sunoco 2003 form 10-k

FORM 10−KSUNOCO INC − SUN

Filed: March 05, 2004 (period: December 31, 2003)

Annual report which provides a comprehensive overview of the company for the past year

Table of ContentsPART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS

ITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURES

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ONFORM 8−K

SIGNATURESEX−10.1 (Material contracts)

EX−10.2 (Material contracts)



EX−12 (Statement regarding computation of ratios)

EX−13 (Annual report to security holders)

EX−21 (Subsidiaries of the registrant)

EX−23 (Consents of experts and counsel)

EX−24.1 (Power of attorney)

EX−24.2 (Power of attorney)

EX−31.1

EX−31.2

EX−32.1

EX−32.2

2003SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10−K(Mark One)

⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003OR

¨ 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

SUNOCO, INC.(Exact name of registrant as specified in its charter)

Pennsylvania 23−1743282(State or other jurisdiction of

incorporation or organization)(I.R.S. Employer

Identification No.)

Ten Penn Center1801 Market Street, Philadelphia, PA 19103−1699

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (215) 977−3000

Securities registered pursuant to Section 12(b) of the Act:

Title of each className of each

exchange on which registered

Common Stock, $1 par value New York Stock ExchangePhiladelphia Stock Exchange

Convertible Subordinated Debentures 6 3/4%, Due

June 15, 2012New York Stock Exchange

Sinking Fund Debentures 9 3/8%, Due June 1, 2016 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 1934during 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 filingrequirements for the past 90 days. Yes ⌧ 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 thebest 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 thisForm 10−K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b2 of the Exchange Act). Yes ⌧ No ¨

At June 30, 2003, the aggregate market value of voting stock held by non−affiliates was $2,889 million.

At January 30, 2004, there were 75,637,053 shares of Common Stock, $1 par value, outstanding.Selected portions of the Sunoco, Inc. Annual Report to Shareholders for the Fiscal Year Ended December 31, 2003 are incorporated by reference in Parts I,

II and IV of this Form 10−K.

Selected portions of the Sunoco, Inc. definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days afterDecember 31, 2003, are incorporated by reference in Part III of this Form 10−K.

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIESThose 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 theCompany’s 2003 Annual Report to Shareholders* for a discussion of the factors that could cause actual results to differ materially from those projected.

GeneralSunoco, 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. Its telephone number is (215) 977−3000 and its Internet website address iswww.SunocoInc.com. The Company makes available free of charge on its website all materials that it files electronically with the Securities and ExchangeCommission, including its Annual Report on Form 10−K, Quarterly Reports on Form 10−Q, Current Reports on Form 8−K and amendments to these reports assoon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.

The Company, through its subsidiaries, is principally a petroleum refiner and marketer and chemicals manufacturer with interests in logistics andcokemaking. Sunoco’s petroleum refining and marketing operations include the manufacturing and marketing of a full range of petroleum products, includingfuels, lubricants and some petrochemicals. Sunoco’s chemical operations comprise the manufacturing, distribution and marketing of commodity and intermediatepetrochemicals. The petroleum refining and marketing, chemicals and logistics operations are conducted principally in the eastern half of the United States.Sunoco’s cokemaking operations are conducted in Virginia and Indiana.

The Company’s operations are organized into five business segments (Refining and Supply, Retail Marketing, Chemicals, Logistics and Coke) plus aholding company and a shared services organization. Sunoco, Inc., the holding company, is a non−operating parent company. It includes certain corporateofficers and their staffs. The shared services organization consists of a number of staff functions, including: communications; engineering services; transactionprocessing; systems operations and information technology planning; legal; insurance; health, environment and safety; human resources; public affairs; andprocurement and facilities management. Costs incurred by the shared services organization to provide these services are allocated to the five business segmentsand the holding company. This discussion of the Company’s business and properties reflects this organizational structure. For additional information regardingthese business units, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and the business segment informationpresented in Note 17 to the Consolidated Financial Statements, both in the Company’s 2003 Annual Report to Shareholders.

*References in this Annual Report on Form 10−K to material in the Company’s 2003 Annual Report to Shareholders and in the Company’s definitive ProxyStatement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, mean that such material isincorporated herein by reference; other material in those documents is not deemed to be filed as part of this Annual Report on Form 10−K.**In this report, the terms “Company” and “Sunoco” are used interchangeably to mean Sunoco, Inc. or collectively, Sunoco, Inc. and its subsidiaries. The useof these terms is for convenience of discussion and is not intended to be a precise description of corporate relationships.

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Sunoco currently owns and operates five refineries which are located in Marcus Hook, PA, Philadelphia, PA, Westville, NJ, Toledo, OH and Tulsa, OK.The refineries in Marcus Hook, Philadelphia, Westville and Toledo produce principally fuels and commodity petrochemicals while the refinery in Tulsaemphasizes lubricants production with related fuels production being sold in the wholesale market. The refinery in Westville (also known as the Eagle Pointrefinery) was acquired in January 2004. A sixth refinery in Puerto Rico, which also emphasized lubricants production, was sold in December 2001, completingthe Company’s restructuring of its lubricants operations (see “Refining and Supply” below).

Sunoco markets gasoline and middle distillates, and offers a broad range of convenience store merchandise through a network of 4,528 retail outlets in 25states primarily on the East Coast and in the Midwest United States. During the second quarter of 2003, Sunoco completed the purchase of 193 Speedway retailgasoline sites located primarily in Florida and South Carolina and, in the fourth quarter of 2003, substantially completed the divestment of its interests in 190retail sites in Michigan and the southern Ohio markets of Columbus, Dayton and Cincinnati (see “Retail Marketing” below).

Sunoco owns and operates facilities in Philadelphia, PA and Haverhill, OH, which produce phenol and acetone, and in LaPorte, TX, Neal, WV andBayport, TX, which produce polypropylene. In addition, Sunoco is a joint venture partner in a facility in Marcus Hook, PA, which produces propylene andpolypropylene and in a facility in Mont Belvieu, TX, which produces MTBE. The polypropylene facility in Bayport was acquired in the first quarter of 2003 aspart of a transaction in which Sunoco secured a favorable long−term supply of propylene for its Gulf Coast polypropylene business. A facility in Pasadena, TX,which produces plasticizers, was sold to BASF in January 2004, while a facility in Neville Island, PA will continue to produce plasticizers exclusively for BASFunder a three−year tolling agreement (see “Chemicals” below).

Sunoco owns, principally through Sunoco Logistics Partners L.P. (the “Partnership”) (a master limited partnership that is 75.3 percent owned by Sunoco),a geographically diverse and complementary group of pipelines and terminal facilities which transport, terminal and store refined products and crude oil (see“Logistics” below).

Sunoco makes high−quality, blast−furnace coke at its Indiana Harbor facility in East Chicago, IN and its Jewell facility in Vansant, VA, and producesmetallurgical coal from mines in Virginia primarily for use at the Jewell cokemaking facility. A new cokemaking facility is currently under construction inHaverhill, OH, which is expected to be operational in March 2005 (see “Coke” below).

The following are separate discussions of Sunoco’s business segments.

Refining and SupplyThe Refining and Supply business consists of the manufacture of petroleum products, including gasoline, middle distillates (mainly jet fuel, heating oil and

diesel fuel) and residual fuel oil at the Marcus Hook, Philadelphia, Eagle Point, Toledo and Tulsa refineries and commodity petrochemicals, including olefins andtheir derivatives (ethylene, ethylene oxide polymers and refinery−grade propylene) and aromatics and their derivatives (benzene, cyclohexane, toluene andxylene) at the Marcus Hook, Philadelphia, Eagle Point and Toledo refineries, and the sale of these products to other Sunoco business units and to wholesale andindustrial customers. This business also manufactures lubricant products at the Tulsa refinery which are sold into process oil, wholesale base oil and waxmarkets.

In January 2004, Sunoco completed the purchase of the 150 thousand barrels−per−day Eagle Point refinery and related assets from El Paso Corporation for$235 million, including an estimated $124 million for crude oil and refined product inventory. In connection with this transaction, Sunoco

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assumed certain environmental and other liabilities. Management believes the acquisition of the Eagle Point refinery complements and enhances the Company’srefining operations in the Northeast and enables the capture of significant synergies in the larger Northeast Refining Complex. The related assets acquired includecertain pipeline and other logistics assets associated with the refinery which Sunoco intends to sell to Sunoco Logistics Partners L.P.

The Company’s refinery operations are organized into two refining centers. The Northeast Refining Complex is comprised of the Marcus Hook,Philadelphia and recently acquired Eagle Point refineries, while the MidContinent Refining Complex is comprised of the Toledo and Tulsa refineries. Thefollowing tables set forth information concerning operations at the two refining centers (in thousands of barrels daily and percentages):

2003

NortheastRefining

Complex*

Mid−ContinentRefining

Complex** Total

Crude Unit Capacity 505.0 225.0 730.0

Crude Inputs as Percent of Crude Unit Rated Capacity 95% 101% 97%

Conversion Capacity 210.0 96.7 306.7

Conversion Unit Capacity Utilized 97% 100% 98%

Throughputs:Crude Oil 481.7 226.4 708.1Other Feedstocks 46.8 6.4 53.2

Total Throughputs 528.5 232.8 761.3

Products Manufactured:Gasoline 261.2 114.4 375.6Middle Distillates 169.1 67.6 236.7Residual Fuel 55.7 4.1 59.8Petrochemicals 20.8 7.1 27.9Lubricants — 13.6 13.6Other 42.1 35.5 77.6

Total Production 548.9 242.3 791.2Less Production Used as Fuel in Refinery Operations 26.3 10.8 37.1

Total Production Available for Sale 522.6 231.5 754.1

*In January 2004, crude unit capacity increased to 655 thousands of barrels daily and conversion capacity increased to 265 thousands of barrels dailyas a result of the acquisition of the Eagle Point refinery. **In January 2004, crude unit capacity increased to 235 thousands of barrels daily as a result of a 10 thousand−barrels−per−day adjustment to 150thousands of barrels daily at the Toledo refinery reflecting the increased reliability and enhanced operations at this facility in recent years.

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2002*

NortheastRefiningComplex

Mid−ContinentRefiningComplex Total










*Restated to conform to the 2003 presentation.

2001*

NortheastRefiningComplex

Mid−ContinentRefiningComplex Total










*Restated to conform to the 2003 presentation. In addition, excludes the Puerto Rico refinery which was sold in December 2001 (see below).

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Sunoco meets all of its crude oil requirements through purchases from third parties. There has been an ample supply of crude oil available to meetworldwide refining needs, and Sunoco has been able to supply its refineries with the proper mix and quality of crude oils without disruption. Virtually all of thecrude oil processed at Sunoco’s refineries, including the recently acquired Eagle Point refinery, is light sweet crude oil. The Company believes that amplesupplies of light sweet crude oil will continue to be available. The Philadelphia, Marcus Hook and Eagle Point refineries process crude oils supplied from foreignsources, while the Toledo refinery processes crude oils supplied primarily from Canada and the United States and the Tulsa refinery processes crude oils suppliedprimarily from the United States. Approximately 35 percent of Sunoco’s crude oil supply during 2003 came from Nigeria. Some of the crude producing areas ofthis West African country experienced political and ethnic violence during 2003, which resulted in the shutdown of a small portion of total Nigerian crudesupply. The lost crude oil production in Nigeria did not have a material impact on Sunoco’s operations, and the Company believes other sources of light sweetcrude oil are available in the event it is unable to obtain crude oil from Nigeria in the future. The following table sets forth information concerning theCompany’s crude oil purchases (in thousands of barrels daily):

2003 2002 2001

Crude Type:West African Light 447.0 435.8 437.8Domestic Light Sweet 152.9 125.6 133.9Canadian 52.3 56.2 82.8North Sea 34.3 42.6 37.1South and Central American Light 4.6 10.2 .6“Lubes−Extracted” Gasoil/Naphtha Intermediate Feedstock 16.6 8.3 3.2

707.7 678.7 695.4

Refining and Supply sells fuels through wholesale and industrial channels principally in the Northeast and upper Midwest and sells petrochemicals andlubricants on a worldwide basis. The following table sets forth Refining and Supply’s refined product sales (in thousands of barrels daily):

2003 2002 2001*

To Unaffiliated Customers:Gasoline 153.3 152.5 137.5Middle Distillates 216.8 209.9 205.7Residual Fuel 69.5 62.6 59.8Petrochemicals 11.3 13.2 13.5Lubricants 13.8 13.4 9.3Other 44.3 53.8 52.8

509.0 505.4 478.6To Affiliates** 333.9 316.2 287.6

842.9 821.6 766.2

*Excludes base oil and related fuels from the Puerto Rico refinery and specialty oils relating to blending, packaging and branded marketing operations thatwere sold during 2001 (see below).**Includes gasoline and middle distillate sales to Retail Marketing and benzene and refinery−grade propylene sales to Chemicals.

Feedstocks can be moved between refineries in the Northeast Refining Complex by barge, truck and rail. In addition, an interrefinery pipeline leased fromSunoco Logistics Partners L.P. enables the transfer of unfinished stocks, including butanes, naphtha, distillate blendstocks and gasoline

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blendstocks between the Philadelphia and Marcus Hook refineries. Finished products are delivered to customers via the pipeline and terminal network owned andoperated by Sunoco Logistics Partners L.P. (see “Logistics” below) and by third−party pipelines and barges.

The Clean Air Act phases in limitations on the sulfur content of gasoline beginning in 2004 and the sulfur content of on−road diesel fuel beginning in2006. These rules are expected to have a significant impact on refinery operations, primarily with respect to capital and operating expenditures. Most of thecapital spending is likely to occur in the 2004−2006 period, while the higher operating costs will be incurred when the low−sulfur fuels are produced. TheCompany estimates that the total capital outlays to comply with the new gasoline and diesel requirements will be in the range of $400−$500 million, includingamounts attributable to the recently acquired Eagle Point refinery. Through year−end 2003, the Company’s Tier II spending totaled $25 million. The Companyplans to meet the new gasoline specifications with new gasoline hydrotreaters at the Marcus Hook, Philadelphia, Eagle Point and Toledo refineries. In an effort tolimit engineering and construction costs, the Company intends to build identical gasoline hydrotreaters at each of these four facilities. Spending in 2004 willinclude continued engineering and construction work associated with these efforts.

For many years, sulfur gas generated during the refining process at the Marcus Hook refinery had been sent to a third party, General Chemical, forprocessing into sulfur. In October 2002, General Chemical’s parent company, GenTek, filed for Chapter 11 bankruptcy reorganization. As part of thisproceeding, General Chemical petitioned the court in February 2003, seeking to close the sulfur processing portion of its facility on or about September 30, 2003.As a result, Sunoco constructed a sulfur plant at Marcus Hook at a cost of $50 million. The plant began processing the sulfur gas from the Marcus Hook refineryin September 2003.

During the fourth quarter of 1999, Refining and Supply entered into an agreement with a subsidiary of FPL Energy (“FPL”) to purchase steam from a750−megawatt, natural gas fired cogeneration power plant currently being constructed and to be owned and operated by FPL at Sunoco’s Marcus Hook refinery.The power plant is designed to supply up to one million pounds of steam per hour to the refinery, which will reduce the refinery’s steam supply costs andenhance the reliability of operations. Construction commenced on this facility in 2001 and is expected to be completed in 2004.

During 2000, Sunoco announced its intention to sell its Puerto Rico refinery and its specialty oil operations due to its inability to achieve an adequatereturn on capital employed. In connection with this decision, Sunoco sold its lubricants marketing assets in March 2001, closed its lubricants blending plants inMarcus Hook, PA, Tulsa, OK and Richmond, CA in July 2001 and sold the Puerto Rico refinery in December 2001, which concluded the lubricants restructuringplan. Sales of lubricants and other refined products attributable to these operations totaled 17.1 thousands of barrels daily during 2001. For a discussion of thefinancial impact of these actions, see Note 3 to the Consolidated Financial Statements in the Company’s 2003 Annual Report to Shareholders.

Retail MarketingThe Retail Marketing business consists of the retail sale of gasoline and middle distillates and the operation of convenience stores in 25 states primarily on

the East Coast and in the Midwest region of the United States. The highest concentration of outlets is located in Connecticut, Florida, Massachusetts, Michigan,New Jersey, New York, Ohio and Pennsylvania.

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The following table sets forth Sunoco’s retail gasoline outlets at December 31, 2003, 2002 and 2001:

2003 2002 2001

Direct Outlets:Company Owned or Leased:Company−Operated:Traditional 154 208 203Convenience Stores 578 406 421

732 614 624

Dealer−Operated:Traditional 287 330 354Convenience Stores 221 221 230Ultra Service Centers

SM202 219 225

710 770 809

Total Company Owned or Leased* 1,442 1,384 1,433Dealer Owned** 594 682 686

Total Direct Outlets 2,036 2,066 2,119Distributor Outlets 2,492 2,315 2,032

4,528 4,381 4,151

*Gasoline and diesel throughput per Company−owned or leased outlet averaged 124.4, 121.7 and 116.3 thousands of gallons monthly during 2003, 2002 and2001, respectively.**Primarily traditional outlets.

Retail Marketing has a portfolio of outlets that differ in various ways including: product distribution to the outlets; site ownership and operation; and typesof products and services provided.

Direct outlets may be operated by Sunoco or by an independent dealer, and are sites at which fuel products are delivered directly to the site by Sunoco’s132 trucks or by its contract carriers. The Company or an independent dealer owns or leases the property. These sites may be traditional locations that sell almostexclusively fuel products under the Sunoco®, Coastal® and Optima® brands (see below) or may include APlus® or Coastal Mart® convenience stores or UltraService CentersSM that provide automotive diagnosis and repair. Included among Retail Marketing’s outlets at December 31, 2003 were 70 outlets on turnpikesand expressways in Pennsylvania, New Jersey, New York, Ohio and Maryland. Of these outlets, 55 were Company−operated sites providing gasoline, diesel fueland convenience store merchandise.

Distributor outlets are sites in which the distributor takes delivery at a terminal where branded products are available. Sunoco does not own, lease oroperate these locations.

During 2001, Sunoco completed the acquisition of 473 Coastal retail gasoline outlets and related working capital from El Paso Corporation for $59million. The acquisition consisted of 166 Company−owned or leased outlets, 150 dealer−owned traditional outlets and 157 distributor−owned or supplied outlets.During 2002, Sunoco acquired an additional 397 Coastal distributor−owned or supplied outlets from El Paso Corporation for $3 million. The outlets are locatedin 22 states in the eastern half of the United States with the largest concentration in Florida, New Jersey, Pennsylvania, Tennessee and Virginia. In 2003, Sunococompleted the purchase of 193 Speedway retail gasoline outlets from Marathon Ashland Petroleum LLC for $162 million, including inventory. The Speedwaysites, which are located primarily in Florida and South Carolina, are all Company−operated locations with convenience stores. Of the 193 outlets, Sunoco is thelessee for 54 sites under long−term lease

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agreements. The Speedway sites are being re−branded as Sunoco locations in 2003 and 2004. These acquisitions are part of the Company’s strategy to grow anddiversify its retail presence. At December 31, 2003, there were 283 outlets selling gasoline under the Coastal® brand and 113 outlets selling gasoline under theSpeedway® brand.

During 2003, Sunoco intensified its asset portfolio management activities in order to concentrate operations and future investments in geographic areas andin direct or distributor outlet channels with higher potential investment returns. In 2003, Sunoco announced its intention to sell its interest in 190 retail sites inMichigan and the southern Ohio markets of Columbus, Dayton and Cincinnati (“Midwest Marketing Divestment Program”). During 2003, 75 Company−ownedor leased properties and contracts to supply 23 dealer−owned sites were divested under this program. The cash generated from these divestments totaled $46million, which represents substantially all of the proceeds expected from the Midwest Marketing Divestment Program. The remaining 92 sites are virtually alldealer−owned locations that are expected to be converted to distributor outlets in 2004. Sunoco continues to supply branded gasoline to substantially all of thedivested outlets.

In January 2004, Sunoco agreed to purchase 385 retail outlets currently operated under the Mobil® brand from ConocoPhillips for $187 million, plusinventory. The acquisition consists of 114 Company−owned or leased outlets, 36 dealer−owned locations and 235 distributor−supplied outlets. These outlets,which include 31 sites that are Company−operated and have convenience stores, are located primarily in Delaware, Maryland, Virginia and Washington, D.C.The transaction, which is subject to certain conditions including regulatory approval and the completion of due diligence, is expected to be completed in thesecond quarter of 2004.

Retail Marketing offers at least three grades of gasoline at its retail locations, including 93, 89 and 87 octanes. In addition, Retail Marketing offers Ultra®

94, the highest octane premium gasoline commercially available in the United States, at Sunoco stations in selected areas in the Northeast and Midwest. TheUltra® 94 product offering is being eliminated in New York and in the New England states. Branded fuels sales (including middle distillates) averaged 316.8thousand barrels daily in 2003 compared to 298.7 thousand barrels daily in 2002 and 279.1 thousand barrels daily in 2001. The increase in branded fuels salesduring the 2001−2003 period was largely due to the acquisition of the Coastal and Speedway retail sites.

Retail Marketing is one of the largest providers of heating products in the eastern United States. In 2003, the Company sold 190 million gallons of theseproducts to approximately 110 thousand customers. Sunoco is also the largest manufacturer and marketer of high performance (racing) gasoline in the UnitedStates with approximately 11 million gallons sold during 2003.

The Sunoco brand is positioned as a premium brand. Brand improvements over the past three years have focused on physical image, customer service andproduct offerings. In 2003, Sunoco further strengthened its brands and its high performance gasoline business by reaching a ten−year sponsorship agreement withNASCAR whereby Sunoco becomes the Official Fuel of NASCAR and the exclusive fuel supplier to NASCAR events, and APlus® becomes the OfficialConvenience Store of NASCAR.

Sunoco’s convenience stores are located principally in Pennsylvania, New York, Massachusetts, Ohio, Michigan, South Carolina and Florida. These storessupplement sales of fuel products with a broad mix of high−margin merchandise such as groceries, fast foods, beverages and tobacco products. The followingtable sets forth information concerning Sunoco’s convenience store locations:

2003 2002 2001

Number of Stores (at December 31) 813 638 652Merchandise Sales (Thousands of Dollars/Store/Month) $72.1 $69.2 $64.3Merchandise Margin (Company Operated) (% of Sales) 24.6% 25.2% 25.5%

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The number of stores at December 31, 2003 includes 193 outlets that were added in connection with the Speedway acquisition. The Company intends tocontinue to grow its convenience store business through acquisitions, new site construction and redesign of traditional gasoline outlets in an effort to reduce itsdependence on gasoline margins.

ChemicalsThe Chemicals business is comprised of the manufacturing, distribution and marketing of commodity and intermediate petrochemicals. The chemicals

include polypropylene and aromatic derivatives (cumene, phenol, acetone and bisphenol−A) manufactured at Company−owned facilities as well aspolymer−grade propylene and polypropylene produced at the Company’s Epsilon Products Company, LLC (“Epsilon”) joint venture and MTBE produced at itsBelvieu Environmental Fuels (“BEF”) joint venture. Cumene is produced at the Philadelphia, PA refinery and the recently acquired Eagle Point refinery inWestville, NJ; phenol and acetone are produced at facilities in Philadelphia, PA and Haverhill, OH; and polypropylene is produced at facilities in LaPorte, TX,Neal, WV and Bayport, TX. The Epsilon polypropylene joint venture is located in Marcus Hook, PA, and the BEF MTBE joint venture is located in MontBelvieu, TX. A facility in Pasadena, TX, which produces plasticizers, was sold to BASF in January 2004, while a facility in Neville Island, PA will continue toproduce plasticizers exclusively for BASF under a three−year tolling agreement. (See “Refining and Supply” for a discussion of the commodity petrochemicalsproduced by Refining and Supply at the Marcus Hook, Philadelphia, Eagle Point and Toledo refineries.)

