirement Date at the Termination Date, such benefits shall commence coincident with or next following the first day of the calendar month in which the Participant attains age 55, or if the Participant elects, the benefit will be paid no later than 30 days after the Termination Date, in a lump sum payment of the Actuarial Equivalent of the age 55 retirement income determined under Section 3.06 with additional reduction of such benefit by discounting it to the date of payment using the interest rate used in Section 1.01. (b) Notwithstanding any other provisions in the Plan, upon a Change in Control and for a period of twelve (12) months thereafter, any retired Participant or Beneficiary who is receiving an optional form of retirement income pursuant to Article IV hereof, shall have the right to elect to receive in a single lump-sum cash payment an amount equal to ninety-five percent (95%) of the Actuarial Equivalent of the payments of such retirement income to which the Participant or Beneficiary is entitled for all future periods under the Plan; provided, however, that if this option is exercised, such retired Participant or Beneficiary will forfeit to the Company the remaining five percent 5% of the Actuarial Equivalent of such payments. Payments under this Section 6.04(b) shall be made as soon as practicable, but no later than 30 days after the retired Participant or Beneficiary notifies the Plan that he is exercising his right to withdraw. (c) The Company shall pay all reasonable legal fees and related expenses incurred by a Participant in seeking to obtain or enforce any payment, benefit or other right such Participant may be entitled to under the Plan after a Change in Control; provided, however, that the Participant shall be required to repay any such amounts to the Company to the extent a court of competent jurisdiction issues a final and non-appealable order setting forth the determination that the position taken by the Participant was frivolous or advanced in bad faith." 14. This amendment is effective September 1, 1997. EX-10.10 11 SPECIAL EXECUTIVE SEVERANCE PLAN Exhibit 10.10 ================================================================================ SUN COMPANY, INC. SPECIAL EXECUTIVE SEVERANCE PLAN -------------------------------- ================================================================================ 2 ARTICLE I. DEFINITIONS Section 1.1 "Annual Compensation" shall mean a Participant's annual base salary and applicable guideline (target) annual bonus amount in effect on his or her Employment Termination Date, or, if greater, the annual base salary and applicable guideline (target) annual bonus amount on the date of the Change in Control. Section 1.2 "Auditor" shall have the meaning provided herein at Section 4.7(b). Section 1.3 "Benefit" or "Benefits" shall mean any or all of the benefits that a Participant is entitled to receive pursuant to Article IV of the Plan. Section 1.4 "Benefit Extension Period" shall mean: (a) for the Company's Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer, three years; (b) for an Executive Resource Employee in Grade 17 or above, two years; and (c) for each other Executive Resource Employee, one year and six months. Section 1.5 "Board of Directors" shall mean the Board of Directors of Sun Company, Inc. or any successor thereto. Section 1.6 "Change in Control" shall mean the occurrence of any of the following events or transactions: (a) Continuing Directors cease, within one year of a Control Transaction, to constitute a majority of the Board of Directors of Sun Company, Inc. (or of the Board of Directors of any successor to Sun Company, Inc. or to all or substantially all of its assets), or (b) any entity, person or Group acquires shares of Sun Company, Inc. in a transaction or series of transactions that results in such entity, person or Group directly or indirectly owning beneficially more than twenty percent (20%) of the outstanding voting shares of Sun Company, Inc. Section 1.7 "Chief Executive Officer" shall mean the individual serving as the Chief Executive Officer of Sun Company, Inc. as of the date of reference. Section 1.8 "Code" shall mean the Internal Revenue Code of 1986, as amended. Section 1.9 "Committee" shall mean the administrative committee designated pursuant to Article VI of the Plan to administer the Plan in accordance with its terms. Section 1.10 "Company" shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any subsidiary or affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any subsidiary or affiliate by merger, consolidation, liquidation or purchase of assets or stock or similar transaction. 3 Section 1.11 "Company Service" shall mean, for purposes of determining Benefits available to any Participant in this Plan, the total aggregate recorded length of such Participant's service with: Sun Company, Inc.; any subsidiary or affiliate of Sun Company, Inc. (whether by merger, consolidation or liquidation or purchase of assets or stock or similar transaction) which has adopted the Plan; and/or any corporation succeeding to the business of Sun Company, Inc. Company Service shall commence with the Participant's initial date of employment with the Company, and shall end with such Participant's death, retirement, or termination for any reason. Company Service also shall include: (a) all periods of approved leave of absence (civil, family, medical, military, or Olympic); provided, however, that the Participant returns to work within the prescribed time following the leave; (b) any break in service of thirty (30) days or less; and (c) any service credited under applicable Company policies with respect to the length of a Participant's employment by any non-affiliated entity that is subsequently acquired by, and becomes a part of, the Company's operations. Section 1.12 "Continuing Director" shall mean a director who was a member of the Board of Directors immediately prior to a Control Transaction which results in a Change in Control. Section 1.13 "Control Transaction" shall mean any of the following transactions or any combination thereof: (a) any tender offer for or acquisition of capital stock of Sun Company, Inc.; (b) any merger, consolidation, or sale of all or substantially all of the assets of Sun Company, Inc.; or (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or a Group of shareholders in a proxy solicitation or otherwise. Section 1.14 "Disability" shall mean any illness, injury or incapacity of such duration and type as to render a Participant eligible to receive long-term disability benefits under the applicable broad-based long-term disability program of the Company. Section 1.15 "Employment Termination Date" shall mean the date on which the employment relationship between the Participant and the Company is terminated. Section 1.16 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Section 1.17 "Excise Tax" shall have the meaning provided herein at Section 4.7(a). Section 1.18 "Executive Resource Employee" shall mean any individual employed by the Company who has been designated by the Company as a member of the Company's executive resources group. Generally, such group shall include employees in Grades 14-20 and all other employees subject to Section 16 of the Securities Exchange Act of 1934, as amended. 4 Section 1.19 "Gross-Up Payment" shall have the meaning provided herein at Section 4.7(a). Section 1.20 "Group" shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. Section 1.21 "Just Cause" shall mean: (a) a judicial determination that the Participant has committed fraud, misappropriation, or embezzlement against the Company; or (b) a non-appealable conviction of, or entry of a plea of nolo contendere for, an act by the Participant constituting a felony which, as determined by the Company in good faith, constitutes a crime involving moral turpitude and has resulted in material harm to the Company, its subsidiaries and affiliates taken as a whole. No termination of employment shall be deemed an effective termination for Just Cause unless accompanied by a copy of a resolution duly adopted by the affirmative vote of not less a majority of the Continuing Directors at a meeting of the Board of Directors which was called and held for the purpose of considering such termination, or if there are no Continuing Directors, then by at least three quarters (3/4) of the entire Board of Directors (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the Participant was guilty of conduct set forth in the preceding sentence, and specifying the particulars thereof in detail. In any deliberations or votes by the Board of Directors concerning a determination under this Section, the Participant shall recuse himself from such deliberations and votes. Section 1.22 "Participant" shall mean any Executive Resource Employee who is employed by the Company on or before the occurrence of any Change in Control. In addition, for purposes of Sections 4.6 and 4.7 of this Plan, each former Executive Resource Employee shall be a Participant. Section 1.23 "Payment Date" shall have the meaning provided herein at Section 4.7(a). Section 1.24 "Plan" shall mean the Sun Company, Inc. Special Executive Severance Plan, as set forth herein, and as the same may from time to time be amended. Section 1.25 "Potential Change in Control" shall mean the occurrence of any of the following events or transactions: (a) any person (other than Sun Company, Inc., or any affiliate or subsidiary thereof) makes a tender offer for capital stock of Sun Company, Inc.; (b) any person becomes the beneficial owner, directly or indirectly, of capital stock of Sun Company, Inc. in an amount which requires the filing of Schedule 13D or its equivalent form pursuant to the Rules and Regulations under the Securities Exchange Act of 1934 as from time to time amended; 5 (c) the submission of a nominee or nominees for the position of director of Sun Company, Inc. by a shareholder or Group of shareholders in a proxy solicitation or otherwise which, in its judgment, the Board of Directors determines by adoption of a resolution within thirty (30) days of such submission, might result in a Change in Control of Sun Company, Inc.; (d) any person files a pre-merger notification for the acquisition of capital stock of Sun Company, Inc. pursuant to the Hart-Scott-Rodino Act; or (e) the Board of Directors in its judgment determines by adoption of a resolution that a Potential Change in Control of Sun Company, Inc. for purposes of this Plan has occurred. Section 1.26 "Qualifying Termination" of the employment of a Participant shall mean any of the following: (a) a termination of employment by the Company within two (2) years after a Change in Control, other than for Just Cause, death or Disability; provided, however, that any Participant who also is eligible to receive benefits under the Sun Company, Inc. Executive Involuntary Severance Plan shall not receive benefits thereunder, but shall instead receive the Benefits provided under this Plan; (b) a termination of employment by the Participant within two (2) years after a Change in Control for one or more of the following reasons: (1) the assignment to such Participant of any duties inconsistent in a way adverse to such Participant, with such Participant's positions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a reduction in the duties and responsibilities held by the Participant immediately prior to the Change in Control; a change in the Participant's reporting responsibilities, title or offices as in effect immediately prior to the Change in Control that is adverse to the Participant; or any removal of the Participant from or any failure to re-elect the Participant to any position with the Company that such Participant held immediately prior to the Change in Control except in connection with such Participant's: (i) assignment to a new position at a higher combined annual base salary and guideline (target) bonus; or (ii) termination of employment by the Company for Just Cause; or (2) with respect to any Participant who is a member of the Board of Directors immediately prior to the Change in Control, any failure of the shareholders of the Company to elect or reelect, or of the Company to appoint or reappoint, the Participant as a member of the Board of Directors; 6 (3) a reduction by the Company in either of the Participant's annual base salary or guideline (target) bonus as in effect immediately prior to the Change in Control; the failure by the Company to continue in effect, or the taking of any action by the Company that would adversely affect such Participant's participation in or significantly reduce such Participant's benefits under, any employee benefit plan or compensation plan in which such Participant was participating immediately prior to the Change in Control, provided, however, that in the aggregate such actions by the Company significantly reduce the Participant's total compensation (i.e., the sum of Participant's annual base salary, guideline (target) bonus, and the aggregate value to the Participant of all employee benefit and compensation plans); or the failure by the Company, without the Participant's consent, to pay to the Participant any portion of the Participant's current compensation, or to pay to the Participant any portion of an installment of deferred compensation under any deferred compensation program of the Company; or (4) The Company requires the Participant to be based anywhere other than the Participant's present work location or a location within thirty-five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantially more burdensome than such Participant's travel obligations during the period of twelve (12) consecutive months immediately preceding the Change in Control; provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not be deemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason for the termination; or (c) a termination of employment by the Company other than a termination for Just Cause, or a termination of employment by the Participant for one of the reasons set forth in (b) above, following a Potential Change in Control, if the Participant can demonstrate that such termination or circumstance in (b) above leading to termination: (1) was at the request of a third party with which the Company had entered into negotiations or an agreement with regard to a Change in Control; or (2) otherwise occurred in connection with, or in anticipation of, a Change in Control; provided, however, that in either such case, such Change in Control actually occurs within one (1) year following the Employment Termination Date. Section 1.27 "Tax Counsel" shall have the meaning provided herein at Section 4.7(b). Section 1.28 "Total Payments" shall have the meaning provided herein at Section 4.7(a). 7 ARTICLE II. BACKGROUND, PURPOSE AND TERM OF PLAN Section 2.1 Background. Sun Company, Inc. maintains this Plan for the purpose of providing severance allowances to Executive Resource Employees whose employment is terminated in connection with or following a Change in Control. The Plan shall be effective as of September 4, 1997. Section 2.2 Purpose of the Plan. The Plan, as set forth herein, has been adopted by the Board of Directors of the Company, or a committee thereof, delegated such responsibility, acting in its sole discretion, in recognition that the possibility of a major transaction or a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company. The Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of Participants, as key members of Company's management, to their assigned duties without distraction. The Plan is not intended to be included in the definitions of "employee pension benefit plan" and "pension plan" set forth under Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Rather, this Plan is intended to meet the descriptive requirements of a plan constituting a "severance pay plan" within the meaning of regulations published by the Secretary of Labor at Title 29, Code of Federal Regulations, Section 2510.3- 2(b). Accordingly, the benefits paid by the Plan are not deferred compensation. Section 2.3 Term of the Plan. The Plan will continue until such time as the Board of Directors, or a committee thereof, delegated such responsibility, acting in its sole discretion, elects to modify, supersede or terminate it; provided, however, that effective upon a Change in Control, no such action may terminate or reduce the benefits or prospective benefits of any Participant on the date of reference without the express written consent of the Participant. ARTICLE III. PARTICIPATION AND ELIGIBILITY FOR BENEFITS Section 3.1 General Requirements. Each Executive Resource Employee shall become a Participant upon confirmation of his/her official title or employment grade by election by the Board of Directors or appointment by the Company. Except with respect to the benefits and payments under Sections 4.7 and 4.8, in order to receive a Benefit under this Plan, a Participant's employment must have been terminated as a result of a Qualifying Termination. Section 3.2 Qualifying Termination. The Committee shall determine whether any termination of a Participant is a Qualifying Termination. The Participant shall follow the procedures described in Article IX for presenting his or her claim for Benefits under this Plan. ARTICLE IV. BENEFITS Section 4.1 Amount of Immediate Cash Benefit; Qualifying Termination. In the event of a termination of employment that would qualify the Participant for Benefits that is a Qualifying Termination, the cash amount to be paid to a Participant eligible to receive Benefits under Section 3.1 hereof shall be paid in a lump sum as provided in Section 5.1 hereof and shall equal the sum of the following: 8 (a) An amount equal to the Participant's earned vacation (as determined under the Company's applicable vacation policy as in effect at the time of the Change in Control) through his or her Employment Termination Date; (b) (1) for the Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer, Annual Compensation multiplied by three (3); (2) for an Executive Resources Employee in Grade 17 or above, Annual Compensation multiplied by two (2); (3) for each other Executive Resources Employee, Annual Compensation multiplied by one and one-half (1-1/2). Section 4.2 Executive Severance Benefits. In the event that Benefits are paid under Section 4.1, the Participant shall continue to be entitled, through the end of his/her Benefit Extension Period, to those employee benefits, based upon the amount of coverage or benefits provided at the Change in Control, listed below: (a) death benefits as follows: (1) for Participants who became Executive Resource Employees on or after January 1, 1985, an amount equal to one (1) times annual base salary at the Employment Termination Date; and (2) for Participants who became Executive Resource Employees before January 1, 1985, an amount equal to two (2) times the sum of annual base salary and guideline bonus at the Employment Termination Date; Any supplemental coverages elected under the Sun Company, Inc. Death Benefits Plan (or any similar plan of any of the following: a subsidiary or affiliate which has adopted this Plan; a corporation succeeding to the business of Sun Company, Inc.; and/or any subsidiary or affiliate, by merger, consolidation, liquidation, purchase of assets or stock, or similar transaction) will be discontinued under the terms of such plan or plans; and (b) medical plan benefits (excluding dental coverage), including COBRA continuation coverage following the Benefit Extension Period (i.e., COBRA continuation eligibility will begin as of the end of the Benefit Extension Period). In each case, when contributions are required of all Executive Resource Employees at the time of the Participant's Employment Termination Date, or thereafter, if required of all other active Executive Resource Employees, the Participant shall continue to be responsible for making the required contributions during the Benefit Extension Period in order to be eligible for the coverage. In lieu of the coverages provided under clauses (a) and (b) above, the Company may pay, at the time payment is otherwise to be made of cash Benefits pursuant to Section 5.1 hereof, the Participant an amount (as adjusted for taxes) equal to the then present value of the Company's cost of such coverages, or the Company may provide the Participant with comparable coverage under a policy of insurance. The Participant also shall be entitled to outplacement services during the Benefit Extension Period, at no cost to the Participant, from an experienced third-party vendor selected by the Committee and consistent with vendors used in connection with the Sun Company, Inc. Involuntary Termination Plan at the Change in Control. 9 Section 4.3 Special Medical Benefit. In the event that Benefits are paid to the Participant under Section 4.1, Participants who are fifty (50) or more years of age on the Employment Termination date, with a minimum of ten (10) years of Company Service shall have medical (but not dental) benefits available under the same terms and conditions as other employees not yet eligible for Medicare coverage who retire under the terms of a Company retirement plan. Such benefits may continue until such time as the Participant becomes first eligible for Medicare, or the Participant voluntarily cancels coverage, whichever is earliest. Section 4.4 Retirement Plans. This Plan shall not govern and shall in no way affect the Participant's interest in, or entitlement to benefits under, any of the Company's "qualified" or supplemental retirement plans and any payments received under any such plans shall not affect a Participant's right to any Benefit hereunder. Section 4.5 Minimum Benefit. Notwithstanding the provisions of Sections 4.1, 4.2 and 4.3 hereof, the Benefits available under this Plan shall not be less than those determined in accordance with the provisions of the Sun Company, Inc. Special Employee Severance Plan. If the Participant determines that the benefits under the Sun Company, Inc. Special Employee Severance Plan are more valuable to the Participant than the comparable Benefits set forth in this Plan, then the provisions used to calculate the Benefits available to the Participant under this Plan shall not apply, and the Benefits available to the Participant under this Plan shall be calculated using only the applicable provisions of the Sun Company, Inc. Special Employee Severance Plan. Section 4.6 Effect on Other Benefits. There shall not be drawn from the continued provision by the Company of any of the aforementioned Benefits any implication of continued employment or of continued right to accrual of retirement benefits under the Company's qualified or supplemental retirement plans, nor shall a terminated employee, except as otherwise provided under the terms of the Plan, accrue vacation days, paid holidays, paid sick days or other similar benefits normally associated with employment for any part of the Benefit Extension Period during which benefits are payable under this Plan. A Participant shall have no duty to mitigate with respect to Benefits under this Plan by seeking or accepting alternative employment. Further, the amount of any payment or benefit provided for in this Plan shall not be reduced by any compensation earned by the Participant as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Participant to the Company, or otherwise. Section 4.7 Parachute Payments. (a) Whether or not the Participant becomes entitled to Benefits under Section 4.1, if any payment or benefit received or to be received by the Participant in connection with a Change in Control or the termination of the Participant's employment (all such payments and benefits, including the Benefits under Sections 4.1, 4.2 and 4.3, being hereinafter the "Total Payments"), whether pursuant to the terms of: (1) this Plan; or (2) any other plan, arrangement or agreement with: (i) the Company; (ii) any person whose actions result in a Change in Control; or 10 (iii) any person affiliated with the Company or with any person whose actions result in a Change in Control; will be subject (in whole or part) to the excise tax under section 4999 of the Code (the "Excise Tax"), then the Company shall pay to the Participant an additional amount (the "Gross-Up Payment") such that the net amount retained by the Participant, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment tax and Excise Tax upon the Gross-Up-Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Participant shall be deemed to pay federal income and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made (the "Payment Date") and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Participant's residence on the Payment Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax: (1) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel (the "Tax Counsel") reasonably acceptable to the Participant and selected by the accounting firm (the "Auditor") which was, immediately prior to the Change in Control, the Company's independent auditor, such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code; (2) all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the "base amount" within the meaning set forth in section 280G(b)(3) of the Code allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax; and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of section 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 4.7(d) hereof, the Company shall provide the Participant with its calculation of the amounts referred to in this Section 4.7(b) and such supporting materials as are reasonably necessary for the Participant to evaluate the Company's calculations. If the Participant disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. 11 (c) In the event that: (1) amounts are paid to the Participant pursuant to Section 4.7(a) above; and (2) the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Participant's employment, the Participant shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the Payment Date (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross- Up Payment to the Participant in respect of such excess (plus any interest, penalties or additions payable by the Participant with respect to such excess and such portion) at the time that the amount of such excess is finally determined. (d) The payments provided for in subsections (a) and, if applicable, (c) of this Section 4.7 shall be made not later than the ninetieth (90th) day following the Change in Control if payments are due at that time, or the Employment Termination Date, if payments are then due; provided, however, that if the amounts of such payments, or, if applicable, the Excise Tax, cannot be finally determined on or before such day, the Company shall pay to the Participant on such day an estimate, as determined in good faith by the Participant, of the minimum amount of such payments to which the Participant is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the date payment is due. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Participant, payable on the fifth (5th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Participant with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). (e) All of the fees and expenses of the Tax Counsel and Auditor in performing the determinations referred to in subsections (b) and (c) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Tax Counsel and Auditor of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Tax Counsel or Auditor. 12 Section 4.8 Legal Fees and Expenses. The Company also shall pay to the Participant all legal fees and expenses incurred by the Participant: (a) in disputing in good faith any issue relating to the termination of the Participant's employment following a Change in Control as a result of a Qualifying Termination entitling the Participant to Benefits under this Plan (including a termination of employment following a Potential Change in Control if the Participant alleges in good faith that such termination will be or is a Qualifying Termination pursuant to Section 1.18 hereof, and the Change in Control actually occurs within one (1) year following the Employment Termination Date); or (b) in seeking in good faith to obtain or enforce any benefit or right provided by this Plan (or the payment of any Benefits through any trust established to fund Benefits under this Plan) or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made as such fees and expenses are incurred by the Participant, but in no event later than five (5) business days after delivery of the Participant's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. The Participant shall reimburse the Company for such fees and expenses at such time as a court of competent jurisdiction, or another independent third party having similar authority, determines that the Participant's claim was frivolously brought without reasonable expectation of success on the merits thereof. ARTICLE V. METHOD AND DURATION OF BENEFIT PAYMENTS Section 5.1 Method of Payment. The cash Benefits to which a Participant is entitled, as determined pursuant to Article IV hereof, shall be paid in a lump sum. Payment shall be made by mailing to the last address provided by the Participant to the Company. In general, payment shall be made within fifteen (15) days after the Participant's Employment Termination Date but in no event later than thirty (30) days thereafter. In the event the Company should fail to pay when due the amounts described in Article IV, the Participant shall also be entitled to receive from the Company an amount representing interest on any unpaid or untimely paid amounts from the due date, as determined under Section 4.7(d), to the date of payment at a rate equal to the prime rate of Citibank, N.A. as in effect from time to time after such due date. Section 5.2 Payments to Beneficiary(ies). Each Executive Resource Employee shall designate a beneficiary(ies) to receive any Benefits due hereunder in the event of the Participant's death prior to the receipt of all such Benefits. Such beneficiary designation shall be made in the manner, and at the time, prescribed by the Company in its sole discretion. In the absence of an effective beneficiary designation hereunder, the Participant's estate shall be deemed to be his or her designated beneficiary. 