Effective March 31, 2003, Sunoco formed a limited partnership with Equistar Chemicals, L.P. (“Equistar”) involving Equistar’s ethylene facility inLaPorte, TX. Equistar is a joint venture between Lyondell Chemical Company and Millennium Chemicals Inc. In connection with this transaction, Equistar andthe new partnership entered into a 700 million pounds−per−year, 15−year propylene supply contract with Sunoco. Of this amount, 500 million pounds per year ispriced on a cost−based formula that includes a fixed discount that declines over the life of the contract, while the remaining 200 million pounds per year is basedon market prices. Sunoco also purchased Equistar’s polypropylene facility in Bayport, TX. Sunoco paid $194 million in cash and borrowed $4 million from theseller to form the partnership and acquire the Bayport facility. Through the new partnership and supply contract, the Company believes it has secured a favorablelong−term supply of propylene for its Gulf Coast polypropylene business. Realization of these benefits is largely dependent upon performance by Equistar,which has a credit rating below investment grade. Equistar has not given any indication that it will not perform under its contracts. In the event ofnonperformance, Sunoco has collateral and certain other contractual rights under the partnership agreement. The acquisition of the Bayport facility has increasedthe Company’s polypropylene capacity, complementing and enhancing the Company’s existing polypropylene business and strengthening its market position.

Effective January 1, 2001, Sunoco completed the acquisition of Aristech Chemical Corporation (“Aristech”), a wholly owned subsidiary of MitsubishiCorporation (“Mitsubishi”), for $506 million in cash and the assumption of $163 million in debt. The purchase price included $107 million for working capital.Contingent payments with a net present value as of the acquisition date of up to $167 million (the “earn out”) may also be made if realized margins forpolypropylene and phenol exceed certain agreed upon thresholds through 2006. As of December 31, 2003, no such payments have been earned. Since the $167million represents a present value as of January 1, 2001, the actual amounts that could ultimately be paid under the earn out provisions increase over time by acontract−specified 11 percent per year. However, these contingent payments are limited to $90 million per year. Any earn out payments would be treated asadjustments to the purchase price. Sunoco also entered into a margin hedge agreement with Mitsubishi whereby Mitsubishi provided polypropylene marginprotection for 2001 of up to $6.5 million per quarter. In connection with the margin hedge agreement, Sunoco received $19.5 million from Mitsubishi in 2001related to Aristech’s operations for the first nine months

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and an additional $6.5 million in the first quarter of 2002 related to the 2001 fourth quarter’s operations. These payments were reflected as reductions in thepurchase price when received. In addition, Mitsubishi is responsible during a 25−year indemnification period for up to $100 million of potential environmentalliabilities of the business arising out of or related to the period prior to the acquisition date.

Included in the purchase from Mitsubishi were a phenol plant in Haverhill, OH; polypropylene plants in La Porte, TX, and Neal, WV; plasticizer facilitiesin Pasadena, TX and Neville Island, PA; and a research center in Pittsburgh, PA. During 2003, Sunoco announced its decision to sell its plasticizer business andrecorded a $28 million charge ($17 million after tax) to write down the assets held for sale to their estimated fair values less costs to sell and to establish accrualsfor employee terminations under a postemployment plan and other required exit costs. Sunoco sold this business and related inventory in January 2004 to BASFfor approximately $90 million in cash. The sale included the plasticizer facility in Pasadena, TX, including the land, phthalic anhydride and oxo−alcoholmanufacturing plants, plus the plasticizer esters, 2−ethylhexanol and phthalic anhydride business. The Neville Island, PA, site was not part of the transaction andwill continue to produce plasticizers exclusively for BASF under a three−year tolling agreement. Sunoco also agreed to provide terminalling services at thisfacility to BASF for a 15−year period. During 2003, Sunoco also temporarily idled a production line at its Haverhill, OH, plant, which has the capacity toproduce 350 million pounds per year of phenol and 217 million pounds per year of associated acetone. During 2002, Sunoco permanently shut down a 200million pounds−per−year polypropylene line at its LaPorte, TX, plant and a 170 million pounds−per−year aniline and diphenylamine facility in Haverhill, OH, inorder to eliminate less efficient production capacity and recorded a $21 million provision ($14 million after tax) to write off the affected units and establishaccruals for related exit costs.

Effective June 15, 2000, Chemicals entered into the Epsilon joint venture which combined its 735 million pounds−per−year polymer−grade propyleneoperations at the Marcus Hook refinery with the adjacent polypropylene plant owned by Epsilon Products Company. The polypropylene facility has an annualproduction capacity of 750 million pounds. The Chemicals business is entitled to 100 percent of all cash distributions from the joint venture through June 2004declining to 50 percent by 2015. The Chemicals business markets the joint venture’s production under the Sunoco® name in combination with production fromits LaPorte, TX, Neal, WV and Bayport, TX, polypropylene plants.

Sunoco Chemicals has a one−third partnership interest in the BEF joint venture. In 1995, Sunoco entered into a 10−year off−take agreement with the jointventure whereby Sunoco agreed to purchase all of the MTBE production from the plant. For the remaining term of this agreement, these purchases will be basedon current market prices. MTBE is used by Refining and Supply in the manufacture of reformulated gasoline. Various governmental authorities have banned orare considering the ban or phase−down of MTBE. These governmental actions have had, and are expected to continue to have, a materially adverse impact onMTBE industry demand. As a result, the joint venture is currently evaluating alternative uses for its MTBE production facility, including the conversion from theproduction of MTBE to the production of iso−octane or alkylate, which are used as gasoline blending components. Although industry MTBE production capacityhas been contracting, MTBE supply is expected to exceed future demand. Accordingly, during 2003, the joint venture recorded a provision to write down itsMTBE production facility to its estimated fair value. The estimated fair value was determined by an independent appraiser using present value techniques whichreflect various alternative operating assumptions. Sunoco’s share of this provision amounted to $23 million ($15 million after tax). If the assumptions used toestimate the fair market value of the MTBE production facility change, an additional write−down of this facility may be necessary. At December 31, 2003,Sunoco had a $25 million investment in this operation.

Sunoco’s Philadelphia phenol facility has the capacity to produce annually more than one billion pounds of phenol and 700 million pounds of acetone.Under a long−term contract, the Chemicals

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business supplies Honeywell International Inc. (“Honeywell”) with approximately 745 million pounds of phenol annually at a price based on the market value ofcumene feedstock plus an amount approximating other phenol production costs.

The following table sets forth information concerning petrochemicals production by the Chemicals business (in millions of pounds):

Capacity at

December 31, 2003*

Production*

2003 2002 2001

Phenol 2,050** 1,521 1,689 1,534Acetone 1,275** 943 1,051 952Bisphenol−A 215 214 200 182Other Phenol Derivatives*** 120 77 183 204Cumene 1,215† 1,005 1,111 1,026Polypropylene†† 1,700 1,542 1,372 1,345Plasticizers and Related Feedstocks††† 755 748 786 650

Total Production 7,330 6,050 6,392 5,893

Less: Production Used as Feedstocks#

1,400 1,587 1,501

Total Production Available for Sale 4,650 4,805 4,392

*Excludes polypropylene and MTBE joint venture operations. **Includes 350 million pounds per year of phenol capacity and 217 million pounds per year of associated acetone capacity related to a production line inHaverhill, OH, which was temporarily idled in 2003. ***Reflects a 170 million pound reduction in production capacity in 2002 in connection with the permanent shutdown of the aniline and diphenylamineproduction facility in Haverhill, OH. †In January 2004, cumene capacity increased to 1,715 million pounds as a result of the acquisition of the Eagle Point refinery. ††Includes amounts attributable to the Bayport facility subsequent to its purchase effective March 31, 2003. In addition, reflects impact of a 200 millionpound reduction in production capacity in 2002 in connection with the permanent shutdown of a line at the LaPorte, TX, plant. †††Consists of amounts attributable to the plasticizer business, which was divested in January 2004. #Consists of cumene (used in the manufacture of phenol and acetone), phenol and acetone (used in the manufacture of bisphenol−A), and plasticizerfeedstocks phthalic anhydride and 2−ethylhexanol (used in the manufacture of plasticizers).

Petrochemical products produced by the Chemicals business are distributed and sold on a worldwide basis with most of the sales made to customers in theUnited States. The following table sets forth the sale of petrochemicals to third parties by Chemicals (in millions of pounds):

2003 2002 2001

Phenol and Related Products (including Bisphenol−A) 2,629 2,831 2,605Polypropylene* 1,562 1,346 1,384Plasticizers and Related Feedstocks** 591 615 532Propylene 774 774 715Other 162 178 175

5,718 5,744 5,411

*Includes amounts attributable to the Bayport facility subsequent to its purchase effective March 31, 2003.**Consists of amounts attributable to the plasticizer business, which was divested in January 2004.

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The tables above reflect only volumes manufactured and sold directly by the Chemicals business. Chemicals also manages the third−party chemicals salesfor Refining and Supply, a joint venture with Suncor Energy Inc. and the Epsilon joint venture, bringing the total petrochemicals sold under the Sunoco® name toapproximately 8.4 billion pounds in 2003.

Sales made by the Chemicals business during 2003 were distributed through the following channels:

• Phenol and Related Products—Long−term phenol contract sales to Honeywell are used in nylon production. Other phenol contract sales are to largemanufacturers of resins and adhesives primarily for use in building products. Large contract sales of acetone are to major customers who manufacturepolymers. Other sales of acetone are made to individually smaller customers for use in inks, paints, varnishes and adhesives. Bisphenol−A,manufactured from phenol and acetone, is sold to manufacturers of epoxy resins and polycarbonates;

• Polypropylene—Sales are made to a diverse group of customers for use in fibers, carpeting, packaging, automotive, furniture and other end products;

• Refinery−grade Propylene—Refinery−grade propylene is sold to the Epsilon joint venture for its use in the production of polypropylene; and

• Plasticizers and Precursors—Prior to the divestment of the plasticizer business in January 2004, phthalic anhydride and 2−ethylhexanol were sold tothird−party customers in addition to their use by Chemicals in the production of plasticizers. Phthalic anhydride customers manufacture plasticizers,unsaturated polyester resins and coatings. 2−ethylhexanol was supplied to producers of plasticizers, fuel and lubricating oil additives, and surfactants,with significant volumes exported. Plasticizers are consumed by medium and small customers making PVC plastics, packaging, wire and cablecoatings, and a number of specialty polymers.

LogisticsThe Logistics business operates refined product and crude oil pipelines and terminals and conducts crude oil acquisition and marketing activities primarily

in the Northeast, Midwest and South Central regions of the United States. The Logistics business also has an ownership interest in several refined product andcrude oil pipeline joint ventures.

In February 2002, the Company contributed a substantial portion of its logistics business to Sunoco Logistics Partners L.P., a master limited partnershipformed in 2001, in exchange for a 73.2 percent limited partner interest, a 2 percent general partner interest, incentive distribution rights and a $245 millionspecial distribution, representing the net proceeds from the Partnership’s sale of ten−year senior notes. The Partnership concurrently issued 5.75 million limitedpartnership units, representing a 24.8 percent interest in the Partnership, in an initial public offering at a price of $20.25 per unit. Proceeds from this offeringtotaled approximately $96 million net of underwriting discounts and offering expenses. Concurrent with the offering, Sunoco entered into various agreementswith the Partnership which require Sunoco to pay for minimum storage and throughput usage of certain Partnership assets. These agreements also establish feesfor administrative services provided by Sunoco to the Partnership and provide indemnifications by Sunoco to the Partnership for certain environmental, toxic tortand other liabilities.

Pipeline operations are primarily conducted through the Partnership’s pipelines and through other pipelines in which the Partnership or Sunoco has anownership interest. The pipelines are principally common carriers and, as such, are regulated by the Federal Energy Regulatory Commission for interstatemovements and by state regulatory agencies for intrastate movements. The tariff rates charged, while regulated by the governing agencies, are based uponcompetition from other pipelines or alternate modes of transportation.

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Refined product pipeline operations, located primarily in the Northeast and Midwest, transport gasoline, jet fuel, diesel fuel, home heating oil and otherproducts for Sunoco’s other businesses and for third−party integrated petroleum companies, independent marketers and distributors. Crude oil pipelineoperations, located primarily in the South Central United States, transport foreign crude oil received at its Nederland, TX, terminal and crude oil producedprimarily in Oklahoma and Texas to refiners (including Sunoco’s Tulsa and Toledo refineries) or to local trade points.

During November 2002, the Partnership acquired from an affiliate of Union Oil Company of California (“Unocal”) interests in three Midwestern andWestern U.S. products pipeline companies, consisting of a 31.5 percent interest in Wolverine Pipe Line Company, a 9.2 percent interest in West Shore Pipe LineCompany and a 14.0 percent interest in Yellowstone Pipe Line Company, for $54 million in cash. During September 2003, the Partnership acquired an additional3.1 percent interest in West Shore Pipe Line Company for $4 million, increasing its overall ownership interest in West Shore to 12.3 percent. In November 2002,the Partnership also completed the acquisition of an additional interest in West Texas Gulf pipeline for $6 million in cash, which increased its ownership interestin this pipeline from 17.3 percent to 43.8 percent.

At December 31, 2003, the Partnership owned and operated 2,813 miles of crude oil pipelines and 1,735 miles of refined product pipelines. In 2003, crudeoil and refined product shipments totaled 12.9 and 15.2 billion barrel miles, respectively, as compared to 12.6 and 15.5 billion barrel miles in 2002 and 13.5 and14.9 billion barrel miles in 2001. These amounts consist of 100 percent of the pipeline shipments of pipelines owned and operated by the Partnership.

Product terminalling operations include 34 terminals in the Northeast and Midwest that receive refined products from pipelines and distribute themprimarily to Sunoco and also to third parties, who in turn deliver them to end−users such as retail outlets. Terminalling operations also include an LPG terminalnear Detroit, MI, three crude oil terminals adjacent to Sunoco’s Philadelphia refinery and a refined product terminal adjacent to Sunoco’s Marcus Hook refinery.

The Partnership’s Nederland, TX, terminal provides approximately 12.5 million barrels of storage and provides terminalling throughput capacityexceeding one million barrels per day. Its Gulf Coast location provides local and midwestern refiners access to foreign and offshore domestic crude oil. Thefacility is also a key link in the distribution system for U.S. government purchases for and sales from the Strategic Petroleum Reserve storage facilities. During2003, the Partnership completed construction of 1.3 million barrels of additional storage capacity and an additional mainline pumping station at the Nederlandterminal.

The Fort Mifflin Terminal Complex, located on the Delaware River in Philadelphia, supplies Refining and Supply’s Philadelphia refinery with all of itscrude oil. The terminal complex is comprised of the Fort Mifflin Terminal, the Hog Island Wharf, the Darby Creek Tank Farm and connecting pipelines.

The Partnership’s crude oil pipeline operations in the South Central United States are complemented by crude oil acquisition and marketing operations.During 2003 and 2002, approximately 193 and 189 thousand barrels daily, respectively, of crude oil were purchased (including exchanges) from third−partyleases and approximately 300 and 215 thousand barrels daily, respectively, were purchased in bulk or other exchange transactions. Crude oil is delivered tovarious pipelines either directly from the wellhead or utilizing the Partnership’s fleet of 113 trucks.

CokeSun Coke Company’s business consists of blast−furnace coke manufacturing at the Company’s facilities in East Chicago, IN and Vansant, VA and

metallurgical coal production from mines in Virginia. Such operations are conducted by Sun Coke Company and its affiliates.

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The Sun Coke business produces high−quality coke at its 1.3 million ton−per−year Indiana Harbor cokemaking operation in East Chicago, IN and at its700 thousand ton−per−year Jewell cokemaking operation in Vansant, VA. These facilities use a proprietary low−cost, heat−recovery cokemaking technology,which is environmentally superior to the chemical by−product recovery technology currently used by most other coke producers.

In July 2002, Sunoco transferred an additional interest in its Indiana Harbor cokemaking operation to a third−party investor for $215 million in cash. Since1995, Sunoco has received $724 million in exchange for interests in its Indiana Harbor and Jewell cokemaking operations in four separate transactions. Sunocodid not recognize any gain at the dates of these transactions as the third−party investors are entitled to a preferential return on their investments, currently equalto 98 percent of the cash flows and tax benefits from the respective cokemaking operations, during preferential return periods which continue until they recovertheir investments and achieve a cumulative return thereon that averages approximately 10 percent after tax. Income is recognized as coke production and salesgenerate cash flows and tax benefits which are allocated to Sunoco and the third−party investors, while expense is recognized to reflect the investors’ preferentialreturns.

Under the current tax law, beginning in 2003, a portion of the coke production at Jewell is no longer entitled to tax credits, which has resulted in a declinein Coke’s annual income of $6 million after tax. The remainder of the coke production at Jewell and all of the production at Indiana Harbor are eligible togenerate credits through 2007.

The preferential return period for the Jewell operation is expected to end in 2011. The preferential return period for the first investor in the Indiana Harboroperation ended in July 2002, at which time the first investor’s interest in the cash flows and tax benefits from Indiana Harbor decreased from 95 percent to 5percent. As a result of the additional investment in July 2002, third−party investors’ interests in Indiana Harbor increased from 5 percent to 98 percent. The newinvestor’s preferential return period for the Indiana Harbor operation is expected to end in 2007. The estimated lengths of these preferential return periods arebased upon the Company’s current expectations of future operations, including sales volumes and prices, raw material and operating costs and capitalexpenditure levels. Better−than−expected results will shorten the investors’ preferential return periods, while lower−than−expected results will lengthen theperiods.

After these preferential return periods, the investor in the Jewell operation will be entitled to a minority interest in the cash flows and tax benefits fromJewell amounting to 18 percent, while the investors in the Indiana Harbor operation will be entitled to a minority interest in the cash flows and tax benefits fromIndiana Harbor initially amounting to 34 percent and declining to 10 percent by 2038.

The following table sets forth information concerning cokemaking and coal mining operations:

2003 2002 2001

Production (Thousands of Tons):Coke 2,024 2,001 2,006

Metallurgical Coal 1,160 1,103 1,027

Proven and Probable Metallurgical Coal Reservesat December 31 (Millions of Tons) 108 109 110

In 2003, 89 percent of Sun Coke’s metallurgical coal production was converted into coke at the Jewell cokemaking facility and 11 percent was sold in spotmarket transactions. This is consistent with the Company’s strategy of using its metallurgical coal production principally in its Jewell cokemaking operation. Allof the metallurgical coal used to produce coke at Indiana Harbor is purchased from third parties generally under one−year contracts. The Company believes thereis an ample supply of metallurgical coal available, and Sun Coke has been able to supply its Indiana Harbor facility without disruption.

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Production from the Indiana Harbor cokemaking facility is sold principally to Ispat Inland Inc. (“Ispat”) for use at Ispat’s Indiana Harbor Works steel plantlocated adjacent to the Indiana Harbor facility. A supply agreement requires Sun Coke to provide Ispat 1.2 million tons of coke annually on a take−or−pay basisthrough 2013. Additional production of approximately 150,000 tons per year will be sold either to Ispat or to other steel producers. Sun Coke is also required tosupply all of the flue gas by−product produced at the cokemaking facility to an adjacent third−party utility for the generation of steam and electricity. In return,the utility reduces the sulfur and particulate content of the flue gas to acceptable emission levels.

In March 2002, Jewell’s former long−term contract customer, National Steel Corporation (“National”), filed for Chapter 11 bankruptcy reorganization. Aspart of its bankruptcy proceedings, National rejected its contract with Jewell. As a result, Jewell’s 2002 coke sales were made into lower−value short−termmarkets.

In October 2003, Sun Coke entered into an agreement with three affiliates of International Steel Group (“ISG”) under which Sun Coke will build andoperate a 550,000 tons−per−year cokemaking facility in Haverhill, OH. Construction of this facility, which is estimated to cost approximately $140 million,commenced in December 2003, and the facility is expected to be operational in March 2005. In connection with this agreement, ISG has agreed to purchase550,000 tons per year of coke from this facility, which is in addition to the 700,000 tons it currently is purchasing annually from Jewell’s production through2005. These two contracts have been combined into a 15−year, 1.25 million tons−per−year contract. In addition, the heat recovery steam generation associatedwith the cokemaking process at this facility will provide low cost steam to the Company’s adjacent chemical manufacturing complex.

Substantially all coke sales are currently made under the long−term contracts with Ispat and ISG. These contracts contain cost pass through or escalatingfixed price provisions. Both Ispat and ISG have credit ratings below investment−grade. Competition from foreign steelmakers and an economic slowdown havehad an adverse impact on the U.S. steel industry. As a result, in recent years, a number of steel companies filed for bankruptcy protection and conductedrestructuring efforts through consolidation and shutdown of inefficient assets. In response to these events, in March 2002, the U.S. government providedtemporary economic relief for the industry in the form of tariffs on foreign imports. These initiatives, coupled with an increase in worldwide steel demand, havecontributed to an overall improvement in the U.S. steel industry. In November 2003, the World Trade Organization ruled that the tariffs were illegal and, inDecember 2003, the U.S. government ended the tariffs. Removal of the tariffs is not expected to have a material impact on current steel imports due to the weakU.S. dollar, rising transportation costs and a strengthening of Chinese demand.

Neither Ispat nor ISG have given any indication that they will not perform under their contracts. However, in the event of their nonperformance, SunCoke’s results of operations and cash flows may be adversely affected and the periods during which the third−party investors are entitled to preferential returnscould be extended.

In April 2003, Sun Coke entered into an agreement with three major steel companies and a major iron ore producer under which Sun Coke would buildand operate a production facility and associated cogeneration power plant in Vitória, Brazil. The companies have agreed to long−term commitments wherebySun Coke would produce coke for the customers under a tolling agreement, and each customer would purchase a pro−rata share of the power produced at thefacility. Sun Coke’s commitment to this project is subject to a number of contingencies including: approval by Sunoco’s Board of Directors; finalization of theconstruction cost; obtaining all requisite permits; and obtaining financing satisfactory to Sunoco. If these contingencies are satisfied, construction of the facilities,which is estimated to cost approximately $300−$350 million, would begin in 2004, and management expects the facilities would be operational in 2006.

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CompetitionIn all of its operations, Sunoco is subject to competition, both from companies in the industries in which it operates and from products of companies in

other industries.

The refining and marketing business is very competitive. Sunoco competes with a number of other domestic refiners and marketers in the northeasternUnited States and U.S. Gulf Coast, with foreign refiners who import products into the United States and with producers and marketers in other industriessupplying other forms of energy and fuels to consumers. While the number of Sunoco’s competitors has decreased due to consolidation in the refining andmarketing industry, the competitiveness in the marketplace has not declined.

Profitability in the refining and marketing industry depends largely on refined product margins, which can fluctuate significantly, as well as operatingefficiency, product mix, and costs of product distribution and transportation. Certain of Sunoco’s competitors that have larger and more complex refineries maybe able to realize lower per barrel costs or higher margins per barrel of throughput. Several of Sunoco’s principal competitors are integrated national orinternational oil companies that are larger and have substantially greater resources than Sunoco. Because of their integrated operations and larger capitalization,these companies may be more flexible in responding to volatile industry or market conditions, such as shortages of feedstocks or intense price fluctuations.Refining margins are frequently impacted by sharp changes in crude oil costs, which may not be immediately reflected in product prices.

The refining industry is highly competitive with respect to feedstock supply. Unlike certain of its competitors that have access to proprietary sources ofcontrolled crude oil production, Sunoco must obtain all of its feedstocks from unaffiliated sources. Most of the crude oils processed in Sunoco’s refining systemare light sweet crude oils. However, management believes that any potential competitive impact of Sunoco’s inability to process significant quantities of lessexpensive heavy sour crude oils will likely be mitigated by: the higher−value product slate obtained from light sweet crude oils; the lower cost to process lightsweet crude oils; and the continued availability of ample quantities of light sweet crude oils.

Sunoco also faces strong competition in the market for the sale of retail gasoline and merchandise. Sunoco’s competitors include service stations of largeintegrated oil companies, independent gasoline service stations, convenience stores, fast food stores, and other similar retail outlets, some of which arewell−recognized national or regional retail systems. The number of competitors varies depending on the geographical area. It also varies with gasoline andconvenience store offerings. This competition is expected to continue. The principal competitive factors affecting Sunoco’s retail marketing operations include:site location, product price, selection and quality, appearance and cleanliness, hours of operation, store safety, customer loyalty and brand recognition.

Sunoco competes by pricing gasoline competitively, combining its retail gasoline business with convenience stores which provide a wide variety ofbranded products, and using advertising and promotional campaigns. Sunoco believes that it is in a position to compete effectively as a marketer of refinedproducts because of the location of its Northeast and Midwest refineries and retail network which are well integrated with the distribution system owned bySunoco Logistics Partners L.P., the Company’s 75.3 percent owned master limited partnership.

Sunoco’s chemical business is largely a commodities business and competes with local, regional, national and international companies, some of whichhave greater financial, research and development, production and other resources than Sunoco. Although competitive factors may vary among product lines, ingeneral, Sunoco’s competitive position is primarily based on raw material costs, selling prices, product quality, manufacturing technology, access to newmarkets, proximity to the market and

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customer service and support. Sunoco’s competitors can be expected in the future to improve technologies, expand capacity, and, in certain product lines,develop and introduce new products. While there can be no assurances of its ability to do so, Sunoco believes that it will have sufficient resources to maintain itscurrent position. Sunoco faces similarly strong competition in the sale of base oil lubricant products.

Logistics operations are very competitive. Generally, pipelines are the lowest cost method for long−haul, overland movement of crude oil and refinedproducts. Therefore, the most significant competitors for large volume shipments in the areas served by the Partnership’s pipelines are other pipelines. However,high capital requirements, environmental considerations and the difficulty in acquiring rights−of−way and related permits make it difficult for other companies tobuild competing pipelines in areas served by the Partnership’s pipelines. As a result, competing pipelines are likely to be built only in those cases in which strongmarket demand and attractive tariff rates support additional capacity in an area. In addition, pipeline operations face competition from trucks that deliver productin a number of areas that the Partnership’s pipeline operations serve. While their costs may not be competitive for longer hauls or large volume shipments, truckscompete effectively for incremental and marginal volumes in many areas served by the Partnership’s pipelines. The Partnership’s terminals compete with otherindependent terminals in regards to price, versatility and services provided. The competition primarily comes from integrated petroleum companies, refining andmarketing companies, independent terminal companies and distribution companies with marketing and trading operations.

Cokemaking operations are also highly competitive. Current production from Sunoco’s cokemaking business is largely committed under long−termcontracts; therefore, competition mainly impacts its ability to obtain new contracts supporting development of additional production capacity, both in the UnitedStates and internationally. The principal competitive factors affecting Sunoco’s cokemaking business include coke quality and price, technology, reliability ofsupply, proximity to market, access to metallurgical coal, and environmental performance. Competitors include conventional chemical by−product coke ovenengineering and construction companies, other merchant coke producers and engineering companies that are attempting to develop heat−recovery cokemakingtechnology. Most of the world’s coke production capacity is owned by integrated steel companies, utilizing conventional chemical by−product coke oventechnology. The international merchant coke market is largely supplied by Chinese producers. Sunoco believes it is well−positioned to compete with other cokeproducers since its proven proprietary technology allows Sunoco to construct coke plants that, when compared to other proven technologies, are moreenvironmentally benign, produce consistently higher quality coke, are substantially less costly to build, and require significantly fewer workers.

Research and DevelopmentSunoco’s research and development activities are currently focused on applied research, process and product development, and engineering and technical

services related to chemicals. Sunoco spent $14, $13 and $13 million on research and development activities in 2003, 2002 and 2001, respectively. As ofDecember 31, 2003, approximately 95 scientists, engineers, technicians and support personnel participated in these activities. Sunoco owns or has madeapplication for numerous patents in the United States.

EmployeesAs of December 31, 2003, Sunoco had approximately 14,900 employees compared to approximately 14,000 employees as of December 31, 2002. The

increase in 2003 is primarily attributable to the acquisition of the Speedway service stations. Approximately 7,500 of Sunoco’s employees as of December 31,2003 were employed in Company−operated convenience stores and service stations and the Company’s heating products business. Approximately 20 percent ofSunoco’s employees were

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covered by 48 collective bargaining agreements as of December 31, 2003. The collective bargaining agreements have various terms and dates of expiration. Inmanagement’s opinion, Sunoco has a good relationship with its employees.

Environmental MattersSunoco is subject to extensive and frequently changing federal, state and local laws and regulations, including, but not limited to, those relating to the

discharge of materials into the environment or that otherwise deal with the protection of the environment, waste management and the characteristics andcomposition of fuels. As with the industry generally, compliance with existing and anticipated laws and regulations increases the overall cost of operatingSunoco’s businesses. These laws and regulations have required, and are expected to continue to require, Sunoco to make significant expenditures of both acapital and expense nature. For additional information regarding Sunoco’s environmental matters, see “Environmental Matters” in Management’s Discussion andAnalysis of Financial Condition and Results of Operations in the Company’s 2003 Annual Report to Shareholders.

ITEM 3. LEGAL PROCEEDINGSVarious lawsuits and governmental proceedings arising in the ordinary course of business are pending against the Company, as well as the lawsuits and

proceedings discussed below.

Administrative ProceedingsIn September 2003, Sunoco, Inc. (R&M), a subsidiary of Sunoco, Inc., received a proposed consent order from the New York Department of

Environmental Conservation seeking a penalty in excess of $100,000 for alleged violations of the New York State Navigation Law and violations of reportingrequirements in connection with alleged underground storage tank releases in Fort Montgomery, NY. (Please refer to the Company’s Quarterly Report on Form10−Q for the quarterly period ended September 30, 2003.) In February 2004, a settlement was reached pursuant to which Sunoco paid a civil penalty of $75,000.However, an additional $75,000 penalty was suspended, provided that there are no further violations of law or the consent order.

In December 2003, Sunoco, Inc. (R&M) received two Citations from the Occupational Safety and Health Administration (“OSHA”) relating to its LaPorte, TX chemical plant and paid a total penalty of $175,000. The Citations resulted from a hexane fire at the plant on June 18, 2003 during which an employeewas burned.

In December 2003, Mohawk Valley Oil Company, a division of Sunoco, Inc. (R&M), received a Notice of Opportunity related to an Enforcement Actionfrom the U.S. Environmental Protection Agency (the “U.S. EPA”), Region II, for alleged violations of SARA Title III reporting requirements. The U.S. EPA isseeking a penalty in excess of $100,000.

In January 2004, Sunoco, Inc. and one of its independent dealers received an administrative order and notice of civil administration penalty assessmentfrom the New Jersey Department of Environmental Protection (the “N.J. DEP”) relating to a service station location in Towaco, NJ. The location was formerlyowned by Sunoco and sold to the dealer. The N.J. DEP alleges failure to remediate discharges at the site and failure to submit and implement a remedial actionwork plan addendum for this site. The N.J. DEP is seeking a civil penalty in excess of $100,000.

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MTBE LitigationSunoco is a defendant in cases in several lawsuits pending in 17 states. The lawsuits are substantially identical and involve the manufacture and use of

MTBE and MTBE contamination in groundwater. Several other refiners and suppliers of gasoline are defendants in some or all of these cases. The cases includethe following:

Town of Duxbury, et al. v. Sunoco, et al. (U.S. D. C., District of Massachusetts, E. D.) was served in December 2003. Sunoco is one of several defendantswhich include manufacturers, refiners, formulators, distributors, suppliers, sellers and/or marketers of MTBE and/or gasoline containing MTBE. This casealleges product liability/defective product, public and private nuisance, failure to warn, negligence, trespass, civil conspiracy, and violation of the MassachusettsOil and Hazardous Material Release Prevention and Response Act. Plaintiffs seek injunctive relief, compensatory and punitive damages, and interest and costs.

County of Nassau v. Sunoco, et al. (Supreme Court of the State of New York, County of New York), was served in October 2003. Sunoco is one of severaldefendants which include manufacturers, refiners, formulators, distributors, suppliers, sellers and/or marketers of MTBE and/or gasoline containing MTBE. Thecase alleges product liability/defective product, nuisance, failure to warn, negligence, deceptive business acts and practices, and violation of the New York StateNavigation Law. Plaintiffs seek compensatory and punitive damages.

Long Island Water Corporation v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau), was served in October 2003. Sunoco is oneof several defendants which include manufacturers, refiners, formulators, distributors, suppliers, sellers and/or marketers of MTBE and/or gasoline containingMTBE. The case alleges product liability/defective product, nuisance, failure to warn, negligence, deceptive business acts and practices, and violation of the NewYork State Navigation Law. Plaintiffs seek compensatory and punitive damages.

Water Authority of Great Neck North v. Sunoco, et al. (Supreme Court of the State of New York, County of Nassau), was served in November 2003.Sunoco is one of several defendants which include manufacturers, refiners, formulators, distributors, suppliers, sellers and/or marketers of MTBE and/or gasolinecontaining MTBE. The case alleges product liability/defective product, nuisance, failure to warn, negligence, deceptive business acts and practices, and violationof the New York State Navigation Law. Plaintiffs seek compensatory and punitive damages and costs.

Water Authority of Western Nassau County v. Sunoco, et al. (Supreme Court of the State of New York, County of New York), was served in November2003. Sunoco is one of several defendants which include manufacturers, refiners, formulators, distributors, suppliers, sellers and/or marketers of MTBE and/orgasoline containing MTBE. The case alleges product liability/defective product, nuisance, failure to warn, negligence, deceptive business acts and practices, andviolation of the New York State Navigation Law. Plaintiffs seek compensatory and punitive damages.

Escambia County Utilities Authority v. Sunoco, Inc., et al (Florida Circuit Court for Escambia County), was served in November 2003. Sunoco is one ofseveral defendants which include manufacturers, refiners, formulators, distributors, suppliers, sellers and/or marketers of MTBE and/or gasoline containingMTBE. The case alleges product liability/defective product, nuisance, failure to warn, and negligence. Plaintiffs seek compensatory and punitive damages,interest and costs.

Abrevaya, et al v. Sunoco, et al (Supreme Court of the State of New York, County of Orange), was served in November 2003 by residential and commercialproperty owners, and lessees in the Town of Highlands Hamlet in Fort Montgomery, NY. Sunoco is one of several defendants which include MTBEmanufacturers and distributors and owners/operators of gasoline service stations. This case alleges product liability/defective product, nuisance, trespass,interference with the right to appropriate water, unfair competition, outrageous conduct causing the infliction of emotional distress, violation of

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the New York State Navigation Law, and negligence. Plaintiffs seek declaratory relief; declaratory judgment requiring a testing and monitoring program and anindependent water source; compensatory damages and exemplary damages; and remediation costs for abatement of MTBE.

The defendants in most of the above MTBE cases have removed the cases to federal courts and will attempt to have the cases consolidated by the JudicialPanel on Multidistrict Litigation. Plaintiffs have moved to remand the cases to state court. A hearing has been held and a decision is pending.

Up to this point, for the group of MTBE cases currently pending, there has been little information developed about the plaintiffs’ legal theories or the factsthat would be relevant to an analysis of potential exposure. Based on the current law and facts available at this time, Sunoco believes that these cases will nothave a material adverse effect on its consolidated financial position.

Many other legal and administrative proceedings are pending or possible against Sunoco from its current and past operations, including proceedingsrelated to commercial and tax disputes, product liability, antitrust, employment claims, leaks from pipelines and underground storage tanks, natural resourcedamage claims, premises−liability claims, allegations of exposures of third parties to toxic substances (such as benzene or asbestos) and general environmentalclaims. Although the ultimate outcome of these proceedings cannot be ascertained at this time, it is reasonably possible that some of them could be resolvedunfavorably to Sunoco. Management of Sunoco believes that any liabilities that may arise from such proceedings would not be material in relation to Sunoco’sbusiness or consolidated financial position at December 31, 2003.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone.

Executive Officers of Sunoco, Inc.

Name, Age and PresentPosition with Sunoco, Inc. Business Experience During Past Five Years

Terence P. Delaney, 48Vice President,Investor Relationsand Planning

Mr. Delaney was elected to his present position in January 2003. He was Director, Investor Relationsand Strategic Planning from April 2000 to January 2003. From September 1995 to April 2000, heserved as Manager, Investor Relations.

Michael H.R. Dingus, 55Senior Vice President,Sunoco, Inc., andPresident, Sun Coke Company

Mr. Dingus was elected Senior Vice President, Sunoco, Inc. in January 2002. He was elected a VicePresident of Sunoco, Inc. in May 1999 and President, Sun Coke Company in June 1996.

John G. Drosdick, 60Chairman, ChiefExecutive Officerand President

Mr. Drosdick was elected Chairman and Chief Executive Officer in May 2000. He was elected aDirector and President and Chief Operating Officer in December 1996.

Bruce G. Fischer, 48Senior Vice President,Sunoco Chemicals

Mr. Fischer was elected to his present position in January 2002. He was Vice President, SunocoChemicals from November 2000 to January 2002, Vice President and General Manager, SunocoMidAmerica Marketing & Refining from January 1999 to November 2000 and General Manager,Sunoco MidAmerica Marketing & Refining from June 1995 to January 1999.

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Name, Age and PresentPosition with Sunoco, Inc. Business Experience During Past Five Years

Thomas W. Hofmann, 52Senior Vice Presidentand Chief FinancialOfficer

Mr. Hofmann was elected to his present position in January 2002. He was Vice President and ChiefFinancial Officer from July 1998 to January 2002.

Joseph P. Krott, 40Comptroller

Mr. Krott was elected to his present position in July 1998.

Michael S. Kuritzkes, 43Senior Vice Presidentand General Counsel

Mr. Kuritzkes was elected to his present position in January 2003. He was Vice President andGeneral Counsel from May 2000 to January 2003. From August 1997 to May 2000, he served asGeneral Attorney.

Joel H. Maness, 53Senior Vice President,Refining and Supply

Mr. Maness was elected to his present position in September 2001. He was Senior Vice President,Sunoco Northeast Refining from May 2000 to September 2001. From January 2000 to April 2000, heserved as Manager, Safety, Health and Environment for the global downstream business of the newlyformed ExxonMobil Corporation. He was President of Mobil de Venezuela, a subsidiary of Mobil,from July 1997 to December 1999.

Paul A. Mulholland, 51Treasurer

Mr. Mulholland was elected to his present position in April 2000. From May 1996 to April 2000, heserved as Assistant Treasurer.

Rolf D. Naku, 53Senior Vice President,Human Resources andPublic Affairs

Mr. Naku was elected to his present position in January 2003. He was Vice President, HumanResources and Public Affairs from May 2000 to January 2003. From July 1998 to May 2000, heserved as Director of Compensation, Benefits & HR Systems.

Robert W. Owens, 50Senior Vice President,Marketing

Mr. Owens was elected to his present position in September 2001. He was Senior Vice President,Sunoco Northeast Marketing from May 2000 to September 2001 and Vice President and GeneralManager, Sunoco Northeast Marketing from February 1997 to May 2000.

Charles K. Valutas, 53Senior VicePresident and ChiefAdministrative Officer

Mr. Valutas was elected to his present position in May 2000. He was Vice President, SunocoChemicals from August 1994 to May 2000.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSThe information required by this Item is incorporated herein by reference to the Quarterly Financial and Stock Market Information on page 69 of the

Company’s 2003 Annual Report to Shareholders.

ITEM 6. SELECTED FINANCIAL DATAThe information required by this Item is incorporated herein by reference to the Selected Financial Data on page 10 of the Company’s 2003 Annual Report

to Shareholders.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe information required by this Item is incorporated herein by reference to pages 11−39 in the Company’s 2003 Annual Report to Shareholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe information required by this Item is incorporated herein by reference to Derivative Instruments on page 33 in the Company’s 2003 Annual Report to

Shareholders.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe following information in the Company’s 2003 Annual Report to Shareholders is incorporated herein by reference: the Consolidated Financial

Statements on pages 40−43; the Notes to Consolidated Financial Statements on pages 44−66; the Report of Independent Auditors on page 67; and the QuarterlyFinancial and Stock Market Information on page 69.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURESAs required by Rule 13a−15 under the Exchange Act, as of the end of the period covered by this report, the Company carried out an evaluation of the

effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was carried out under the supervision and withthe participation of the Company’s management, including the Company’s Chairman, Chief Executive Officer and President and the Company’s Senior VicePresident and Chief Financial Officer. Based upon that evaluation, the Company’s Chairman, Chief Executive Officer and President and the Company’s SeniorVice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There have been no changes in theCompany’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. However, in order to enhance its internal controls, during 2003, the Company centralized certainaccounting functions previously performed by business unit personnel into corporate accounting.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under theExchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Companyreports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chairman, Chief Executive Officer andPresident and the Company’s Senior Vice President and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe information on directors required by Item 401 of Regulation S−K appearing under the heading “Nominees for the Board of Directors” and the section

entitled “Board and Committee Membership,” under the heading “Governance of the Company,” and the information required by Item 405 of

22

Regulation S−K appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement (“ProxyStatement”), which will be filed with the Securities and Exchange Commission (“SEC”) within 120 days after December 31, 2003, is incorporated herein byreference.

Information concerning the Company’s executive officers appears in Part I of this Annual Report on Form 10−K.

Sunoco, Inc. has adopted a Code of Business Conduct and Ethics (the “Code”) effective April 1, 2003 which applies to all officers, directors andemployees and includes the Code of Ethics for the chief executive officer, the principal financial officer, the principal accounting officer and persons performingsimilar functions. A copy of the Code can be found on Sunoco’s website (www.SunocoInc.com). Sunoco intends to disclose on its website the nature of anyfuture amendments to and waivers of the Code of Ethics that apply to the chief executive officer, the principal financial officer, the principal accounting officeror persons performing similar functions.

Sunoco’s Corporate Governance Guidelines and the Charters of its Audit, Compensation, Executive, Governance, and Public Affairs Committees areavailable on its website (www.SunocoInc.com), and are also available in printed form upon request.

ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 402 of Regulation S−K appearing under the heading “Executive Compensation,” including the sections entitled

“Summary Compensation Table,” “Aggregated Option/SAR Exercises and Year−End Values,” “Option Grant Table,” and “Other Long−Term IncentiveAwards,” and under the headings “Pension Plans,” “Severance Plans,” and “Directors’ Compensation,” in the Company’s Proxy Statement, which will be filedwith the SEC within 120 days after December 31, 2003, is incorporated herein by reference, except that the Report of the Compensation Committee and theStock 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 AND RELATEDSTOCKHOLDER MATTERS

The information required by Item 403 of Regulation S−K appearing under the heading “Directors’ and Officers’ Ownership of Sunoco Stock” in theCompany’s Proxy Statement and the information required by Item 201(d) of Regulation S−K appearing in the section entitled “Equity Compensation PlanInformation” under the heading “Governance of the Company” in the Company’s Proxy Statement, which will be filed with the SEC within 120 days afterDecember 31, 2003, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThe information required by Item 404 of Regulation S−K appearing in the section entitled “Certain Relationships and Related Transactions” under the

heading “Other Governance Matters” in the Company’s Proxy Statement, which will be filed with the SEC within 120 days after December 31, 2003, isincorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Item 9(e) of Schedule 14A appearing in the section entitled “Item 2. Ratification of the Appointment of Ernst & Young LLP

as Independent Auditors for the Fiscal Year 2004” under the heading “Proposals on Which You May Vote” in the Company’s Proxy Statement, which will befiled with the SEC within 120 days after December 31, 2003, is incorporated herein by reference.

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PART IV

ITEM 15. 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 2003 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 30 of this Form 10−K. Other schedules are omitted because the required information is shown

elsewhere in this report, is not necessary or is not applicable.

3. Exhibits:

3.(i) —Articles of Incorporation of Sunoco, Inc., as amended and restated effective as of November 6, 1998 (incorporated byreference to Exhibit 3.(i) of the Company’s 1998 Form 10−K filed March 5, 1999, File No. 1−6841).

3.(ii) —Sunoco, Inc. Bylaws, as amended and restated effective as of March 7, 2002 (incorporated by reference to Exhibit 3.(ii) ofthe Company’s 2001 Form 10−K filed March 7, 2002, 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 filedsince the total amount of securities authorized under each such instrument does not exceed 10 percent of the total assets of theCompany and its subsidiaries on a consolidated basis. The Company will provide the SEC a copy of any instruments definingthe rights of holders of long−term debt of the Company and its subsidiaries upon request.

4.2 —Fifth Amendment to Rights Agreement dated as of July 3, 2003 between Sunoco, Inc. and First Chicago Trust Company ofNew York (predecessor to EquiServe Trust Company, N.A.) (incorporated by reference to Exhibit 4.7 of the Company’s Form8−A/A filed July 11, 2003, File No. 1−6841).

4.3 —Fourth Amendment to Rights Agreement dated as of September 6, 2001 between Sunoco, Inc. and First Chicago TrustCompany of New York (predecessor to EquiServe Trust Company, N.A.) (incorporated by reference to Exhibit 4.6 of theCompany’s Form 8−A/A filed October 5, 2001, File No. 1−6841).

4.4 —Third Amendment to Rights Agreement dated as of July 6, 2001 between Sunoco, Inc. and First Chicago Trust Company ofNew York (predecessor to EquiServe Trust Company, N.A.) (incorporated by reference to Exhibit 4 of the Company’sQuarterly Report on Form 10−Q for the quarterly period ended June 30, 2001 filed on August 8, 2001, File No. 1−6841).

4.5 —Second Amendment to Rights Agreement dated as of February 3, 2000 between Sunoco, Inc. and First Chicago TrustCompany of New York (predecessor to EquiServe Trust Company, N.A.) (incorporated by reference to Exhibit 4.4 of theCompany’s Form 8−A/A filed February 7, 2000, File No. 1−6841).

24

4.6 —Amendment to Rights Agreement dated as of July 3, 1997 between Sunoco, Inc. and First Chicago Trust Company of New York(predecessor to EquiServe Trust Company, N.A.) (incorporated by reference to Exhibit 4 of the Company’s Current Report on Form 8−Kdated July 8, 1997, File No. 1−6841).

4.7 —Rights Agreement between Sunoco, Inc. and First Chicago Trust Company of New York (predecessor to EquiServe Trust Company, N.A.)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* —Sunoco, Inc. Long−Term Performance Enhancement Plan, as amended and restated as of December 3, 2003.

10.2* —Sunoco, Inc. Long−Term Performance Enhancement Plan II, as amended and restated as of December 3, 2003.

10.3* —Sunoco, Inc. Executive Long−Term Stock Investment Plan, as amended February 5, 2003 (incorporated by reference to Exhibit 10.3 of theCompany’s 2002 Form 10−K filed March 7, 2003, File No. 1−6841).

10.4* —Sunoco, Inc. Directors’ Deferred Compensation Plan, as amended and restated as of September 6, 2001 (incorporated by reference to Exhibit10.4 of the Company’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841).

10.5* —Sunoco, Inc. Deferred Compensation Plan, as amended and restated as of September 6, 2001 (incorporated by reference to Exhibit 10.5 ofthe Company’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841).

10.6* —Sunoco, Inc. Pension Restoration Plan, as amended and restated effective February 1, 1996 (incorporated by reference to Exhibit 10.5 of theCompany’s 1995 Form 10−K filed March 7, 1996, File No. 1−6841) and as amended effective September 1, 1997 (incorporated by referenceto Exhibit 10.6 of the Company’s 1997 Form 10−K filed March 6, 1998, File No. 1−6841).