13 ARTICLE VI. ADMINISTRATION Section 6.1 Appointment of the Committee. The Committee shall consist of three (3) or more persons appointed by the Chief Executive Officer. Committee members may be, but need not be, employees of Sun Company, Inc. Section 6.2 Tenure of the Committee. Committee members shall serve at the pleasure of the Chief Executive Officer. Committee members may resign at any time on ten (10) days' written notice, and Committee members may be discharged, with or without cause, at any time by the Chief Executive Officer. Section 6.3 Authority and Duties. It shall be the duty of the Committee, on the basis of information supplied to it by the Company, to determine the eligibility of each Participant for Benefits under the Plan, to determine the amount of Benefit to which each such Participant may be entitled, and to determine the manner and time of payment of the Benefit consistent with the provisions hereof. In addition, the exercise of discretion by the Committee need not be uniformly applied to similarly situated Participants. The Company shall make such payments as are certified to it by the Committee to be due to Participants. The Committee shall have the full power and authority to construe, interpret and administer the Plan, to correct deficiencies therein, and to supply omissions. Except as provided in Section 9.2, all decisions, actions and interpretations of the Committee shall be final, binding and conclusive upon the parties. Section 6.4 Action by the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business at a meeting of the Committee. Any action of the Committee may be taken upon the affirmative vote of a majority of the members of the Committee at a meeting, or at the direction of the chairperson, without a meeting by mail, telegraph, telephone or electronic communication device; provided that all of the members of the Committee are informed of their right to vote on the matter before the Committee and of the outcome of the vote thereon. Section 6.5 Officers of the Committee. The Chief Executive Officer shall designate one of the members of the Committee to serve as chairperson thereof. The Chief Executive Officer shall also designate a person to serve as Secretary of the Committee, which person may be, but need not be, a member of the Committee. Section 6.6 Compensation of the Committee. Members of the Committee shall receive no compensation for their services as such. However, all reasonable expenses of the Committee shall be paid or reimbursed by the Company upon proper documentation. The Company shall indemnify members of the Committee against personal liability for actions taken in good faith in the discharge of their respective duties as members of the Committee and shall provide coverage to them under the Company's Liability Insurance program(s). Section 6.7 Records, Reporting and Disclosure. The Committee shall keep all individual and group records relating to Participants and former Participants and all other records necessary for the proper operation of the Plan. Such records shall be made available to the Company and to each Participant for examination during business hours 14 except that a Participant shall examine only such records as pertain exclusively to the examining Participant and to the Plan. The Committee shall prepare and shall file as required by law or regulation all reports, forms, documents and other items required by ERISA, the Internal Revenue Code, and every other relevant statute, each as amended, and all regulations thereunder (except that the Company, as payor of the Benefits, shall prepare and distribute to the proper recipients all forms relating to withholding of income or wage taxes, Social Security taxes, and other amounts which may be similarly reportable). Section 6.8 Actions of the Chief Executive Officer. Whenever a determination is required of the Chief Executive Officer under the Plan, such determination shall be made solely at the discretion of the Chief Executive Officer. In addition, the exercise of discretion by the Chief Executive Officer need not be uniformly applied to similarly situated Participants and shall be final and binding on each Participant or beneficiary(ies) to whom the determination is directed. Section 6.9 Benefits of the Chief Executive Officer. The Board of Directors (or any committee thereof delegated such responsibility) shall make all determinations with respect to the amounts, timing and eligibility for any Benefits provided hereunder to the Chief Executive Officer. In addition, if the Chief Executive Officer is serving on the Committee, the Chief Executive Officer shall not participate on any matter that directly pertains to, or affects, the Chief Executive Officer. Whenever a determination is required of the Chief Executive Officer as to any matter that directly pertains to, or affects, the Chief Executive Officer under the Plan, such determination with respect to the Chief Executive Officer shall be made and approved by a majority of the Continuing Directors, or, if there are no Continuing Directors, then by at least three quarters (3/4) of the entire Board of Directors. Section 6.10 Bonding. The Committee shall arrange any bonding that may be required by law, but no amount in excess of the amount required by law (if any) shall be required by the Plan. ARTICLE VII. AMENDMENT AND TERMINATION Section 7.1 Amendment, Suspension and Termination. The Company, acting through the Board of Directors, retains the right, at any time and from time to time, to amend, suspend or terminate the Plan in whole or in part, for any reason, and without either the consent of or the prior notification to any Participant. Notwithstanding the foregoing, effective upon a Change in Control, no such action may terminate or reduce the benefits or prospective benefits of any Participant on the date of reference without the express written consent of the Participant. No such amendment, suspension or termination shall give the Company the right to recover any amount paid to a Participant prior to the date of such amendment or to cause the cessation and discontinuance of payments of Benefits to any person or persons under the Plan already receiving Benefits. The Board of Directors shall have the right to delegate its authority and powers hereunder, or any portion thereof, to any committee of the Board of Directors, and shall have the right to rescind any such delegation in whole or in part. 15 ARTICLE VIII. DUTIES OF THE COMPANY Section 8.1 Records. The Company shall supply to the Committee all records and information necessary to the performance of the Committee's duties. Section 8.2 Payment. The Company shall make payments from its general assets to Participants and shall provide the Benefits described in Article IV hereof in accordance with the terms of the Plan, as directed by the Committee. ARTICLE IX. CLAIMS PROCEDURES Section 9.1 Application for Benefits. Benefits shall be paid by the Company following an event that qualifies the Participant for Benefits. In the event a Participant believes himself/herself eligible for Benefits under this Plan and Benefit payments have not been initiated by the Company, the Participant may apply for such Benefits by requesting payment of Benefits in writing from the Committee. Section 9.2 Appeals of Denied Claims for Benefits. In the event that any claim for benefits is denied in whole or in part, the Participant (or beneficiary, if applicable) whose claim has been so denied shall be notified of such denial in writing by the Committee, within thirty (30) days following submission by the Participant (or beneficiary, if applicable) of such claim to the Committee. The notice advising of the denial shall specify the reason or reasons for denial, make specific reference to pertinent Plan provisions, describe any additional material or information necessary for the claimant to perfect the claim (explaining why such material or information is needed), and shall advise the Participant of the procedure for the appeal of such denial. All appeals shall be made by the following procedure: (a) The Participant whose claim has been denied shall file with the Committee a notice of desire to appeal the denial. Such notice shall be filed within sixty (60) days of notification by the Committee of the claim denial, shall be made in writing, and shall set forth all of the facts upon which the appeal is based. Appeals not timely filed shall be barred. (b) The Committee shall, within thirty (30) days of receipt of the Participant's notice of appeal, establish a hearing date on which the Participant may make an oral presentation to the Committee in support of his/her appeal. The Participant shall be given not less than ten (10) days' notice of the date set for the hearing. (c) The Committee shall consider the merits of the claimant's written and oral presentations, the merits of any facts or evidence in support of the denial of benefits, and such other facts and circumstances as the Committee shall deem relevant. If the claimant elects not to make an oral presentation, such election shall not be deemed adverse to his/her interest, and the Committee shall proceed as set forth below as though an oral presentation of the contents of the claimant's written presentation had been made. (d) The Committee shall render a determination upon the appealed claim, within sixty (60) days of the hearing date, which determination shall be accompanied by a written statement as to the reasons therefor. 16 ARTICLE X. MISCELLANEOUS Section 10.1 Nonalienation of Benefits. None of the payments, benefits or rights of any Participant shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Participant. No Participant shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he/she may expect to receive, contingently or otherwise, under this Plan. Section 10.2 No Contract of Employment. Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant, or any person whosoever, the right to be retained in the service of the Company, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been adopted. Section 10.3 Severability of Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. Section 10.4 Successors, Heirs, Assigns, and Personal Representatives. This Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant, present and future. Section 10.5 Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. Section 10.6 Gender and Number. Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. Section 10.7 Unfunded Plan. The Plan shall not be funded. A Participant's right to receive payment of Benefits hereunder shall be no greater than the right of any unsecured creditor of the Company. The Company may, but shall not be required to, set aside or earmark an amount necessary to provide the Benefits specified herein (including the establishment of trusts). In any event, no Participant shall have any right to, or interest in, any assets of the Company which may be applied by the Company to the payment of Benefits except as may be provided pursuant to the terms of any trust established by the Company to provide Benefits. Section 10.8 Payments to Incompetent Persons, Etc. Any Benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Company, the Committee and all other parties with respect thereto. 17 Section 10.9 Lost Payees. A Benefit shall be deemed forfeited if the Committee is unable to locate a Participant to whom a Benefit is due. Such Benefit shall be reinstated if application is made by the Participant for the forfeited Benefit while this Plan is in operation. Section 10.10 Controlling Law. This Plan shall be construed and enforced according to the laws of the Commonwealth of Pennsylvania to the extent not preempted by federal law. Section 10.11 Successor Employer. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company" shall mean the Company and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Plan. EX-10.11 12 EXECUTIVE INVOLUNTARY SEVERANCE PLAN Exhibit 10.11 ======================================================================== SUN COMPANY, INC. EXECUTIVE INVOLUNTARY SEVERANCE PLAN ======================================================================== 2 ARTICLE I DEFINITIONS Section 1.1 "Benefit" or "Benefits" shall mean any or all of the benefits that a Participant is entitled to receive pursuant to Article IV of the Plan. Section 1.2 "Board of Directors" shall mean the Board of Directors of Sun Company, Inc. or any successor thereto. Section 1.3 "Chief Executive Officer" shall mean the individual serving as `the Chief Executive Officer of Sun Company, Inc. as of the date of reference. Section 1.4 "Committee" shall mean the administrative committee designated pursuant to Article VI of the Plan to administer the Plan in accordance with its terms. Section 1.5 "Company" shall mean Sun Company, Inc., a Pennsylvania corporation. The term "Company" shall include any successor to Sun Company, Inc., any subsidiary or affiliate which has adopted the Plan, or a corporation succeeding to the business of Sun Company, Inc., or any subsidiary or affiliate, by merger, consolidation or liquidation or purchase of assets or stock or similar transaction. Section 1.6 "Company Service" shall mean, for purposes of determining Benefits available to any Participant in this Plan, the total aggregate recorded length of such Participant's service with: Sun Company, Inc.; any subsidiary or affiliate of Sun Company, Inc. (whether by merger, consolidation or liquidation or purchase of assets or stock or similar transaction) which has adopted the Plan; and/or any corporation succeeding to the business of Sun Company, Inc. Company Service shall commence with the Participant's initial date of employment with the Company, and shall end with such Participant's death, retirement, or termination for any reason. Company Service also shall include: (a) all periods of approved leave of absence (civil, family, medical, military, or Olympic; provided, however, that the Participant returns to work within the prescribed time following the leave; (b) any break in service of thirty (30) days or less; and (c) any service credited under applicable Company policies with respect to the length of a Participant's employment by any non-affiliated entity that is subsequently acquired by, and becomes a part of, the Company's operations. Section 1.7 "Disability" shall mean any illness, injury or incapacity of such duration and type as to render a Participant eligible to receive long-Term disability benefits under the applicable broad-based long-term disability program of the Company. Section 1.8 "Employment Termination Date" shall mean the date on which the employment relationship between the Participant and the Company is terminated. 3 Section 1.9 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Section 1.10 "Executive Resource Employee" shall mean any individual employed by the Company who has been designated by the Company as a member of the Company's executive resources group. Generally, such group shall include employees in Grades 14-20 and all employees subject to Section 16 of the Securities Exchange Act of 1934, as amended. Section 1.11 "Just Cause" shall mean: (a) the Participant's conviction for a criminal offense (other than a traffic offense) including, without limitation, a crime involving moral turpitude or common law fraud; or (b) the Company's reasonable determination that the Participant has either: (1) committed an act of fraud, embezzlement, theft, or misappropriation of funds in connection with such Participant's duties in the course of his employment with the Company; or (2) engaged in gross mismanagement, willful misconduct, or gross negligence in the course of his/her employment with the Company. Disputes with respect to whether "Just Cause" exists shall be resolved in accordance with Article IX. Section 1.12 "Participant" shall mean any Executive Resource Employee; provided, however, that any Executive Resource Employee who has an employment contract with the Company that provides severance benefits shall not be eligible to participate in the Plan while such contract is in effect except to the extent specifically provided in the contract. Section 1.13 "Plan" shall mean the Sun Company, Inc. Executive Involuntary Severance Plan, as set forth herein, and as the same may from time to time be amended. Section 1.14 "Plan Year" shall mean each fiscal year of the Company during which this Plan is in effect. Section 1.15 "Salary Continuation Period" shall mean: (a) six (6) weeks, in the case of a Participant who either has not executed the release described in Section 3.3 hereof, or who has revoked such a previously executed release; or (b) in the case of a Participant that has executed and not revoked the release described in Section 3.3 hereof: (1) one-hundred-four (104) weeks for the Company's Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer; 4 (2) seventy-eight (78) weeks for each other Executive Resource Employee in Grade 17 or above; and (3) fifty-two (52) weeks for each other Executive Resource Employee. Section 1.16 "Weekly Compensation" shall mean the sum of each of the following items divided by 52: (a) a Participant's annual base salary; and (b) the applicable guideline (target) annual bonus amount in effect on his or her Employment Termination Date. ARTICLE II BACKGROUND, PURPOSE AND TERM OF PLAN Section 2.1 Background. The Company maintains this Plan for the purpose of providing severance allowances to all Executive Resource Employees, whose employment is terminated for reasons other than fault of their own. The Plan shall be effective as of September 4, 1997. Section 2.2 Purpose of the Plan. In recognition of their past service to the Company, this Plan is intended to alleviate, in part or in full, financial hardships which may be experienced by certain of those employees of the Company whose employment is terminated. In essence, benefits under the Plan are intended to be additional compensation for past services or the continuation of the specified fringe benefits for a transitional period. The amount or kind of benefit to be provided is to be based on the position of the Executive Resource Employee, the Executive Resource Employee's compensation and the fringe benefit programs applicable to him or her, at his or her Employment Termination Date. The Plan is not intended to be included in the definitions of "employee pension benefit plan" and "pension plan" as set forth under Section 3(2) of ERISA. Rather, this Plan is intended to meet the descriptive requirements of a plan constituting a "severance pay plan" within the meaning regulations published by the Secretary of Labor at Title 29, Code of Federal Regulations, Section 2510.3- 2(b). Section 2.3 Term of the Plan. The Plan will continue until such time as the Board of Directors, or a committee thereof, delegated such responsibility, acting in its sole discretion, elects to modify, supersede or terminate it in accordance with the further provisions hereof. ARTICLE III PARTICIPATION AND ELIGIBILITY FOR BENEFITS Section 3.1 General Eligibility Requirement. In order to receive a Benefit under this Plan, a Participant's employment must have been terminated by the Company other than for Just Cause, death or Disability; provided, however, that any Participant who is receiving benefits under the Sun Company, Inc. Special Executive Severance Plan shall not also be eligible to receive any Benefit under this Plan. 5 Section 3.2 Employment by Successor. Notwithstanding anything herein to the contrary, no Benefits shall be due hereunder in connection with the sale or other disposition by the Company of the capital stock or assets of any business unit, division, subsidiary, or other affiliate, if the Participant receives an offer of employment from the purchaser or other acquiror at a combined annual salary and guideline bonus at least equal to the annual salary and guideline bonus for his or her position with the Company immediately prior to such sale or other disposition. Section 3.3 Release. Unless the Participant executes a full waiver and release of claims in a form satisfactory to the Company, and notwithstanding anything herein to the contrary as provided in Section 5.2, the Benefits provided hereunder in connection with a termination of employment shall be provided only for the Salary Continuation Period set forth in Section 1.15(a) of this Plan, and the special medical benefit described in Section 4.4 of this Plan shall not be provided. ARTICLE IV BENEFIT Section 4.1 Amount of Immediate Cash Benefit. The immediate cash amount to be paid to a Participant eligible to receive Benefits under Section 3.1 hereof shall be paid in a lump sum and shall equal the Participant's earned vacation (as determined under the Company's applicable vacation policy as in effect on the Employment Termination Date) through the end of his or her Employment Termination Date. Section 4.2 Salary Continuation. A Participant who is eligible to receive Benefits under Section 3.1 shall continue to be entitled, through the end of his/her Salary Continuation Period to his/her Weekly Compensation as in effect on the Employment Termination Date. Section 4.3 Executive Benefits. A Participant who is eligible to receive Benefits under Section 3.1 shall continue to be entitled, through the end of his/her Salary Continuation Period to those employee benefits listed below : (a) death benefits as follows: (1) for Participants who became Executive Resource Employees on or after January 1, 1985, an amount equal to one (1) times annual base salary at the Employment Termination Date; and (2) for Participants who became Executive Resource Employees before January 1, 1985, an amount equal to two (2) times the sum of annual base salary and guideline bonus at the Employment Termination Date; Any supplemental coverages elected under the Sun Company, Inc. Death Benefits Plan (or any similar plan of any of the following: a subsidiary or affiliate which has adopted this Plan; a corporation succeeding to the business of Sun Company, Inc.; and/or any subsidiary or affiliate, by merger, consolidation or liquidation or purchase of assets or stock or similar transaction) will be discontinued under the terms of such plan or plans; and 6 (b) medical plan benefits (excluding dental coverage), including COBRA continuation coverage beginning as of the start of the Salary Continuation Period and running concurrently therewith. In each case, when contributions are required of all other active Executive Resource Employees at the time of the Participant's Employment Termination Date, or thereafter, if required of other Executive Resource Employees, the Participant shall continue to be responsible for making the required contributions during the Salary Continuation Period in order to be eligible for the coverage. In lieu of the coverages provided under clauses (a) and (b) above, the Company may pay, at the time payment is otherwise to be made of cash Benefits pursuant to Section 5.1 hereof, the Participant an amount equal to the then present value of the Company's cost of such coverages (as adjusted for taxes), or the Company may provide the Participant with comparable coverage under a policy of insurance. The Participant also shall be entitled to such outplacement services as deemed appropriate by the Committee. Section 4.4 Special Medical Benefit. Participants who have executed and not revoked the release described in Section 3.3 hereof, and who are fifty (50) or more years of age on the Employment Termination date, with a minimum of ten (10) years of Company Service shall have medical (but not dental) benefits available under the same terms and conditions as other employees not yet eligible for Medicare coverage who retire under the terms of a Company retirement plan. Such benefits may continue until such time as the Participant becomes first eligible for Medicare, or the Participant voluntarily cancels coverage, whichever is earliest. Section 4.5 Retirement Plans. This Plan shall not govern and shall in no way affect the Participant's interest in, or entitlement to benefits under, any of the Company's qualified or supplemental retirement plans and any payments received under any such plan shall not affect a Participant's right to any Benefit hereunder. Section 4.6 Minimum Benefit. Notwithstanding the provisions of Sections 4.2, 4.3 and 4.4 hereof, the Benefits available under this Plan shall not be less than those determined in accordance with the provisions of the Sun Company, Inc. Involuntary Termination Plan. If the Participant determines that the benefits under the Sun Company, Inc. Involuntary Termination Plan are more valuable to the Participant than the comparable Benefits set forth in this Plan, then the provisions used to calculate the Benefits available to the Participant under this Plan shall not apply, and the Benefits available to the Participant under this Plan shall be calculated using only the applicable provisions of the Sun Company, Inc. Involuntary Termination Plan. Section 4.7 Effect on Other Benefits. There shall not be drawn from the continued provision by the Company of any of the aforementioned Benefits any implication of continued employment or of continued right to accrual of retirement benefits under the Company's qualified or supplemental retirement plans, nor shall a Participant accrue vacation days, paid holidays, paid sick days or other similar benefits normally associated with employment for any part of the Salary Continuation Period during which benefits are payable under this Plan. 7 ARTICLE V METHOD AND DURATION OF BENEFIT PAYMENTS Section 5.1 Method of Payment. The cash Benefits to which a Participant is entitled, as determined pursuant to Article IV hereof, generally shall be paid monthly. Payment shall be made by mailing to the last address provided by the Participant to the Company, or by direct deposit into a bank account designated by the Participant in writing to the Company. Alternatively, with the prior written consent of the Committee, the Participant may elect to receive such benefits as a single lump sum payment, determined on the same basis as lump sum payments are determined under the Sun Company, Inc. Retirement Plan. Section 5.2 Conditions to Entitlement to Benefit. In order to be eligible to receive full Benefits hereunder, a Participant shall make himself/herself available to the Company and cooperate in any reasonable manner (so as not to unreasonably interfere with subsequent employment) in providing assistance to the Company after his or her Employment Termination Date in conducting any matters which are pending at such time, and, as provided in Section 3.3, shall execute a release and discharge of the Company from any and all claims, demands or causes of action other than as to amounts or benefits due to the Participant under any plan, program or contract provided by, or entered into with, the Company. Such release and discharge shall be in such form as is prescribed by the Committee and shall be executed prior to the payment of any Benefits due hereunder. In addition, no Benefits due hereunder shall be paid to a Participant who is required by Company guidelines to execute an agreement governing the assignment of patents or the disclosure of confidential information unless an executed copy of such agreement is on file with the Company. Section 5.3 Payments to Beneficiary(ies). Each Executive Resource Employee shall designate a beneficiary(ies) to receive any Benefits due hereunder in the event of the Participant's death prior to the receipt of all such Benefits. Such beneficiary designation shall be made in the manner, and at the time, prescribed by the Committee in its sole discretion. In the absence of an effective beneficiary designation hereunder, the Participant's estate shall be deemed to be his or her designated beneficiary. ARTICLE VI ADMINISTRATION Section 6.1 Appointment of the Committee. The Committee shall consist of three (3) or more persons appointed by the Chief Executive Officer. Committee members may be, but need not be, employees of the Company. Section 6.2 Tenure of the Committee. Committee members shall serve at the pleasure of the Chief Executive Officer. Committee members may resign at any time on ten (10) days' written notice, and Committee members may be discharged, with or without cause, at any time by the Chief Executive Officer. 8 Section 6.3 Authority and Duties. It shall be the duty of the Committee, on the basis of information supplied to it by the Company, to determine the eligibility of each Participant for Benefits under the Plan, to determine the amount of Benefit to which each such Participant may be entitled, and to determine the manner and time of payment of the Benefit consistent with the provisions hereof. In addition, the exercise of discretion by the Committee need not be uniformly applied to similarly situated Participants. The Company shall make such payments as are certified to it by the Committee to be due to Participants. The Committee shall have the full power and authority to construe, interpret and administer the Plan, to correct deficiencies therein, to supply omissions and to make factual determinations. All decisions, actions and interpretations of the Committee shall be final, binding and conclusive upon the parties. Section 6.4 Action by the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business at a meeting of the Committee. Any action of the Committee may be taken upon the affirmative vote of a majority of the members of the Committee at a meeting, or at the direction of the Chairperson, without a meeting by mail, telegraph, telephone or electronic communication device; provided that all of the members of the Committee are informed of their right to vote on the matter before the Committee and of the outcome of the vote thereon. Section 6.5 Officers of the Committee. The Chief Executive Officer shall designate one of the members of the Committee to serve as Chairperson thereof. The Chief Executive Officer shall also designate a person to serve as Secretary of the Committee, which person may be, but need not be, a member of the Committee. Section 6.6 Compensation of the Committee. Members of the Committee shall receive no compensation for their services as such. However, all reasonable expenses of the Committee shall be paid or reimbursed by the Company upon proper documentation. The Company shall indemnify members of the Committee against personal liability for actions taken in good faith in the discharge of their respective duties as members of the Committee and shall provide coverage to them under the Company's liability insurance program(s). Section 6.7 Records, Reporting and Disclosure. The Committee shall keep all individual and group records relating to Participants and former Participants and all other records necessary for the proper operation of the Plan. Such records shall be made available to the Company and to each Participant for examination during business hours except that a Participant shall examine only such records as pertain exclusively to the examining Participant and to the Plan. The Committee shall prepare and shall file as required by law or regulation all reports, forms, documents and other items required by ERISA, the Internal Revenue Code, and every other relevant statute, each as amended, and all regulations thereunder (except that the Company, as payor of the Benefits, shall prepare and distribute to the proper recipients all forms relating to withholding of income or wage taxes, Social Security taxes, and other amounts which may be similarly reportable). 9 Section 6.8 Actions of the Chief Executive Officer. Whenever a determination is required of the Chief Executive Officer under the Plan, such determination shall be made solely at the discretion of the Chief Executive Officer. In addition, the exercise of discretion by the Chief Executive Officer need not be uniformly applied to similarly situated Participants and shall be final and binding on each Participant or beneficiary(ies) to whom the determination is directed. Section 6.9 Benefits of the Chief Executive Officer. The Board of Directors (or any committee thereof delegated such responsibility) shall make all determinations with respect to the amounts, timing and eligibility for any Benefits provided hereunder to the Chief Executive Officer. In addition, if the Chief Executive Officer is serving on the Committee, the Chief Executive Officer shall not participate on any matter that directly pertains to, or affects, the Chief Executive Officer. Whenever a determination is required of the Chief Executive Officer as to any matter that directly pertains to, or affects, the Chief Executive Officer under the Plan, such determination with respect to the Chief Executive Officer shall be made and approved by a majority of the Continuing Directors, or, if there are no Continuing Directors, then by at least three quarters (3/4) of the entire Board of Directors. Section 6.10 Bonding. The Committee shall arrange any bonding that may be required by law, but no amount in excess of the amount required by law (if any) shall be required by the Plan. ARTICLE VII AMENDMENT AND TERMINATION Section 7.1 Amendment, Suspension and Termination. The Company, acting by or pursuant to a resolution of the Board of Directors, or a committee thereof delegated such responsibility, retains the right, at any time and from time to time, to amend, suspend or terminate the Plan in whole or in part, for any reason, and without either the consent of or the prior notification to any Participant. No such amendment shall give the Company the right to recover any amount paid to a Participant prior to the date of such amendment or to cause the cessation and discontinuance of payments of Benefits to any person or persons under the Plan already receiving Benefits. ARTICLE VIII DUTIES OF THE COMPANY Section 8.1 Records. The Company shall supply to the Committee all records and information necessary to the performance of the Committee's duties. Section 8.2 Payment. The Company shall make payments from its general assets to Participants, and shall provide the Benefits described in Article IV hereof in accordance with the terms of this Plan, as directed by the Committee. 10 ARTICLE IX CLAIMS PROCEDURES Section 9.1 Application for Benefits. Benefits shall be paid by the Company following a termination of employment that qualifies the Participant for Benefits. In the event a Participant believes himself/herself eligible for Benefits under this Plan and Benefit payments have not been initiated by the Company, the Participant may apply for such Benefits by requesting payment of Benefits in writing from the Company. Section 9.2 Appeals of Denied Claims for Benefits. In the event that any claim for benefits is denied in whole or in part, the Participant (or beneficiary, if applicable) whose claim has been so denied shall be notified of such denial in writing by the Committee, within thirty (30) days following submission by the Participant (or beneficiary, if applicable) of such claim to the Committee. The notice advising of the denial shall specify the reason or reasons for denial, make specific reference to pertinent Plan provisions, describe any additional material or information necessary for the claimant to perfect the claim (explaining why such material or information is needed), and shall advise the Participant of the procedure for the appeal of such denial. All appeals shall be made by the following procedure: (a) The Participant whose claim has been denied shall file with the Committee a notice of desire to appeal the denial. Such notice shall be filed within sixty (60) days of notification by the Committee of the claim denial, shall be made in writing, and shall set forth all of the facts upon which the appeal is based. Appeals not timely filed shall be barred. (b) The Committee shall, within thirty (30) days of receipt of the Participant's notice of appeal, establish a hearing date on which the Participant may make an oral presentation to the Committee in support of his/her appeal. The Participant shall be given not less than ten (10) days' notice of the date set for the hearing. (c) The Committee shall consider the merits of the claimant's written and oral presentations, the merits of any facts or evidence in support of the denial of benefits, and such other facts and circumstances as the Committee shall deem relevant. If the claimant elects not to make an oral presentation, such election shall not be deemed adverse to his/her interest, and the Committee shall proceed as set forth below as though an oral presentation of the contents of the claimant's written presentation had been made. (d) The Committee shall render a determination upon the appealed claim, within sixty (60) days of the hearing date, which determination shall be accompanied by a written statement as to the reasons therefor. The determination so rendered shall be binding upon all parties. ARTICLE X MISCELLANEOUS Section 10.1 Nonalienation of Benefits. None of the payments, benefits or rights of any Participant shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or 11 equitable process available to any creditor of such Participant. No Participant shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he/she may expect to receive, contingently or otherwise, under this Plan. Section 10.2 No Contract of Employment. Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant, or any person whosoever, the right to be retained in the service of the Company, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been adopted. Section 10.3 Severability of Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. Section 10.4 Successors, Heirs, Assigns, and Personal Representatives. This Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant, present and future. Unless the Chief Executive Officer directs otherwise, the Company shall require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, or a division thereof, to acknowledge expressly that this Agreement is binding upon and enforceable against the Company in accordance with the terms hereof, and to become jointly and severally obligated with the Company to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or successions had taken place. Section 10.5 Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. Section 10.6 Gender and Number. Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. Section 10.7 Unfunded Plan. The Plan shall not be funded. The Company may, but shall not be required to, set aside or earmark an amount necessary to provide the Benefits specified herein (including the establishment of trusts). In any event, no Participant shall have any right to, or interest in, any assets of the Company which may be applied by the Company to the payment of Benefits. Section 10.8 Payments to Incompetent Persons, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Company, the Committee and all other parties with respect thereto. 12 Section 10.9 Lost Payees. A Benefit shall be deemed forfeited if the Committee is unable to locate a Participant to whom a Benefit is due. Such Benefit shall be reinstated if application is made by the Participant for the forfeited Benefit while this Plan is in operation. Section 10.10 Controlling Law. This Plan shall be construed and enforced according to the laws of the Commonwealth of Pennsylvania to the extent not preempted by Federal law. EX-10.13 13 AMEND SCHEDULE TO FORM OF INDEMNIFICATION Exhibit 10.13 AMENDED SCHEDULE TO INDEMNIFICATION AGREEMENT The Indemnification Agreements between Sun Company, Inc. and the directors and executive officers named below are identical in all material respects.