10.7* —Sunoco, Inc. Savings Restoration Plan, as amended and restated as of September 6, 2001 (incorporated by reference to Exhibit 10.6 of theCompany’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841) and as amended effective January 1, 2003 (incorporatedby reference to Exhibit 10 of the Company’s Quarterly Report on Form 10−Q for the quarterly period ended March 31, 2003 filed on May 14,2003, File No. 1−6841).

10.8* —Sunoco, Inc. Executive Incentive Plan, as amended and restated as of September 6, 2001 (incorporated by reference to Exhibit 10.7 of theCompany’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841).

10.9* —Sunoco, Inc. Executive Retirement Plan, as amended and restated as of January 1, 2003 (incorporated by reference to Exhibit 10.9 of theCompany’s 2002 Form 10−K filed March 7, 2003, File No. 1−6841).

10.10* —Sunoco, Inc. Special Executive Severance Plan, as amended and restated as of February 6, 2003 (incorporated by reference to Exhibit 10.10of the Company’s 2002 Form 10−K filed March 7, 2003, File No. 1−6841).

10.11* —Sunoco, Inc. Executive Involuntary Severance Plan, as amended and restated as of September 6, 2001 (incorporated by reference to Exhibit10.10 of the Company’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841).

10.12* —Sunoco, Inc. Retainer Stock Plan for Outside Directors, as amended May 1, 2003 (incorporated by reference to Exhibit 10.2 of theCompany’s Quarterly Report on Form 10−Q for the quarterly period ended June 30, 2003 filed on August 7, 2003, File No. 1−6841).

25

10.13* —Amended Schedule to the Form of Indemnification Agreement, individually entered into between Sunoco, Inc. and various directors, officersand other key employees of the Company. The Form of Indemnification Agreement is incorporated by reference to Exhibit 10.11 of theCompany’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841.

10.14* —Directors’ Deferred Compensation and Benefits Trust Agreement, by and among Sunoco, Inc., Bankers Trust Company and Towers, Perrin,Forster & Crosby, Inc., dated as of January 11, 1999 and amended and restated as of September 6, 2001 (incorporated by reference to Exhibit10.12 of the Company’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841).

10.15* —Amended Schedule 2.1 to the Directors’ Deferred Compensation and Benefits Trust Agreement.

10.16* —Deferred Compensation and Benefits Trust Agreement, by and among Sunoco, Inc., Bankers Trust Company, and Towers, Perrin, Forster, &Crosby, Inc., dated as of January 11, 1999 and amended and restated as of September 6, 2001 (incorporated by reference to Exhibit 10.13 ofthe Company’s Current Report on Form 8−K dated December 21, 2001, File No. 1−6841). The Amended Schedule 2.1 to the DeferredCompensation and Benefits Trust Agreement is incorporated by reference to Exhibit 10.17 of the Company’s 2001 Form 10−K filed March 7,2002, File No. 1−6841.

10.17* —Letter Agreement dated October 21, 2002 appointing Boston Safe Deposit and Trust Company as successor Trustee under each of theDirectors’ Deferred Compensation and Benefits Trust Agreement, and the Deferred Compensation and Benefits Trust Agreement(incorporated by reference to Exhibit 10.16 of the Company’s 2002 Form 10−K filed March 7, 2003, File No. 1−6841).

10.18 —Sunoco, Inc. Employee Option Plan, as amended and restated as of November 1, 2000 (incorporated by reference to Exhibit 10.17 of theCompany’s 2002 Form 10−K filed March 7, 2003, File No. 1−6841).

10.19 —$400,000,000 Amended and Restated Credit Agreement dated as of July 21, 2003 (amending and restating the 364−Day Credit Agreementdated as of July 22, 2002, as amended) among Sunoco, Inc. and JPMorgan Chase Bank, Banc of America Securities LLC, The Bank ofTokyo—Mitsubishi Trust Company, Bank of Nova Scotia and Barclays Bank PLC, and other Lenders thereto (incorporated by reference toExhibit 10 of the Company’s Quarterly Report on Form 10−Q for the quarterly period ended September 30, 2003 filed on November 6, 2003,File No. 1−6841).

10.20 —$385,000,000 Three−Year Competitive Advance and Revolving Credit Facility Agreement dated as of July 22, 2002, among Sunoco, Inc.and JPMorgan Chase Bank, Banc of America Securities LLC, Bank of Nova Scotia and The Bank of Tokyo—Mitsubishi Trust Company(incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10−Q for the quarterly period ended June 30, 2002filed on August 7, 2002, File No. 1−6841).

10.21 —Omnibus Agreement, dated as of February 8, 2002, among Sunoco, Inc., Sunoco, Inc. (R&M), Sunoco Pipe Line Company of Delaware,Atlantic Petroleum Corporation, Sunoco Texas Pipe Line Company, Sun Pipe Line Services (Out) LLC, Sunoco Logistics Partners L.P.,Sunoco Logistics Partners Operations L.P., and Sunoco Partners LLC (incorporated by reference to Exhibit 10.5 of the 2001 Form 10−K filedby Sunoco Logistics Partners L.P. on April 1, 2002, File No. 1−31219).

26

10.22 —Pipelines and Terminals Storage and Throughput Agreement, dated as of February 8, 2002, among Sunoco, Inc. (R&M), Sunoco LogisticsPartners L.P., Sunoco Logistics Partners Operations L.P., Sunoco Partners LLC, Sunoco Partners Marketing & Terminals L.P., SunocoPipeline L.P., Sunoco Logistics Partners GP LLC, and Sunoco Logistics Partners Operations GP LLC (incorporated by reference to Exhibit10.6 of the 2001 Form 10−K filed by Sunoco Logistics Partners L.P. on April 1, 2002, File No. 1−31219).

10.23 —Asset Sale Agreement dated December 22, 2003 by and among Coastal Eagle Point Oil Company, Coastal Pipeline Company, and El PasoMerchant Energy−Petroleum Company, as Sellers, and Sunoco, Inc. (R&M) as the Buyer (incorporated by reference to Exhibit 2.1 of theCompany’s Current Report on Form 8−K dated January 28, 2004, File No. 1−6841).

12 —Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges for the Year Ended December 31, 2003.

13 —Sunoco, Inc. 2003 Annual Report to Shareholders Financial Section.

14 —Sunoco, Inc. Code of Business Conduct and Ethics (incorporated by reference to Exhibit 99.3 of the Company’s 2002 Form 10−K filedMarch 7, 2003, File No. 1−6841).

21 —Subsidiaries of Sunoco, Inc.

23 —Consent of Ernst & Young LLP.

24.1 —Power of Attorney executed by certain officers and directors of Sunoco, Inc.

24.2 —Certified copy of the resolution authorizing certain officers to sign on behalf of Sunoco, Inc.

31.1 —Certification Pursuant to Section 302 of the Sarbanes−Oxley Act of 2002.

31.2 —Certification Pursuant to Section 302 of the Sarbanes−Oxley Act of 2002.

32.1 —Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes−Oxley Act of 2002.

32.2 —Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes−Oxley Act of 2002.

*These exhibits constitute the Executive Compensation Plans and Arrangements of the Company.

27

(b) Reports on Form 8−K:

On October 23, 2003, the Company furnished under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 12 –“Results of Operations and Financial Condition” of Form 8−K, a copy of its earnings press release for the third quarter of 2003 that was issued on October 23,2003. In this Form 8−K, the Company also furnished under Item 7 and Item 9 – “Regulation FD Disclosure” additional information concerning the Company’sthird quarter earnings that was presented to investors in a teleconference call on October 23, 2003.

On January 14, 2004, the Company furnished under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 9 –“Regulation FD Disclosure” of Form 8−K a copy of its press release issued January 13, 2004, which included an announcement that it had closed its previouslyannounced acquisition of the Eagle Point refinery in Westville, NJ from El Paso Corporation. The Company also furnished under these Items additionalinformation concerning this acquisition that was presented to investors in a teleconference call on January 14, 2004. In this Form 8−K, the Company alsofurnished under Item 7 and Item 12 – “Results of Operations and Financial Condition” a copy of its press release issued January 13, 2004, which included anannouncement of certain projected financial results for its 2003 fourth quarter.

On January 22, 2004, the Company furnished under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 12 –“Results of Operations and Financial Condition” of Form 8−K, a copy of its earnings press release for the fourth quarter of 2003 that was issued on January 22,2004. In this Form 8−K, the Company also furnished under Item 7 and Item 9 – “Regulation FD Disclosure” additional information concerning the Company’sfourth quarter earnings that was presented to investors in a teleconference call on January 22, 2004.

On January 28, 2004, the Company filed a Form 8−K to provide under Item 2 – “Acquisition or Disposition of Assets” a brief description of theacquisition of the Eagle Point refinery, which was completed effective January 13, 2004. Since it was impracticable to provide the financial statements requiredby Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” at the time of this filing, the required financial statements will be filed byamendment as soon as practicable, but in any event not later than March 29, 2004.

On February 6, 2004, the Company furnished under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 9 –“Regulation FD Disclosure” of Form 8−K information that was presented to certain investors by Sunoco executives at the Credit Suisse First Boston 2004Energy Summit held on February 6, 2004.

Note: Copies of each Exhibit to this Form 10−K are available upon request.

28

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 signedon its behalf by the undersigned, thereunto duly authorized.

SUNOCO, INC.

By /s/ THOMAS W. HOFMANN

Thomas W. HofmannSenior Vice President and Chief Financial Officer

Date March 4, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by or on behalf of the following personson behalf of the registrant and in the capacities indicated on March 4, 2004:

ROBERT J. DARNALL*

Robert J. Darnall, Director

ROBERT D. KENNEDY*

Robert D. Kennedy, Director

JOSEPH P. KROTT*

Joseph P. Krott, Comptroller(Principal Accounting Officer)

RICHARD H. LENNY*

Richard H. Lenny, Director

NORMAN S. MATTHEWS*

Norman S. Matthews, Director

R. ANDERSON PEW*

R. Anderson Pew, Director

G. JACKSON RATCLIFFE*

G. Jackson Ratcliffe, Director

JOHN W. ROWE*

John W. Rowe, Director

JOHN G. DROSDICK*

John G. Drosdick, Chairman,Chief Executive Officer,President and Director(Principal Executive Officer)URSULA F. FAIRBAIRN*

Ursula F. Fairbairn, DirectorTHOMAS P. GERRITY*

Thomas P. Gerrity, DirectorROSEMARIE B. GRECO*

Rosemarie B. Greco, DirectorTHOMAS W. HOFMANN*

Thomas W. Hofmann, Senior VicePresident and Chief Financial Officer(Principal Financial Officer)

JAMES G. KAISER*

James G. Kaiser, Director*By /s/ THOMAS W. HOFMANN

Thomas W. HofmannIndividually and asAttorney−in−Fact

29

SUNOCO, INC. AND SUBSIDIARIESSCHEDULE II—VALUATION ACCOUNTS

For the Years Ended December 31, 2003, 2002, and 2001(Millions of Dollars)

Balance atBeginningof Period

Additions

Deductions

Balanceat End

of Period

Charged toCostsand

Expenses

Chargedto

OtherAccounts

For the year ended December 31, 2003:Deducted from asset in balance sheet—allowance for doubtful accounts and notes receivable $ 11 $ 5 $ — $ 11 $ 5

For the year ended December 31, 2002:Deducted from asset in balance sheet—allowance for doubtful accounts and notes receivable $ 7 $10 $ — $ 6 $ 11

For the year ended December 31, 2001:Deducted from asset in balance sheet—allowance for doubtful accounts and notes receivable $ 8 $ 7 $ — $ 8 $ 7

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Exhibit 10.1

SUNOCO, INC.LONG−TERM PERFORMANCE ENHANCEMENT PLAN

(Amended and Restated as of December 3, 2003)

1

ARTICLE I

Definitions

As used in this Plan, the following terms shall have the meanings herein specified:1.1 Affiliate − shall mean any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control

with Sunoco, Inc.

1.2 Board of Directors − shall mean the Board of Directors of Sunoco, Inc.

1.3 Business Combination − shall have the meaning provided herein at Section 1.4(c).

1.4 Change in Control − shall mean the occurrence of any of the following events:(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of

beneficial ownership (within the meaning of Rule 13d−3 promulgated under the Exchange Act) of 20% or more of either (1) the then−outstanding shares ofcommon stock of Sunoco, Inc. (the “Outstanding Company Common Stock”) or (2) the combined voting power of the then−outstanding voting securities ofSunoco, Inc. entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of thisSection (a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from Sunoco, Inc., (B) any acquisition by Sunoco,Inc., (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Sunoco, Inc. or any company controlled by, controlling orunder common control with Sunoco, Inc. or (D) any acquisition by any entity pursuant to a transaction that complies with Sections (c)(1), (c)(2) and (c)(3) of thisdefinition;

(b) Individuals who, as of September 6, 2001, constitute the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least amajority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination forelection by the shareholders of Sunoco, Inc., was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall beconsidered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption ofoffice occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation ofproxies or consents by or on behalf of a Person other than the Board of Directors;

(c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Sunoco, Inc., orany of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Sunoco, Inc., or the acquisition of assets or stock of another entity bySunoco, Inc. or any of its subsidiaries (each, a “Business

2

Combination”), in each case unless, following such Business Combination, (1) all or substantially all of the individuals and entities that were the beneficialowners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combinationbeneficially own, directly or indirectly, more than 60% of the then−outstanding shares of common stock and the combined voting power of the then−outstandingvoting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination(including, without limitation, a corporation that, as a result of such transaction, owns Sunoco, Inc. or all or substantially all of the assets of Sunoco, Inc., eitherdirectly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of theOutstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any corporation resultingfrom such Business Combination or any employee benefit plan (or related trust) of Sunoco, Inc. or such corporation resulting from such Business Combination orany of their respective subsidiaries) beneficially owns, directly or indirectly, 20% or more of, respectively, the then−outstanding shares of common stock of thecorporation resulting from such Business Combination or the combined voting power of the then−outstanding voting securities of such corporation, except to theextent that such ownership existed prior to the Business Combination, and (3) at least a majority of the members of the board of directors of the corporationresulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of theBoard of Directors providing for such Business Combination; or

(d) Approval by the shareholders of Sunoco, Inc., of a complete liquidation or dissolution of Sunoco, Inc.

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, as constituted from time to time. The Committeeshall 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 underSection 16 of the Exchange Act, and Section 162(m) of the Code.

1.7 Common Stock − shall mean the authorized and unissued or treasury shares of common stock of Sunoco, Inc.

1.8 Common Stock Units − shall have the meaning provided herein at Section 6.1.

1.9 Company − shall mean Sunoco, Inc., and any Affiliate.

1.10 CSU Payout Date − shall have the meaning provided herein at Section 6.9.

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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 disabilitybenefits under the applicable broad−based long−term disability program of the Company.

1.12 Dividend Equivalents − shall have the meaning provided herein at Section 6.3.

1.13 Dividend Equivalent Account − shall have the meaning provided herein at Section 6.3.

1.14 Employment Termination Date − shall mean the date on which the employment relationship between the Participant and the Company is terminated.

1.15 Exchange Act − shall mean the Securities Exchange Act of 1934, as amended.

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 CommonStock (which price shall be the closing price on the previous trading day of a share of Common Stock as published in the Wall Street Journal under the caption“New York Stock Exchange Composite Transactions” or any other publication selected by the Committee). If there is no sale of shares of Common Stock on theNew York Stock Exchange for more than ten (10) days immediately preceding such date, or if deemed appropriate by the Committee for any other reason, thefair 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 thefair market value of any share of Common Stock be less than its par value.

1.18 Incentive Stock Options − shall have the meaning provided herein at Article IV.

1.19 Incumbent Board − shall have the meaning provided herein at Section 1.4(b).

1.20 Just Cause − shall mean, for any Participant who is a participant in the Sunoco, Inc. Special Executive Severance Plan, “Just Cause” as defined insuch plan, and for any other Participant:

(a) the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company (other than any such failureresulting from incapacity due to physical or mental illness or following notice of employment termination by the Participant pursuant to Section 1.33), after awritten demand for substantial performance is delivered to the Participant by the Board of Directors or any employee of the Company with supervisory authorityover the Participant that specifically identifies the manner in which the Board of Directors or such supervising employee believes that the Participant has notsubstantially performed the Participant’s duties, or

(b) the willful engaging by the Participant in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company.

1.21 Limited Rights − shall have the meaning provided herein at Article V.

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1.22 Market Price − shall have the meaning provided herein at Section 5.4.

1.23 Option − shall mean Stock Option and/or Incentive Stock Option.

1.24 Option Price − shall mean the purchase price per share of Common Stock deliverable upon the exercise of an Option.

1.25 Optionee − shall mean the holder of an Option.

1.26 Outstanding Company Common Stock − shall have the meaning provided herein at Section 1.4(a).

1.27 Outstanding Company Voting Securities − shall have the meaning provided herein at Section 1.4(a).

1.28 Participant − shall have the meaning provided herein at Section 2.4(a).

1.29 Performance Factors − shall mean the various payout percentages related to the attainment levels of one or more Performance Goals, as determinedby the Committee.

1.30 Performance Goals − shall mean the specific targeted amounts of, or changes in, financial or operating goals including: revenues; expenses; netincome; operating income; equity; return on equity, assets or capital employed; working capital; shareholder return; operating capacity utilized; production orsales volumes; or throughput. Other financial or operating goals may also be used as determined by the Committee. Such goals may be applicable to theCompany 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 orrelative to other companies, industries or indices or any combination thereof, as determined by the Committee.

1.31 Performance Period − shall have the meaning provided herein at Section 6.4.

1.32 Person − shall have the meaning provided herein at Section 1.4(a).

1.33 Qualifying Termination − shall mean, with respect to the employment of any Participant who is a participant in the Sunoco, Inc. Special ExecutiveSeverance Plan, a “Qualifying Termination” as defined in such plan, and with respect to the employment of any other 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 significantly adverse to such Participant, with such Participant’spositions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a significant reduction in the dutiesand responsibilities held by the Participant

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immediately prior to the Change in Control, in each case except in connection with such Participant’s termination of employment by the Companyfor Just Cause; or

(2) a reduction by the Company in the Participant’s combined annual base salary and guideline (target) bonus as in effect immediately prior tothe Change in Control; or

(3) the Company requires the Participant to be based anywhere other than the Participant’s present work location or a location withinthirty−five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantiallymore burdensome than such Participant’s travel obligations during the period of twelve (12) consecutive months immediately preceding the Changein Control;

provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not bedeemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason forthe termination; or

(c) before a Change in Control, a termination of employment by the Company, other than a termination for Just Cause, or a termination ofemployment by the Participant for one of the reasons set forth in (b) above, if the affected Participant can demonstrate that such termination orcircumstance in (b) above leading to the termination:

(1) was at the request of a third party with which Sunoco, Inc. had entered into negotiations or an agreement with regard to a Change inControl; or

(2) otherwise occurred in connection with a Change in Control;provided, however, that in either such case, a Change in Control actually occurs within one (1) year following the Employment Termination Date.1.34 Stock Options − shall have the meaning provided herein at Section 3.1.

1.35 Sunoco, Inc. − shall mean Sunoco, Inc., a Pennsylvania corporation, and any successor thereto by merger, consolidation, liquidation or purchase ofassets or stock or similar transaction.

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 Sunoco, Inc. Executive Long−Term Stock Investment Planadopted 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 Sunoco, 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;

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(b) provide management with the ability to increase equity ownership in Sunoco, 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 will become effective upon approval by the holders of a majority of the votes present, in person or represented by proxy, atthe 1997 Annual Meeting of Shareholders of Sunoco, Inc.. No awards will be made under the Plan after December 31, 2001, unless the Board of Directorsextends 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 ineffect 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 ofthe 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 managerialor professional positions and

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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 andpotential 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 ofCommon 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 CommonStock 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 paymentfor 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 orpartial 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 becounted.

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 sharesequal 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 aParticipant 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 anOption, 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 arenot 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.

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(f) The maximum number of Common Stock Units granted under the Plan will be one million.

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 theCommittee 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 allotsa 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 theholder 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 mayfrom 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 theFair 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, except as otherwiseprovided in Section 3.10, no Stock Option may be exercisable before the second anniversary of the date of grant or after the tenth anniversary of the date of grant.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, andshall 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 Pricefor such shares with cash or with Common Stock. All shares of Common Stock issued under the Sunoco, Inc. Long−Term Incentive Plan, the Sunoco, 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 certificatesfor such shares of Common Stock. The Optionee shall become a shareholder of Sunoco, Inc. with respect to Common Stock represented by share certificates soissued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder.

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3.7 Retirement or Disability. Upon termination of the Optionee’s employment by reason of Disability or retirement (as determined by the Committee), theOptionee may, within sixty (60) months from the date of termination, exercise any Stock Options to the extent such options are exercisable during such60−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, upon termination ofan Optionee’s employment, all unvested Stock Options shall terminate immediately, and all vested Stock Options shall terminate:

(a) immediately, in the case of an Optionee terminated by the Company for Just Cause; or(b) upon the expiration of ninety (90) calendar days following the date of termination of an Optionee’s employment, other than for Just Cause;

provided, however, that the Limited Rights awarded in tandem with such Stock Options shall not terminate and such Limited Rights shall remainexercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of anyQualifying 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 theOptionee’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 theOptionee. 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 shallapply 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, theOptionee’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 StockOption 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 terminatingemployment 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 outstandingOption shall become immediately and fully exercisable upon the occurrence of any Change in Control.

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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 ofshares 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 asthe Committee may prescribe, grant to any Participant in the Plan one or more “Incentive Stock Options” (intended to qualify as such under the provisions ofSection 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 ofCommon Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which theCommittee allots a specific number of options to a Participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be grantedto any owner of ten percent (10%) or more of the total combined voting power of Sunoco, Inc. and its subsidiaries (within the meaning of Section 424(f) of theCode).

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 Optionevidenced 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 beless 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 IncentiveStock 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 beexercisable 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 grantwith 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 optionplan of Sunoco, Inc. and its subsidiaries (within the meaning of Section 424(f) of the Code) exceeds One Hundred Thousand Dollars ($100,000.00), then theoption, 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).

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4.6 Retirement or Disability. Upon the termination of the Optionee’s employment by reason of Disability or retirement (as 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 IncentiveStock Options are exercisable during such 60−month period. Notwithstanding the foregoing, the tax treatment available pursuant to Section 422 of the InternalRevenue 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, upon termination ofan Optionee’s employment, all unvested Incentive Stock Options shall terminate immediately, and all vested Incentive Stock Options shall terminate:

(a) immediately, in the case of an Optionee terminated by the Company for Just Cause; or(b) upon the expiration of ninety (90) calendar days following the date of termination of an Optionee’s employment other than for Just Cause;

provided, however, that the Limited Rights awarded in tandem with such Incentive Stock Options shall not terminate and such Limited Rights shall remainexercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any QualifyingTermination.

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 bythe 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 ofthe Optionee. Any such exercise to be valid must occur within the remaining option term of the Incentive Stock Option. The foregoing provisions of this Section4.8 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, theOptionee’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 theIncentive Stock Option in accordance with Section 4.6; or

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(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 terminatingemployment 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 ofOptions and Section 3.11, Effect of Exercise, applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated byreference 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 andsuch other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each Option, a related limited right permitting theOptionee, 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 fromtime 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 inControl (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% ofthe 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 during the period from the sixtieth (60th) calendar dayimmediately prior to the Change in Control through the ninetieth (90th) calendar day following the Change in Control; and

(b) the highest trading price per share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the New YorkStock Exchange Composite Transactions quotations) during the 60−day period immediately 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.

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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 thenumber of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Options, if any, related to such LimitedRights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Options were exercised orterminated; provided, however, that with respect to Options that are terminated as a result of the termination of the Optionee’s employment status, the LimitedRights awarded in tandem therewith shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whoseemployment 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 determined by the Committee), theOptionee may, within six (6) months from the date of termination, exercise any Limited Rights to the extent such Limited Right is exercisable during suchsix−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 Disability or be employed bythe 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 employmentrelationship 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 Planrights 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 CommonStock 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).