Officer Date of Agreement ------- ----------------- Robert M. Aiken, Jr. February 1, 1996 Robert H. Campbell February 1, 1996 John G. Drosdick February 1, 1997 Jack L. Foltz February 1, 1996 Deborah M. Fretz February 1, 1996 Thomas W. Hofmann February 1, 1996 David E. Knoll February 1, 1996 Robert W. Owens February 6, 1997 Malcolm I. Ruddock, Jr. February 1, 1996 David C. Shanks February 17, 1997 Sheldon L. Thompson February 1, 1996 Director Date of Agreement -------- ----------------- Raymond E. Cartledge February 1, 1996 Robert E. Cawthorn February 1, 1996 Mary J. Evans February 1, 1996 Thomas P. Gerrity February 1, 1996 James G. Kaiser February 1, 1996 Robert D. Kennedy February 1, 1996 R. Anderson Pew February 1, 1996 William F. Pounds February 1, 1996 Alexander B. Trowbridge February 1, 1996
EX-10.18 14 AMEND NO. 1998-1 EXECUTIVE RETIREMENT PLAN Exhibit 10.18 SUN COMPANY, INC. EXECUTIVE RETIREMENT PLAN Amendment No. 1998-1 -------------------- 1. Section 1.16 is restated as follows: "1.16 'Final Average Earnings' means the arithmetic average of the Participant's aggregate Earnings during the 36 calendar months of the last 120-consecutive calendar month period of Service immediately preceding the earlier of actual retirement or Termination Date (or the actual number of such months if less than 36) which produces the highest average." 2. This amendment is effective January 1, 1998. EX-10.19 15 AMEND NO. 1998-2 EXECUTIVE RETIREMENT PLAN Exhibit 10.19 SUN COMPANY, INC. EXECUTIVE RETIREMENT PLAN Amendment No. 1998-2 --------------------------- 1. Section 1.11 is restated as follows: "1.11 'Earnings' means: (a) For periods beginning after December 31, 1997, the sum of (i) base salary paid or payable to a Participant by the Company or an Affiliated Company and (ii) the actual incentive awards granted to a Participant pursuant to the Sun Company, Inc. Executive Incentive Plan, or the equivalent thereof pursuant to an incentive plan sponsored by an Employer, or (b) For periods beginning prior to January 1, 1998, the sum of (i) base salary paid or payable to a Participant by the Company or an Affiliated Company and (ii) the actual incentive awards granted to a Participant pursuant to the Sun Company, Inc. Executive Incentive Plan, up to the Participant's unadjusted annual guideline bonus in effect for the Participant under such plan, or the equivalent thereof pursuant to an incentive plan sponsored by an Employer." 2. Section 1.16 is restated as follows: "1.16 'Final Average Earnings' means the greater of (a) arithmetic average of the Participant's aggregate Earnings during the 36 calendar months of the last 120-consecutive calendar month period of Service immediately preceding the earlier of actual retirement or Termination Date (or the actual number of such months if less than 36) which produces the highest average, or (b) the Transition Final Average Earnings." 3. There is added a new Section 1.29 as follows: "1.29 'Transition Earnings' means: (a) For periods beginning on or after September 1, 1997, and ending on or before December 31, 1998, the sum of (i) base salary paid or payable to a Participant by the Company or an Affiliated Company and (ii) the Participant's unadjusted annual guideline bonus in effect for the Participant under the Sun Company, Inc. Executive Incentive Plan or successor plans ("EIP") pro rated over the applicable period (e.g., for computation of Earnings for a one-month period, the unadjusted annual guideline bonus would be divided by 12); or (b) For periods ending prior to September 1, 1997, the sum of (i) base salary paid or payable to a Participant by the Company or an Affiliated Company (including an amount equal to the value on the date of grant of any restricted stock units ("RSUs") designated as base salary, and not as short-term or long-term incentives, under the Sun Company, Inc. Long-Term Incentive Plan or the Sun Company, Inc. Executive Long-Term Stock Investment Plan, provided that such RSUs become vested and payable) and (ii) the dollars represented by (1) the Participant's unadjusted guideline incentive percentage in effect under the EIP during such period, multiplied by (II) the Participant's base salary paid or payable (as defined in subsection (b)(i) herein)." 4. There is added a new Section 1.30 as follows: "1.30 'Transition Final Average Earnings' means the arithmetic average of the Participant's aggregate Transition Earnings during the 36 calendar months of the 120-consecutive calendar month period of Service ending on the earlier of December 31, 1998, actual retirement or Termination Date (or the actual number of such months if less than 36) which produces the highest average." 5. This amendment is effective March 1, 1998. EX-12 16 STATEMENT RE COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a) Sun Company, Inc. and Subsidiaries
(Millions of Dollars Except Ratio) - ------------------------------------------------------------------------------------- For the Twelve Months Ended December 31, 1997 ----------------------- (UNAUDITED) Fixed Charges: Consolidated interest cost and debt expense $ 78 Interest cost and debt expense of real estate operations held for sale 4 Interest allocable to rental expense(b) 36 ----- Total $ 118 ===== Earnings: Consolidated income before income tax expense $ 385 Proportionate share of income tax expense of 50 percent owned but not controlled affiliated companies 6 Equity in income of less than 50 percent owned affiliated companies (15) Dividends received from less than 50 percent owned affiliated companies 5 Fixed charges 118 Interest capitalized (7) Amortization of previously capitalized interest 10 ----- Total $ 502 ===== Ratio of Earnings to Fixed Charges 4.25 =====
- ---------------- (a) The consolidated financial statements of Sun Company, Inc. and subsidiaries contain the accounts of all subsidiaries that are controlled (generally more than 50 percent owned) except for Radnor Corporation, the Company's wholly owned real estate development subsidiary, which is accounted for as an investment held for sale. (See Note 2 to the Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders.) Affiliated companies over which the Company has the ability to exercise significant influence but that are not controlled (generally 20 to 50 percent owned) are accounted for by the equity method. (b) Represents one-third of total operating lease rental expense which is that portion deemed to be interest. EX-13 17 ANNUAL REPORT TO SHAREHOLDERS FINANCIAL SECTION Exhibit 13 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA
(Millions of Dollars Except Per Share Amounts) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Sales and other operating revenue (including consumer excise taxes) $10,464 $11,233 $9,834 $9,513 $8,889 Income (loss) from continuing operations before cumulative effect of change in accounting principle* $263 $(281) $(8) $(19) $87 Income from discontinued operations** $-- $166 $235 $116 $196 Cumulative effect of change in accounting principle*** $-- $-- $(87) $(7) $5 Net income (loss) $263 $(115) $140 $90 $288 - ----------------------------------------------------------------------------------------- PER SHARE DATA: Income (loss) from continuing operations before cumulative effect of change in accounting principle:+ Basic $3.03 $(4.43) $(.33) $(.18) $.82 Diluted $2.70 $(4.43) $(.33) $(.18) $.82 Net income (loss):+ Basic $3.03 $(2.17) $1.29 $.84 $2.70 Diluted $2.70 $(2.17) $1.29 $.84 $2.70 Cash dividends on preference stock++ $3.60 $3.60 $1.80 $-- $-- Cash dividends on common stock++ $1.00 $1.00 $1.40 $1.80 $1.80 Shareholders' equity+++ $15.40 $14.69 $17.16 $17.42 $18.60 - ----------------------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets $4,667 $5,025 $5,085 $5,646 $5,145 Long-term debt $824 $835 $888 $936 $582 Shareholders' equity $1,462 $1,438 $1,699 $1,863 $1,984 - -----------------------------------------------------------------------------------------
*Includes after-tax provision for write-down of assets and other matters totalling $21, $254, $61, $32 and $12 million for 1997, 1996, 1995, 1994 and 1993, respectively. (See Notes 2 and 13 to the consolidated financial statements.) **Includes after-tax gains on divestment of discontinued operations and dis- posal of exploration and production properties totalling $125, $157, $28 and $99 million for 1996, 1995, 1994 and 1993, respectively. (See Note 2 to the consolidated financial statements.) ***Consists of impact of the cumulative effect of a change in the method of ac- counting for impairment of long-lived assets in 1995, postemployment benefits in 1994 and income taxes in 1993. (See Note 3 to the consolidated financial statements.) +All earnings per share amounts have been presented in accordance with State- ment of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), which replaced primary and fully diluted earnings per share with basic and diluted earnings per share. SFAS No. 128 had no impact on the prior-period amounts in the above table. (See Note 6 to the consolidated financial statements.) ++Effective in the third quarter of 1995, Sun began paying quarterly dividends on preference stock at a rate of $.90 per share and reduced its quarterly common stock dividend from $.45 to $.25 per share. (See Note 14 to the consolidated financial statements.) +++Assumes redemption of preference shares for common stock utilizing a ratio of two shares of common stock for each outstanding preference share. (See Note 14 to the consolidated financial statements.) 27 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Those statements in the Management's Discussion and Analysis that are not his- torical in nature should be deemed forward-looking statements that are inher- ently uncertain. See "Forward-Looking Statements" on page 40 for a discussion of the factors which could cause actual results to differ materially from those projected in such statements. OUTLOOK The refining and marketing industry is a highly competitive global business subject to significant volatility. Sun's planning assumptions, including antic- ipated near-term market trends, are discussed below: .Sun's operating results will continue to be sensitive to historically unpre- dictable refining and marketing margins. Because margins will continue to be driven by competitive pressures, Sun's business plan is focused on improving operating results by increasing the production of high-value products, improv- ing the reliability and efficiency of its facilities and reducing operating and administrative costs per barrel. Sun's operating results improved dramatically during 1997 as a result of the ongoing implementation of this plan. Overall production levels increased 6 percent at the Company's mainland refineries with a large portion of the increase attributable to high-value fuels and chemicals products. Input to crude units averaged 101 percent of rated capacity. Overall operating and administrative costs were reduced by approximately $160 million. In 1998, Sun will continue to operate its refining units near full capacity and focus on increasing productivity and retail sales volumes. . Ample supplies of light sweet crude oil will continue to be available. Most of the crude oil processed in Sun's refining system is light sweet crude oil. Therefore, the availability of this type of crude oil and its price relative to alternative heavy sour crude oil will continue to have a significant impact on Sun's profitability and competitive position. .Sun's retail gasoline marketing strategy in the Northeast is to improve prof- itability and the return on capital employed by increasing the number of out- lets, increasing gasoline throughput and merchandise sales per outlet and re- ducing marketing and administrative costs per gallon. As a result of its logistically advantaged refining and distribution assets and its strong branded marketing presence in this region, Sun believes that it is well positioned to compete effectively. .Margins for base oil lubricant products declined in 1997 and will continue to be under pressure in the near term as new lubricants supply is absorbed in the marketplace. In order to reduce the impact of unfavorable base oil market con- ditions, Sun has significantly increased the amount of base oil that it up- grades into higher-value transportation lubricants. The reconfiguration of the Puerto Rico refinery in 1997 significantly reduced lower-value fuels production at this refinery while fully maintaining the volume and quality of lubricants production. The streamlining of the Puerto Rico facility has improved operating efficiency, lowered fixed costs and reduced ongoing capital spending and work- ing capital requirements. Sun will reduce costs further in this business in 1998. .Overall margins for petrochemicals, particularly for polymer-grade propylene and cumene, will decline in 1998. Petrochemicals production will increase in 1998, reflecting higher production levels of benzene and ethylene/ethylene ox- ide. Petrochemical production will also benefit when additional cumene produc- tion capacity comes on stream at the Philadelphia refinery during the year. .Operating income in Sun's logistics business in 1998 will approximate the amount earned during 1997. 28 .Operating income in Sun's cokemaking business will increase significantly af- ter commencement of operations at the Company's new cokemaking facility in East Chicago, IN, in the first quarter of 1998. RESULTS OF OPERATIONS EARNINGS PROFILE OF SUN BUSINESSES (after tax)
(Millions of Dollars) 1997 1996 1995 - --------------------------------------------------------------------------- Sun Northeast Refining $ 75 $ (60) $ (37) Sunoco Northeast Marketing 73 1 45 Sunoco Chemicals 77 40 68 Sun Lubricants 1 (14) (15) Sunoco MidAmerica Marketing & Refining 40 (3) (8) Sunoco Logistics 51 48 53 Sun Coke 38 31 25 Corporate expenses (23) (23) (24) Net financing expenses (48) (47) (55) Real estate operations held for sale -- -- (1) Sun International Production* -- 41 57 Canada (Suncor)* -- -- 23 - --------------------------------------------------------------------------- 284 14 131 - --------------------------------------------------------------------------- Special items:** Gain on divestment of International Production business* -- 125 -- Gain on divestment of Suncor common stock* -- -- 157 Provision for write-down of assets and other matters (21) (254) (61) Cumulative effect of change in accounting principle -- -- (87) - --------------------------------------------------------------------------- Consolidated net income (loss) $263 $(115) $140 - ---------------------------------------------------------------------------
*Sun completed the sale of its International Production business on September 30, 1996 and divested its remaining 55-percent interest in Suncor on June 8, 1995. Sun's international oil and gas production business and Canadian up- stream petroleum operations are classified as discontinued operations in the consolidated financial statements. **For a discussion of special items, see Notes 2, 3 and 13 to the consolidated financial statements. ANALYSIS OF EARNINGS PROFILE OF SUN BUSINESSES In 1997, Sun Company, Inc. and its subsidiaries earned $263 million, or $2.70 per share of common stock on a diluted basis compared to a net loss of $115 million, or $2.17 per share in 1996 and net income of $140 million, or $1.29 per share in 1995. Excluding the special items shown separately in the Earnings Profile of Sun Businesses, Sun earned $284 million in 1997, compared to $14 million in 1996 and $131 million in 1995. The $270 million increase in earnings before special items in 1997 was primar- ily due to record production levels, particularly of high-value fuels and chem- icals products, and significantly lower operating and administrative expenses throughout the Company. Also contributing to the improvement were higher aver- age retail and wholesale gasoline margins and higher chemical margins. Par- tially offsetting these positive factors were lower base oil margins and the absence of earnings from Sun's International Production business which was di- vested in 1996. In 1996, the $117 million decrease in earnings before special items was primar- ily due to the impact of significantly higher crude oil costs on gasoline, as- phalt, petrochemical and base oil lubricant margins and on refinery fuel costs. Also contributing to the decline were higher marketing expenses, increased planned refinery maintenance activity and the absence of earnings from Suncor and International Production following their divestments in June 1995 and Sep- tember 1996, respectively. Partially offsetting these negative factors were significantly improved middle distillate margins, higher lubricant sales vol- umes and lower net financing expenses. 29 Sun Northeast Refining
1997 1996 1995 - --------------------------------------------------------------------------- Income (loss) (millions of dollars) $75 $(60) $(37) Wholesale margin* (per barrel) $3.25 $2.76 $2.73 Wholesale sales (thousands of barrels dai- ly): To unaffiliated customers: Gasoline 101.4 93.8 98.2 Middle distillates 169.9 133.6 133.8 Residual fuel 53.9 47.7 50.6 Asphalt -- 15.8 24.1 Other 33.2 31.3 39.7 - --------------------------------------------------------------------------- 358.4 322.2 346.4 To affiliates (primarily gasoline) 182.9 188.3 184.3 - --------------------------------------------------------------------------- 541.3 510.5 530.7 - --------------------------------------------------------------------------- Crude unit capacity (thousands of barrels daily) at December 31 482.0 482.0 482.0 Crude unit capacity utilized 100% 93% 93% - ---------------------------------------------------------------------------
*Wholesale sales price less cost of crude oil, other feedstocks and purchased refined products. Sun Northeast Refining operating results increased $135 million in 1997 primar- ily due to a $92 million pretax reduction in operating expenses and signifi- cantly higher realized margins and sales volumes for wholesale fuels. The in- crease in margins and sales volumes reflects a significant improvement in pro- duction levels, particularly for high-value gasoline and distillate products, in part due to the turnaround and modernization of the 86,000 barrels-per-day fluid catalytic cracking unit at the Marcus Hook refinery completed in the lat- ter part of 1996. In addition, wholesale gasoline margins were adversely im- pacted in 1996 and 1995 by the Company's high cost of MTBE (a component of re- formulated gasoline) due to a contractual purchase commitment (see Note 13 to the consolidated financial statements). During 1996, Sun reconfigured its Philadelphia refinery to process only sweet crude oil and to cease asphalt production. The reconfiguration is part of a continuing process to integrate the Point Breeze and Girard Point segments of the refinery. This project has contributed to the substantial improvement in the Northeast refining system's operating reliability and cost structure in 1997. In connection with the reconfiguration, a $53 million after-tax provision was established in 1996 primarily to write-off redundant and/or unprofitable units. This provision is reported as part of the Provision for Write-Down of Assets and Other Matters shown separately in the Earnings Profile of Sun Busi- nesses. Sun Northeast Refining operating results decreased $23 million in 1996 primar- ily due to an $18 million pretax increase in refinery operating expenses and lower sales volumes, partially offset by higher average wholesale fuels product margins. The higher operating expenses were due largely to higher refinery fuel costs resulting from higher crude oil and natural gas prices. The lower sales volumes were due largely to increased planned refinery maintenance activity. The increase in wholesale fuels margins reflects significantly higher margins for middle distillates, largely offset by the adverse impact of higher crude oil prices on wholesale gasoline and asphalt margins. Wholesale gasoline mar- gins were adversely impacted in both 1996 and 1995 by the Company's high cost of making reformulated gasoline. 30 Sunoco Northeast Marketing
1997 1996 1995 - ------------------------------------------------------------------------ Income (millions of dollars) $73 $1 $45 Gasoline margin* (per barrel) $5.40 $4.02 $4.88 Sales (thousands of barrels daily): Gasoline 152.3 159.5 158.0 Middle distillates 17.3 15.7 14.7 - ------------------------------------------------------------------------ 169.6 175.2 172.7 - ------------------------------------------------------------------------ Retail gasoline outlets 2,821 2,880 2,944 - ------------------------------------------------------------------------
*Retail sales price less wholesale sales price. The retail sales price is the weighted average price received through the various branded marketing distribution channels. The $72 million increase in Sunoco Northeast Marketing operating results in 1997 was primarily due to significantly higher average retail gasoline margins and a $47 million pretax decrease in marketing and administrative expenses. Partially offsetting these positive factors were 5 percent lower retail gaso- line sales volumes. Retail gasoline margins were adversely impacted in 1996 and 1995 by the Company's high cost of MTBE. Sunoco Northeast Marketing operating results declined $44 million in 1996 pri- marily due to lower retail gasoline margins and an $18 million pretax increase in marketing and administrative expenses. The increase in expenses was due largely to the impact of a major advertising campaign and higher expenses asso- ciated with volume increases in company-operated outlets. Partially offsetting these negative factors was a 2 percent increase in sales volumes. Sunoco Chemicals
1997 1996 1995 - ------------------------------------------------------------------------ Income (millions of dollars) $77 $40 $68 Petrochemicals margin* (per barrel) $25.01 $21.46 $25.58 Petrochemical sales (thousands of barrels daily): Aromatics 10.8 9.6 8.5 Propylene 10.8 6.4 8.1 Ethylene/ethylene oxide 2.8 2.4 2.3 Other -- 1.8 2.0 - ------------------------------------------------------------------------ 24.4 20.2 20.9 - ------------------------------------------------------------------------
*Wholesale sales price less the cost of feedstocks and product purchases. Income from Sunoco Chemicals increased $37 million in 1997 largely due to higher margins and sales volumes reflecting record production levels. Total petrochemical production for 1997 was 8.8 million barrels (24,100 barrels per day) versus 1996 production of 6.9 million barrels (18,900 barrels per day). This 28 percent increase in production volumes was largely a result of refinery maintenance turnarounds completed in the 1996-97 period at the Philadelphia and Marcus Hook refineries and the expansion of polymer-grade propylene production capacity at the Marcus Hook refinery in late 1996. Sunoco Chemicals income decreased $28 million in 1996 primarily due to signifi- cantly lower margins for most petrochemicals products compared to the strong margins experienced during 1995. Production shortfalls due to maintenance ac- tivities at the Company's operating facilities also negatively impacted Sunoco Chemicals results in 1996. 31 Sun Lubricants
1997 1996 1995 - -------------------------------------------------------------------------- Income (loss) (millions of dollars) $1 $(14) $(15) Wholesale margin* (per barrel): Lubricants $26.43 $20.90 $25.03 Fuels $.58 $1.52 $.87 Wholesale sales (thousands of barrels daily): To unaffiliated customers: Specialty oils** 11.7 9.3 8.6 Base oils 7.1 8.7 6.9 Waxes and other lubricants 6.3 5.9 4.5 - -------------------------------------------------------------------------- 25.1 23.9 20.0 Gasoline 26.2 36.4 25.9 Middle distillates 36.9 49.8 44.9 Residual fuel 22.8 30.8 19.5 Other 7.3 7.3 11.1 - -------------------------------------------------------------------------- 118.3 148.2 121.4 To affiliates*** 17.8 21.1 27.0 - -------------------------------------------------------------------------- 136.1 169.3 148.4 - --------------------------------------------------------------------------
*Wholesale sales price of lubricants and fuels less cost of crude oil, other feedstocks and purchased refined products. **Comprised principally of transportation and industrial lubricants. ***Primarily "lubes-extracted" feedstocks which are transported to the Toledo refinery for further processing. Sun Lubricants results improved $15 million in 1997 due primarily to higher specialty oil lubricant margins and a $16 million pretax decline in operating expenses. Also contributing to the improvement were higher earnings attribut- able to the Kendall lubricants business acquired by Sun in November 1996. This acquisition has increased the amount of base oil production upgraded into transportation lubricants and has enabled Sun Lubricants to increase its spe- cialty oil lubricants sales. Partially offsetting these positive factors were 20 percent lower base oil margins. The decline in operating expenses during 1997 was largely attributable to im- proved operations at the Puerto Rico refinery resulting from the reconfiguration initiated at this facility in the first quarter of the year. The changes significantly reduced fuels production at this refinery while fully maintaining lubricants manufacturing capabilities. The Puerto Rico refinery is now processing approximately 30,000 barrels per day of reduced crude oil in lieu of conventional crude oil. Prior to the reconfiguration, this facility had a crude oil processing capacity of 85,000 barrels per day. Sun Lubricants oper- ating results for 1996 exclude an $80 million after-tax provision related to the reconfiguration. This provision is reported as part of the Provision for Write-Down of Assets and Other Matters shown separately in the Earnings Profile of Sun Businesses. The $1 million improvement in Sun Lubricants operating results in 1996 was pri- marily due to higher lubricants sales volumes and higher margins on wholesale fuels products. These positive factors were essentially offset by lower lubri- cant margins, principally for base oils, and higher operating and administra- tive expenses. The increase in expenses was largely attributable to an increase in refinery fuel costs and production levels. 32 Sunoco MidAmerica Marketing & Refining
1997 1996 1995 - --------------------------------------------------------------------------- Income (loss) (millions of dollars) $40 $(3) $(8) - --------------------------------------------------------------------------- Retail Marketing: Gasoline margin* (per barrel) $3.28 $3.86 $3.86 Sales (thousands of barrels daily): Gasoline 49.5 46.2 46.6 Middle distillates 4.6 4.8 4.2 - --------------------------------------------------------------------------- 54.1 51.0 50.8 - --------------------------------------------------------------------------- Retail gasoline outlets 968 926 917 - --------------------------------------------------------------------------- Refining and Wholesale Marketing: Wholesale margin** (per barrel): Fuels $4.18 $3.55 $2.98 Petrochemicals $7.53 $3.76 $9.06 Wholesale sales (thousands of barrels daily): To unaffiliated customers: Gasoline 42.6 36.8 29.9 Middle distillates 20.1 16.0 13.3 Residual fuel 3.4 3.9 3.8 Petrochemicals 10.8 11.3 10.2 Other 7.9 10.0 8.4 - --------------------------------------------------------------------------- 84.8 78.0 65.6 To affiliates and Sunoco MidAmerica Retail Marketing 55.2 52.6 54.8 - --------------------------------------------------------------------------- 140.0 130.6 120.4 - --------------------------------------------------------------------------- Crude unit capacity*** (thousands of barrels daily) at December 31 125.0 125.0 125.0 Crude unit capacity utilized 106% 100% 89% - ---------------------------------------------------------------------------