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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 CommonStock 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 ofCommon 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 cashdividend (“Dividend Equivalent”) Sunoco, Inc. would have paid to such holder had he, on the record date for payment of such dividend, been the holder ofrecord 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 suchrecord date. The Company shall establish a bookkeeping account on behalf of each Participant in which the Dividend Equivalents that would have been paid tothe 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 theapplicable period during which employment must be maintained or certain performance targets must be attained (the “Performance Period”). PerformancePeriods will normally be from three (3) to five (5) years; however, the Committee at its sole discretion may establish other time periods.

6.5 Performance Goals. Common Stock Units and the related Dividend Equivalent Account earned may be based upon the attainment of PerformanceGoals established by the Committee in accordance with Section 162(m). Within the first ninety (90) days of the Performance Period, the Committee shallestablish, in writing, the weighted Performance Goals and related Performance Factors for various goal achievement levels for the Company. In establishing theweighted Performance Goals, the Committee shall take the necessary steps to insure that the Company’s ability to achieve the preestablished goals is uncertain atthe time the goals are set. The established written Performance Goals, assigned weights, and Performance Factors shall be written in terms of an objectiveformula, whereby any third party having knowledge of the relevant Company performance results could calculate the amount to be paid. Such PerformanceGoals 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

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that would otherwise be payable by reason of the satisfaction of the Performance Goals. In making any such determination, the Committee is authorized to takeinto 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 underSections 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 theCommittee certifies in writing that the continuing employment and/or any applicable performance targets have been met.

Except as may be otherwise provided by Section 6.9, payment for Common Stock Units earned shall be made either in shares of Common Stock, or incash, at the sole discretion of the Committee. The medium of payment, whether in shares of Common Stock or in cash, shall be set forth in the Committee’sresolution granting the Common Stock Units and in the Agreement with the Participant.

For an award of Common Stock Units to be paid out in shares, the number of shares paid shall be equal to the number of Common Stock Units earned. Theholder 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 MarketValue 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 amountof such withholding tax due.

For an award of Common Stock Units to be settled in cash, the amount of cash paid shall be equal to the number of Common Stock Units earnedmultiplied by the average closing price for a share of Common Stock as published in the Wall Street Journal (under the caption “New York Stock ExchangeComposite Transactions”) or any other publication selected by the Committee for the ten (10) day period immediately prior to such date following the lapse ofthe Performance Period, and the satisfaction of any other applicable conditions established by the Committee at the time of grant, that the Participant firstbecomes entitled to receive such payment. Such amount will be reduced by applicable federal, state and local withholding tax due.

A holder of Common Stock Units (whether or not such Common Stock Units are to paid out in Common Stock, or settled in cash) will be entitled toreceive from the Company, at the end of the Performance Period, payment of an amount in cash equal to the Dividend Equivalent Account earned (as determinedunder Sections 6.4 and 6.5) by the holder minus applicable federal, state and local withholding tax due.

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6.7 Death, Disability or Retirement.(a) Upon the termination of a Participant’s employment by reason of death, Disability or retirement (as determined by the Committee) prior to the

end of the Performance Period:(1) in the case of an award of Common Stock Units made pursuant to Section 6.1(a) hereof and conditioned upon the Participant’s continued

employment, the conditions to payout, if any, shall be determined by the Committee and shall be as set forth in the agreement granting the CommonStock Units.

(2) in the case of an award of Common Stock Units made pursuant to Section 6.1(b) hereof and conditioned upon the attainment of certainpredetermined performance objectives, no portion of the Participant’s Common Stock Unit and the Dividend Equivalent Account related to suchaward shall be forfeited, and the Common Stock Units, together with related Dividend Equivalents, shall be paid out as though such Participantcontinued in the employment of the Company through any applicable Performance Period, and as, if, and when the applicable Performance Goalshave been met.

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 aParticipant under the Plan shall be forfeited and the Dividend Equivalent Account shall be forfeited upon termination of the Participant’s employment with theCompany 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 theDividend 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, Common Stock Units shall be paid to the Participant no later than ninety (90) days followingthe date of occurrence of such Change in Control (the “CSU Payout Date”), regardless of whether the applicable Performance Period has expired or whether theapplicable Performance Goals have been met. For a Change in Control occurring within the first consecutive twelve−month period following the date of grant,the number of performance−based Common Stock Units paid out with regard to such grant shall be equal to the total number of Common Stock Unitsoutstanding in such grant as of the Change in Control, not adjusted for any Performance Factors described in Section 6.5. For a Change in Control occurring afterthe first consecutive twelve−month period following the date of grant, the number of performance−based Common Stock Units paid out with regard to such grantshall be the greater of (i) the total number of Common Stock Units outstanding in such grant as of the Change

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in Control, not adjusted for any Performance Factors described in Section 6.5 or (ii) the total number of such Common Stock Units outstanding in such grant,multiplied by the applicable Performance Factors related to the Company’s actual performance immediately prior to the Change in Control. In the case of anaward of Common Stock Units conditioned upon the Participant’s continued employment, the total number of Common Stock Units outstanding in such grant asof the Change in Control shall be paid to the Participant. The Participant’s Common Stock Units shall be payable to the Participant in cash or stock, asdetermined by the Committee prior to the Change in Control, as follows:

(a) if the Participant is to receive stock, the Participant will receive shares of Common Stock equal in number to the total number of Common StockUnits as stated above in this Section 6.9; or

(b) if the Participant is to receive cash, the Participant will be paid an amount in cash equal to the number of Common Stock Units stated above inthis Section 6.9 multiplied by the Market Price as defined in Section 5.4. Such amount will be reduced by the applicable federal, state and localwithholding taxes due.

On or before the CSU Payout Date, the Participant will be paid an amount in cash equal to the applicable Dividend Equivalents on the number of CommonStock Units being paid pursuant to this Section 6.9 for the time period immediately preceding the change in Control. Payout of Common Stock Units and theDividend Equivalents 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, Disability or retirement (as determined by the Committee), that has occurred 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 conditionsshall 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

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(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, thensuch award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effectedor obtained free of any conditions not acceptable to the Committee.

7.2 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 anddistribution except as otherwise determined by the Committee. Accordingly, during the life of the recipient, such award shall be exercisable only by such personor by such person’s guardian or legal representative, unless the Committee determines otherwise.

7.3 Right to Terminate Employment; Effect of Disaffiliation. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer uponany 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 suchParticipant. If an Affiliate ceases to be an Affiliate as a result of the sale or other disposition by Sunoco, Inc. or one of its continuing Affiliates of its ownershipinterest in the former Affiliate, or otherwise, then individuals who remain employed by such former Affiliate thereafter shall be considered for all purposes underthe Plan to have terminated their employment relationship with the Company.

7.4 Non−Uniform Determinations. The Committee’s determinations under the Plan (including without limitation, determinations of the persons to receiveawards, the form, amount and timing of such awards, the terms and provisions of such awards, and the agreements evidencing same) need not be uniform andmay 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.

7.5 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and untilcertificates for shares of Common Stock are issued on behalf of such recipient.

7.6 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan inrespect 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 suchleave of absence on awards under the Plan theretofore made to any recipient who takes such leaves of absence.

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7.7 Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate inrespect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period.

7.8 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 maybe issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretoforegranted under the Plan, the number of Common Stock Units theretofore awarded under the Plan and any and all other matters deemed appropriate by theCommittee.

7.9 Amendment of the Plan.

(a) The Committee may, without further action by the shareholders and without receiving further consideration from the Participants, amend thisPlan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretationsthereof 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, or any award granted under the Plan, in any respect;provided, however, 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 issuedunder the Plan (other than increases pursuant to Section 7.8);

(2) extend the term during which an Option may be exercised beyond ten years from the date of grant; or(3) alter the terms of any Option to reduce the Option Price, or cancel any outstanding Option award and replace it with a new Option, having a

lower Option Price, where the economic effect would be the same as reducing the Option Price of the cancelled Option.

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Except as provided in Section 7.9(a) above, no termination, modification or amendment of the Plan (or any award granted under the Plan), shall,without the consent of a Participant, affect the Participant’s rights under an award previously granted.

The termination or any modification or amendment of the Plan, except as provided in Section 7.9(a) above, shall not without the consent of a Participant,affect the Participant’s rights under an award previously granted.

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Exhibit 10.2

SUNOCO, INC.LONG−TERM PERFORMANCE ENHANCEMENT PLAN II

(Amended and Restated as of December 3, 2003)

ARTICLE I

Definitions

As used in this Plan, the following terms shall have the meanings herein specified:1.1 Affiliate − shall mean any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control

with Sunoco, Inc.

1.2 Board of Directors − shall mean the Board of Directors of Sunoco, Inc.

1.3 Business Combination − shall have the meaning provided herein at Section 1.4(c).

1.4 Change in Control − shall mean the occurrence of any of the following events:(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of

beneficial ownership (within the meaning of Rule 13d−3 promulgated under the Exchange Act) of 20% or more of either (1) the then−outstanding shares ofcommon stock of Sunoco, Inc. (the “Outstanding Company Common Stock”) or (2) the combined voting power of the then−outstanding voting securities ofSunoco, Inc. entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of thisSection (a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from Sunoco, Inc., (B) any acquisition by Sunoco,Inc., (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Sunoco, Inc. or any company controlled by, controlling orunder common control with Sunoco, Inc., or (D) any acquisition by any entity pursuant to a transaction that complies with Sections (c)(1), (c)(2) and (c)(3) ofthis definition;

(b) Individuals who, as of September 6, 2001, constitute the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least amajority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination forelection by the shareholders of Sunoco, Inc., was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall beconsidered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption ofoffice occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation ofproxies or consents by or on behalf of a Person other than the Board of Directors;

(c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Sunoco, Inc. orany of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Sunoco, Inc. or the acquisition of assets or stock of another entity bySunoco, Inc. or any of its subsidiaries (each, a “Business

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Combination”), in each case unless, following such Business Combination, (1) all or substantially all of the individuals and entities that were the beneficialowners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combinationbeneficially own, directly or indirectly, more than 60% of the then−outstanding shares of common stock and the combined voting power of the then−outstandingvoting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination(including, without limitation, a corporation that, as a result of such transaction, owns Sunoco, Inc. or all or substantially all of the assets of Sunoco, Inc., eitherdirectly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of theOutstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any corporation resultingfrom such Business Combination or any employee benefit plan (or related trust) of Sunoco, Inc. or such corporation resulting from such Business Combination orany of their respective subsidiaries) beneficially owns, directly or indirectly, 20% or more of, respectively, the then−outstanding shares of common stock of thecorporation resulting from such Business Combination or the combined voting power of the then−outstanding voting securities of such corporation, except to theextent that such ownership existed prior to the Business Combination, and (3) at least a majority of the members of the board of directors of the corporationresulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of theBoard of Directors providing for such Business Combination; or

(d) Approval by the shareholders of Sunoco, Inc. of a complete liquidation or dissolution of Sunoco, Inc.

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, as constituted from time to time. The Committeeshall 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 underSection 16 of the Exchange Act and Section 162(m) of the Code.

1.7 Common Stock − shall mean the authorized and unissued or treasury shares of common stock of Sunoco, Inc.

1.8 Common Stock Units − shall have the meaning provided herein at Section 6.1.

1.9 Company − shall mean Sunoco, Inc., and any Affiliate.

1.10 CSU Payout Date − shall have the meaning provided herein at Section 6.9

1.11 Dividend Equivalents − shall have the meaning provided herein at Section 6.3.

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1.12 Dividend Equivalent Account − shall have the meaning provided herein at Section 6.3.

1.13 Employment Termination Date − shall mean the date on which the employment relationship between the Participant and the Company is terminated,or on which the Participant ceases to be a member of the Board of Directors.

1.14 Exchange Act − shall mean the Securities Exchange Act of 1934, as amended.

1.15 Exercise Period − shall have the meaning provided herein at Section 5.3.

1.16 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 CommonStock (which price shall be the closing price on the previous trading day of a share of Common Stock as reflected in the consolidated trading tables of the WallStreet Journal under the caption “New York Stock Exchange Composite Transactions” or any other publication selected by the Committee). If there is no sale ofshares of Common Stock on the New York Stock Exchange for more than ten (10) days immediately preceding such date, the Fair Market Value of the shares ofCommon 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 shareof Common Stock be less than its par value.

1.17 Immediate Family Member − shall mean spouse (or common law spouse), siblings, parents, children, stepchildren, adoptive relationships and/orgrandchildren of the Participant (and, for this purpose, also shall include the Participant).

1.18 Incentive Stock Options − shall have the meaning provided herein at Section 4.1.

1.19 Incumbent Board − shall have the meaning provided herein at Section 1.4(b).

1.20 Just Cause − shall mean, for any Participant who is a participant in the Sunoco, Inc. Special Executive Severance Plan, “Just Cause” as defined insuch plan, and for any other Participant:

(a) the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company (other than any such failureresulting from incapacity due to physical or mental illness or following notice of employment termination by the Participant pursuant to Section 1.34), after awritten demand for substantial performance is delivered to the Participant by the Board of Directors or any employee of the Company with supervisory authorityover the Participant that specifically identifies the manner in which the Board of Directors or such supervising employee believes that the Participant has notsubstantially performed the Participant’s duties, or

(b) the willful engaging by the Participant in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company.

1.21 Limited Rights − shall have the meaning provided herein at Section 5.1.

1.22 Market Price − shall have the meaning provided herein at Section 5.4.

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1.23 Option − shall mean Stock Option and/or Incentive Stock Option.

1.24 Option Price − shall mean the purchase price per share of Common Stock deliverable upon the exercise of an Option.

1.25 Optionee − shall mean the holder of an Option.

1.26 Outstanding Company Common Stock − shall have the meaning provided herein at Section 1.4(a).

1.27 Outstanding Company Voting Securities − shall have the meaning provided herein at Section 1.4(a).

1.28 Participant − shall have the meaning provided herein at Section 2.4(a).

1.29 Performance Factors − shall mean the various payout percentages related to the attainment levels of one or more Performance Goals, as determinedby the Committee.

1.30 Performance Goals − shall mean the specific targeted amounts of, or changes in, financial or operating goals including: revenues; expenses; netincome; operating income; equity; return on equity, assets or capital employed; working capital; shareholder return; operating capacity utilized; production orsales volumes; or throughput. Other financial or operating goals may also be used as determined by the Committee. Such goals may be applicable to theCompany 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 orrelative to other companies, industries or indices or any combination thereof, as determined by the Committee.

1.31 Performance Period − shall have the meaning provided herein at Section 6.4.

1.32 Person − shall have the meaning provided herein at Section 1.4(a).

1.33 Plan − shall have the meaning provided herein at Section 2.2.

1.34 Qualifying Termination − shall mean, with respect to the employment of any Participant who is a participant in the Sunoco, Inc. Special ExecutiveSeverance Plan, a “Qualifying Termination” as defined in such plan, and with respect to the employment of any other 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 permanentdisability;

(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 significantly 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 significant reduction in the dutiesand responsibilities held by the Participant immediately prior to the Change in Control, in each case except in connection with such Participant’stermination of employment by the Company for Just Cause; or

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(2) a reduction by the Company in the Participant’s combined annual base salary and guideline (target) bonus as in effect immediately prior tothe Change in Control; or

(3) the Company requires the Participant to be based anywhere other than the Participant’s present work location or a location withinthirty−five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantiallymore burdensome than such Participant’s travel obligations during the period of twelve (12) consecutive months immediately preceding the Changein Control;

provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not bedeemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason forthe termination; or

(c) before a Change in Control, a termination of employment by the Company, other than a termination for Just Cause, or a termination ofemployment by the Participant for one of the reasons set forth in (b) above, if the affected Participant can demonstrate that such termination orcircumstance in (b) above leading to the 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 inControl; or

(2) otherwise occurred in connection with a Change in Control;provided, however, that in either such case, a Change in Control actually occurs within one (1) year following the Employment Termination Date.

1.35 Stock Options − shall have the meaning provided herein at Section 3.1.

1.36 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 ofdirectors are owned directly or indirectly by Sunoco, Inc. or any subsidiary thereof.

1.37 Sunoco, Inc. − shall mean Sunoco, Inc., a Pennsylvania corporation, and any successor thereto by merger, consolidation, liquidation or purchase ofassets or stock or similar transaction.

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ARTICLE II

Background, Purpose and Term of Plan; Participation & Eligibility for Benefits

2.1 Background. Effective on December 31, 2001, no further awards shall be made under the Sunoco, Inc. Long−Term Performance Enhancement Planadopted in May, 1997; provided, however, that any rights theretofore granted under that plan shall not be affected.

2.2 Purpose of the Plan. The purposes of this Sunoco, Inc. Long−Term Performance Enhancement Plan II (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 Sunoco, Inc.;(c) provide competitive compensation opportunities that 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. The original Plan was approved by shareholders at Sunoco, Inc.’s 2001 Annual Meeting of Shareholders and first became effective atthat time. The amended and re−stated version of the Plan, presented at Sunoco, Inc.’s 2003 Annual Meeting of Shareholders, will become effective uponapproval by the holders of a majority of the votes present, in person or represented by proxy, at such meeting. No awards will be made under this Plan afterDecember 31, 2008 unless the Board of Directors extends this date to a date no later than December 31, 2013 The Plan and all awards made under the Plan priorto 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 suchawards.

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 directors, or classes of employees or directors, eligible to participate in the Plan (each such employee or director

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

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(d) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other actionnecessary 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 ofthe 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:(a) non−employee members of the Board of Directors; and(b) those officers and other key employees occupying responsible managerial or professional positions at the Company, and capable of substantially

contributing to its success.

In making this selection and in determining the amount of awards, the Committee shall consider any factors deemed relevant, including the individual’sfunctions, 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 ofCommon Stock authorized for issuance under the Plan as originally adopted by the shareholders at Sunoco, Inc.’s 2001 Annual Meeting was four million(4,000,000). No Option may be granted if the number of shares of Common Stock to which such Option relates, when added to the number of shares of CommonStock previously issued under the Plan, exceeds the number of such shares reserved under the preceding sentence. For purposes of calculating the maximumnumber 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 paymentfor shares issued upon exercise of an Option;

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(b) only the shares issued (including the shares, if any, withheld for tax withholding requirements) net of shares of Common Stock used as full orpartial payment for such shares upon exercise of an Option, shall be counted; and

(c) only the shares issued (including the shares, if any, withheld for tax withholding) upon vesting and payment of Common Stock Units, shall becounted.

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 sharesequal 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 aParticipant as payment for shares issued upon exercise of an Option shall be available for issuance under the Plan. Any shares distributed pursuant to an Optionmay consist, in whole or in part, of authorized and unissued shares or treasury shares including shares of Common Stock acquired by purchase in the open marketor in private transactions. Any shares of Common Stock subject to an Option, which for any reason is terminated, unexercised or expires shall again be availablefor issuance under the Plan, but shares subject to an Option that, as a result of the exercise of Limited Rights, are not issued, shall not be available for issuanceunder the Plan.

(d) The maximum number of Options that shall be granted in any calendar year to a Participant shall be four hundred thousand (400,000).(e) The maximum number of Common Stock Units granted in any calendar year to a Participant shall be one hundred fifty thousand (150,000).(f) The maximum number of Common Stock Units granted under the Plan will be two million (2,000,000).

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 theCommittee 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 allotsa specific number of options to a Participant pursuant to the Plan.

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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 theholder 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 mayfrom 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 theFair 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, except as otherwiseprovided in Section 3.11, no Stock Option may be exercisable before the first anniversary of the date of grant or after the tenth anniversary of the date of grant.No Stock Option shall be exercisable after the expiration of its term.

3.5 Transferability. No Stock Option may be transferred by the Participant other than by will, by the laws of descent and distribution or, to the extent notinconsistent with the applicable provisions of the Code, pursuant to a domestic relations order under applicable provisions of law, and during the Participant’slifetime the option may be exercised only by the Participant; provided, however, that, subject to such limits as the Committee may establish, the Committee, in itsdiscretion, may allow the Participant to transfer a Stock Option for no consideration to, or for the benefit of, an Immediate Family Member or to a bona fide trustfor the exclusive benefit of such Immediate Family Members, or a partnership or limited liability company in which such Immediate Family Members are theonly partners or members.

Such transfer may only be effected following the advance written notice from the Participant to the Committee, describing the terms and conditions of theproposed transfer, and such transfer shall become effective only when recorded in the Company’s record of outstanding Stock Options. Any such transferableStock Option is further conditioned on the Participant and such Immediate Family Member or other transferee agreeing to abide by the Company’s then−currentStock Option transfer guidelines. In the discretion of the Committee, the foregoing right to transfer a Stock Option also will apply to the right to transfer ancillaryrights associated with such Stock Option, and to the right to consent to any amendment to the applicable Stock Option Agreement.

Subsequent transfers shall be prohibited except in accordance with the laws of descent and distribution, or by will. Following transfer, any such StockOptions shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and the terms “Optionee” or “Participant”shall be deemed to include the transferee; provided, however, that

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the events of termination of employment of Sections 3.8 (“Retirement or Disability”), 3.9 (“Termination for Other Reasons”) and 3.10 (“Death of Optionee”)hereof shall continue to be applied with respect to the original Optionee, following which the options shall be exercisable by the transferee only to the extent, andfor the respective periods specified therein. Neither the Committee nor the Company will have any obligation to inform any transferee of a Stock Option or stockappreciation right of any expiration, termination, lapse or acceleration of such Option. The Company will have no obligation to register with any federal or statesecurities commission or agency any Common Stock issuable or issued under a Stock Option or stock appreciation right that has been transferred by a Participantunder this Section 3.5.

3.6 Manner of Payment. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, andshall 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 Pricefor such shares (together with payment for any taxes which the Company is required by law to withhold by reason of such exercise) with cash or with CommonStock. All shares of Common Stock issued under this Plan, or any other Company plan, must be held at least six (6) months before they may be used as paymentof the Option Price.

3.7 Issuance and Delivery of Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificatesfor, or otherwise register the Optionee on the books and records of the Company as a holder of, such shares of Common Stock. The Optionee shall become ashareholder of Sunoco, Inc. with respect to the Common Stock so registered, or represented by share certificates so issued, and as such shall be fully entitled toreceive dividends, to vote and to exercise all other rights of a shareholder except to the extent otherwise provided in the Option award.

(a) Notwithstanding the foregoing, and at the discretion of the Committee, any Optionee subject to minimum stock ownership guidelines (asestablished from time to time by the Committee or the Company), but failing to meet the applicable personal ownership requirement within the prescribedperiod may, upon exercise of the Options, receive a number of shares of Common Stock subject to the following restrictions which shall remain in placeuntil compliance with such ownership guidelines is attained:

(1) The number of shares subject to the restrictions shall be equal to the total number of shares received in the exercise of the Options, minusthe sum of:

(i) to the extent that shares received upon exercise of the Option are used to pay the Option Price, the number of shares which have aFair Market Value on the date of the Option exercise equal to the total amount paid for all the shares received in the Option exercise; and

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(ii) to the extent that shares received upon exercise of the Option are used to pay taxes and brokerage fees, the number of shares whichhave a Fair Market Value on the date of the Option exercise equal to the applicable federal, state and local withholding tax on the totalOption exercise and any brokerage commission or interest charges, if applicable to the exercise.

(2) Other than transfers to family members or trusts that are permitted in accordance with the applicable stock ownership guidelines, and thatwill not result in a reduction in the level of ownership attributable to the Participant under such guidelines, the Optionee shall be prohibited fromeffecting the sale, exchange, transfer, pledge, hypothecation, gift or other disposition of such shares of Common Stock until the earlier of:

(i) attainment of compliance with applicable stock ownership guidelines;(ii) the Optionee’s death, retirement, or permanent disability (as determined by the Committee); or(iii) occurrence of the Optionee’s Employment Termination Date, for any reason other than Just Cause.