*Retail sales price less wholesale sales price.The retail sales price is the weighted average price received through the various branded marketing distribution channels. **Wholesale sales price of fuels or petrochemicals less cost of crude oil, other feedstocks and purchased refined products. ***Effective January 1, 1998, the rated capacity of the crude unit at the Toledo refinery increased to 130 thousand barrels daily. Sunoco MidAmerica Marketing & Refining results improved $43 million in 1997 largely due to an increase in wholesale fuel margins and higher wholesale fuel sales volumes, reflecting record refinery production levels. Also contributing to the improvement were higher chemical margins and a $12 million pretax de- crease in operating expenses. Partially offsetting these positive factors were lower retail gasoline margins. Sunoco MidAmerica Marketing & Refining results improved $5 million in 1996 due to higher wholesale fuel margins and sales volumes and a $9 million pretax de- crease in retail marketing expenses. Partially offsetting these positive fac- tors were a decline in margins on petrochemicals, largely xylene, and a $22 million pretax increase in refinery expenses resulting from higher refinery fuel costs and production volumes. Sunoco Logistics
1997 1996 1995 - ------------------------------------------------------------------------ Income (millions of dollars) $51 $48 $53 Pipeline throughput (thousands of barrels daily): Unaffiliated customers 682 627 557 Affiliated customers 932 819 776 - ------------------------------------------------------------------------ 1,614 1,446 1,333 - ------------------------------------------------------------------------
Sunoco Logistics income increased $3 million in 1997 primarily due to higher throughput at the Nederland, TX, crude oil terminal and in the eastern product pipeline system. In 1996, Sunoco Logistics results decreased $5 million primar- ily due to lower eastern product pipeline system throughput and a loss associ- ated with a pipeline leak, partially offset by higher earnings from joint ven- ture pipeline operations. 33 Sun Coke
1997 1996 1995 - ------------------------------------------------------------------------- Income (millions of dollars) $38 $31 $25 Average sales price of coal and coke (per ton) $47.84 $40.03 $37.65 Proven and probable coal reserves (millions of tons) 124 132 139 Production (thousands of tons): Coal 3,287 4,416 5,121 Coke 664 648 638 - -------------------------------------------------------------------------
Sun Coke income increased $7 million during 1997 after increasing $6 million in 1996. The increases in earnings during the 1995-97 period were primarily due to higher margins for coke and improved results from steam coal operations in Ken- tucky. Sun Coke results included gains from divestments and insurance recov- eries totalling approximately $2 million after tax in both 1997 and 1996. In November 1996, Sun Coke entered into an agreement to construct, own and op- erate a $195 million cokemaking facility in East Chicago, IN, which will pro- duce coke for Inland Steel Company's Indiana Harbor Works steel plant located adjacent to the new facility. The agreement requires Inland to buy 1.2 million tons of coke annually on a take-or-pay basis for a period of 15 years commenc- ing after the cokemaking facility's scheduled first quarter 1998 start-up date. Additional production of up to 150,000 tons per year will be sold either to In- land or other steel producers. The plant's coke ovens will utilize Sun Coke's proprietary heat-recovery cokemaking technology, which is environmentally and economically superior to the chemical by-product technology currently used by other coke producers. Net Financing Expenses--Net financing expenses increased $1 million in 1997 af- ter decreasing $8 million in 1996. The decline in 1996 was primarily due to lower average total borrowings. Real Estate Operations Held for Sale--For a discussion of Sun's real estate op- erations held for sale, see Note 2 to the consolidated financial statements. Sun International Production--On September 30, 1996, Sun completed the sale of its International Production business for $278 million in cash which resulted in a $125 million after-tax gain. This gain is shown separately in the Earnings Profile of Sun Businesses. Prior to the divestment, operating results for this business unit totalled $41 million in 1996 and $57 million in 1995. Canada (Suncor)--On June 8, 1995, Sun divested its remaining 55-percent inter- est in Suncor Inc., a Canadian integrated oil company, for $770 million, of which $635 million was received in June 1995 and $135 million was received in June 1996. This divestment resulted in a $157 million after-tax gain, which is shown separately in the Earnings Profile of Sun Businesses. Suncor's operating results totalled $23 million in 1995 prior to the divestment. ANALYSIS OF CONSOLIDATED STATEMENTS OF OPERATIONS Revenues--Total revenues from continuing operations were $10.5 billion in 1997, $11.3 billion in 1996 and $9.9 billion in 1995. The 7 percent decrease in 1997 was primarily due to lower revenues from resales of purchased crude oil, lower refined product prices and lower consumer excise taxes, partially offset by higher refined product sales volumes. In 1996, the 14 percent increase reflects higher refined product sales prices and volumes and higher revenues from resales of purchased crude oil, partially offset by the absence of revenues from Canadian refining and marketing opera- tions as a result of the divestment of Suncor on June 8, 1995. 34 Costs and Expenses--Total pretax costs and expenses attributable to continuing operations were $10.1 billion in 1997, $11.7 billion in 1996 and $9.9 billion in 1995. The 14 percent decrease in 1997 was primarily due to lower resales of purchased crude oil and lower crude oil and refined product acquisition costs. Also contributing to the decrease were reduced operating and administrative ex- penses reflecting cost containment efforts and a decline in the provisions for asset write-downs, employee terminations and other matters. The 18 percent increase in costs and expenses in 1996 was primarily due to higher crude oil and refined product acquisition costs largely as a result of an increase in crude oil prices, and higher resales of purchased crude oil. Also contributing to the increase were higher domestic refinery operating ex- penses attributable principally to higher refinery fuel costs, higher domestic consumer excise taxes, higher costs related to Sun's cokemaking business and an increase in the provisions for asset write-downs, employee terminations and other matters. Partially offsetting these increases were lower costs and ex- penses related to Canadian refining and marketing operations resulting from the Suncor divestment and lower interest cost and debt expense due to lower average borrowings. FINANCIAL CONDITION CAPITAL RESOURCES AND LIQUIDITY Cash and Working Capital--At December 31, 1997, Sun had cash and cash equiva- lents of $33 million compared to $67 million at December 31, 1996 and had a working capital deficit of $216 million compared to a working capital deficit of $282 million at December 31, 1996. Sun's working capital position is consid- erably stronger than indicated because of the relatively low historical costs assigned under the LIFO method of accounting for most of the inventories re- flected in the consolidated balance sheet. The current replacement cost of all such inventories exceeds their carrying value at December 31, 1997 by $492 mil- lion. Inventories valued at LIFO, which consist of crude oil and refined prod- ucts, are readily marketable at their current replacement values. Management believes that the current levels of Sun's cash and working capital are adequate to support Sun's ongoing operations. Cash Flows and Financial Capacity--In 1997, Sun's net cash provided by operat- ing activities ("cash generation") was $452 million compared to $332 million in 1996 and $352 million in 1995. The $120 million increase in cash generation in 1997 was primarily attributable to the significant increase in income before special items, partially offset by an increase in working capital uses pertain- ing to operating activities and a reduction in net cash provided by operating activities of discontinued operations. The $20 million decrease in cash genera- tion in 1996 was largely due to declines in income before special items and net cash provided by operating activities of discontinued operations, essentially offset by a reduction in working capital uses pertaining to operating activi- ties. Divestment activities have also been a source of cash and in the past have en- hanced liquidity. During the 1995-97 period, proceeds from divestments totalled $1,326 million, including $278 million received in 1996 from the sale of the International Production business and $770 million received in the 1995-96 pe- riod from the sale of Suncor common stock. Management believes that future cash generation will be sufficient to satisfy Sun's capital requirements and to pay the current level of cash dividends on common and preference stock. However, from time to time, the Company's short- term cash requirements may exceed its cash generation due to various factors including volatility in crude oil and refined product markets and increases in capital spending and working capital levels. During those periods, the Company may supplement its cash generation with proceeds from financing activities. 35 The Company has a $500 million revolving credit agreement ("Agreement") with commercial banks that provides access to short-term financing through September 2002. The Company can borrow directly from the participating banks under this Agreement or use it to support commercial paper issued by Sun. The Company also has access to short-term financing under non-committed money market facilities. At December 31, 1997 and 1996, there were no amounts outstanding related to the above short-term borrowing arrangements. The following table sets forth amounts outstanding related to Sun's other borrowings:
December 31 ----------- (Millions of Dollars) 1997 1996 - --------------------------------------------------- Current portion of long-term debt $ 12 $ 54 Long-term debt 824 835 - --------------------------------------------------- Total borrowings $836 $889 - ---------------------------------------------------
Sun's debt-to-capital ratio was 36.4 percent at December 31, 1997 compared to 38.2 percent at December 31, 1996. Management believes there is sufficient bor- rowing capacity available to pursue strategic investment opportunities as they arise. In addition, the Company has the option of issuing additional common or preference stock as a means of increasing its equity base; however, there are no current plans to do so. No commitments have been made with respect to any investment opportunity which would require the use of a significant portion of Sun's unused financial capacity. In early 1998, Sun transferred an interest in its cokemaking operations in East Chicago, IN, to a third party in exchange for $200 million in cash. The trans- feree is entitled to a preferential return from the cash flows of this cokemaking operation until certain cumulative return targets have been met. Sun did not recognize a gain or loss on this transaction. CAPITAL EXPENDITURES
(Millions of Dollars) 1998 PLAN 1997 1996 1995 - -------------------------------------------------------------------------- Sun Northeast Refining $111 $ 81 $148 $103 Sunoco Northeast Marketing 70 46 81 102 Sunoco Chemicals 49 37 57 55 Sun Lubricants 33 22 30* 52 Sunoco MidAmerica Marketing & Refining 47 29 36 48 Sunoco Logistics 39 32 22 42 Sun Coke 68 133 34 7** Canadian Refining and Marketing -- -- -- 8 - -------------------------------------------------------------------------- Consolidated capital expenditures $417 $380 $408 $417 - --------------------------------------------------------------------------
*Excludes $74 million attributable to the purchase of the Kendall lubricants business and related working capital. **Excludes capital expenditures of Sun Coke prior to June 30, 1995 while such operations were accounted for as an investment held for sale. In 1997, major capital expenditures included: $118 million for the ongoing con- struction of the $195 million cokemaking facility in East Chicago, IN, sched- uled to commence operations in the first quarter of 1998; $25 million to begin the expansion of the Philadelphia refinery's cumene production capacity; $17 million for the scheduled turnaround of various units at the Philadelphia re- finery including a catcracker, a crude unit and a gasoline reformer; and $46 million largely for service station modernization activities in the Northeast. In 1996, in addition to the $74 million spent to acquire the Kendall lubricants business (of which $46 million related to working capital), major capital out- lays included: $81 million for branded marketing activities in the Northeast mainly for ongoing upgrades of service stations; $76 million for the six-week scheduled turnaround and modernization of the 86,000 barrel-per-day catalytic cracking unit, gas plant and ethylene complex at the Marcus Hook refinery; $37 million to complete the expansion of a propylene unit at the 36 Marcus Hook refinery; and $19 million to begin construction of the East Chica- go, IN, cokemaking facility. In 1995, major capital expenditures included: $61 million related to service station conversion and modernization activities; $26 million at the Marcus Hook refinery to begin the expansion of the propylene unit and to complete expansion of an ethylene oxide unit; $18 million to complete a cyclohexane plant and ex- pand benzene extraction capacity at the Marcus Hook refinery and $13 million to complete the construction of a pipeline connecting the Philadelphia and Marcus Hook refineries. The 1998 planned capital expenditures include $144 million for growth projects with four projects comprising approximately 80 percent of the growth spending. These outlays are: $58 million to complete the construction of the East Chica- go, IN, cokemaking facility; $25 million to complete the expansion of the Phil- adelphia refinery's cumene production facilities; $18 million to modernize the 68,000 barrel-per-day catalytic cracking unit at the Philadelphia refinery; and $17 million to upgrade or acquire Sunoco(R) retail marketing locations in the Northeast. An additional $273 million is designated for base infrastructure and legally required spending in 1998, a significant portion of which relates to projects that will enhance the reliability of the Company's operations. The base infrastructure spending includes scheduled turnarounds at Sun's refining facilities and projects that will maintain the high quality image of Sunoco(R) retail outlets. ENVIRONMENTAL MATTERS Sun is subject to numerous federal, state and local laws which regulate the discharge of materials into, or otherwise relate to the protection of, the en- vironment. These laws have required, and are expected to continue to require, Sun to make significant expenditures of both a capital and expense nature. The following table summarizes Sun's expenditures for environmental projects and compliance activities:
(Millions of Dollars) 1997 1996 1995 - ------------------------------------------------------------------------ Pollution abatement capital* $ 23 $ 29 $ 60 Remediation 38 37 48 Operations, maintenance and administration 188 185 238 - ------------------------------------------------------------------------ $249 $251 $346 - ------------------------------------------------------------------------
*Capital expenditures for pollution abatement are expected to approximate $35 and $34 million in 1998 and 1999, respectively. The Clean Air Act establishes stringent criteria for regulating air toxics at operating facilities by mandating major reductions in allowable emissions and establishing a more comprehensive list of substances deemed to be air toxics. The Clean Air Act also requires refiners to market cleaner-burning gasoline that reduces emissions of certain toxic and conventional pollutants. The Com- pany has implemented the first phase of the reformulated gasoline regulations which requires an increase in the minimum quantity of oxygen for certain non- attainment areas, a reduction in benzene content, and a reduction in summertime Reid Vapor Pressure ("RVP"). Sun expects to implement the next more stringent phases of these regulations in 1998 and 2000 with modest capital investment. In order to obtain a secure supply of oxygenates, Sun entered into an off-take agreement with Belvieu Environmental Fuels ("BEF"), a joint venture in which Sun is a one-third partner, whereby Sun agreed to purchase all of the MTBE from BEF's 14,000 barrel-per-day facility. At December 31, 1996, Sun established a $130 million accrual ($85 million after tax) for estimated losses expected to be realized with respect to the off-take agreement. During 1997, actual losses attributable to this agreement totalling $65 million were charged against the accrual. (See Note 13 to the consolidated financial statements.) The Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") and the Solid Waste Disposal Act as amended by the Resource Conser- vation and Recovery Act ("RCRA"), and related federal and state laws subject Sun to the potential obligation to remove or mitigate the environmental effects of the disposal or 37 release of certain pollutants at Sun's facilities and at third-party or former- ly-owned sites. Under CERCLA, Sun is subject to potential joint and several li- ability for the costs of remediation at sites at which it has been identified as a "potentially responsible party" ("PRP"). As of December 31, 1997, Sun had been named as a PRP at 44 sites identified or potentially identifiable as "Superfund" sites under CERCLA. Sun has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon the other parties involved or Sun's negligible participation therein, believes that its potential liability associated with such sites will not be significant. Under various environmental laws, including RCRA, Sun has initiated corrective remedial action at Sun's facilities, formerly-owned facilities and third-party sites and could be required to undertake similar actions at various other sites. The cost of such remedial actions could be significant but is expected to be incurred over an extended period of time. Sun establishes accruals related to environmental remediation activities for work at identified sites where an assessment has indicated that cleanup costs are probable and reasonably estimable. For a discussion of the accrued liabili- ties and charges against income related to these activities, see Note 13 to the consolidated financial statements. On October 4, 1996, Sun filed a complaint in Los Angeles County Superior Court, Jalisco Corporation, Inc., et al. v. Argonaut Insurance Company, et al. (Case No. BC 158441), naming more than 45 insurance companies as defendants and seek- ing recovery under numerous insurance policies for certain environmental expen- ditures of Sun, including its predecessor companies and subsidiaries, arising from the ownership and operation of its business and properties. The Company cannot quantify the ultimate outcome of this litigation which may be protract- ed. Total future costs for environmental remediation activities will depend upon, among other things, the identification of any additional sites, the determina- tion of the extent of the contamination at each site, the timing and nature of required remedial actions, the technology available and needed to meet the var- ious existing legal requirements, the nature and extent of future environmental laws, inflation rates and the determination of Sun's liability at multi-party sites, if any, in light of the number, participation level and financial via- bility of other parties. Management believes that the overall expenditures for the matters discussed above are likely to be significant but are expected to be incurred over an ex- tended period of time and to be funded from Sun's net cash provided by operat- ing activities. Although potentially significant with respect to results of op- erations or cash flows for any one year, management believes that such costs will not have a material impact on Sun's consolidated financial position or, over an extended period of time, on Sun's cash flows or liquidity. YEAR 2000 INFORMATION PROCESSING A comprehensive program is currently underway to evaluate and implement changes that will be necessary for the Company to accurately process information at and beyond the Year 2000. The program consists of an evaluation of and changes to Sun's information technology environment, which includes all software, hardware and network components, as well as an assessment of the ability of the Company's major customers and suppliers to conduct business. Management expects that all of Sun's systems critical to its ongoing business will be Year 2000 compliant by mid-1999. Management also believes that the costs associated with this project will not be significant in relation to Sun's results of opera- tions. Furthermore, the Company has not identified any material adverse Year 2000 consequences to date in connection with any of its third-party relation- ships. However, if any governmental agencies, key customers or key suppliers are unable to make the necessary computer system changes on a timely basis, such inability could negatively impact the Company's results of operations. 38 DERIVATIVE INSTRUMENTS Sun uses swaps, options, futures, forwards and other similar derivative con- tracts to hedge the impact of fluctuations in crude oil, natural gas, refined product and electricity prices. At December 31, 1997, Sun had swaps and options outstanding to hedge against significant increases in crude oil prices amount- ing to approximately 4 million barrels (2 percent) of its expected 1998 crude oil purchases and had locked in what it considers to be acceptable margins for approximately 6 million barrels (2 percent) of its anticipated 1998 wholesale fuel sales. Sun is at risk for possible changes in the market value of all of its deriva- tive contracts. However, it is anticipated that such risk would be mitigated by price changes in the underlying hedged transactions. In addition, Sun is ex- posed to credit risk in the event of nonperformance by counterparties. Manage- ment believes this risk is negligible as its counterparties are either regu- lated by exchanges or are major international financial institutions with high credit ratings. Although most of these derivative contracts are intended to limit the Company's exposure to rising crude oil prices and/or declining mar- gins, they could limit the Company's participation in falling crude oil prices and/or rising margins. For a further discussion of Sun's hedging activities, see Note 16 to the consolidated financial statements. CASH DIVIDENDS AND SHARE REDEMPTION AND REPURCHASES The Company has paid cash dividends on a regular quarterly basis since 1904. Effective with the third quarter of 1995, Sun reduced its quarterly common stock dividend from $.45 per share to $.25 per share. As a result, the cash dividends paid on common stock totalled $1.40 per share in 1995 and $1.00 per share in 1996 and 1997. The Company expects to continue to sustain the quar- terly common stock cash dividend at its current level. During the third quarter of 1995, Sun exchanged 25 million "depositary shares" for an equal number of shares of its common stock in a tax-free transaction. Each depositary share represents ownership of one-half share of the Company's Series A cumulative preference stock. The depositary shares accrue dividends quarterly at a rate of $.45 per share, or one-half the rate paid on the prefer- ence stock. Cash dividends paid on the depositary shares totalled $.90 per share in 1995 and $1.80 per share in both 1996 and 1997. (See Note 14 to the consolidated financial statements.) The outstanding depositary shares are redeemable at any time by the Company, in whole or in part, for common stock at a value which initially equaled $42.40 per depositary share at June 12, 1995 and declines ratably to $40.00 per depos- itary share at June 11, 1998. As of February 12, 1998, this call price was $40.27 per depositary share. After June 11, 1998, the Company can redeem the depositary shares with common shares on a one-for-one basis, subject to adjust- ment in certain events. If Sun were to do a partial redemption of depositary shares, it would be done on a pro rata basis. The Company currently intends to redeem all of the outstanding depositary shares no later than June 12, 1998. The Company repurchased 6,400,000 shares of its common stock in mid-1995 through a tender offer for $192 million and an additional 6,774,500 shares of common stock and 885,700 depositary shares during the 1995-97 period on the open market for $250 million. At December 31, 1997, the Company had a remaining authorization from its Board of Directors to purchase up to $150 million of Company stock in the open market or through privately negotiated transactions from time to time depending on prevailing market conditions. 39 FORWARD-LOOKING STATEMENTS Those statements in the Management's Discussion and Analysis that are not his- torical in nature should be deemed forward-looking statements within the mean- ing of Section 21E of the Securities Exchange Act of 1934. Such statements gen- erally will be accompanied by words such as "anticipate," "believe," "esti- mate," "expect," "forecast," "intend," "possible," "potential," "predict," "project," or other similar words that convey the uncertainty of future events or outcomes. Although Sun believes these forward-looking statements are reason- able, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Such forward-looking statements involve risks and are inherently uncertain. Important factors that could cause actual results to differ materially from those projected in such statements are discussed below. Sun's operating results are dependent upon the reliability and efficiency of the Company's operating facilities, the level of operating expenses and hazards common to operating facilities (including equipment malfunction, explosions, fires, oil spills and the effects of severe weather conditions). Plans for the construction, modernization or debottlenecking of refineries, chemical plants and/or cokemaking facilities, and the utilization and timing of production from these facilities are subject to many factors, including unplanned delays, and the issuance of applicable building, environmental and other permits. Sun's in- come and revenues are affected by market supply and demand for Sun's products and actions taken by competitors (including both pricing and expansion and re- tirement of refinery capacity in response to market conditions), as well as changes in industry-wide refining margins, market forces affecting the avail- ability and pricing of oxygenates such as MTBE, changes in crude oil and other raw material costs, and world and regional events that could significantly in- crease volatility in the marketplace. The ability to meet liquidity requirements, including the funding of the Company's capital program from operations, is subject to changes in commodity prices and crude oil supply that could be affected by factors beyond Sun's con- trol, such as embargoes, the continued discovery and production of light sweet crude oil, or military conflicts involving (or internal instability in) one or more oil-producing countries. Other factors that could affect Sun's business include the continued availability of debt and equity financing, changes in la- bor relations, general economic conditions (including recessionary trends, in- flation and interest and currency exchange rates), and civil, criminal, regula- tory or administrative actions, claims or proceedings. Sun's operations could also be affected by domestic and international political, legislative, regula- tory and legal actions, such as restrictions on production, restrictions on im- ports and exports, price controls, tax increases and retroactive tax claims, expropriation of property and cancellation of contract rights. Sun is impacted by laws pertaining to workers' health and safety, and current or amended state and federal environmental and other similar regulations (including, particular- ly, regulations dealing with gasoline composition and characteristics) or the judicial interpretation of such regulations. The factors identified above are believed to be important factors (but not nec- essarily all of the important factors) that could cause actual results to dif- fer materially from those expressed in any forward-looking statement made by Sun. Unpredictable or unknown factors not discussed herein could also have ma- terial adverse effects on forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K are expressly qualified in their entirety by the foregoing cautionary statements. The Company under- takes no obligation to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or fu- ture events. 40 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS Sun Company, Inc. and Subsidiaries (Millions of Dollars and Shares Except Per Share Amounts)