Notwithstanding the foregoing, six (6) months after the exercise of the Stock Option, such shares of Common Stock may be used as paymentof the Option Price of shares issued upon the exercise of other Stock Options. However, all such shares issued will be restricted shares.

(3) The restrictions shall apply to any new, additional or different securities the Optionee may become entitled to receive with respect to suchshares by virtue of a stock split or stock dividend or any other change in the corporate or capital structure of the Company.(b) Until such time as the restrictions hereunder lapse, the shares will be held in “book−entry form” and appropriate notation of these restrictions

will be maintained in the records of the Company’s transfer agent and registrar. Any share certificate representing such shares

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will bear a conspicuous legend evidencing these restrictions, and the Company may require the Optionee to deposit the share certificate with the Companyor its agent, endorsed in blank or accompanied by a duly executed irrevocable stock power or other instrument of transfer.

3.8 Retirement or Disability. Upon termination of the Optionee’s employment by reason of retirement or permanent disability (as each is determined bythe Committee), the Optionee may, within sixty (60) months from the date of termination, exercise any Stock Options to the extent such options are exercisableduring such 60−month period.

3.9 Termination for Other Reasons. Except as provided in Sections 3.8 and 3.10, or except as otherwise determined by the Committee, upon termination ofan Optionee’s employment, all unvested Stock Options shall terminate immediately, and all vested Stock Options shall terminate:

(a) immediately, in the case of an Optionee terminated by the Company for Just Cause; or(b) upon the expiration of ninety (90) calendar days following the occurrence of the Optionee’s Employment Termination Date, other than for Just

Cause;

provided, however, that the Limited Rights awarded in tandem with such Stock Options shall not terminate and such Limited Rights shall remain exercisableduring the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination.

3.10 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 theOptionee’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 theOptionee. Any such exercise to be valid must occur within the remaining option term of the Stock Option. The foregoing provisions of this Section 3.10 shallapply 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, theOptionee’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 StockOption in accordance with Section 3.8; 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 terminatingemployment with the Company will have the remainder of any exercise period provided under Sections 3.8 and 3.9.

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3.11 Acceleration of Options. Notwithstanding any provisions to the contrary in agreements evidencing Options granted thereunder or in this Plan, eachoutstanding Option shall become immediately and fully exercisable upon the occurrence of any Change in Control.

3.12 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 ofshares 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 asthe Committee may prescribe, may grant to any Participant in the Plan one or more “incentive stock options” (intended to qualify as such under the provisions ofSection 422 of the Code (“Incentive Stock Options”)) to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The datean 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 aParticipant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of ten percent (10%) or more of thetotal combined voting power of Sunoco, Inc. and its subsidiaries (within the meaning of Section 424(f) of the Code).

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 Optionevidenced 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 beless 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 IncentiveStock Option may be exercisable before the first anniversary of the date of grant or after the tenth anniversary of such date. No Incentive Stock Option shall beexercisable 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 grantwith respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year, under this Plan

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or any other stock option plan of Sunoco, Inc. and its subsidiaries (within the meaning of Section 424(f) of the Code) exceeds One Hundred Thousand Dollars($100,000.00), 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 personwho 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 determinedby the Committee), the Optionee may, within sixty (60) months from the date of such termination of employment, exercise any Incentive Stock Options to theextent such Incentive Stock Options are exercisable during such 60−month period. Notwithstanding the foregoing, the tax treatment available pursuant to Section422 of the Code 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, upon termination ofan Optionee’s employment, all unvested Incentive Stock Options shall terminate immediately, and all vested Incentive Stock Options shall terminate:

(a) immediately, in the case of an Optionee terminated by the Company for Just Cause; or(b) upon the expiration of ninety (90) calendar days following the date of termination of an Optionee’s employment other than for Just Cause;

provided, however, that the Limited Rights awarded in tandem with such Incentive Stock Options shall not terminate and such Limited Rights shall remainexercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any QualifyingTermination.

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 bythe 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 ofthe Optionee. Any such exercise to be valid must occur within the remaining option term of the Incentive Stock Option. The foregoing provisions of this Section4.8 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, theOptionee’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 theIncentive Stock Option in accordance with Section 4.6; or

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(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 terminatingemployment 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 3.6 (“Manner of Payment”), Section 3.7 (“Issuance and Delivery of Shares”), Section 3.11(“Acceleration of Options”) and Section 3.12 (“Effect of Exercise”), applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sectionsare 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 andsuch other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each Option, a related limited right permitting theOptionee, 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 fromtime 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 inControl (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% ofthe 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 during the period from the sixtieth (60th) calendarday immediately prior to the Change in Control through the ninetieth (90th) calendar day following the Change in Control; and

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(b) the highest trading price per share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the NewYork Stock Exchange Composite Transactions quotations) during the 60−day period immediately 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 thenumber of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Options, if any, related to such LimitedRights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Options were exercised orterminated; provided, however, that with respect to Options that are terminated as a result of the termination of the Optionee’s employment status, the LimitedRights awarded in tandem therewith shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whoseemployment 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 permanent disability or retirement (as each is determined bythe Committee), the Optionee may, within six (6) months from the date of termination, exercise any Limited Rights to the extent such Limited Right isexercisable 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 beemployed 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 whoseemployment 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 Planrights 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 CommonStock 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

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(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 CommonStock 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 ofCommon 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 cashdividend (“Dividend Equivalent”) Sunoco, Inc. would have paid to such holder had he, on the record date for payment of such dividend, been the holder ofrecord 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 suchrecord date. The Company shall establish a bookkeeping account on behalf of each Participant in which the Dividend Equivalents that would have been paid tothe 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 theapplicable period during which employment must be maintained or certain performance targets must be attained (the “Performance Period”). PerformancePeriods will normally be from three (3) to five (5) years; provided, however, that the Committee at its sole discretion may establish other time periods; andfurther provided, that the Performance Period for an award conditioned upon a Participant’s continued employment with the Company shall not be less than three(3) years.

6.5 Performance Goals. Common Stock Units and the related Dividend Equivalent Account earned may be based upon the attainment of PerformanceGoals established by the Committee in accordance with Section 162(m) of the Code. Within the first ninety (90) days of the Performance Period, the Committeeshall establish, in writing, the weighted Performance Goals and related Performance Factors for various goal achievement levels for the Company. In establishingthe weighted Performance Goals, the Committee shall take the necessary steps to insure that the Company’s ability to achieve the pre−established goals isuncertain at the time the goals are set.

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The established written Performance Goals, assigned weights, and Performance Factors shall be written in terms of an objective formula, whereby any third partyhaving knowledge of the relevant Company performance results could calculate the amount to be paid. Such Performance Goals may vary by Participant and bygrant.

The number of Common Stock Units and Dividend Equivalents earned will be equal to the amounts awarded multiplied by the applicable PerformanceFactors. 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 wouldotherwise be payable by reason of the satisfaction of the Performance Goals. In making any such determination, the Committee is authorized to take into accountany 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 underSections 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 theCommittee certifies in writing that the continuing employment and/or any applicable performance targets have been met.

Except as may be otherwise provided by Section 6.9, payment for Common Stock Units earned shall be made either in shares of Common Stock, or incash, at the sole discretion of the Committee. The medium of payment, whether in shares of Common Stock or in cash, shall be set forth in the Committee’sresolution granting the Common Stock Units and in the Agreement with the Participant.

For an award of Common Stock Units to be paid out in shares, the number of shares paid shall be equal to the number of Common Stock Units earned. Theholder 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 MarketValue 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 amountof such withholding tax due.

For an award of Common Stock Units to be settled in cash, the amount of cash paid shall be equal to the number of Common Stock Units earnedmultiplied by the average closing price for a share of Common Stock as published in the Wall Street Journal (under the caption “New York Stock ExchangeComposite Transactions”) or any other publication selected by the Committee for the ten (10) day period immediately prior to such date following the lapse ofthe Performance Period, and the satisfaction of any other applicable conditions established by the Committee at the time of grant, that the Participant firstbecomes entitled to receive such payment. Such amount will be reduced by applicable federal, state and local withholding tax due.

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A holder of Common Stock Units (whether or not such Common Stock Units are to be paid out in Common Stock, or settled in cash) will be entitled toreceive from the Company, at the end of the Performance Period, payment of an amount in cash equal to the Dividend Equivalent Account earned (as determinedunder Sections 6.4 and 6.5) by the holder minus applicable federal, state and local withholding tax due.

(a) Notwithstanding the foregoing, and at the discretion of the Committee, any Participant subject to minimum stock ownership guidelines (asestablished from time to time by the Committee or the Company), but failing to meet the applicable personal ownership requirement within theprescribed period may receive a number of shares of Common Stock upon payment of the Common Stock Units, subject to the following restrictionswhich shall remain in place until compliance with such ownership guidelines is attained:

(1) The number of shares subject to the restrictions shall be equal to the total number of Common Stock Units being paid out, minus the numberof shares of Common Stock used to pay applicable federal, state and local withholding tax on the total payment of such Common StockUnits.

(2) Other than transfers to family members or trusts that are permitted in accordance with the applicable stock ownership guidelines, and thatwill not result in a reduction in the level of ownership attributable to the Participant under such guidelines, the Participant shall be prohibitedfrom effecting the sale, exchange, transfer, pledge, hypothecation, gift or other disposition of such shares of Common Stock until the earlierof:

(i) attainment of compliance with applicable stock ownership guidelines;

(ii) the Participant’s death, retirement, or permanent disability (as determined by the Committee); or

(iii) occurrence of the Participant’s Employment Termination Date, for any reason other than Just Cause.

(3) These restrictions shall apply to any new, additional or different securities the Participant may become entitled to receive with respect tosuch shares by virtue of a stock split or stock dividend or any other change in the corporate or capital structure of the Company.

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(b) Until such time as the restrictions hereunder lapse, the shares will be held in “book−entry form” and appropriate notation of these restrictions will bemaintained in the records of the Company’s transfer agent and registrar. Any share certificate representing such shares will bear a conspicuouslegend evidencing these restrictions, and the Company may require the Participant to deposit the share certificate with the Company or its agent,endorsed in blank or accompanied by a duly executed irrevocable stock power or other instrument of transfer.

6.7 Death, Disability or Retirement.

(a) Upon the occurrence of a Participant’s Employment Termination Date, by reason of death, permanent disability or retirement (as each isdetermined by the Committee) prior to the end of the Performance Period:

(1) in the case of an award of Common Stock Units made pursuant to Section 6.1(a) hereof and conditioned upon the Participant’s continuedemployment, the conditions to payout, if any, shall be determined by the Committee and shall be as set forth in the agreement granting the CommonStock Units.

(2) in the case of an award of Common Stock Units made pursuant to Section 6.1(b) hereof and conditioned upon the attainment of certainpredetermined performance objectives, no portion of the Participant’s Common Stock Units and the Dividend Equivalent Account related to suchaward shall be forfeited, and the Common Stock Units, together with related Dividend Equivalents, shall be paid out as though such Participantcontinued to be an employee or director of the Company through any applicable Performance Period, and as, if, and when the applicablePerformance Goals have been met.

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 aParticipant under the Plan shall be forfeited and the Dividend Equivalent Account shall be forfeited upon the occurrence of the Participant’s EmploymentTermination Date 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 paymentof 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, Common Stock Units shall be paid to the Participant no later than ninety (90) days followingthe date of occurrence of such Change in

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Control (the “CSU Payout Date”), regardless of whether the applicable Performance Period has expired or whether the applicable Performance Goals have beenmet. For a Change in Control occurring within the first consecutive twelve−month period following the date of grant, the number of performance−basedCommon Stock Units paid out with regard to such grant shall be equal to the total number of Common Stock Units outstanding in such grant as the Change inControl, not adjusted for any Performance Factors described in Section 6.5. For a Change in Control occurring after the first consecutive twelve−month periodfollowing the date of grant, the number of performance−based Common Stock Units paid out with regard to such grant shall be the greater of (i) the total numberof Common Stock Units outstanding in such grant as of the Change in Control, not adjusted for any Performance factors described in Section 6.5 or (ii) the totalnumber of such Common Stock Units outstanding in such grant, multiplied by the applicable Performance Factors related to the Company’s actual performanceimmediately prior to the Change in Control. In the case of an award of Common Stock Units conditioned upon the Participant’s continued employment, the totalnumber of Common Stock Units outstanding in such grant as of the Change in Control shall be paid to the Participant. The Participant’s Common Stock Unitsshall be payable to the Participant in cash or stock, as determined by the Committee prior to the Change in Control, as follows:

(a) if the Participant is to receive stock, the Participant will receive shares of Common Stock equal in number to the total number of Common StockUnits as stated above in this Section 6.9; or

(b) if the Participant is to receive cash, the Participant will be paid an amount in cash equal to the number of Common Stock Units stated above inthis Section 6.9 multiplied by the Market Price as defined in Section 5.4. Such amount will be reduced by the applicable federal, state and localwithholding taxes due.

On or before the CSU Payout Date, the Participant will be paid an amount in cash equal to the applicable Dividend Equivalents on the number of CommonStock Units being paid pursuant to this Section 6.9 for the time period immediately preceding the Change in Control. Payout of Common Stock Units and theDividend Equivalents 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, permanent disability or retirement (as each is determined by the Committee), that has occurred prior to the

CSU Payout Date.

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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 conditionsshall be set forth in the Committee’s resolution granting the Common Stock Units and in the Agreement with the holders.

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, thensuch award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effectedor obtained free of any conditions not acceptable to the Committee.

7.2 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 anddistribution except as otherwise determined by the Committee. Accordingly, during the life of the recipient, such award shall be exercisable only by such personor by such person’s guardian or legal representative, unless the Committee determines otherwise.

7.3 Right to Terminate Employment; Effect of Disaffiliation. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer uponany Participant the right to continue in the employment of the Company, to continue to be nominated or serve on the Board of Directors, or affect any right whichthe Company may have to terminate the employment of such Participant. If an Affiliate ceases to be an Affiliate as a result of the sale or other disposition bySunoco, Inc. or one of its continuing Affiliates of its ownership interest in the former Affiliate, or otherwise, then individuals who remain employed by suchformer Affiliate thereafter shall be considered for all purposes under the Plan to have terminated their employment relationship with the Company.

7.4 Non−Uniform Determinations. The Committee’s determinations under the Plan (including without limitation, determinations of the persons to receiveawards, the form, amount and timing of

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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 amongpersons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated.

7.5 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 shares ofCommon Stock are issued on behalf of such recipient in “book−entry” form, in the records of the Company’s transfer agent and registrar, or certificates havebeen issued for such shares.

7.6 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan inrespect 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 suchleave of absence on awards under the Plan theretofore made to any recipient who takes such leaves of absence.

7.7 Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate inrespect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period.

7.8 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 maybe issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretoforegranted under the Plan, the number of Common Stock Units theretofore awarded under the Plan and any and all other matters deemed appropriate by theCommittee.

7.9 Amendment of the Plan.

(a) The Committee may, without further action by the shareholders and without receiving further consideration from the Participants, amend thisPlan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretationsthereof 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, or any award granted under the Plan, in any respect;provided, however, that, without shareholder approval the Committee may not:

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(1) increase the maximum award levels established in Section 2.7, including the maximum number of shares of Common Stock which may beissued under the Plan (other than increases pursuant to Section 7.8);

(2) extend the term during which an Option may be exercised beyond ten years from the date of grant; or(3) alter the terms of any Option to reduce the Option Price, or cancel any outstanding Option award and replace it with a new Option, having

a lower Option Price, where the economic effect would be the same as reducing the Option Price of the cancelled Option.

Except as provided in Section 7.9(a) above, no termination, modification or amendment of the Plan (or any award granted under the Plan), shall, withoutthe consent of a Participant, affect the Participant’s rights under an award previously granted.

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Exhibit 10.13

Schedule to the Form of Indemnification Agreement

The Indemnification Agreements between Sunoco, Inc. and the directors and executive officers named below are identical in all material respects.

Officer Date of Agreement

Terence P. Delaney September 6, 2001Michael H. R. Dingus September 6, 2001John G. Drosdick September 6, 2001Bruce G. Fischer September 6, 2001Thomas W. Hofmann September 6, 2001Joseph P. Krott September 6, 2001Michael S. Kuritzkes September 6, 2001Joel H. Maness September 6, 2001Michael J. McGoldrick September 6, 2001Ann C. Mulé September 6, 2001Paul A. Mulholland September 6, 2001Rolf D. Naku September 6, 2001Robert W. Owens September 6, 2001Ross S. Tippin, Jr. September 6, 2001Charles K. Valutas September 6, 2001

Director Date of Agreement

Robert J. Darnall September 6, 2001Ursula F. Fairbairn September 6, 2001Thomas P. Gerrity September 6, 2001Rosemarie B. Greco September 6, 2001James G. Kaiser September 6, 2001Robert D. Kennedy September 6, 2001Richard H. Lenny February 8, 2002Norman S. Matthews September 6, 2001R. Anderson Pew September 6, 2001G. Jackson Ratcliffe September 6, 2001John W. Rowe November 6, 2003

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Exhibit 10.15

Schedule 2.1to the

Directors’ Deferred Compensation and BenefitsTrust Agreement

Benefit Plans and Other Arrangements Subject to Trust

(1) Sunoco, Inc. Directors’ Deferred Compensation Plan;(2) The entire funding for all the Indemnification Agreements with the current and former directors set forth below shall be Five Million Dollars

($5,000,000.00) in the aggregate upon a Potential Change in Control, and an amount upon a Change in Control calculated on the basis of the IndemnificationAgreements with the following directors:

(a) Raymond E. Cartledge(b) Robert J. Darnall(c) Mary J. Evans(d) Ursula F. Fairbairn(e) Thomas P. Gerrity(f) Rosemarie B. Greco(g) James G. Kaiser(h) Robert D. Kennedy(i) Richard H. Lenny(j) Norman S. Matthews(k) R. Anderson Pew(l) G. Jackson Ratcliffe(m) John W. Rowe(n) Alexander B. Trowbridge

(3) Benefits payable to former directors of the Company (or their beneficiaries) in pay status as of the date of termination of the Sunoco, Inc.Non−Employee Directors’ Retirement Plan.

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EXHIBIT 12

STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a)Sunoco, Inc. and Subsidiaries

(Millions of Dollars Except Ratio)

For theYear Ended

December 31, 2003

(UNAUDITED)Fixed Charges:Consolidated interest cost and debt expense $ 114Proportionate share of interest cost and debt expense of 50 percent−owned−but−not−controlledinvestees (b) 4Interest allocable to rental expense(c) 46

Total $ 164

Earnings:Consolidated income before income tax expense $ 495Minority interest in net income of subsidiaries having fixed charges 15Proportionate share of income tax expense of 50 percent−owned−but−not−controlled investees 3Equity loss of less−than−50−percent−owned investees 14Dividends received from less than 50 percent owned investees 13Fixed charges 164Interest capitalized (3)Amortization of previously capitalized interest 2

Total $ 703

Ratio of Earnings to Fixed Charges 4.29

(a) The consolidated financial statements of Sunoco, Inc. and subsidiaries contain the accounts of all operations that are controlled (generally more than 50percent owned). Corporate joint ventures and other investees over which the Company has the ability to exercise significant influence but that are notcontrolled (generally 20 to 50 percent owned) are accounted for by the equity method.

(b) Consists of Sunoco’s share of interest cost and debt expense of the Epsilon Products Company, LLC (“Epsilon”) polypropylene joint venture in which theCompany is a partner. Sunoco guarantees Epsilon’s $120 million term loan due in 2006 and borrowings under Epsilon’s $40 million revolving creditfacility maturing in 2006, which amounted to $28 million at December 31, 2003. Epsilon’s interest and debt expense totaled $4 million for the year endedDecember 31, 2003.

(c) Represents one−third of total operating lease rental expense which is that portion deemed to be interest.

Exhibit 13

Selected Financial Data(Millions of Dollars Except Per Share Amounts) 2003 2002 2001 2000 1999

Statement of Income Data:Sales and other operating revenue (including consumerexcise taxes) $17,866 $14,299 $14,063 $14,514 $10,045Income (loss) from continuing operations* $312 $(47) $398 $411 $97Income from discontinued operations $— $— $— $11** $—Net income (loss) $312 $(47) $398 $422 $97

Per Share Data:Income (loss) from continuing operations:Basic $4.07 $(.62) $4.92 $4.72 $1.07Diluted $4.03 $(.62) $4.85 $4.70 $1.07Net income (loss):Basic $4.07 $(.62) $4.92 $4.85 $1.07Diluted $4.03 $(.62) $4.85 $4.82 $1.07Cash dividends on common stock $1.025*** $1.00 $1.00 $1.00 $1.00

Balance Sheet Data:Cash and cash equivalents $431 $390 $42 $239 $87Total assets $6,922 $6,441 $6,019 $5,537 $5,289Short−term borrowings and current portion of long−term debt $103 $2 $302 $2 $151Long−term debt $1,350 $1,453 $1,142 $933 $878Shareholders’ equity $1,556 $1,394 $1,642 $1,702 $1,506Shareholders’ equity per share $20.64 $18.24 $21.74 $20.06 $16.76

* Includes after−tax provisions for asset write−downs and other matters totaling $23, $22, $1, $147 and $1 million in 2003, 2002, 2001, 2000 and 1999, respectively,after−tax gains on settlement of insurance litigation totaling $5 and $47 million in 2000 and 1999, respectively, and gains on income tax settlements totaling $21and $117 million in 2001 and 2000, respectively. (See Notes 2, 3 and 4 to the consolidated financial statements.)

** Consists of a favorable adjustment to the 1996 gain on divestment of discontinued international oil and gas production operations.

*** Commencing with the fourth quarter of 2003, the Company increased the quarterly dividend paid on common stock from $.25 per share ($1.00 per year) to $.275 per share($1.10 per year).

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Management’s Discussion and Analysis of Financial Condition and Results ofOperations

Management’s Discussion and Analysis is the Company’s analysis of its financial performance and of significant trends that may affect future performance. Itshould be read in conjunction with Sunoco’s consolidated financial statements and related notes. Those statements in Management’s Discussion and Analysisthat are not historical in nature should be deemed forward−looking statements that are inherently uncertain. See “Forward−Looking Statements” on page 38for a discussion of the factors that could cause actual results to differ materially from those projected.

OverviewSunoco’s profitability is primarily determined by refined product and chemical margins and the reliability and efficiency of its operations. The volatility of crudeoil, refined product and chemical prices and the overall supply/demand balance for these commodities have had, and should continue to have, a significantimpact on margins and the financial results of the Company.During the first half of 2001, refined product margins in Sunoco’s principal refining centers in the Northeast and Midwest were extremely strong, benefiting fromexceptionally low industry refined product inventory levels and very strong product demand. However, product margins declined significantly in the second halfof 2001 and remained low throughout the first nine months of 2002 due to high industry inventory levels, rising crude oil prices, a higher level of gasolineimports from Europe and warmer winter weather in early 2002. In the latter part of 2002, refining margins began to improve, and throughout most of 2003 wereonce again very strong, benefiting from low industry refined product inventory levels, colder winter weather in early 2003, strong gasoline demand and supplydisruptions. Chemical margins for most products were weak during 2001 and most of 2002 as a result of an oversupplied marketplace. In the latter part of 2002,chemical margins began to strengthen in response to price increases due to phenol supply disruptions in the United States and an improvement in productdemand. This improvement continued during 2003 as chemical prices continued to rise and product demand strengthened further as a result of an improving U.S.and global economy.In 2004, the Company believes refined product margins should remain above historical averages, primarily due to more stringent fuel specifications as a result ofsulfur reductions in gasoline and MTBE−related product changes, and to higher transportation rates. These factors are expected to tighten the supply/demandbalance. In addition, the Company believes chemical margins and volumes will improve in 2004 assuming the strengthening U.S. and global economy continuesto favorably impact demand. However, the absolute level of refined product and chemical margins is difficult to predict as they are influenced not only by theabove factors but also by a number of other extremely volatile factors in the global marketplace including: crude oil, natural gas and other feedstock price levelsand availability; crude oil, petroleum and chemical product inventory levels; product demand; refinery and chemical plant utilization rates; and geopoliticalevents.The Company expects 2004 operating results to be adversely impacted by an approximately $15 million after−tax increase in pension and postretirement benefitsexpense, largely as a result of the impact of falling interest rates on projected plan benefit obligations.The Company’s future operating results and capital spending plans will also be impacted by environmental matters (see “Environmental Matters” below).