- -------------------------------------------------------------------------------- For the Years Ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------- REVENUES Sales and other operating revenue (including consumer excise taxes) $10,464 $11,233 $9,834 Interest income 7 15 13 Other income (Note 4) 60 52 30 - -------------------------------------------------------------------------------- 10,531 11,300 9,877 COSTS AND EXPENSES Cost of products sold and operating expenses 7,610 8,718 7,011 Selling, general and administrative expenses 533 589 616 Consumer excise taxes 1,563 1,612 1,751 Payroll, property and other taxes 78 89 94 Depreciation, depletion and amortization 259 267 263 Provision for write-down of assets and other matters (Note 2) 32 356 93 Interest cost and debt expense 78 79 98 Interest capitalized (7) (2) (2) - -------------------------------------------------------------------------------- 10,146 11,708 9,924 Income (loss) from continuing operations before income tax expense (benefit) and cumulative effect of change in accounting principle 385 (408) (47) Income tax expense (benefit) (Note 5) 122 (127) (39) - -------------------------------------------------------------------------------- Income (loss) from continuing operations before cumulative effect of change in accounting principle 263 (281) (8) Income from discontinued operations (Note 2) -- 166 235 Cumulative effect of change in accounting principle (Note 3) -- -- (87) - -------------------------------------------------------------------------------- NET INCOME (LOSS) 263 (115) 140 Dividends on preference stock (44) (45) (22) - -------------------------------------------------------------------------------- Net income (loss) attributable to common shareholders $ 219 $ (160) $ 118 - -------------------------------------------------------------------------------- EARNINGS PER SHARE OF COMMON STOCK (Note 6): Basic: Income (loss) from continuing operations before cumulative effect of change in accounting principle $3.03 $(4.43) $(.33) Income from discontinued operations -- 2.26 2.57 Cumulative effect of change in accounting principle -- -- (.95) - -------------------------------------------------------------------------------- Net income (loss) $3.03 $(2.17) $1.29 - -------------------------------------------------------------------------------- Diluted: Income (loss) from continuing operations before cumulative effect of change in accounting principle $2.70 $(4.43) $(.33) Income from discontinued operations -- 2.26 2.57 Cumulative effect of change in accounting principle -- -- (.95) - -------------------------------------------------------------------------------- Net income (loss) $2.70 $(2.17) $1.29 - -------------------------------------------------------------------------------- Weighted average number of shares outstanding: Basic 72.3 73.6 91.3 Diluted 97.4 73.6 91.3 - -------------------------------------------------------------------------------- CASH DIVIDENDS PAID PER SHARE:* Preference stock $3.60 $3.60 $1.80 Common stock $1.00 $1.00 $1.40 - --------------------------------------------------------------------------------
*Effective in the third quarter of 1995, Sun began paying quarterly dividends on preference stock at a rate of $.90 per share and reduced its quarterly common stock dividend from $.45 to $.25 per share. Each share of preference stock is represented by two depositary shares. Each depositary share accrues dividends quarterly at a rate of $.45 per share, or one-half the rate paid on preference stock. (See Accompanying Notes) 41 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS Sun Company, Inc. and Subsidiaries (Millions of Dollars)
- ---------------------------------------------------------------------------- At December 31 1997 1996 - ---------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 33 $ 67 Accounts and notes receivable, net 671 864 Inventories (Note 7) 431 476 Deferred income taxes (Note 5) 113 128 - ---------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,248 1,535 - ---------------------------------------------------------------------------- Investment in real estate operations held for sale (Note 2) 43 79 Investments and long-term receivables (Note 8) 94 91 Properties, plants and equipment, net (Note 9) 3,064 3,044 Deferred charges and other assets 218 276 - ---------------------------------------------------------------------------- TOTAL ASSETS $4,667 $5,025 - ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 830 $1,081 Accrued liabilities 534 573 Current portion of long-term debt (Note 11) 12 54 Taxes payable 88 109 - ---------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,464 1,817 - ---------------------------------------------------------------------------- Long-term debt (Note 11) 824 835 Retirement benefit liabilities (Note 12) 477 489 Deferred income taxes (Note 5) 73 -- Other deferred credits and liabilities 367 446 Commitments and contingent liabilities (Note 13) SHAREHOLDERS' EQUITY (Notes 14 and 15) Cumulative preference stock--Series A, no par value Authorized--12,500,000 shares; Outstanding, 1997--12,057,150 shares; Outstanding, 1996--12,460,550 shares 723 748 Common stock, par value $1 per share Authorized--200,000,000 shares; Issued, 1997--131,572,867 shares; Issued, 1996--129,871,604 shares 132 130 Capital in excess of par value 1,361 1,316 Earnings employed in the business 1,430 1,284 - ---------------------------------------------------------------------------- 3,646 3,478 Less common stock held in treasury, at cost 1997--60,744,258 shares; 1996--56,880,126 shares 2,184 2,040 - ---------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 1,462 1,438 - ---------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,667 $5,025 - ----------------------------------------------------------------------------
(See Accompanying Notes) 42 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Sun Company, Inc. and Subsidiaries (Millions of Dollars)
- --------------------------------------------------------------------------------- For the Years Ended December 31 1997 1996 1995 - --------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 263 $(115) $ 140 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Income from discontinued operations -- (166) (235) Cumulative effect of change in accounting principle -- -- 87 Provision for write-down of assets and other matters 32 356 93 Depreciation, depletion and amortization 259 267 263 Deferred income tax expense (benefit) 131 (129) 11 Changes in working capital pertaining to operating activities: Accounts and notes receivable 203 (198) (143) Inventories 45 57 (28) Accounts payable and accrued liabilities (383) 257 66 Taxes payable (51) 7 (101) Other (47) (21) (13) - --------------------------------------------------------------------------------- Net cash provided by continuing operating activities 452 315 140 Net cash provided by discontinued operating activities -- 17 212 - --------------------------------------------------------------------------------- Net cash provided by operating activities 452 332 352 - --------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (380) (408) (417) Acquisition of Kendall lubricants business (Notes 2 and 17) -- (74) -- Proceeds from divestments: International Production operations (Note 2) -- 278 -- Suncor common stock (Note 2) -- 135 635 Other 182 32 64 Investing activities of discontinued operations -- (13) (99) Other 11 -- (18) - --------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (187) (50) 165 - --------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments of short-term borrowings -- (54) (167) Repayments of long-term debt (53) (2) (142) Cash dividend payments (117) (119) (156) Purchases of preference stock for retirement (27) (2) -- Purchases of common stock for treasury (144) (31) (238) Proceeds from issuance of common stock under management incentive and employee option plans 48 4 6 Financing activities of discontinued operations -- -- 15 Other (6) (22) 90 - --------------------------------------------------------------------------------- Net cash used in financing activities (299) (226) (592) - --------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (34) 56 (75) Cash and cash equivalents at beginning of year 67 11 86 - --------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 33 $ 67 $ 11 - ---------------------------------------------------------------------------------
(See Accompanying Notes) 43 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Sun Company, Inc. and Subsidiaries (Dollars in Millions, Shares in Thousands)
- ----------------------------------------------------------------------------------------------------------------------- Cumulative Preference Stock Common Stock Earnings Common Stock ---------------------- ------------------ Capital in Employed Held in Treasury Number of Liquidation Number of Par Excess of Translation in the ------------------ Shares Value Shares Value Par Value Adjustment Business Shares Cost - ----------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1994 -- $ -- 129,521 $130 $1,309 $(89) $1,534 22,584 $1,021 Net income -- -- -- -- -- -- 140 -- -- Cash dividend payments -- -- -- -- -- -- (156) -- -- Exchange of preference stock for common stock (Note 14) 12,500 750 -- -- -- -- -- 25,000 750 Purchases for treasury -- -- -- -- -- -- -- 8,125 238 Issued under management incentive plans -- -- 56 -- 2 -- -- -- -- Issued under employee option plan -- -- 132 -- 4 -- -- (4) -- Foreign currency translation adjustment -- -- -- -- -- 89 -- -- -- Other -- -- -- -- (5) -- -- (6) -- - ----------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1995 12,500 $750 129,709 $130 $1,310 $ -- $1,518 55,699 $2,009 Net loss -- -- -- -- -- -- (115) -- -- Cash dividend payments -- -- -- -- -- -- (119) -- -- Purchases for retirement (39) (2) -- -- -- -- -- -- -- Purchases for treasury -- -- -- -- -- -- -- 1,185 31 Issued under management incentive plans -- -- 74 -- 2 -- -- -- -- Issued under employee option plan -- -- 88 -- 2 -- -- -- -- Other -- -- 1 -- 2 -- -- (4) -- - ----------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1996 12,461 $748 129,872 $130 $1,316 $ -- $1,284 56,880 $2,040 Net income -- -- -- -- -- -- 263 -- -- Cash dividend payments -- -- -- -- -- -- (117) -- -- Purchases for retirement (404) (25) -- -- (2) -- -- -- -- Purchases for treasury -- -- -- -- -- -- -- 3,864 144 Issued under management incentive plans -- -- 1,051 1 29 -- -- -- -- Issued under employee option plan -- -- 647 1 17 -- -- -- -- Other -- -- 3 -- 1 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1997 12,057 $723 131,573 $132 $1,361 $ -- $1,430 60,744 $2,184 - -----------------------------------------------------------------------------------------------------------------------
(See Accompanying Notes) 44 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sun Company, Inc. and Subsidiaries 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Sun Company, Inc. and all operations that are controlled (generally more than 50 percent owned) except those accounted for as investments in operations held for sale and discontinued operations (collectively, "Sun" or the "Company") are consolidated. Affiliated companies over which the Company has the ability to exercise significant influence but that are not controlled (generally 20 to 50 percent owned) are accounted for by the equity method. USE OF ESTIMATES Certain amounts included in the accompanying consolidated financial statements and related footnotes reflect the use of estimates based on assumptions made by management. Actual amounts could differ from these estimates. CASH EQUIVALENTS Sun considers all highly liquid investments with a remaining maturity of three months or less at the time of purchase to be cash equivalents. These cash equivalents consist principally of time deposits and certificates of deposit. INVENTORIES Inventories are valued at the lower of cost or market. The cost of crude oil and refined product inventories is determined using the last-in, first-out method ("LIFO"). The cost of materials, supplies and other inventories is de- termined using principally the average cost method. DEPRECIATION AND RETIREMENTS Plants and equipment are generally depreciated on a straight-line basis over their estimated useful lives. Coal property acquisition costs and capitalized development costs are depleted by the unit of production method based on proved reserves. Gains and losses on the disposals of fixed assets are generally re- flected in income. ENVIRONMENTAL REMEDIATION Sun accrues environmental remediation costs for work at identified sites where an assessment has indicated that cleanup costs are probable and reasonably es- timable. Such accruals are undiscounted and are based on currently available information, estimated timing of remedial actions and related inflation assump- tions, existing technology and presently enacted laws and regulations. REFINERY MAINTENANCE SHUTDOWNS Maintenance and repair costs in excess of $500 thousand incurred in connection with major refinery maintenance shutdowns are capitalized when incurred and then amortized over the period benefitted by the maintenance activities. FOREIGN CURRENCY TRANSLATION Prior to the divestment of Suncor Inc., the functional currency for Canadian operations was the Canadian dollar. Foreign exchange gains and losses that re- sulted from translating Suncor's balance sheet from Canadian dollars into U.S. dollars were included as a separate component of shareholders' equity. The functional currency for International Production operations was the U.S. dol- lar. DERIVATIVE INSTRUMENTS Sun uses swaps, options, futures, forwards and other off-balance sheet commodi- ty-based financial and nonfinancial derivative instruments to hedge its expo- sure to crude oil, natural gas, refined product and electricity price volatili- ty. Such contracts, which effectively meet the Company's risk reduction and correlation criteria, are recorded using hedge accounting. Effectiveness is measured based upon the high correlation between the gains and losses on the derivative contracts and the corresponding offsetting changes in the market value of the underlying items being hedged. Under hedge accounting, gains or losses on derivative contracts (whether or not held until the underlying items being hedged are recognized in income) are deferred and recognized in cost of products sold and operating expenses in the same periods as the underlying items being hedged. In the event a derivative contract were to become ineffec- tive as a hedge or if an anticipated transaction being hedged were no longer likely to occur, any related unrealized derivative gain or loss would be recog- nized in income at such time. The cash flows from hedge contracts are included in operating activities in the consolidated statements of cash flows. Sun does not hold or issue derivative instruments for trading purposes. STOCK-BASED COMPENSATION The Company follows the method of accounting for employee stock compensation plans prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") (Note 15). 45 2. CHANGES IN BUSINESS The following is a summary of Sun's significant changes in business during the three-year period ended December 31, 1997: DISCONTINUED OPERATIONS On September 30, 1996, Sun completed the sale of its international oil and gas production business for $278 million in cash. The sale of this business repre- sents the completion of the Company's withdrawal from oil and gas exploration and production activities. The Company withdrew from international exploration activities in 1992 and divested its remaining 55-percent interest in Suncor Inc., a Canadian integrated oil company, on June 8, 1995. Sun received $770 million from the sale of Suncor, after commissions and discounts, of which $635 million was received in June 1995 and $135 million was received in June 1996. As a result of the sale of the international oil and gas production business, it and the previously divested Canadian synthetic oil production and conven- tional oil and gas exploration and production operations (collectively, "Cana- dian Upstream Petroleum Operations") have been classified as discontinued oper- ations in 1996 and 1995 up to their respective dates of divestment. The follow- ing is a summary of income from discontinued operations:
Canadian International Upstream Production Petroleum (Millions of Dollars) Operations Operations Total - -------------------------------------------------------- 1996 Income before income tax benefit $152 $-- $152 Income tax benefit 14 -- 14 - -------------------------------------------------------- Income from discontinued operations $166 $-- $166 - -------------------------------------------------------- 1995 Income before income tax expense $ 80 $286 $366 Income tax expense 23 108 131 - -------------------------------------------------------- Income from discontinued operations $ 57 $178 $235 - --------------------------------------------------------
Income from discontinued International Production Operations in 1996 includes a $125 million gain on divestment of this business (comprised of a pretax gain of $93 million and an income tax benefit of $32 million). Income from discontinued Canadian Upstream Petroleum Operations in 1995 includes a $157 million gain on divestment of Suncor (comprised of a pretax gain of $242 million and income tax expense of $85 million). Prior to their divestment, sales and other operating revenue from discontinued International Production Operations totalled $187 and $236 million for 1996 and 1995, respectively, while sales and other operating revenue from discontinued Canadian Upstream Petroleum Operations totalled $271 million for 1995. INVESTMENTS IN OPERATIONS HELD FOR SALE Real Estate Operations--Sun has been disposing of the assets of Radnor Corpora- tion ("Radnor"), its wholly owned real estate development subsidiary, since Oc- tober 1991 and subsequent to that date has divested approximately 95 percent of Radnor's real estate portfolio. Radnor is accounted for as an investment held for sale. Accordingly, pretax results from real estate operations have been in- cluded as a single amount in other income in the accompanying consolidated statements of operations (Note 4). Radnor's assets and liabilities have been segregated in the consolidated bal- ance sheets and separately reflected as an investment in operations held for sale. Such amounts are detailed as follows:
December 31 -------------- (Millions of Dollars) 1997 1996 - ----------------------------------------------- Inventories $ 49 $ 78 Properties, plants and equipment 9 119 Other assets 15 18 Debt -- (109) Other liabilities (30) (27) - ----------------------------------------------- Investment in real estate operations held for sale $ 43 $ 79 - -----------------------------------------------
Coal and Cokemaking Operations--In January 1993, Sun decided to sell its coal and cokemaking operations. In connection with this decision, Sun sold its west- ern U.S. coal operations during 1993 and certain of its eastern U.S. coal oper- ations during 1994. Prior to June 30, 1995, Sun's coal and cokemaking opera- tions had been accounted for as an investment held for sale. However, effective June 30, 1995, the remaining coal and cokemaking business became one of the Company's ongoing business units and is no longer held for sale. Accordingly, the consolidated balance sheets as of December 31, 1997 and 1996 contain the accounts of Sun's coal and cokemaking operations on a fully consolidated basis. The accompanying consolidated statements of operations and cash flows reflect coal and cokemaking operations on a fully consolidated basis after June 30, 1995 and as an operation held for sale prior to that date. 46 WRITE-DOWNS OF ASSETS AND OTHER MATTERS The following table sets forth summary information regarding the provisions for write-down of assets and other matters:
Pretax After-Tax (Millions of Dollars) Provisions Provisions - --------------------------------------------- 1997 Employee terminations and related costs $ 32 $ 21 - --------------------------------------------- 1996 Reconfiguration projects: Philadelphia refinery $ 85 $ 53 Puerto Rico refinery 85 80 MTBE purchase commitment 130 85 Other 56 36 - --------------------------------------------- $356 $254 - --------------------------------------------- 1995 Refining and marketing assets $ 43 $ 28 Employee terminations and related costs 50 33 - --------------------------------------------- $ 93 $ 61 - ---------------------------------------------
During the first quarter of 1997, Sun established an accrual for approximately 320 involuntary employee terminations and related costs. The employee reduc- tions are throughout the organization and include senior management, support staff and operations personnel. As of December 31, 1997, the amount of actual termination benefits paid and charged against the accrual totalled $22 million. During the fourth quarter of 1996, Sun reconfigured the Philadelphia refinery to process only sweet crude oil and to cease asphalt production. This reconfiguration continues the integration of the Point Breeze and Girard Point facilities at the Philadelphia, PA, refinery. In 1996, Sun also announced that it would reconfigure the Puerto Rico refinery commencing in the first quarter of 1997 to significantly reduce fuels production while fully maintaining the volume and quality of lubricants production. In connection with these reconfigurations, Sun recorded provisions to write off redundant and/or unprof- itable processing units and established accruals for environmental remediation activities, employee terminations and related costs. In addition, at December 31, 1996, Sun established accruals for estimated losses expected to be realized with respect to an off-take agreement to purchase MTBE (Note 13) and for other environmental remediation activities and recorded a provision to write down to fair value certain assets in its refining and marketing business. During 1995, Sun recorded a provision to write down to fair value certain as- sets in the refining and marketing business and to establish accruals for em- ployee terminations and related costs. The $50 million accrual for employee terminations and related costs consisted of $38 million attributable to termi- nation benefits and $12 million related to future rental payments for vacated office space. ACQUISITION OF KENDALL LUBRICANTS BUSINESS On November 1, 1996, Sun acquired the Kendall lubricants blending, packaging and marketing business for $74 million. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of this business have been included in the consolidated statements of operations since the date of acquisition. The purchase price has been allocated to the assets acquired based on their relative fair market values (Note 17). The results of operations of the Kendall lubricants business in 1996 and 1995 were not material in relation to Sun's consolidated results of operations. 3. CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 1995, Sun adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived As- sets and for Long-Lived Assets to be Disposed Of." This statement requires com- panies to write down to estimated fair value long-lived assets that are im- paired. Certain of the write-downs recognized in 1995 are reflected as a cumu- lative effect of a change in accounting principle in the consolidated statement of operations and related to properties to be disposed of in the Company's coal, real estate and refining and marketing operations. The following table sets forth summary information concerning these write-downs:
Pretax After-tax (Millions of Dollars) Provisions Provisions - -------------------------------------------- Coal $ 45 $29 Real estate 33 15 Refining and marketing* 67 43 - -------------------------------------------- $145 $87 ============================================
*Primarily service stations and terminals. The impaired coal assets were sold during 1996. The disposal of the Company's remaining real estate portfolio and the refining and marketing assets held for sale is expected to be substantially completed by the end of 1999. Other than the cumulative effect, the results of operations during the 1995-97 period for the properties to be disposed of were not significant. 47 4. OTHER INCOME
(Millions of Dollars) 1997 1996 1995 - ------------------------------------------------ Equity in earnings of affiliated companies $25 $24 $17 Gain on divestments 12 14 1 Pretax income from investments in operations held for sale (Note 2) -- -- 5 Other 23 14 7 - ------------------------------------------------ $60 $52 $30 ================================================
5. INCOME TAXES The components of the income (loss) from continuing operations before income tax expense (benefit) and cumulative effect of the change in accounting princi- ple are as follows:
(Millions of Dollars) 1997 1996 1995 - --------------------------------------------------- U.S. $385 $(408) $(52) Foreign* -- -- 5 - --------------------------------------------------- $385 $(408) $(47) - ---------------------------------------------------
*Attributable to Canadian refining and marketing operations. The components of the income tax expense (benefit) from continuing operations before cumulative effect of the change in accounting principle are as follows:
(Millions of Dollars) 1997 1996 1995 - --------------------------------------------------- Income taxes currently payable: U.S. federal $ (9) $-- $(59) Foreign -- -- 4 State and other -- 2 5 - --------------------------------------------------- (9) 2 (50) - --------------------------------------------------- Deferred taxes: U.S. federal 130 (118) 22 Foreign -- -- (1) State and other 1 (11) (10) - --------------------------------------------------- 131 (129) 11 - --------------------------------------------------- $122 $(127) $(39) ===================================================
The reconciliation of the income tax expense (benefit) at the U.S. statutory rate to the income tax expense (benefit) from continuing operations before cu- mulative effect of the change in accounting principle is as follows:
(Millions of Dollars) 1997 1996 1995 - --------------------------------------------------- Income tax expense (benefit) at U.S. statutory rate of 35 percent $135 $(143) $(16) Increase (reduction) in income taxes resulting from: Nonconventional fuel credit -- -- (8) Puerto Rico tax exemption (expires in 2007) -- 25 (5) State income taxes after Federal income tax effects -- (2) (4) Dividend exclusion for affiliated companies (4) (4) (3) Other (9) (3) (3) - --------------------------------------------------- $122 $(127) $(39) - ---------------------------------------------------
The tax effects of temporary differences which comprise the net deferred income tax asset are as follows:
December 31 -------------- (Millions of Dollars) 1997 1996 - ------------------------------------------------ Deferred tax assets: Retirement benefit liabilities $ 152 $ 157 Environmental remediation liabilities 70 78 Other liabilities not yet deductible 203 211 Federal net operating loss carryforward* 50 74 Alternative minimum tax credit carryforward** 60 68 Other 66 82 Valuation allowance*** (32) (32) - ------------------------------------------------ 569 638 - ------------------------------------------------ Deferred tax liabilities: Properties, plants and equipment (469) (438) Other (60) (48) - ------------------------------------------------ (529) (486) - ------------------------------------------------ Net deferred income tax asset $ 40 $ 152 ================================================
*The Federal net operating loss carryforward of $142 million at December 31, 1997 expires in 2011. **Alternative minimum tax credit carryforwards may be carried forward indefinitely. ***The valuation allowance reduces certain state net operating loss carryforwards to the amount that will more likely than not be realized. The net deferred income tax asset is classified in the consolidated balance sheets as follows:
December 31 -------------- (Millions of Dollars) 1997 1996 - ----------------------------------------------- Current asset $113 $128 Noncurrent asset (liability) (73) 24* - ----------------------------------------------- $ 40 $152 ===============================================
*Included in deferred charges and other assets in the consolidated balance sheet. Management expects that Sun will generate sufficient future taxable income to realize the benefit of its net deferred income tax asset. 6. EARNINGS PER SHARE In 1997, Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") was issued which replaced the disclosure of earnings per share ("EPS") on a primary and fully diluted basis with basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive effect of stock incen- tive awards. Diluted EPS is very similar to fully diluted EPS. All EPS amounts in the accompanying consolidated statements of operations have been presented in accordance with SFAS No. 128. The new standard had no impact on previously reported full year 1996 and 1995 EPS amounts. Basic EPS is computed by dividing earnings (losses) after deducting dividends on preference stock (Note 14) by the weighted average number of common shares outstanding. Diluted EPS generally is determined by dividing 48 earnings (losses) by the weighted average number of shares outstanding after giving effect to the assumed issuance of common stock under stock incentive awards and the assumed redemption of preference shares for common stock utiliz- ing a ratio of two shares of common stock for each outstanding preference share. However, in 1996 and 1995, since both the assumed issuance of common stock under stock incentive awards and the assumed redemption of preference shares would not have been dilutive, diluted per share amounts are equal to ba- sic per share amounts. The following table sets forth the computation of basic and diluted EPS from continuing operations for 1997:
(In Millions, Except Per Share Amounts) - ------------------------------------------------- Income from continuing operations after dividends on preference stock (basic EPS numerator) $219 Add: Dividends on preference stock 44 - ------------------------------------------------- Income from continuing operations (diluted EPS numerator) $263 - ------------------------------------------------- Weighted average number of common shares outstanding (basic EPS denominator) 72.3 Add effect of dilutive securities: Redeemable preference shares 24.6 Stock incentive awards .5 - ------------------------------------------------- Weighted average number of shares (diluted EPS denominator) 97.4 - ------------------------------------------------- Basic EPS from continuing operations $3.03 Diluted EPS from continuing operations $2.70 - -------------------------------------------------
7. INVENTORIES
December 31 ------------ (Millions of Dollars) 1997 1996 - --------------------------------------------- Crude oil $150 $157 Refined products 214 252 Materials, supplies and other 67 67 - --------------------------------------------- $431 $476 - ---------------------------------------------
The current replacement cost of all inventories valued at LIFO exceeded their carrying value by $492 and $780 million at December 31, 1997 and 1996, respec- tively. During 1996, Sun reduced certain inventory quantities which were valued at lower LIFO costs prevailing in prior years. The effect of this reduction was to decrease the 1996 net loss by $8 million. 8. INVESTMENTS AND LONG-TERM RECEIVABLES
December 31 ------------ (Millions of Dollars) 1997 1996 - ---------------------------------------------- Investments in and advances to affiliated companies $77 $72 Accounts and notes receivable 12 14 Other investments 5 5 - ---------------------------------------------- $94 $91 - ----------------------------------------------
Dividends received from affiliated companies amounted to $13, $15 and $11 mil- lion in 1997, 1996 and 1995, respectively. Earnings employed in the business at December 31, 1997 include $42 million of undistributed earnings of affiliated companies. 9. PROPERTIES, PLANTS AND EQUIPMENT
Accumulated Gross Depreciation, (Millions of Dollars) Investment Depletion and Net December 31 at Cost Amortization Investment - ---------------------------------------------------------- 1997 Refining and marketing* $5,424 $2,586 $2,838 Coal mining and cokemaking 413 188 225 Corporate 1 -- 1 - ---------------------------------------------------------- $5,838 $2,774 $3,064 - ---------------------------------------------------------- 1996 Refining and marketing* $5,537 $2,599 $2,938 Coal mining and cokemaking 291 186 105 Corporate 1 -- 1 - ---------------------------------------------------------- $5,829 $2,785 $3,044 - ----------------------------------------------------------
*Includes gross amounts leased to third parties totalling $569 and $588 million at December 31, 1997 and 1996, respectively. Related accumulated depreciation totalled $224 and $206 million at December 31, 1997 and 1996, respectively. Annual future minimum rentals due Sun, as lessor, on noncancelable operating leases at December 31, 1997 are as follows (in millions of dollars): - ---------------------------------- Year ending December 31: 1998 $44 1999 27 2000 12 2001 1 2002 1 Thereafter -- - ---------------------------------- $85 - ----------------------------------
10. CREDIT FACILITIES The Company has a $500 million revolving credit agreement ("Agreement") with commercial banks that provides access to short-term financing through September 2002. The Company can borrow directly from the participating banks under this Agreement or use it to support commercial paper issued by Sun. The Agreement is subject to commitment fees, the amounts of which are not material. Under the terms of the Agreement, Sun is required, among other things, to maintain con- solidated net worth of at least $1.0 billion. At December 31, 1997, the Company's consolidated net worth was $1.5 billion. Sun also has access to short-term financing under non-committed money market facilities. At December 31, 1997 and 1996, there were no amounts outstanding related to the above short-term borrowing arrangements. 49 11. LONG-TERM DEBT
December 31 ------------- (Millions of Dollars) 1997 1996 - --------------------------------------------- SUN COMPANY, INC. 9 3/8% debentures due 2016 $200 $200 9% debentures due 2024 100 100 8 1/8% notes due 1999 150 150 7.95% notes due 2001 150 150 7 1/8% notes due 2004 100 100 7.03%-7.10% notes, paid in 1997 -- 50 6 3/4% convertible debentures due 2012 (Note 14) 10 10 - --------------------------------------------- 710 760 - --------------------------------------------- SUBSIDIARIES OF SUN COMPANY, INC. 7.60% environmental industrial revenue bonds due 2024 100 100 Other 30 33 - --------------------------------------------- 130 133 - --------------------------------------------- 840 893 Less:unamortized discount 4 4 current portion 12 54 - --------------------------------------------- $824 $835 =============================================
The aggregate amount of long-term debt maturing and sinking fund requirements in the years 1998 through 2002 is as follows (in millions of dollars): - ------------------------------------------- 1998 $ 12 2001 $151 1999 $152 2002 $ 1 2000 $ 2 ===========================================
12. RETIREMENT BENEFIT PLANS DEFINED BENEFIT PENSION PLANS Sun has noncontributory defined benefit pension plans which provide retirement benefits for the majority of its employees. Plan benefits are generally based on years of service, age at retirement and employees' compensation. For Sun's principal defined benefit pension plan, the benefit for employees hired prior to January 1, 1987 is determined based on either final or total career average compensation, whichever produces the greater benefit. For employees hired on or after January 1, 1987, the benefit is generally determined based on total ca- reer average compensation. It is Sun's policy to fund defined benefit pension contributions in accordance with the requirements of the Internal Revenue Code. Pension expense consisted of the following components:
(Millions of Dollars) 1997 1996 1995 - ------------------------------------------------------ Service cost (cost of benefits earned during the year) $ 26 $ 29 $ 26 Interest cost on projected benefit obligation 92 91 97 Actual return on plan assets* (197) (132) (241) Net amortization and deferral* 86 26 134 - ------------------------------------------------------ $ 7** $ 14 $ 16** ======================================================
*Estimated returns on assets are used in determining net periodic pension cost. Differences between estimated and actual returns are included in net amortization and deferral. Net amortization and deferral also includes amortization of the unrecognized net asset or obligation at January 1, 1986 and amortization of the unrecognized prior service cost and unrecognized net gain or loss as of the beginning of each year. **Excludes $(2) and $1 million curtailment gains (losses) recognized in connection with the employee termination programs implemented during 1997 and 1995, respectively (Note 2). The following table sets forth the funded status of the plans and amounts rec- ognized in the balance sheets at:
DECEMBER 31, 1997 December 31, 1996 ------------------------------ ------------------------------ Plans in Which Plans in Which Plans in Which Plans in Which Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits (Millions of Dollars) Benefits Exceed Assets Benefits Exceed Assets - ----------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested $ 872 $213 $ 861 $212 Nonvested 41 19 40 18 - ----------------------------------------------------------------------------------------- Accumulated benefit obligation 913 232 901 230 Effect of projected future salary increases 101 22 89 22 - ----------------------------------------------------------------------------------------- Projected benefit obligation 1,014 254 990 252 Less plan assets at fair value* 1,183 94 1,137 105 - ----------------------------------------------------------------------------------------- Projected benefit obligation in excess of (less than) plan assets (169) 160 (147) 147 Unrecognized net asset (obligation) at January 1, 1986 30 (11) 43 (14) Unrecognized prior service cost (13) -- (15) -- Unrecognized net gain (loss) 97 (37) 76 (27) Additional minimum liability** -- 43 -- 40 - ----------------------------------------------------------------------------------------- Pension liability (asset) $ (55) $155 $ (43) $146 - -----------------------------------------------------------------------------------------
*Plan assets consist principally of commingled trust funds, marketable equity securities, corporate and government debt securities and real estate. Less than 1 percent of plan assets was invested in Company common and preference stock at both December 31, 1997 and 1996. **An equivalent intangible asset is included in deferred charges and other as- sets in the consolidated balance sheets. 50 As of December 31, 1997 and 1996, the projected benefit obligations were deter- mined using weighted average assumed discount rates of 7.0 and 7.5 percent, re- spectively, and a rate of compensation increase of 4.0 percent. The weighted average expected long-term rate of return on plan assets was 9.0 percent in both 1997 and 1996. All of these rates are subject to change in the future as economic conditions change. DEFINED CONTRIBUTION PENSION PLANS Sun has defined contribution pension plans which provide retirement benefits for most of its employees. Sun's contributions, which are principally based on a percentage of employees' annual base compensation and are charged against in- come as incurred, amounted to $17, $18 and $18 million in 1997, 1996 and 1995, respectively. Sun's principal defined contribution plan is the Sun Company, Inc. Capital Ac- cumulation Plan ("SunCAP"). Sun matches 100 percent of employee contributions to the plan up to 5 percent of an employee's base compensation. SunCAP is a combined profit sharing and employee stock ownership plan which contains a pro- vision designed to permit SunCAP, only upon approval by the Company's Board of Directors, to borrow in order to purchase shares of Company common stock. As of December 31, 1997, no such borrowings had been approved. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS Sun has plans which provide health care and life insurance benefits for sub- stantially all retirees. The plans are unfunded and the costs are shared by Sun and its retirees. Postretirement benefits expense consisted of the following components:
(Millions of Dollars) 1997 1996 1995 - ------------------------------------------------------ Service cost (cost of benefits earned during the year) $ 4 $ 5 $ 5 Interest cost on accumulated post-retirement benefit obligation 23 23 23 Net amortization* (8) (9) (10) - ------------------------------------------------------ $19** $19 $18** - ------------------------------------------------------
*Consists of amortization of the unrecognized prior service benefit and the unrecognized net loss. **Excludes $5 and $4 million curtailment gains recognized in connection with the employee termination programs implemented during 1997 and 1995, respectively (Note 2). The following table sets forth the funded status of the plans and amounts rec- ognized in the balance sheets at:
December 31 --------------- (Millions of Dollars) 1997 1996 - ----------------------------------------------- Accumulated postretirement benefit obligation ("apbo"): Retirees $231 $223 Fully eligible active participants 25 27 Other active participants 80 82 - ----------------------------------------------- 336 332 Unrecognized prior service benefit 51 63 Unrecognized net loss (10) (9) - ----------------------------------------------- Accrued postretirement benefit obligation $377 $386 - -----------------------------------------------
As of December 31, 1997 and 1996, the APBO was determined using weighted aver- age assumed discount rates of 7.0 and 7.5 percent, respectively. The health care cost trend assumptions used at December 31, 1997 and 1996 were 7.0 and 7.3 percent, respectively, which are assumed to decline gradually to 5.5 percent in 2001 and to remain at that level thereafter. All of these rates are subject to change in the future as economic conditions change. An increase in the assumed health care cost trend rate by one percentage point in each year would have in- creased the APBO by $8 million at December 31, 1997 and would have increased the service and interest components of postretirement benefits expense in the aggregate by $1 million for each of the three years in the period ended Decem- ber 31, 1997. 13. COMMITMENTS AND CONTINGENT LIABILITIES Sun, as lessee, has noncancelable operating leases for marine transportation time charters and for service stations, office space and other property and equipment. Total rental expense for such leases for the years 1997, 1996 and 1995 amounted to $107, $97 and $102 million, respectively. Approximately 8 per- cent of total rental expense was recovered through related sublease rental in- come during 1997. Under contracts existing as of December 31, 1997, future min- imum annual rentals applicable to noncancelable operating leases are as follows (in millions of dollars): - ---------------------------------- Year ending December 31: 1998 $ 76 1999 62 2000 47 2001 43 2002 40 Thereafter 234 - ---------------------------------- $502 - ----------------------------------
A wholly owned subsidiary of the Company is a one-third partner in Belvieu En- vironmental Fuels ("BEF"), a joint venture formed for the purpose of construct- ing, 51 owning and operating a $225 million methyl tertiary butyl ether ("MTBE") pro- duction facility in Mont Belvieu, Texas. The facility was completed in 1995. In order to obtain a secure supply of oxygenates for the manufacture of refor- mulated gasoline, Sun entered into an off-take agreement with BEF whereby Sun agreed to purchase all of the MTBE production from the plant. For the first 14,000 barrels daily of production, Sun agreed to pay BEF prices through May 1997 based on the market value of MTBE feedstocks (methanol and butane) plus a fixed amount per gallon (the "formula price"), and thereafter through May 2000 based on the then-existing MTBE prices per gallon in the contract market (the "contract market price"). However, the price to be paid by Sun for the first 12,600 barrels daily of MTBE production through May 2000, at a minimum, will equal the sum of BEF's annual raw material and operating costs associated with this production plus BEF's debt service payments (collectively, the "minimum price") if the minimum price per gallon exceeds the applicable formula or con- tract market price. After May 2000, Sun and BEF will negotiate a new price for the last four years of the agreement based upon the market conditions existing at that time. Sun's total MTBE purchases under this agreement were $235, $214 and $150 mil- lion during 1997, 1996 and 1995, respectively. Such amounts were based upon the formula price through May 1997 and the minimum price for the remainder of 1997. The formula prices paid by Sun during most of 1996 were believed to have ap- proximated prices of other MTBE long-term sales agreements in the marketplace. However, management believes that the contract market changed in the latter part of 1996 as feedstock-plus-fixed-priced contracts expired and were replaced by spot-market-price-based contracts, which have been more favorable to the purchaser. Management also believes that the spot market for MTBE had developed by the latter part of 1996. During the fourth quarter of 1996, spot market prices for MTBE were less than the prices paid by Sun under the off-take agree- ment with BEF. At that time, the Company expected this adverse relationship to continue into the future. Accordingly, a $130 million accrual ($85 million af- ter tax) was established at December 31, 1996 for the estimated losses expected to be realized with respect to this agreement. During 1997, actual MTBE pur- chase costs in excess of market prices totalling $65 million were charged against the accrual. Sun is contingently liable under various arrangements which guarantee debt of affiliated companies and others aggregating approximately $27 million at December 31, 1997 and maturing at various dates through 2014. Sun is subject to numerous federal, state and local laws regulating the dis- charge of materials into, or otherwise relating to the protection of, the envi- ronment. These laws result in liabilities and loss contingencies for remediation at Sun's facilities and at third-party or formerly-owned sites. The accrued liability for environmental remediation is classified in the consoli- dated balance sheets as follows:
December 31 ------------- (Millions of Dollars) 1997 1996 - --------------------------------------------- Accrued liabilities $ 59 $ 77 Other deferred credits and liabilities 145 150 - --------------------------------------------- $204 $227 - ---------------------------------------------
Pretax charges against income for environmental remediation totalled $6, $56 and $12 million in 1997, 1996 and 1995, respectively. The high level of expense in 1996 was largely attributable to accruals for remediation activities associ- ated with the reconfigurations of the Philadelphia and Puerto Rico refineries and to increased accruals at service station sites (Note 2). The 1996 service station accruals were determined utilizing recent regulatory changes which in- corporate a risk-based methodology and clarify previously uncertain remediation requirements. Claims for recovery of environmental liabilities that are proba- ble of realization totalled $3 million at December 31, 1997 and are included in deferred charges and other assets in the consolidated balance sheets. On October 4, 1996, Sun filed a complaint in Los Angeles County Superior Court, Jalisco Corporation, Inc., et al. v. Argonaut Insurance Company, et al. (Case No. BC 158441), naming more than 45 insurance companies as defendants and seek- ing recovery under numerous insurance policies for certain environmental expen- ditures of Sun, including its predecessor companies and subsidiaries, arising from the ownership and operation of its business and properties. The Company cannot quantify the ultimate outcome of this litigation, which may be protract- ed. Total future costs for environmental remediation activities will depend upon, among other things, the identification of any additional sites, the determina- tion of the extent of contamination at each site, the timing and nature of re- quired remedial actions, the technology available and needed to meet the vari- ous existing legal requirements, the nature and extent of future environmental laws, inflation rates and the determination of Sun's liability at multi-party sites, if any, in light of the number, participation levels and financial via- bility of other parties. Many other legal and administrative proceedings are pending against Sun. The ultimate outcome of these proceedings and the matters discussed above cannot be as- 52 certained at this time; however, it is reasonably possible that some of them could be resolved unfavorably to Sun. Management believes that any expenditures attributable to these matters will be incurred over an extended period of time and will be funded from Sun's net cash flows from operating activities. Al- though the ultimate impact of these matters could have a significant impact on results of operations for any one year, management of Sun believes that any ad- ditional liabilities which may arise pertaining to such matters would not be material in relation to the consolidated financial position of Sun at December 31, 1997. 