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Strategic ActionsSunoco is committed to improving its results and enhancing its shareholder value while, at the same time, maintaining its financial strength and flexibility bycontinuing to:

• Deliver excellence in health and safety and environmental compliance;

• Increase reliability and realize additional efficiencies in each of the Company’s operations;

• Prudently manage expenses and capital spending;

• Diversify, upgrade and grow the Company’s asset portfolio through strategic acquisitions and investments;

• Divest assets that do not meet the Company’s return−on−investment criteria; and

• Return cash to the Company’s shareholders through the payment of cash dividends and the purchase of Company common stock.

Recently, Sunoco has undertaken the following initiatives as part of this strategy:

• Effective March 31, 2003, the Company invested $198 million to secure a favorable long−term supply of propylene for its Gulf Coastpolypropylene business through the formation of a limited partnership with Equistar Chemicals, L.P. (“Equistar”) and to increase itspolypropylene capacity through the acquisition of Equistar’s polypropylene facility in Bayport, TX.

• During the second quarter of 2003, Sunoco completed the $162 million purchase from a subsidiary of Marathon Ashland Petroleum LLC(“Marathon”) of 193 retail gasoline sites located primarily in Florida and South Carolina.

• In October 2003, Sunoco entered into an agreement with International Steel Group under which the Company will build and operate a 550,000tons−per−year, $140 million cokemaking facility in Haverhill, OH, which is expected to be operational in March 2005.

• During the fourth quarter of 2003, Sunoco substantially completed a program to sell its interest in certain retail sites in Michigan and the southernOhio markets of Columbus, Dayton and Cincinnati, generating $46 million of cash proceeds.

• In January 2004, Sunoco completed the acquisition from El Paso Corporation of the 150 thousand barrels−per−day Eagle Point refinery located near theCompany’s existing Northeast Refining operations and related assets for $235 million, including an estimated $124 million for inventory.

• In January 2004, the Company completed the sale of its plasticizer business to BASF, generating approximately $90 million of cash proceeds.

• In January 2004, Sunoco agreed to purchase from ConocoPhillips 385 retail outlets located primarily in Delaware, Maryland, Virginia andWashington, D.C. for $187 million, plus related inventory. The transaction is subject to certain conditions including regulatory approval and thecompletion of due diligence.

• During the fourth quarter of 2003, Sunoco increased the quarterly dividend paid on common stock from $.25 per share ($1.00 per year) to $.275 per share($1.10 per year).

• During 2003, the Company repurchased 2.9 million shares, or 4 percent, of its outstanding common stock for $136 million. At December 31, 2003, theCompany had a remaining authorization from its Board of Directors to purchase up to $243 million of Company common stock. Sunoco expects to continueto purchase Company common stock in the open market from time to time depending on prevailing market conditions and available cash.

For additional information regarding the above actions, see Notes 2, 3, 14 and 18 to the consolidated financial statements.

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Results of OperationsEarnings Profile of Sunoco Businesses (after tax)

(Millions of Dollars) 2003 2002 2001

Refining and Supply $261 $(31) $290Retail Marketing 91 20 87Chemicals 53 28 6Logistics 26 33 42Coke 43 42 61Corporate and Other:Corporate expenses (40) (26) (24)Net financing expenses and other (99) (91) (82)Income tax settlements — — 21Asset write−downs and other matters (23) (22) (1)Value Added and Eastern Lubricants* — — (2)

Consolidated net income (loss) $312 $(47) $398

* In connection with the Company’s decision to dispose of its Puerto Rico refinery, lubricants blending and packaging facilities and lubricants branded marketing assets(collectively, “Value Added and Eastern Lubricants”), those operations are reported as a separate item.

Analysis of Earnings Profile of Sunoco BusinessesIn 2003, Sunoco, Inc. and its subsidiaries earned $312 million, or $4.03 per share of common stock on a diluted basis, compared to a net loss of $47 million, or$.62 per share, in 2002 and net income of $398 million, or $4.85 per share, in 2001.The $359 million increase in net income in 2003 was primarily due to significantly higher margins in Sunoco’s Refining and Supply ($339 million), RetailMarketing ($78 million) and Chemicals ($50 million) businesses. Also contributing to the improvement in earnings were higher production of refined products($13 million), $7 million of after−tax income from the 193 retail gasoline sites acquired from Marathon and $14 million of after−tax income related to a supplyagreement with Equistar and the polypropylene facility acquired from Equistar. Partially offsetting these positive factors were higher expenses across theCompany ($109 million), primarily refinery fuel and utility costs and employee−related expenses including pension and performance−related incentivecompensation; lower chemical sales volumes ($15 million); higher net financing expenses ($8 million), primarily due to higher expenses attributable to thepreferential return of third−party investors in Sunoco’s cokemaking operations; and a higher effective income tax rate ($7 million).In 2002, the $445 million decrease in net income was primarily due to significantly lower margins in Sunoco’s Refining and Supply ($341 million) and RetailMarketing ($70 million) businesses. Also contributing to the decline in earnings were a $9 million reduction in Logistics income largely due to the sale inFebruary 2002 of a 24.8 percent interest in Sunoco Logistics Partners L.P., the master limited partnership that is 75.3 percent owned by Sunoco; a $19 millionreduction in Coke earnings, which were negatively impacted by the bankruptcy filing of a former long−term contract customer; the absence of gains on incometax settlements ($21 million); higher insurance and pension costs ($24 million); and higher provisions for asset write−downs and other matters ($21 million).Partially offsetting these negative factors were higher production of refined products ($9 million), higher retail gasoline ($14 million) and chemicals ($14million) sales volumes and lower refinery fuel costs ($20 million).

Refining and SupplyThe Refining and Supply business manufactures petroleum products at its Marcus Hook, Philadelphia, Toledo and Tulsa refineries and commoditypetrochemicals at its Marcus Hook, Philadelphia and Toledo refineries and sells these products to other Sunoco businesses and to wholesale and industrialcustomers. This business also manufactures lubricant products at its

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Tulsa refinery, which are sold into the process oil, wholesale base oil and wax markets. A refinery in Westville, NJ (also known as the Eagle Point refinery),which manufactures petroleum products and commodity petrochemicals, was acquired in January 2004 (see below). Refining operations are organized into tworefining centers. The Northeast Refining Complex is comprised of the Marcus Hook, Philadelphia and Eagle Point refineries, while the MidContinent RefiningComplex is comprised of the Toledo and Tulsa refineries.

2003 2002 2001

Income (loss) (millions of dollars) $261 $(31) $290Wholesale margin* (per barrel):Total Refining and Supply $4.76 $2.83 $4.77Northeast Refining Complex $4.63 $2.47 $3.98MidContinent Refining Complex $5.05 $3.69 $6.54Throughputs (thousands of barrels daily):Crude oil 708.1 689.9 687.7Other feedstocks 53.2 58.4 47.9

Total throughputs 761.3 748.3 735.6

Products manufactured (thousands of barrels daily):Gasoline 375.6 375.2 356.1Middle distillates 236.7 231.2 230.0Residual fuel 59.8 55.9 56.4Petrochemicals 27.9 30.5 30.0Lubricants 13.6 13.1 12.2Other 77.6 73.4 82.5

Total production 791.2 779.3 767.2Less: Production used as fuel in refinery operations 37.1 37.0 37.0

Total production available for sale 754.1 742.3 730.2

Crude unit capacity (thousands of barrels daily) atDecember 31** 730.0 730.0 730.0Crude unit capacity utilized 97% 95% 94%Conversion capacity*** (thousands of barrels daily) atDecember 31 306.7 306.7 306.7Conversion capacity utilized 98% 95% 90%

* Wholesale sales price less cost of crude oil, other feedstocks, product purchases, internally produced fuel and related terminalling and transportation divided by productionavailable for sale. Prior−year amounts have been restated to conform to the current−year presentation.

** In January 2004, crude unit capacity increased to 890 thousands of barrels daily. This change reflects the acquisition of the 150 thousand barrels−per−dayEagle Point refinery and a 10 thousand barrels−per−day adjustment at the Toledo refinery reflecting the increased reliability and enhanced operations at thisfacility in recent years.

*** Represents capacity to upgrade lower−value, heavier petroleum products into higher−value, lighter products. In January 2004, conversion capacity increased to 361.7thousands of barrels daily as a result of the Eagle Point refinery acquisition.

Refining and Supply segment results increased $292 million in 2003 primarily due to significantly higher margins ($339 million) and a 2 percent increase in totalproduction volumes ($13 million). The margin improvement resulted largely from low industry inventory levels, stronger product demand, the exceptionally coldwinter weather in early 2003 and industry−related operating problems in part due to an electrical power failure in the Northeast. Partially offsetting these positivefactors were higher expenses ($53 million), primarily refinery fuel and utility costs and employee−related expenses.Refining and Supply segment results decreased $321 million in 2002 due to significantly lower realized margins ($341 million) compared to the strong levels in2001, partially offset by higher production volumes ($9 million) and a benefit attributable to LIFO inventory profits ($5 million). The margin decline resultedlargely from rising crude oil prices throughout the year and high industry inventory levels. Warmer winter weather in early 2002, reduced jet fuel demand andmuch lower natural gas prices also impacted margins for

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distillates and other related fuel oil products. Margins at the MidContinent Refining Complex during 2001 were exceptionally high, in part, due to the industrysupply disruptions in the Midwest during the second and third quarters of that year.During 2002, Sunoco recorded a $2 million after−tax charge to write off certain processing units at its Toledo refinery that were shut down as part of its decisionto eliminate less efficient production capacity and established a $3 million after−tax accrual relating to a lawsuit concerning the Puerto Rico refinery, which wasdivested in December 2001 (see “Corporate and Other” below). During 2000, Sunoco announced its intention to sell its Value Added and Eastern Lubricantsoperations due to the inability to achieve an adequate return on capital employed in this business and recorded a $123 million after−tax charge at that time towrite down the assets held for sale to their estimated fair values less costs to sell. In connection with this decision, Sunoco sold its lubricants marketing assets inMarch 2001, closed its lubricants blending plants in Marcus Hook, PA, Tulsa, OK and Richmond, CA in July 2001 and sold the Puerto Rico refinery inDecember 2001, which concluded the lubricants restructuring plan. As part of the restructuring, in 2001, Sunoco recorded a net after−tax charge of $10 million.The items recorded in the 2001−2002 period are reported as part of the Asset Write−Downs and Other Matters shown separately under Corporate and Other inthe Earnings Profile of Sunoco Businesses (see Note 3 to the consolidated financial statements).In January 2004, Sunoco completed the purchase of the 150 thousand barrels−per−day Eagle Point refinery and related assets from El Paso Corporation for $235million, including an estimated $124 million for crude oil and refined product inventory. In connection with this transaction, Sunoco assumed certainenvironmental and other liabilities. The Eagle Point refinery is located in Westville, NJ near the Company’s existing Northeast refining operations. Managementbelieves the acquisition of the Eagle Point refinery complements and enhances the Company’s refining operations in the Northeast and enables the capture ofsignificant synergies in the larger Northeast Refining Complex. The related assets acquired include certain pipeline and other logistics assets associated with therefinery which Sunoco intends to sell to Sunoco Logistics Partners L.P. (the “Partnership”), the master limited partnership that is 75.3 percent owned by Sunoco.

Retail MarketingThe Retail Marketing business sells gasoline and middle distillates at retail and operates convenience stores in 25 states primarily on the East Coast and in theMidwest region of the United States.

2003 2002 2001

Income (millions of dollars) $91 $20 $87Retail margin* (per barrel):Gasoline $4.34 $3.14 $4.27Middle distillates $4.73 $4.14 $4.72Sales (thousands of barrels daily):Gasoline 276.5 262.3 244.1Middle distillates 40.3 36.4 35.0

316.8 298.7 279.1

Retail gasoline outlets 4,528 4,381 4,151

* Retail sales price less wholesale price and related terminalling and transportation costs divided by total sales volumes. The retail sales price is the weighted average pricereceived through the various branded marketing distribution channels.

Retail marketing segment income increased $71 million in 2003 primarily due to a higher average retail gasoline margin ($73 million), which was up 2.9 centsper gallon, or 38 percent, versus 2002. Also contributing to the improvement were higher retail distillate margins ($5 million), higher gasoline and distillate salesvolumes ($5 million) and $7 million of after−tax income from the Speedway retail sites acquired from Marathon (see below). Partially offsetting these positivefactors were higher expenses ($18 million), largely employee related.

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Retail marketing segment income decreased $67 million in 2002 primarily due to a lower average retail gasoline margin ($65 million), which was down 2.7 centsper gallon, or 26 percent, versus 2001. Higher expenses ($21 million), largely associated with volume growth, also reduced results. Partially offsetting thesenegative factors were higher retail gasoline sales volumes ($14 million), which increased 7 percent versus 2001 largely due to volumes associated with Coastalretail outlets acquired from El Paso Corporation during the 2001−2002 period (see below), and higher non−gasoline income ($5 million). Average gasoline anddiesel throughput per company−owned or leased outlet and convenience store sales per site were also up, increasing 5 and 8 percent, respectively.In the second quarter of 2003, Sunoco completed the purchase of 193 Speedway retail gasoline sites from Marathon for $162 million, including inventory. Thesites, which are located primarily in Florida and South Carolina, are all Company−operated locations with convenience stores. Of the 193 outlets, Sunoco is thelessee for 54 sites under long−term lease agreements. The Speedway sites are being re−branded as Sunoco locations in 2003 and 2004. In addition, Sunocoacquired 397 and 473 Coastal retail outlets during 2002 and 2001, respectively, from El Paso Corporation for a total of $62 million. These outlets, whichconsisted of 166 Company−owned or leased outlets (including 110 convenience−store locations), 150 dealer−owned traditional outlets and 554distributor−supplied outlets, are located primarily in the Northeastern and Southeastern United States.During 2003, Sunoco intensified its retail portfolio management activities in order to concentrate operations and future investments in geographic areas and indirect or distributor outlet channels with higher potential investment returns. In April 2003, Sunoco announced its intention to sell its interest in 190 retail sites inMichigan and the southern Ohio markets of Columbus, Dayton and Cincinnati (“Midwest Marketing Divestment Program”). During 2003, 75 Company−ownedor leased properties and contracts to supply 23 dealer−owned sites were divested under this program. The cash generated from these divestments totaled $46million, which represents substantially all of the proceeds expected from the program. The remaining 92 sites are virtually all dealer−owned locations that areexpected to be converted to distributor outlets in 2004. During 2003, a $14 million gain ($9 million after tax) was recognized in connection with the MidwestMarketing Divestment Program, which is reported as part of the Asset Write−Downs and Other Matters shown separately in Corporate and Other in the EarningsProfile of Sunoco Businesses. Sunoco continues to supply branded gasoline to substantially all of the divested outlets.In January 2004, Sunoco agreed to purchase 385 retail outlets currently operated under the Mobil® brand from ConocoPhillips for $187 million, plus inventory.The acquisition consists of 114 Company−owned or leased outlets, 36 dealer−owned locations and 235 distributor−supplied outlets. These outlets, which include31 sites that are Company−operated and have convenience stores, are located primarily in Delaware, Maryland, Virginia and Washington, D.C. The transaction,which is subject to certain conditions including regulatory approval and the completion of due diligence, is expected to be completed in the second quarter of2004.

ChemicalsThe Chemicals business manufactures phenol and related products at chemical plants in Philadelphia, PA and Haverhill, OH; polypropylene at facilities in LaPorte, TX, Neal, WV and Bayport, TX; and cumene at the Philadelphia, PA refinery and the recently acquired Eagle Point refinery in Westville, NJ. In addition,propylene and polypropylene are produced at its Marcus Hook, PA Epsilon Products Company, LLC joint venture facility (“Epsilon”) and MTBE is produced atits Mont Belvieu, TX Belvieu Environmental Fuels joint venture facility (“BEF”). A facility in Pasadena, TX, which produces plasticizers, was sold to BASF inJanuary 2004, while a facility in Neville Island, PA will continue to produce plasticizers exclusively for BASF under a three−year tolling agreement.

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2003 2002 2001

Income (millions of dollars) $53 $28 $6Margin* (cents per pound):All products 7.9¢ 6.3¢ 6.4¢Phenol and related products 8.2¢ 6.6¢ 7.4¢Polypropylene** 11.0¢ 9.5¢ 8.9¢Sales (millions of pounds):Phenol and related products 2,629 2,831 2,605Polypropylene** 1,562 1,346 1,384Plasticizers*** 591 615 532Propylene 774 774 715Other 162 178 175

5,718 5,744 5,411

* Wholesale sales price less the cost of feedstocks, product purchases, internally produced fuel and related terminalling and transportation divided by salesvolumes. The polypropylene margin for 2003 excludes the impact of a long−term supply contract entered into on March 31, 2003 with Equistar Chemicals, L.P.which is priced on a cost−based formula that includes a fixed amount (see below).

** Excludes Epsilon joint venture. Includes Bayport facility subsequent to its purchase effective March 31, 2003 (see below).

*** Consists of amounts attributable to the plasticizer business, which was divested in January 2004 (see below).

Chemicals segment income increased $25 million in 2003 due largely to higher margins for both phenol and polypropylene ($50 million) and $14 million ofafter−tax income related to a supply agreement with Equistar Chemicals, L.P. (“Equistar”) and sales from the polypropylene facility acquired from Equistar (seebelow). Partially offsetting the positive variances were higher expenses ($8 million), including natural gas fuel costs; lower sales volumes ($15 million); andlower equity income from BEF ($10 million), due to weakness in MTBE demand. Also included in 2003 results were $4 million of after−tax charges primarilyrelated to employee terminations in connection with a productivity improvement plan.Chemicals segment income increased $22 million in 2002 primarily as a result of higher sales volumes ($14 million), which increased 6 percent versus 2001.Also contributing to the increase were lower operating expenses ($4 million) due to a decline in both fuel costs and controllable expenses and higher equityincome from Sunoco’s joint venture chemical operations ($7 million). Partially offsetting these positive factors were lower margins ($5 million), primarily forphenol and related products.During 2003, BEF recorded a provision to write down its MTBE production facility to its estimated fair value. Sunoco’s share of this provision amounted to $15million after tax. During 2003, Sunoco also announced its intention to sell its plasticizer business and recorded a $17 million after−tax charge to write down theassets held for sale to their estimated fair values less costs to sell and to establish accruals for employee terminations under a postemployment plan and otherrequired exit costs. Sunoco sold this business and related inventory in January 2004 to BASF for approximately $90 million in cash. The sale included theCompany’s plasticizer facility in Pasadena, TX. The Company’s Neville Island, PA site was not part of the transaction and will continue to produce plasticizersexclusively for BASF under a three−year tolling agreement. Sunoco also agreed to provide terminalling services at this facility to BASF for a 15−year period.During 2002, Sunoco shut down a 200 million pounds−per−year polypropylene line at its LaPorte, TX plant and a 170 million pounds−per−year aniline anddiphenylamine production facility in Haverhill, OH. In connection with the 2002 shutdowns, the Company recorded a $14 million after−tax provision in 2002,primarily related to the write−off of the affected assets. These items are reported as part of the Asset Write−Downs and Other Matters shown separately inCorporate and Other in the Earnings Profile of Sunoco Businesses (see Notes 2 and 3 to the consolidated financial statements). The shutdowns have not had amaterial impact on Chemicals’ results of operations.

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Effective March 31, 2003, Sunoco formed a limited partnership with Equistar involving Equistar’s ethylene facility in LaPorte, TX. Equistar is a joint venturebetween Lyondell Chemical Company and Millennium Chemicals Inc. In connection with this transaction, Equistar and the new partnership entered into a 700million pounds−per−year, 15−year propylene supply contract with Sunoco. Of this amount, 500 million pounds per year is priced on a cost−based formula thatincludes a fixed discount that declines over the life of the contract, while the remaining 200 million pounds per year is based on market prices. Sunoco alsopurchased Equistar’s polypropylene facility in Bayport, TX. Sunoco paid $194 million in cash and borrowed $4 million from the seller to form the partnershipand acquire the Bayport facility. Through the new partnership and supply contract, the Company believes it has secured a favorable long−term supply ofpropylene for its Gulf Coast polypropylene business. Realization of these benefits is largely dependent upon performance by Equistar, which has a credit ratingbelow investment grade. Equistar has not given any indication that it will not perform under its contracts. In the event of nonperformance, Sunoco has collateraland certain other contractual rights under the partnership agreement. The acquisition of the Bayport facility has increased the Company’s polypropylene capacity,complementing and enhancing the Company’s existing polypropylene business and strengthening its market position (see Note 3 to the consolidated financialstatements).Effective January 1, 2001, Sunoco completed the acquisition of Aristech, a wholly owned subsidiary of Mitsubishi Corporation (“Mitsubishi”), for $506 millionin cash and the assumption of $163 million in debt. The purchase price included $107 million for working capital. Contingent payments with a net present valueas of the acquisition date of up to $167 million (the “earn out”) may also be made if realized margins for polypropylene and phenol exceed certain agreed uponthresholds through 2006. As of December 31, 2003, no such payments have been earned. Since the $167 million represents a present value as of January 1, 2001,the actual amounts that could ultimately be paid under the earn out provisions increase over time by a contract−specified 11 percent per year. However, thesecontingent payments are limited to $90 million per year. Any earn out payments would be treated as adjustments to the purchase price. Sunoco also entered into amargin hedge agreement with Mitsubishi whereby Mitsubishi provided polypropylene margin protection for 2001 of up to $6.5 million per quarter. In connectionwith the margin hedge agreement, Sunoco received $19.5 million from Mitsubishi in 2001 related to Aristech’s operations for the first nine months and anadditional $6.5 million in the first quarter of 2002 related to the 2001 fourth quarter’s operations. These payments were reflected as reductions in the purchaseprice when received. In addition, Mitsubishi is responsible during a 25−year indemnification period for up to $100 million of potential environmental liabilitiesof the business arising out of or related to the period prior to the acquisition date.

LogisticsThe Logistics business operates refined product and crude oil pipelines and terminals and conducts crude oil acquisition and marketing activities primarily in theNortheast, Midwest and South Central regions of the United States. In addition, the Logistics business has an ownership interest in several refined product andcrude oil pipeline joint ventures. Logistics operations are conducted primarily through Sunoco Logistics Partners L.P., the master limited partnership that is 75.3percent owned by Sunoco (see “Capital Resources and Liquidity—Other Cash Flow Information” below).

2003 2002 2001

Income (millions of dollars) $26 $33 $42Pipeline and terminal throughput (thousands of barrels daily)*:Unaffiliated customers 827 768 554Affiliated customers 1,225 1,286 1,435

2,052 2,054 1,989

* Consists of 100 percent of the throughput of pipelines and terminals owned and operated by the Partnership.