14. SHAREHOLDERS' EQUITY Each share of Company common stock is entitled to one full vote. The $10 mil- lion of outstanding 6 3/4 percent debentures are convertible into shares of common stock of the Company at any time prior to maturity at a conversion price of $40.81 per share and are redeemable at the option of the Company. At Decem- ber 31, 1997, there were 242,981 shares of common stock reserved for this po- tential conversion (Note 11). On August 3, 1995, the Company issued 25,000,000 "depositary shares" in ex- change for an equal number of shares of Company common stock in a tax-free transaction. Each depositary share represents ownership of one-half share of the Company's Series A cumulative preference stock. The Company also reduced the quarterly dividend paid on common stock from $.45 per share ($1.80 per year) to $.25 per share ($1.00 per year). In addition, the Company repurchased 6,400,000 shares of its common stock on August 9, 1995 through a tender offer for $192 million and an additional 6,774,500 shares of common stock and 885,700 depositary shares during the 1995-97 period on the open market for $250 mil- lion. At December 31, 1997, the Company had a remaining authorization from its Board of Directors ("Board") to purchase up to $150 million of stock in the open market or through privately negotiated transactions from time to time de- pending on prevailing market conditions. Each owner of a depositary share is entitled, proportionately, to all the rights, preferences and privileges of the preference stock represented thereby. Dividends on the preference stock are cumulative and accrue at a rate of $3.60 per year. The preference stock ranks prior to common stock with respect to div- idend rights and rights upon liquidation, dissolution and winding up of the Company. Each share of preference stock has a liquidation preference equal to $60.00, which is twice the fair market value of a depositary share at its date of issuance, plus accrued and unpaid dividends. The holders of preference stock vote together with the holders of common stock as a single class, and are enti- tled to one full vote for each share of preference stock owned. The outstanding shares of preference stock are redeemable at any time by the Company, in whole or in part, for common stock at a value which initially equaled $84.80 per share of preference stock at June 12, 1995 and is declining ratably to $80.00 per share of preference stock at June 11, 1998. As of Febru- ary 12, 1998, this call price was $80.53 per share of preference stock. After June 11, 1998, the Company can redeem each outstanding share of preference stock for two shares of common stock, subject to adjustment in certain events. The redemption value also includes a cash amount equal to all proportionate ac- crued but unpaid dividends. If Sun were to do a partial redemption of prefer- ence stock, it would be done on a pro rata basis. The Company currently intends to redeem all of the outstanding preference stock (and thereby the depositary shares) no later than June 12, 1998. The Company's Articles of Incorporation authorize the issuance of up to 2,500,000 shares of additional classes of preference stock without par value, subject to approval by the Board. The Board also has authority to fix the num- ber, designation, rights, preferences and limitations of these shares, subject to applicable laws and the provisions of the Articles of Incorporation. On February 1, 1996, the Company adopted a shareholder rights plan and desig- nated 1,743,019 shares of the remaining 2,500,000 authorized cumulative prefer- ence stock as Series B participating cumulative preference stock. Pursuant to the plan, the Company declared a dividend of one stock purchase right ("Right") for each share of common stock and two Rights for each share of Series A cumu- lative preference stock outstanding on February 12, 1996. A Right will be granted for each share of common stock issued after such date and prior to the expiration date of the rights plan. Generally, the Rights become exercisable a specified period after a party acquires 15 percent or more of the aggregate outstanding common stock and Series A cumulative preference stock (collective- ly, "Voting Stock") or announces a tender offer for 15 percent or more of the Voting Stock. Each Right initially entitles a holder to purchase one one- hundredth of a share of the Series B participating cumulative preference stock for $100. After a party has acquired 15 percent or more of the Voting Stock, each Right will entitle a holder to pay $100 for the number of shares of Com- pany common stock (or in certain situations, common stock of the acquiring par- ty) having a then current market value of $200. Alternatively, the Company has the option to exchange one share of Company common stock for each Right at any time after a party has acquired at least 15 percent but less than 50 percent of the Voting Stock. The Company may redeem each Right for $.01 per Right at any time until the end of a specified period after a party has acquired 15 percent 53 or more of the Voting Stock. In general, none of the benefits of the Rights will be available to a holder of 15 percent or more of the Voting Stock. The Rights will expire on February 12, 2006, unless earlier exchanged or redeemed. In December 1992, the Board approved the adoption of the Employee Option Plan ("EOP") which provides for the award of stock options to all employees (other than executives) of the Company and certain subsidiaries. The awards have a ten-year term, are not exercisable until two years after the date of grant and permit optionees to purchase Company common stock at the fair market value on the date of grant. Two million shares of Company common stock are authorized for issuance under the EOP. In 1994 and 1993, stock option awards totalling 241,895 and 1,721,385, respectively, were made to eligible employees. 15. MANAGEMENT INCENTIVE PLANS Sun's principal management incentive plans are the Executive Incentive Plan ("EIP") and the Long-Term Performance Enhancement Plan ("LTPEP"). The EIP pro- vides for the payment of annual cash incentive awards while the LTPEP, which succeeded the Executive Long-Term Stock Investment Plan in May 1997, provides for the award of stock options, common stock units and related rights to offi- cers and other key employees of Sun. The option awards under LTPEP have a ten- year term, are not exercisable until two years after the date of grant and per- mit optionees to purchase Company common stock at the fair market value on the date of grant. No awards may be granted under LTPEP after December 31, 2001, unless the Board extends this date to a date no later than December 31, 2006. Aggregate charges against income for Sun's principal management incentive plans for 1997 and 1995 were $17 and $4 million, respectively. There were no charges against income for Sun's principal management incentive plans in 1996. The following table summarizes information with respect to common stock option awards under the EOP (Note 14) and Sun's management incentive plans:
Employee Option Plan Management Incentive Plans ----------------------- -------------------------------- Weighted Shares Option Shares Average Under Price Under Option Price Option Per Share Option Per Share - ----------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 1994 1,874,980 $28.00 3,384,887 $30.52 Granted -- 687,990 $27.25 Exercised (135,920) $28.00 (53,770)* $28.43 Canceled (88,230) $28.00 (394,740) $31.31 - ----------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 1995 1,650,830 $28.00 3,624,367 $29.84 Granted -- 646,140 $24.48 Exercised (88,485) $28.00 (72,435)* $28.15 Canceled (74,870) $28.00 (208,272) $30.59 - ----------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 1996 1,487,475 $28.00 3,989,800 $28.96 Granted -- 557,840 $39.88 Exercised (647,127) $28.00 (1,109,732)* $28.64 Canceled (128,910) $28.00 (56,130) $28.99 - ----------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 1997 711,438 $28.00 3,381,778 $30.87 - ----------------------------------------------------------------------------------- EXERCISABLE, DECEMBER 31 - ----------------------------------------------------------------------------------- 1995 1,408,935 $28.00 2,941,577 $30.44 1996 1,487,475 $28.00 3,354,340 $29.83 1997 711,438 $28.00 2,723,938 $29.31 - ----------------------------------------------------------------------------------- AVAILABLE FOR GRANT, DECEMBER 31 - ----------------------------------------------------------------------------------- 1995 213,250 2,891,220 1996 288,120 -- 1997 417,030 3,334,250 - -----------------------------------------------------------------------------------
*Excludes 3,600, 1,600 and 1,970 shares which were issued for matured common stock units during 1997, 1996 and 1995, respectively. Common stock units are awards which entitle the holder to receive Company common stock upon completion of a restriction period or upon attainment of predetermined performance tar- gets. In addition, 1997 includes 144,116 options cancelled due to the exercise of related alternate appreciation rights which resulted in the issuance of 81,735 shares. Alternate appreciation rights permit the optionee to receive in cash or common stock an amount equal to the appreciation in value of Company common stock from the date of grant. 54 The following table provides additional information concerning the options out- standing at December 31, 1997 under Sun's management incentive plans:
Options Outstanding Options Exercisable ------------------------------------ ----------------------- Weighted Average Weighted Weighted Shares Remaining Average Shares Average Under Contractual Exercise Under Exercise Range of Exercise Prices Option Life (Years) Price Option Price - -------------------------------------------------------------------------------------- $23.25 - $27.25 964,549 8 $25.83 864,549 $26.13 $27.38 - $30.19 894,171 6 $29.17 894,171 $29.17 $30.50 - $31.50 851,128 4 $31.09 851,128 $31.09 $39.88 - $41.13 671,930 9 $40.09 114,090 $41.13 - -------------------------------------------------------------------------------------- $23.25 - $41.13 3,381,778 7 $30.87 2,723,938 $29.31 - --------------------------------------------------------------------------------------
The Company follows the method of accounting for employee stock compensation plans prescribed by APB No. 25. In accordance with APB No. 25, the Company has not recognized compensation expense for stock options because the exercise price of the options equals the market price of the underlying stock on the date of grant, which is the measurement date. Had the alternative method of ac- counting for employee stock compensation plans prescribed by Statement of Fi- nancial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" been followed, the pro forma impact on Sun's net income (loss) and net income (loss) per share of common stock on a diluted basis would have been as follows:
(Millions of Dollars, Except Per Share Amounts) 1997 1996 1995 - ---------------------------------------------------------------------------- Net income (loss): As reported $263 $(115) $140 Pro forma $262 $(118) $140 Net income (loss) per share: As reported $2.70 $(2.17) $1.29 Pro forma $2.69 $(2.21) $1.29 - ----------------------------------------------------------------------------
The fair values per options granted during 1997, 1996 and 1995 were estimated to be $10.59, $5.41 and $6.74, respectively, using the Black-Scholes option pricing model based on the following weighted-average assumptions:
1997 1996 1995 - -------------------------------------------- Expected life (years) 6 7 7 Risk-free interest rate 5.8% 6.0% 6.5% Dividend yield 2.5% 4.1% 3.7% Expected volatility 24.3% 24.4% 24.4% - --------------------------------------------
16. FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined based on the Company's assessment of available market information and appropriate valua- tion methodologies. However, these estimates may not necessarily be indicative of the amounts that the Company could realize in a current market exchange. Sun's current assets (other than inventories and deferred income taxes) and current liabilities are financial instruments. The estimated fair value of these financial instruments approximates their carrying amounts. At December 31, 1997 and 1996, the estimated fair value of Sun's long-term debt amounted to $918 and $903 million, respectively, compared to carrying amounts of $824 and $835 million, respectively. Long-term debt which is publicly traded was valued based on quoted market prices while the fair value of other debt issues was es- timated by management based upon current interest rates available to Sun at the respective balance sheet dates for similar issues. The Company guarantees the debt of affiliated companies and others (Note 13). Due to the complexity of these guarantees and the absence of any market for these financial instruments, the Company does not believe it is practicable to estimate their fair value. Sun uses a variety of off-balance sheet commodity-based financial and nonfinan- cial derivative instruments for hedging purposes. Sun is at risk for possible changes in the market value for these derivative instruments. However, it is anticipated that such risk would be mitigated by price changes in the under- lying hedged transactions. In addition, Sun is exposed to credit risk in the event of nonperformance by counterparties. Management believes this risk is negligible as its counterparties are either regulated by exchanges or are major international financial institutions with high credit ratings. Market and credit risks associated with all of Sun's derivative contracts are reviewed regularly by management. The significant derivative instruments outstanding are swaps, price collars and other option contracts which are used to hedge the unfavorable impact of sig- nificant increases in crude oil prices and to lock in what Sun considers to be acceptable wholesale margins for various refined products. At December 31, 1997, these financial instruments were used to hedge approximately 4 million barrels (2 percent) of Sun's expected 1998 crude oil purchases and to lock in margins for approximately 55 6 million barrels (2 percent) of its expected 1998 wholesale fuel sales. These swap and option contracts vary in duration but do not extend beyond 1998. Al- though these contracts are intended to limit the Company's exposure to rising crude oil prices and/or declining margins, they could limit the Company's par- ticipation in falling crude oil prices and/or rising margins. In addition, among other derivative uses, Sun uses futures and forward contracts to achieve ratable pricing of its crude oil purchases and refined product sales and swap and option contracts to lock in a portion of its electricity and natural gas refinery fuel costs. The following table sets forth summary information concerning Sun's financial and nonfinancial derivative instruments at December 31, 1997:
Deferred (Millions of Dollars) Gain (Loss) Fair Value* - ----------------------------------------------- Swaps $(2) $(2) Options (2) (2) Futures and forwards (1) (1) - ----------------------------------------------- $(5) $(5) - -----------------------------------------------
*Based on various indices or dealer quotes. 17. SUPPLEMENTAL CASH FLOW INFORMATION During 1996, Sun acquired the Kendall lubricants business (Note 2). The follow- ing is a summary of the effects of this transaction on Sun's consolidated fi- nancial position as of the acquisition date:
(Millions of Dollars) - ------------------------------------------ Increase in: Accounts and notes receivable $30 Inventories 16 Properties, plants and equipment 16 Deferred charges and other assets 12 - ------------------------------------------ Decrease in cash and cash equivalents $74 - ------------------------------------------
In 1995, Sun transferred an interest in its cokemaking operations in exchange for $95 million in cash. The transferee is entitled to a preferential return from the cash flows of the cokemaking operation until certain cumulative return targets have been met. Sun did not recognize a gain or loss on this transac- tion. The transaction has not had a significant impact on Sun's results of operations. Cash payments for income taxes were $26, $7 and $41 million in 1997, 1996 and 1995, respectively. Cash payments for interest, net of amounts capitalized, were $75, $74 and $95 million in 1997, 1996 and 1995, respectively. 18. BUSINESS SEGMENT INFORMATION Sun is principally a petroleum refiner and marketer with interests in coal min- ing and cokemaking. Sun also has an investment in real estate operations held for sale. Sun's petroleum refining and marketing operations include the refining of crude oil and its derivatives; the marketing of a full range of petroleum products, including fuels, lubricants and petrochemicals; and the transportation of crude oil and refined products. Such operations are currently conducted principally in the eastern half of the United States. Sun's coal mining and cokemaking op- erations are conducted in Virginia, Indiana and Kentucky. Sun completed the sale of its International Production business on September 30, 1996 and divested its remaining interest in Suncor, a Canadian integrated oil company, on June 8, 1995. As a result, Sun's international oil and gas pro- duction and Canadian upstream petroleum operations are presented as discontin- ued operations in 1996 and 1995 up to their respective divestment dates. 56 SEGMENT INFORMATION
Refining Coal Mining and and (Millions of Dollars) Marketing Cokemaking Corporate Consolidated - ------------------------------------------------------------------------------ 1997 Sales to unaffiliated customers and other operating revenue (including consumer excise taxes) $10,313 $151 $ -- $10,464 - ------------------------------------------------------------------------------ Operating profit (loss) $ 431 $ 45 $ (6) $ 470 Equity income 25 -- -- 25 Related income tax (expense) benefit (156) (7) 2 (161) - ------------------------------------------------------------------------------ Profit contribution (loss) before net financing expenses and after tax* $ 300 $ 38 $ (4) 334 - --------------------------------------------------------------- Corporate expenses (after taxes) (23) Net financing expenses (after taxes) (48) -------- Net income $ 263 -------- Depreciation, depletion and amortization $ 247 $ 12 $ -- $ 259 - ------------------------------------------------------------------------------ Capital expenditures $ 247 $133 $ -- $ 380 - ------------------------------------------------------------------------------ Identifiable assets $ 4,142 $262 $263** $ 4,667 - ------------------------------------------------------------------------------
*Includes after-tax provision for employee terminations and related costs of $17 million in refining and marketing and $4 million in corporate (Note 2). **Includes investment in real estate operations held for sale of $43 million (Note 2).
Refining Coal Mining and and (Millions of Dollars) Marketing Cokemaking Corporate Consolidated - ------------------------------------------------------------------------------ 1996 Sales to unaffiliated customers and other operating revenue (including consumer excise taxes) $11,068 $165 $ -- $11,233 - ------------------------------------------------------------------------------ Operating profit (loss) $(364) $ 39 $ -- $(325) Equity income 24 -- -- 24 Related income tax (expense) benefit 98 (8) -- 90 - ------------------------------------------------------------------------------ Profit contribution (loss) before net financing expenses and after tax $(242)* $ 31 $ -- (211) - --------------------------------------------------------------- Corporate expenses (after taxes) (23) Net financing expenses (after taxes) (47) Income from discontinued operations 166** ------- Net loss (115) ------- Depreciation, depletion and amortization $ 250 $ 17 $ -- $ 267 - ------------------------------------------------------------------------------ Capital expenditures $ 374 $ 34 $ -- $ 408 - ------------------------------------------------------------------------------ Identifiable assets $ 4,526 $140 $359*** $ 5,025 - ------------------------------------------------------------------------------
*Includes after-tax provision for write-down of assets and other matters of $254 million (Notes 2 and 13). **Consists of income from international production operations, including a $125 million after-tax gain resulting from the divestment of this business (Note 2). ***Includes investment in real estate operations held for sale of $79 million (Note 2). 57 SEGMENT INFORMATION
Refining Coal Mining and and (Millions of Dollars) Marketing Cokemaking* Corporate Consolidated - -------------------------------------------------------------------------------- 1995 Sales to unaffiliated customers and other operating revenue (including consumer excise taxes) $9,747 $ 87 $ -- $9,834 - -------------------------------------------------------------------------------- Operating profit (loss) $ 45 $ 22 $(8) $ 59 Equity income 17 -- -- 17 Related income tax (expense) benefit (11) 3 3 (5) - -------------------------------------------------------------------------------- Profit contribution (loss) before net financing expenses and after tax** $ 51 $ 25 $(5) 71 - --------------------------------------------------------------- Corporate expenses (after taxes) (24) Net financing expenses (after taxes) (55) Income from discontinued operations 235*** Cumulative effect of change in accounting principle (87)+ ------ Net income $ 140 ------ Depreciation, depletion and amortization $ 253 $ 10 $ -- $ 263 - -------------------------------------------------------------------------------- Capital expenditures $ 410 $ 7 $ -- $ 417 - -------------------------------------------------------------------------------- Identifiable assets $4,397 $143 $545++ $5,085 - --------------------------------------------------------------------------------
*Reflects coal and cokemaking operations as an operation held for sale for the first half of 1995 and on a fully consolidated basis thereafter. Accordingly, the amounts presented for sales to unaffiliated customers and other operating revenue, depreciation, depletion and amortization and capital expenditures are for the second half of 1995 (Note 2). **Includes after-tax provision for write-down of assets and other matters of $57 million in refining and marketing and $4 million in corporate. In addi- tion, corporate includes a $1 million loss from real estate operations held for sale (Note 2). ***Consists of $57 million of income from international production operations and $178 million of income from Canadian upstream petroleum operations. In- cluded in the Canadian income is a $157 million after-tax gain resulting from the completion of the divestment of Suncor (Note 2). +Reflects the cumulative effect for years prior to 1995 of a change in the method of accounting for the impairment of long-lived assets (Note 3). ++Includes investments in real estate operations held for sale of $87 million and discontinued international production operations of $143 million (Note 2). Prior to completion of the divestment of Suncor on June 8, 1995, Canadian re- fining and marketing activities were reflected in continuing operations as part of the refining and marketing segment. The following is a summary of the amounts related to Canadian downstream operations included in the 1995 segment information:
(Millions of Dollars) - ----------------------------------------------- Sales to unaffiliated customers and other operating revenue $558 - ----------------------------------------------- Operating profit $ 5 Related income tax expense (3) - ----------------------------------------------- Profit contribution $ 2 - ----------------------------------------------- Depreciation, depletion and amortization $ 11 - ----------------------------------------------- Capital expenditures $ 8 - -----------------------------------------------
Income tax amounts give effect to tax credits in each of the designated indus- try segments. Overhead expenses that can be identified with Sun's operations in the designated industry segments have been included as deductions in determin- ing operating profits and profit contributions. Net financing expenses consist of interest cost, debt and other financing expenses less interest income and interest capitalized. Identifiable assets are those assets that are utilized within a specific segment. 19. SUBSEQUENT EVENT In early 1998, Sun transferred an interest in its cokemaking operations in East Chicago, IN, to a third party in exchange for $200 million in cash. The trans- feree is entitled to a preferential return from the cash flows of this cokemaking operation until certain cumulative return targets have been met. Sun did not recognize a gain or loss on this transaction. 58 - ----------------------------------------------------------------- REPORT OF MANAGEMENT To the Shareholders of Sun Company, Inc. The accompanying consolidated financial statements of Sun Company, Inc. and its subsidiaries ("Sun") and the related information are the responsibility of management. The financial statements, which include amounts based on informed estimates and judgments, were prepared using generally accepted accounting principles deemed appropriate in the circumstances. Management believes that these financial statements present fairly, in all material respects, Sun's fi- nancial position, results of operations and cash flows. Other financial infor- mation presented in this Annual Report is consistent with that in the financial statements. To fulfill its responsibility for the financial statements, Sun maintains a system of internal controls which in management's opinion provides reasonable assurance of achieving the objectives of internal control. These objectives in- clude safeguarding of assets from loss through unauthorized use or disposition and maintaining reliable records permitting the preparation of financial state- ments and accountability for assets. The system of internal controls is subject to ongoing evaluation of its continuing effectiveness. Sun's independent auditors, Ernst & Young LLP, have expressed an opinion on the fairness of management's 1997 and 1996 financial statements by conducting their audits in accordance with generally accepted auditing standards and issu- ing the report presented on this page. The Audit Committee of the Board of Directors is comprised of directors who are not employees of Sun and meets a minimum of four times annually. It assists the Board of Directors in discharging its duties relating to accounting and re- porting practices and internal controls, and it assesses the performance and recommends the appointment of independent auditors. Both the independent audi- tors and Sun's internal auditors have unrestricted access to the Committee to discuss audit findings and other financial matters. /s/ R.H. Campbell ROBERT H. CAMPBELL Chairman & Chief Executive Officer /s/ John G. Drosdick JOHN G. DROSDICK President & Chief Operating Officer /s/ Robert M. Aiken, Jr. ROBERT M. AIKEN, JR. Executive Vice President & Chief Financial Officer REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors, Sun Company, Inc. We have audited the accompanying consolidated balance sheets of Sun Company, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consol- idated statements of operations, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated statements of opera- tions, changes in shareholders' equity and cash flows for the year ended Decem- ber 31, 1995 were audited by other auditors whose report dated February 13, 1996 (except for the restatement for discontinued operations as described in Note 2 for which the date is February 13, 1997) expressed an unqualified opin- ion on those financial statements and included an explanatory paragraph that disclosed the change in the Company's method of accounting for the impairment of long-lived assets in 1995, discussed in Note 3 to these financial state- ments. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, the 1997 and 1996 financial statements referred to above pres- ent fairly, in all material respects, the consolidated financial position of Sun Company, Inc. and subsidiaries at December 31, 1997 and 1996 and the con- solidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania February 12, 1998 59 - -------------------------------------------------------------------------------- SUPPLEMENTAL FINANCIAL AND OPERATING INFORMATION (Unaudited) DOMESTIC REFINING AND MARKETING DATA
REFINERY UTILIZATION* 1997 1996 1995 - --------------------------------------------- Refinery crude unit capacity at December 31 692.0 777.0 777.0 - --------------------------------------------- Total input to crude units: Crude oil 670.5 691.4 673.9 Other feedstocks 25.5 29.6 26.5 - --------------------------------------------- 696.0 721.0 700.4 - --------------------------------------------- Refinery crude unit capacity utilized 101% 93% 90% - ---------------------------------------------
*Thousands of barrels daily except percentages. Reflects the shutdown on March 6, 1997 of an 85.0 thousand barrels-per-day crude unit in connection with a project to reconfigure the Puerto Rico refinery to process reduced crude oil instead of conventional crude oil. This reconfiguration has resulted in a significant reduction in fuels production while fully maintaining the lubricants manufacturing capabilities of the facility. Effective January 1, 1998, Sun's crude processing capacity increased 5 thousand barrels per day due to an increase in capacity at the Toledo refinery.
REFINED PRODUCT SALES* 1997 1996 1995 - -------------------------------------------------- Gasoline: Wholesale 170.2 167.0 154.0 Retail 201.8 205.7 204.6 Middle distillates 248.8 219.9 210.9 Residual fuel 80.1 82.4 73.9 Petrochemicals 35.2 31.5 31.1 Lubricants 25.1 23.9 20.0 Asphalt** -- 18.3 26.7 Other 48.4 46.1 56.6 - -------------------------------------------------- 809.6 794.8 777.8 - --------------------------------------------------
*Thousands of barrels daily to third parties. **Sun withdrew from the asphalt business in December 1996.
REFINED PRODUCT MARGIN INFORMATION* 1997 1996 1995 - --------------------------------------------------------------- Average sales price $28.10 $28.65 $25.26 Average cost of products sold** 22.09 23.59 19.95 - --------------------------------------------------------------- $ 6.01 $ 5.06 $ 5.31 - ---------------------------------------------------------------
*Dollars per barrel **Consists of crude oil, other purchased feedstocks and refined products.
RETAIL GASOLINE OUTLETS 1997 1996* 1995* - ----------------------------------------------------- Direct outlets: Company owned or leased 1,334 1,366 1,427 Dealer owned 499 535 585 - ----------------------------------------------------- Total direct outlets 1,833 1,901 2,012 Distributor outlets 1,956 1,905 1,849 - ----------------------------------------------------- 3,789 3,806 3,861 - -----------------------------------------------------
*Reclassified to conform to the 1997 presentation.
THROUGHPUT PER DIRECT OUTLET* 1997 1996** 1995** - ------------------------------------------------------------- Company owned or leased 97.4 101.1 96.0 Dealer owned 75.9 77.6 72.9 - ------------------------------------------------------------- Average-total direct outlets 91.5 94.4 89.2 - -------------------------------------------------------------
*Thousands of gallons of gasoline monthly. **Reclassified to conform to the 1997 presentation.
PIPELINE MILEAGE* 1997 1996 1995 - --------------------------------------------- Crude lines 5,120 5,119 5,264 Product lines 4,552 4,548 4,805 - ---------------------------------------------
*Includes all pipelines in which Sun has an ownership interest. COAL AND COKEMAKING DATA
1997 1996 1995 - ---------------------------------------------- Proven and probable coal reserves (millions of tons) at December 31: Metallurgical 114 115 116 Steam 10 17 23 - ---------------------------------------------- 124 132 139 - ---------------------------------------------- Proven coal reserves (million of tons) at December 31 58 63 70 - ---------------------------------------------- Production (thousands of tons): Coal: Metallurgical 1,460 1,490 1,627 Steam 1,827 2,926 3,494 - ---------------------------------------------- 3,287 4,416 5,121 - ---------------------------------------------- Coke 664 648 638 - ---------------------------------------------- Sales (thousands of tons): Coal: Metallurgical 746 592 674 Steam 1,694 2,921 3,556 - ---------------------------------------------- 2,440 3,513 4,230 - ---------------------------------------------- Coke 701 621 660 - ---------------------------------------------- Average sales price of coal and coke (per ton) $47.84 $40.03 $37.65 Net acreage (in thousands) at December 31: Developed 24 22 35 Undeveloped 102 103 112 - ----------------------------------------------
60 - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL AND STOCK MARKET INFORMATION (Millions of Dollars Except Per Share Amounts and Common Stock Prices)
1997 1996 ------------------------------------ ----------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------ Sales and other operating revenue (including consumer excise taxes) $2,733 $2,577 $2,634 $2,520 $2,460 $2,886 $2,874 $3,013 Gross profit* $205 $306 $302 $180 $112 $210 $148 $124 Income (loss) from continuing operations $18** $105 $111 $29 $(24) $(22)*** $(11) $(224)+ Net income (loss) $18 $105 $111 $29 $(5) $(3) $117++ $(224) Earnings per share of common stock:+++ Basic: Income (loss) from continuing operations $.10 $1.29 $1.39 $.25 $(.47) $(.45) $(.30) $(3.22) Net income (loss) $.10 $1.29 $1.39 $.25 $(.22) $(.19) $1.44 $(3.22) Diluted: Income (loss) from continuing operations $.10 $1.07 $1.14 $.25 $(.47) $(.45) $(.30) $(3.22) Net income (loss) $.10 $1.07 $1.14 $.25 $(.22) $(.19) $1.44 $(3.22) Cash dividends per share of preference stock $.90 $.90 $.90 $.90 $.90 $.90 $.90 $.90 Cash dividends per share of common stock $.25 $.25 $.25 $.25 $.25 $.25 $.25 $.25 Common stock price# --high $28.38 $31.94 $46.38 $44.38 $30.25 $32.63 $30.38 $25.63 --low $24.00 $24.00 $30.50 $35.56 $25.38 $27.75 $21.88 $21.88 --end of period $26.13 $31.00 $43.81 $42.06 $28.88 $30.38 $23.00 $24.38 - ------------------------------------------------------------------------------------------------------------
*Gross profit equals sales and other operating revenue less cost of products sold and operating expenses; depreciation, depletion and amortization; and consumer excise, payroll and other applicable taxes. **Includes a $21 million after-tax provision for employee terminations and re- lated costs. ***Includes a $53 million after-tax provision for write-down of assets and other matters. +Includes a $201 million after-tax provision for write-down of assets and other matters and an $8 million after-tax profit due to the reduction in certain in-ventory quantities which were valued at lower LIFO costs prevailing in prior years. ++Includes a $125 million after-tax gain on the sale of the International Pro- duction business. +++For the first and fourth quarters of 1997 and the four quarters of 1996, the diluted per share amounts are equal to the basic per share amounts since both the assumed issuance of common stock under stock incentive awards and the as- sumed redemption of preference shares would not have been dilutive during those periods. The basic income per share from continuing operations for the third quarter of 1997 and the loss per share from continuing operations and net income per share on a diluted basis for the third quarter of 1996 were previously reported on Securities and Exchange Commission Form 10-Q as $1.38, $(.11) and $1.19, respectively. The changes are due to the presentation of earnings per share amounts in accordance with Statement of Financial Account- ing Standards No. 128, "Earnings Per Share," which was adopted in the fourth quarter of 1997. #The Company's common stock is principally traded on the New York Stock Ex- change, Inc. under the symbol "SUN." The Company had approximately 35,200 holders of record of common stock as of January 30, 1998. 61 EX-21 18 SUBSIDIARIES OF SUN COMPANY, INC. EXHIBIT 21 50.10% SUN COMPANY, INC. DECEMBER 31, 1997 SUBSIDIARIES OF THE REGISTRANT
COMPANY NAME: INC/REG - ------------ ------- COS Corporation IL Elk River Resources, Inc. DE - --Elk River Minerals Corporation DE - --Indiana Harbor Coke Company DE - ----Indiana Harbor Coke Company L.P. DE - --Indiana Harbor Coke Corporation IN - --Jewell Coke Company DE - --Jewell Resources Corporation VA - ----Dominion Coal Corporation VA - ----Jewell Coal & Coke Company, Inc. VA - ----Jewell Smokeless Coal Corporation VA - ----Oakwood Red Ash Coal Corporation VA - ----Vansant Coal Corporation VA - --Shamrock Coal Company, Incorporated DE Helios Capital Corporation DE - --Beneco Leasing Two, Inc. OH - --Sunoco Leasing, Inc. DE - ----Heleasco Twenty, Inc. DE - ----Heleasco Twenty-Three, Inc. DE - ----Jalisco Corporation CA - --Sun Leasing Company DE Marine Investment Company of Delaware DE - --Alaska Bulk Carriers, Inc. PA - --Aston Shipping Company DE - --Eastern Sun Barge Company DE - --Florida Barge Company DE - --New York Sun Shipping Co., Inc. DE - --Philadelphia Sun Shipping Co., Inc. DE - --Sun Barge Company DE - --Sun Transport, Inc. DE Mascot Petroleum Company, Inc. DE Mohawk Valley Oil, Inc. NY
2 50.10% SUN COMPANY, INC. DECEMBER 31, 1997 SUBSIDIARIES OF THE REGISTRANT
COMPANY NAME: INC/REG - ------------ ------- Radnor Corporation PA - --Morgan's Run Investment Company DE - --Radnor Development Corporation DE - --Radnor MidAtlantic Corporation PA - --Radnor Suncoast Corporation DE - --Radnor West, Inc. DE - --Radnor/Aire Corporation PA - --Radnor/Alexandria Corporation DE - ----#1 Radnor/Alexandria Corporation DE - --Radnor/Argyle Corporation DE - --Radnor/Beachway Corporation DE - --Radnor/Bowie Corporation DE - --Radnor/California Corporation DE - --Radnor/California Service Corporation DE - --Radnor/Credit Corporation DE - --Radnor/Delaware Avenue Corporation PA - --Radnor/Dutton Mill Corporation PA - --Radnor/Edgewater, Inc. DE - --Radnor/Fulton County Corporation DE - --Radnor/Fulton Industrial Corporation DE - --Radnor/Grand Oaks Corporation DE - --Radnor/Green Meadows Corporation DE - --Radnor/Greenway Corporation DE - --Radnor/Hampton Corporation DE - --Radnor/Investment Corporation DE - --Radnor/Island Corporation DE - --Radnor/La Jolla Corporation DE - --Radnor/Lakeside Corporation DE - --Radnor/Lemon Grove Corporation DE - --Radnor/Loudoun Corporation DE - ----Radnor/Loudoun Day Care Corporation DE - --Radnor/Main St. Corporation DE - --Radnor/Marina Corporation PA - --Radnor/Matsonford Corporation PA - --Radnor/Murrieta Corporation DE - --Radnor/North Corporation DE - --Radnor/Orange Grove Corporation DE - --Radnor/Pacific Corporate Center Corporation DE - --Radnor/Painted Desert Corporation DE - --Radnor/Parke East Corporation DE - --Radnor/Peachtree Point Corporation DE - --Radnor/Pier 5 Corporation PA - --Radnor/Plantation Corporation DE - ----Radnor Realty, Inc. DE
3 50.10% SUN COMPANY, INC. DECEMBER 31, 1997 SUBSIDIARIES OF THE REGISTRANT
COMPANY NAME: INC/REG - ------------ ------- - --Radnor/Plymouth Corporation PA - --I Radnor/Plymouth Investment Company DE - ----Plymouth Building I Business Trust PA - --III Radnor/Plymouth Investment Company DE - --Radnor/Rancho California Corporation DE - --Radnor/Sarasota Corporation DE - ----Laurel Oak Realty Corporation DE - --Radnor/Service Corporation PA - --Radnor/Spring Ridge Corporation DE - ----Radnor/Frederick Corporation DE - --Radnor/Spring Valley Corporation DE - --Radnor/Sun Village Construction Corporation DE - --Radnor/Sun Village Corporation DE - --Radnor/Vail Ranch Corporation DE - --Radnor/Vanguard Corporation DE - --Radnor/Victorville Corporation DE - --Radnor/Villa Trinidad Corporation DE - --Radnor/Vista Mar Corporation DE - --Radnor/Willoughby Corporation DE - --Radnor/Yorba Linda-I Corporation DE - --Striker Investment Company DE Sun Alternate Energy Corporation DE Sun Atlantic Refining and Marketing Company DE - --Sun Atlantic Refining and Marketing B.V., Inc. DE - --Sun Atlantic Refining and Marketing B.V. NL - ------Atlantic Petroleum Corporation DE - --------Atlantic Pipeline Corp. DE - --------Atlantic Refining & Marketing Corp. DE Sun Canada, Inc. DE - --Helios Assurance Company Limited BA - --Petrosun Limited EN - --Sun International Limited BA - --Sun Mexico One, Inc. DE - ----Sunoco de Mexico, S.A. de C.V. MX - --Sun Mexico Two, Inc. DE - --Sunoco Limited EN Sun Coal Company DE Sun Company, Inc. (Name Saver) DE
4 50.10% SUN COMPANY, INC. DECEMBER 31, 1997 SUBSIDIARIES OF THE REGISTRANT
COMPANY NAME: INC/REG - ------------ ------- Sun Company, Inc. (R&M) PA - --Mid-State Oil Company DE - --Puerto Rico Sun Oil Company DE - --Sun BEF, Inc. TX - --Sun Far East Trading, Inc. DE - --Sun Lubricants and Specialty Products Inc. QU - --Sun Oil Far East, Inc. DE - --Sun Petrochemicals, Inc. DE - --Sunmarks, Inc. DE - --Sunoco Caribbean, Inc. DE - --Sunoco Power Marketing L.L.C. PA Sun Executive Services Company PA Sun Ocean Ventures, Inc. DE Sun Oil Argentina Limited BA Sun Oil Argentina Limited S.A. AT Sun Oil Company (Name Saver) DE Sun Oil Company (U.K.) Ltd. DE Sun Oil Export Company DE - --Sun Geologic and Seismic, Inc. DE Sun Oil International, Inc. DE Sun Oil Shabwa Yemen Limited BA Sun Oil (Thailand) Limited TH Sun Oil Trading Company DE Sun Pipe Line Company of Delaware DE - --Mid-Continent Pipe Line Company OK - --Mid-Valley Pipeline Company OH - --Sun Oil Line Company of Michigan MI - --Sun Pipe Line Company PA - --Sun Pipe Line Services Co. DE Sun Refining and Marketing Company (Name Saver) DE Sun Services Corporation PA Sun Ship, Inc. PA - --Lesley Corporation DE
5 50.10% SUN COMPANY, INC. DECEMBER 31, 1997 SUBSIDIARIES OF THE REGISTRANT
COMPANY NAME: INC/REG - ------------ ------- Sun-Del Services, Inc. DE Suncrest Industries, Inc. PA Sunoco Overseas, Inc. DE - --Lugrasa, S.A. PN Sunoco Science and Technological Services, Inc. NY (Name Saver) The Claymont Investment Company DE - --Sunoco Credit Corporation DE Triad Carriers, Inc. PA - --BBQ, Inc. PA - --Carrier Systems Motor Freight, Inc. DE
EX-23.1 19 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in this Annual Report (Form 10-K) of Sun Company, Inc. of our report dated February 12, 1998, included in the 1997 Annual Report to Shareholders of Sun Company, Inc. Our audits also included the financial statement schedule of Sun Company, Inc. for the years ended December 31, 1997 and 1996, listed in Item 14(a). The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference of this report on the financial statement schedule and our report dated February 12, 1998 with respect to the consolidated financial statements of Sun Company, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1997, in the following registration statements: Sun Company, Inc. Capital Accumulation Plan Form S-8 Registration Statement (Registration No. 33-9931); Sun Company, Inc. Long-Term Performance Enhancement Plan Form S-8 Registration Statement (Registration No. 333-30941); Sun Company, Inc. Long-Term Incentive Plan Form S-8 Registration Statement (Registration No. 33-10055); Sun Company, Inc. & Subsidiaries Stock Supplement Plan Form S-8 Registration Statement (Registration No. 2-53283); Sun Company, Inc. Executive Long-Term Stock Investment Plan Form S-8 Registration Statement (Registration No. 33-44059); Sun Company, Inc. Employee Option Plan Form S-8 Registration Statement (Registration No. 33-49275); Sun Company, Inc. Form S-3 Registration Statement (Registration No. 33- 53717); 2 Sun Company, Inc. Dividend Reinvestment Plan Form S-3 Registration Statement (Registration No. 33-39834); and Sun Company, Inc. Dividend Reinvestment Plan Form S-3 Registration Statement (Registration No. 33-52615). s/ERNST & YOUNG LLP - ------------------------ Ernst & Young LLP Philadelphia, Pennsylvania March 6, 1998 EX-23.2 20 CONSENT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23.2 CONSENT OF COOPERS & LYBRAND L.L.P. We consent to the incorporation by reference of our report dated February 13, 1996 except for the restatement for discontinued operations as described in Note 2 to the consolidated financial statements for which the date is February 13, 1997 (which includes an explanatory paragraph regarding the Company's change in method of accounting for impairment of long-lived assets in 1995) on our audit of the consolidated financial statements and financial statement schedule of Sun Company, Inc. and subsidiaries as of December 31, 1995 and for the year then ended, which report is included in this Annual Report on Form 10-K, in the following registration statements: Sun Company, Inc. Capital Accumulation Plan Form S-8 Registration Statement (Registration No. 33-9931); Sun Company, Inc. Long-Term Performance Enhancement Plan Form S-8 Registration Statement (Registration No. 333-30941); Sun Company, Inc. Long-Term Incentive Plan Form S-8 Registration Statement (Registration No. 33-10055); Sun Company, Inc. & Subsidiaries Stock Supplement Plan Form S-8 Registration Statement (Registration No. 2-53283); Sun Company, Inc. Executive Long-Term Stock Investment Plan Form S-8 Registration Statement (Registration No. 33-44059); Sun Company, Inc. Employee Option Plan Form S-8 Registration Statement (Registration No. 33-49275); Sun Company, Inc. Form S-3 Registration Statement (Registration No. 33- 53717); Sun Company, Inc. Dividend Reinvestment Plan Form S-3 Registration Statement (Registration No. 33-39834); and Sun Company, Inc. Dividend Reinvestment Plan Form S-3 Registration Statement (Registration No. 33-52615). s/COOPERS & LYBRAND L.L.P. - -------------------------- Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, PA 19103 March 6, 1998 EX-23.3 21 REPORT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23.3 REPORT OF COOPERS & LYBRAND L.L.P. To the Shareholders and Board of Directors of Sun Company, Inc.: We have audited the consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1995 (included in Exhibit 13 to this Form 10-K)of Sun Company, Inc. and its subsidiaries. In connection with our audit of such consolidated financial statements, we have also audited the related financial statement schedule for the year ended December 31, 1995 listed in Item 14(a) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the consolidated results of operations and cash flows of Sun Company, Inc. and its subsidiaries for the year ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for the impairment of long-lived assets in 1995. s/COOPERS & LYBRAND L.L.P. - -------------------------- Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 13, 1996 except for the restatement for discontinued operations as described in Note 2 to the consolidated financial statements for which the date is February 13, 1997 EX-24.1 22 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That the undersigned officers and/or directors of Sun Company, Inc., a Pennsylvania corporation, do and each of them does, hereby constitute and appoint Robert M. Aiken, Jr., Thomas W. Hofmann and Jack L. Foltz, his or her true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, for him or her and in his or her name, place and stead, to sign the Sun Company, Inc. Form 10-K for the year ending December 31, 1997 and any and all future amendments thereto; and to file said Form 10-K and any such amendments with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. 2 IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 5th day of March, 1998. s/ROBERT M. AIKEN, JR. s/THOMAS W. HOFMANN Robert M. Aiken, Jr. Thomas W. Hofmann Executive Vice President & Comptroller Chief Financial Officer (Principal Accounting Officer) (Principal Financial Officer) s/ROBERT H. CAMPBELL s/JAMES G. KAISER Robert H. Campbell James G. Kaiser Chairman & Chief Executive Director Officer (Principal Executive Officer) s/RAYMOND E. CARTLEDGE s/ROBERT D. KENNEDY Raymond E. Cartledge Robert D. Kennedy Director Director s/ROBERT E. CAWTHORN s/R. ANDERSON PEW Robert E. Cawthorn R. Anderson Pew Director Director s/JOHN G. DROSDICK s/WILLIAM F. POUNDS John G. Drosdick William F. Pounds President & Chief Director Operating Officer s/MARY J. EVANS s/ALEXANDER B. TROWBRIDGE Mary J. Evans Alexander B. Trowbridge Director Director s/THOMAS P. GERRITY Thomas P. Gerrity Director EX-24.2 23 CERTIFIED COPY OF THE RESOLUTION EXHIBIT 24.2 I, Ann C. Mule', Secretary of Sun Company, Inc., a Pennsylvania corporation, hereby certify that the following is a full, true and complete copy of a resolution adopted at a meeting of the Board of Directors of Sun Company, Inc., duly called and held on March 5, 1998, at which a quorum was present and acting throughout and that no action has been taken to rescind or amend said resolution and that the same is now in full force and effect: RESOLVED, That the Sun Company, Inc. Annual Report to the Securities and Exchange Commission on Form 10-K, for the year ended December 31, 1997, is approved in the form presented to this meeting, subject to such changes or amendments as may be approved (as so amended, the "Form 10-K") by any one of the following officers of the Company: the Chief Executive Officer, the Chief Operating Officer, the Executive Vice President and Chief Financial Officer, the Senior Vice President and Chief Administrative Officer or the Vice President and General Counsel; FURTHER RESOLVED, That each of the above-named officers and the Comptroller (collectively, the "Authorized Officers") is authorized to sign and file, or cause to be filed, on behalf of the Corporation, the Form 10- K, together with any such other certificates, documents, instruments or notices as may be necessary or as any such officer may deem necessary or desirable in order to effectuate or carry out the purposes and intent of the foregoing resolutions, and that all such actions heretofore taken by any one or more of the Authorized Officers in order to effectuate or carry out the purposes and intent of the foregoing resolutions are hereby ratified, adopted and approved. (Corporate Seal) s/ANN C. MULE' ______________ Ann C. Mule' Secretary March 5, 1998 Philadelphia, Pennsylvania EX-27 24 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 33 0 677 6 431 1,248 5,838 2,774 4,667 1,464 824 0 723 132 607 4,667 10,464 10,531 7,610 7,610 2,452 6 78 385 122 263 0 0 0 263 3.03 2.70
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