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Logistics segment income decreased $7 million in 2003 largely due to $12 million of after−tax charges for litigation associated with two pipeline spills thatoccurred in prior years, partially offset by increased joint−venture income associated with assets acquired in 2002 (see below). In 2002, Logistics segmentincome decreased $9 million primarily due to Sunoco’s reduced ownership interest in the Partnership subsequent to the February 8, 2002 initial public offering,partially offset by higher income from terminal facility operations.During 2002, Sunoco recorded a $3 million after−tax charge to reflect the Partnership’s write−off of a pipeline located in Pennsylvania and New York and arelated refined products terminal that were idled because they became uneconomic to operate. This amount is reported as part of the Asset Write−Downs andOther Matters shown separately in Corporate and Other in the Earnings Profile of Sunoco Businesses (see Note 3 to the consolidated financial statements).In November 2002, the Partnership completed the acquisition from an affiliate of Union Oil Company of California (“Unocal”) of interests in three Midwesternand Western U.S. products pipeline companies, consisting of a 31.5 percent interest in Wolverine Pipe Line Company, a 9.2 percent interest in West Shore PipeLine Company and a 14.0 percent interest in Yellowstone Pipe Line Company, for $54 million in cash. During September 2003, the Partnership acquired anadditional 3.1 percent interest in West Shore Pipe Line Company for $4 million, increasing its overall ownership interest in West Shore to 12.3 percent. InNovember 2002, the Partnership also completed the acquisition of an additional interest in West Texas Gulf pipeline for $6 million in cash, which increased itsownership interest in this pipeline from 17.3 percent to 43.8 percent.

CokeThe Coke business makes high−quality, blast furnace coke at its Indiana Harbor facility in East Chicago, IN and Jewell facility in Vansant, VA and producesmetallurgical coal from mines in Virginia primarily for use at the Jewell cokemaking facility.

2003 2002 2001

Income (millions of dollars) $43 $42 $61Coke sales (thousands of tons) 2,024 2,158 2,002

Coke segment income increased $1 million in 2003 primarily due to higher coke prices at Jewell and the absence of a $4 million after−tax write−off of accountsreceivable from National Steel Corporation (“National”) recognized in 2002 in connection with this former long−term contract customer’s Chapter 11bankruptcy filing. Partially offsetting these factors were lower tax benefits from Jewell coke operations largely due to the expiration of tax credits for certainovens effective January 1, 2003 (see below). As part of its bankruptcy proceedings, National rejected its contract with Jewell. As a result, Jewell’s 2002 cokesales were made into lower−value short−term markets. Coke segment income decreased $19 million in 2002 due largely to the lower sales prices at Jewell andthe accounts receivable write−off. Partially offsetting these factors were higher sales volumes and related tax benefits due to the liquidation of coke inventory atJewell.The Coke business has third−party investors in its Jewell and Indiana Harbor cokemaking operations which are currently entitled to 98 percent of the cash flowsand tax benefits from the respective cokemaking operations during preferential return periods which continue until they recover their investments and achieve acumulative return thereon that averages approximately 10 percent after tax. Income is recognized by the Coke business as coke production and sales generatecash flows and tax benefits which are allocated to Sunoco and the third−party investors. The Coke business’ after−tax income attributable to the tax benefits,which primarily consist of nonconventional fuel credits, was $38, $50 and $48 million after tax in 2003, 2002 and 2001, respectively. In addition, expense isrecognized to reflect the investors’ preferential returns. Such expense, which is included in Net

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Financing Expenses and Other under Corporate and Other in the Earnings Profile of Sunoco Businesses, totaled $36, $27 and $21 million after tax in 2003, 2002and 2001, respectively.Under the current tax law, beginning in 2003, a portion of the coke production at Jewell is no longer entitled to tax credits, which has resulted in a decline inCoke’s annual income of $6 million after tax. The remainder of the coke production at Jewell and all of the production at Indiana Harbor are eligible to generatecredits through 2007.The preferential return period for the Jewell operation is expected to end in 2011. The preferential return period for the first investor in the Indiana Harboroperation ended in July 2002, at which time the first investor’s interest in the cash flows and tax benefits from Indiana Harbor decreased from 95 percent to 5percent. As a result of an additional $215 million investment in July 2002, third−party investors’ interests in Indiana Harbor increased from 5 percent to 98percent. The new investor’s preferential return period for the Indiana Harbor operation is expected to end in 2007. The estimated lengths of these preferentialreturn periods are based upon the Company’s current expectations of future operations, including sales volumes and prices, raw material and operating costs andcapital expenditure levels. Better−than−expected results will shorten the investors’ preferential return periods, while lower−than−expected results will lengthenthe periods.After these preferential return periods, the investor in the Jewell operation will be entitled to a minority interest in the cash flows and tax benefits from Jewellamounting to 18 percent, while the investors in the Indiana Harbor operation will be entitled to a minority interest in the cash flows and tax benefits from IndianaHarbor initially amounting to 34 percent and declining to 10 percent by 2038.Substantially all coke sales are currently made under long−term contracts with International Steel Group (“ISG”) and Ispat Inland Inc. (“Ispat”). Both ISG andIspat have credit ratings below investment−grade. Neither ISG nor Ispat have given any indication that they will not perform under their contracts. However, inthe event of nonperformance, the Coke business’ results of operations and cash flows may be adversely affected and the period during which the third−partyinvestors are entitled to preferential returns could be extended.In October 2003, Sun Coke entered into an agreement with three affiliates of ISG under which Sun Coke will build and operate a 550,000 tons−per−yearcokemaking facility in Haverhill, OH. Construction of this facility, which is estimated to cost approximately $140 million, commenced in December 2003, andthe facility is expected to be operational in March 2005. In connection with this agreement, ISG has agreed to purchase 550,000 tons per year of coke from thisfacility, which is in addition to the 700,000 tons it currently is purchasing annually from Jewell’s production through 2005. These two contracts have beencombined into a 15−year, 1.25 million tons−per−year contract. In addition, the heat recovery steam generation associated with the cokemaking process at thisfacility will provide low cost steam to the Company’s adjacent chemical manufacturing complex.In April 2003, Sun Coke entered into an agreement with three major steel companies and a major iron ore producer under which Sun Coke would build andoperate a production facility and associated cogeneration power plant in Vitória, Brazil. The companies have agreed to long−term commitments whereby SunCoke would produce coke for the customers under a tolling agreement, and each customer would purchase a pro−rata share of the power produced at the facility.Sun Coke’s commitment to this project is subject to a number of contingencies including: approval by Sunoco’s Board of Directors; finalization of theconstruction cost; obtaining all requisite permits; and obtaining financing satisfactory to Sunoco. If these contingencies are satisfied, construction of the facilities,which is estimated to cost approximately $300−$350 million, would begin in 2004, and management expects the facilities would be operational in 2006.

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Corporate and OtherCorporate Expenses—Corporate administrative expenses increased $14 million in 2003 largely due to higher employee−related expenses, including pensionand performance−related incentive compensation.Net Financing Expenses and Other—Net financing expenses and other increased $8 million in 2003 primarily due to the $9 million increase in after−taxexpense attributable to the preferential return of third−party investors in Sunoco’s cokemaking operations (see “Coke” above). In 2002, net financing expensesand other increased $9 million largely due to higher after−tax preferential return expense ($6 million), higher interest expense ($2 million) and lower interestincome ($1 million). Partially offsetting these negative factors was higher capitalized interest ($2 million).Income Tax Settlements—During 2001, Sunoco settled certain federal income tax issues which increased net income by $21 million.Asset Write−Downs and Other Matters—During 2003, Chemicals’ one−third−owned BEF joint venture recorded a provision to write down its MTBEproduction facility to its estimated fair value. Sunoco’s share of this provision amounted to $15 million after tax. In 2003, Sunoco also recorded a $17 millionafter−tax charge to write down Chemicals’ plasticizer assets that were held for sale at December 31, 2003 to their estimated fair values less costs to sell and toestablish accruals for employee terminations under a postemployment plan and other required exit costs; and a $9 million after−tax gain from Retail Marketing’ssale of service stations in connection with its Midwest Marketing Divestment Program.During 2002, Sunoco recorded a $14 million after−tax provision to write off a 200 million pounds−per−year polypropylene line at Chemicals’ LaPorte, TX plantand a 170 million pounds−per−year aniline and diphenylamine production facility at Chemicals’ Haverhill, OH plant and to recognize related shutdown costs;recorded a $2 million after−tax provision in connection with the shutdown of certain processing units at Refining and Supply’s Toledo refinery; recorded a $3million after−tax provision to write off an idled Logistics business refined products pipeline and terminal; and established a $3 million after−tax accrual relatingto a lawsuit concerning the Puerto Rico refinery, which was divested in 2001.During 2001, Sunoco recorded a $23 million after−tax charge for employee terminations and other required exit costs primarily related to the disposal of itsValue Added and Eastern Lubricants operations; recorded an $11 million after−tax gain on the sale of the Company’s Puerto Rico refinery; and reversed an $11million after−tax accrual for warranty claims and other contingent liabilities established in connection with the disposal of the Company’s real estate business.For a further discussion of the provisions for asset write−downs and other matters, see Notes 2 and 3 to the consolidated financial statements.

Analysis of Consolidated Statements of OperationsRevenues—Total revenues were $17.93 billion in 2003, $14.38 billion in 2002 and $14.14 billion in 2001. The 25 percent increase in 2003 was primarily due tosignificantly higher refined product prices. Also contributing to the increase were higher crude oil sales in connection with the crude oil gathering and marketingactivities of the Company’s Logistics operations, higher refined product and convenience store merchandise sales volumes largely due to the acquisition of theSpeedway retail sites and higher consumer excise taxes. In 2002, the 2 percent increase was primarily due to higher refined product sales volumes, higherconsumer excise taxes, higher crude oil sales in connection with the crude oil gathering and marketing activities of the Company’s Logistics operations andhigher merchandise sales at the Company’s convenience store outlets. Partially offsetting these increases were lower refined product sales prices.

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Costs and Expenses—Total pretax costs and expenses were $17.43 billion in 2003, $14.46 billion in 2002 and $13.56 billion in 2001. The 21 percent increasein 2003 was primarily due to significantly higher crude oil and refined product acquisition costs, largely as a result of crude oil price increases. Also contributingto the increase were higher crude oil costs in connection with the crude oil gathering and marketing activities of the Company’s Logistics operations, higherconsumer excise taxes, higher selling, general and administrative expenses and the cost of higher merchandise sales at the Company’s convenience store outlets.In 2002, the 7 percent increase was primarily due to higher crude oil and refined product acquisition costs, higher consumer excise taxes, higher crude oil costs inconnection with the crude oil gathering and marketing activities of the Company’s Logistics operations and the cost of higher merchandise sales at theCompany’s convenience store outlets. Partially offsetting these increases were lower operating costs due to a decline in refinery fuel costs.

Financial ConditionCapital Resources and LiquidityCash and Working Capital—At December 31, 2003, Sunoco had cash and cash equivalents of $431 million compared to $390 million at December 31, 2002and $42 million at December 31, 2001 and had a working capital deficit of $102 million compared to working capital of $122 million at December 31, 2002 anda working capital deficit of $268 million at December 31, 2001. The $41 million increase in cash and cash equivalents in 2003 was due to $993 million of netcash provided by operating activities (“cash generation”), partially offset by a $720 million net use of cash in investing activities and a $232 million net use ofcash in financing activities. The $348 million increase in cash and cash equivalents in 2002 was due to $547 million of net cash provided by operating activitiesand $233 million of net cash provided by financing activities, partially offset by $432 million of net cash used in investing activities. Sunoco’s working capitalposition is considerably stronger than indicated because of the relatively low historical costs assigned under the LIFO method of accounting for most of theinventories reflected in the consolidated balance sheets. The current replacement cost of all such inventories exceeded their carrying value at December 31, 2003by $1,025 million. Inventories valued at LIFO, which consist of crude oil, and petroleum and chemical products, are readily marketable at their currentreplacement values. Management believes that the current levels of cash and working capital are adequate to support Sunoco’s ongoing operations.Cash Flows from Operating Activities—In 2003, Sunoco’s cash generation was $993 million compared to $547 million in 2002 and $779 million in 2001. The$446 million increase in cash generation in 2003 was largely due to an increase in net income, higher deferred income tax expense, higher depreciation, depletionand amortization and a $73 million income tax refund received in 2003, partially offset by a decrease in other working capital sources pertaining to operatingactivities. The $232 million decrease in cash generation in 2002 was primarily due to a decrease in net income and lower deferred income tax expense, partiallyoffset by a decrease in working capital uses pertaining to operating activities. The cash generated from working capital changes in 2002 was largely the result ofthe liquidation of approximately 6 million barrels of crude oil and petroleum products. Increases in crude oil prices in both 2003 and 2002 increased cashgeneration as the payment terms on Sunoco’s crude oil purchases are generally longer than the terms on product sales.Other Cash Flow Information—Divestment activities have also been a source of cash. During the 2001−2003 period, proceeds from divestments totaled $151million and related primarily to the divestment of retail gasoline outlets.In 2002, Sunoco transferred an additional interest in its Indiana Harbor cokemaking operation to a third−party investor for $215 million in cash. Sunoco did notrecognize any gain or loss at the date of this transaction. (See Note 13 to the consolidated financial statements.)

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On February 8, 2002, the Company contributed a substantial portion of its Logistics business to Sunoco Logistics Partners L.P. in exchange for a 73.2 percentlimited partner interest, a 2 percent general partnership interest, incentive distribution rights and a $245 million special distribution, representing the net proceedsfrom the Partnership’s sale of $250 million ten−year 7.25 percent senior notes. The Partnership concurrently issued 5.75 million limited partnership units,representing a 24.8 percent interest in the Partnership, in an initial public offering at a price of $20.25 per unit. Proceeds from the offering, which totaledapproximately $96 million net of underwriting discounts and offering expenses, were used by the Partnership to establish working capital that was notcontributed to the Partnership by Sunoco. Sunoco liquidated this retained working capital subsequent to the Partnership’s formation. The proceeds from theliquidation and from the special distribution were used by Sunoco for general corporate purposes, including the repayment of outstanding commercial paper.The Partnership, which is included in Sunoco’s consolidated financial statements, distributes to its general and limited partners all available cash (generally cashon hand at the end of each quarter less the amount of cash the general partner determines in its reasonable discretion is necessary or appropriate to: provide forthe proper conduct of the Partnership’s business; comply with applicable law, any of the Partnership’s debt instruments or other agreements; pay fees andexpenses, including payments to the general partner; or provide funds for distribution to unitholders and to the general partner for any one or more of the nextfour quarters). The minimum quarterly distribution is 2 percent of all available cash to the general partner and $.45 per limited partnership unit, or a total of $42million per year. Sunoco’s 17.02 million limited partnership units consist of 5.64 million common units and 11.38 million subordinated units. Distributions onSunoco’s subordinated units are payable only after the minimum quarterly distribution for the common units held by the public and Sunoco, including anyarrearages, have been made. The subordinated units convert to common units when certain financial tests related to earning and paying the minimum quarterlydistribution for the preceding three consecutive one−year periods have been met. The Partnership earned and made its minimum quarterly distributions per unitin 2002 and 2003. The Partnership increased its quarterly distribution per unit from the minimum of $.45 to $.4875 for the fourth quarter of 2002 and then to $.50for the second quarter of 2003, $.5125 for the third quarter of 2003 and $.55 for the fourth quarter of 2003.The Partnership acquired interests in numerous pipelines during 2002, which were financed with long−term borrowings (see “Capital Expenditures andAcquisitions” below). The Partnership intends to implement additional growth opportunities in the future, both within its current system and with third−partyacquisitions. The Partnership expects to finance these capital outlays with a combination of long−term borrowings and the issuance of additional limitedpartnership units to the public to maintain a balanced capital structure. Any issuance of limited partnership units to the public would dilute Sunoco’s ownershipinterest in the Partnership.Concurrent with the initial public offering, Sunoco entered into various agreements with the Partnership which require Sunoco to pay for minimum storage andthroughput usage of certain Partnership assets. These commitments represent approximately 85 to 90 percent of Sunoco’s usage of the various assets during 2003and generated approximately $130 million of revenue for the Partnership in 2003. If, other than as a result of force majeure, Sunoco fails to meet its minimumobligations under these agreements, it would be required to pay the amount of any shortfall to the Partnership. Any such payments would be available as a creditin the following year after Sunoco’s minimum obligation for the year had been met. Sunoco’s obligations under these agreements may be reduced or suspendedunder certain circumstances. These agreements also establish fees for administrative services provided by Sunoco to the Partnership and provide indemnificationsby Sunoco to the Partnership for certain environmental, toxic tort and other liabilities.

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Financial Capacity—Management currently believes that future cash generation will be sufficient to satisfy Sunoco’s ongoing capital requirements, to fund itspension obligations (see “Pension Plan Funded Status” below) and to pay the current level of cash dividends on Sunoco’s common stock. However, from time totime, the Company’s short−term cash requirements may exceed its cash generation due to various factors including reductions in margins for products sold andincreases in the levels of capital spending (including acquisitions) and working capital. During those periods, the Company may supplement its cash generationwith proceeds from financing activities.The Company has a revolving credit facility (the “Facility”) totaling $785 million, which consists of a $385 million commitment through July 2005 and a $400million commitment that matures in July 2004. The Facility provides the Company with access to short−term financing and is intended to support the issuance ofcommercial paper and letters of credit. The Company also can borrow directly from the participating banks under the Facility. The Facility is subject tocommitment fees, which are not material. Under the terms of the Facility, Sunoco is required to maintain tangible net worth (as defined in the Facility) in anamount greater than or equal to targeted tangible net worth (targeted tangible net worth being determined by adding $1.0 billion and 50 percent of the excess ofnet income over share repurchases (as defined in the Facility) for each quarter ended after March 31, 2002). At December 31, 2003, the Company’s tangible networth was $1.6 billion and its targeted tangible net worth was $1.1 billion. The Facility also requires that Sunoco’s ratio of consolidated net indebtedness,including borrowings of Sunoco Logistics Partners L.P., to consolidated capitalization (as those terms are defined in the Facility) not exceed .60 to 1. AtDecember 31, 2003, this ratio was .42 to 1. There were no borrowings under the Facility at December 31, 2003 and 2002.Sunoco Logistics Partners L.P. has a three−year $250 million revolving credit facility through January 2005, which is available to fund the Partnership’s workingcapital requirements, to finance acquisitions, and for general partnership purposes. It includes a $20 million distribution sublimit that is available for distributionsto third−party unitholders and Sunoco. At December 31, 2003 and 2002, $65 million was outstanding under this credit facility. The credit facility containscovenants requiring the Partnership to maintain a ratio of up to 4 to 1 of its consolidated total debt to its consolidated EBITDA (each as defined in the creditfacility) and an interest coverage ratio (as defined in the credit facility) of at least 3.5 to 1. At December 31, 2003, the Partnership’s ratio of its consolidated debtto its consolidated EBITDA was 3.0 to 1 and the interest coverage ratio was 5.1 to 1.The following table sets forth Sunoco’s outstanding borrowings:

December 31

(Millions of Dollars) 2003 2002

Current portion of long−term debt $ 103 $ 2Long−term debt 1,350 1,453

Total borrowings $ 1,453 $ 1,455

Sunoco’s ratio of debt (net of cash and cash equivalents) to total capital was 39.6 percent at December 31, 2003 compared to 43.3 percent at December 31, 2002.The Company currently intends to refinance the current portion of long−term debt through the issuance of commercial paper. Management believes there issufficient borrowing capacity available to pursue strategic investment opportunities as they arise. In addition, the Company has the option of issuing additionalshares of its common or preference stock or selling a portion of its Sunoco Logistics Partners L.P. common units.The Company has an effective shelf registration statement which provides the Company with financing flexibility to offer senior and subordinated debt, commonand preferred stock, warrants and trust preferred securities. At December 31, 2003, $1,300 million remains available under this shelf registration statement.Sunoco Logistics Partners L.P. also has a shelf registration, which became effective in 2003. Under this registration statement,

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the Partnership may sell up to a total of $500 million of debt or common units representing limited partner interests. The amount, type and timing of anyfinancings under these registration statements will depend upon, among other things, the Company’s and Partnership’s funding requirements, market conditionsand compliance with covenants contained in the Company’s and Partnership’s respective debt obligations and revolving credit facilities.

Contractual Obligations —The following table summarizes the Company’s significant contractual obligations:

Payment Due Dates

(Millions of Dollars) Total 2004 2005−2006 2007−2008 Thereafter

Long−term debt:Principal $ 1,453 $ 103 $ 222 $ 53 $ 1,075Interest 913 101 193 168 451Operating leases 780 123 197 167 293Purchase obligations:Crude oil, other feedstocks and refinedproducts* 6,822 4,790 601 243 1,188Convenience store items** 1,757 247 707 696 107Transportation and distribution 334 80 59 38 157Fuel and utilities 202 93 95 14 —Obligations supporting financingarrangements*** 97 9 18 17 53Properties, plants and equipment 107 95 12 — —Other 30 6 12 9 3

$ 12,495 $ 5,647 $ 2,116 $ 1,405 $ 3,327

* Includes feedstocks for chemical manufacturing and coal purchases for cokemaking operations.

** Actual amounts will vary based upon the number of Company−operated convenience stores and the level of purchases.

*** Represents fixed and determinable obligations to secure wastewater treatment services at the Toledo refinery and coal handling services at the Indiana Harbor cokemakingfacility.

Sunoco’s operating leases include leases for marine transportation vessels, service stations, office space and other property and equipment. Operating leasesinclude all operating leases that have initial or remaining noncancelable terms in excess of one year. Approximately one half of the $780 million of futureminimum annual rentals relates to time charters for marine transportation vessels. Most of these time charters were recently entered into by the Company andcontain seven−year terms with renewal and sublease options. The lease payments consist of a fixed−price minimum and a variable component based onspot−market rates. In the table above, the variable component of the lease payments has been estimated utilizing the average spot market prices for the year 2003.The actual variable component of the lease payments attributable to these time charters could vary significantly from the estimates included in the table.A purchase obligation is an enforceable and legally binding agreement to purchase goods and services that specifies significant terms, including: fixed orminimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Sunoco has various obligationsto purchase in the ordinary course of business: crude oil, other feedstocks and refined products; convenience store items; transportation and distribution services,including pipeline and terminal throughput and railroad services; and fuel and utilities. Approximately one third of the contractual obligations to purchase crudeoil and other feedstocks and refined products for 2004 relates to spot−market purchases to be satisfied within the first 60−90 days of the year. Sunoco also hascontractual obligations supporting financing arrangements of third parties, contracts to acquire or construct properties, plants and equipment, and othercontractual obligations, primarily related to services and materials, including commitments to purchase supplies and various other maintenance, systems andcommunications services. Most of Sunoco’s purchase obligations are based on market prices or formulas based on market prices. These purchase obligationsgenerally include fixed or minimum volume requirements. The purchase obligation amounts in the table above are based on the minimum quantities to be pur −

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chased at estimated prices to be paid based on current market conditions. Accordingly, the actual amounts may vary significantly from the estimates included inthe table.Sunoco also has obligations with respect to its defined benefit pension plans and postretirement health care plans (see “Pension Plan Funded Status” below andNote 9 to the consolidated financial statements).Off−Balance Sheet Arrangements—Sunoco is contingently liable under an arrangement that guarantees a $120 million term loan due in 2006 of the EpsilonProducts Company, LLC polypropylene joint venture in which the Company is a partner. Under this arrangement, Sunoco also guarantees borrowings under thejoint venture’s $40 million revolving credit facility maturing in September 2006, which amounted to $28 million at December 31, 2003 (see Note 1 to theconsolidated financial statements). Sunoco is also contingently liable under various arrangements, which guarantee debt of third parties aggregating toapproximately $12 million at December 31, 2003. At this time, management does not believe that it is likely that the Company will have to perform under any ofthese guarantees.In December 2003, a wholly owned subsidiary of the Company, Sunoco Receivables Corporation, Inc., entered into a three−year accounts receivablesecuritization facility under which the subsidiary may sell on a revolving basis up to a $200 million undivided interest in a designated pool of certain accountsreceivable. This facility replaces a $200 million facility that was scheduled to terminate in 2004. No receivables have been sold to third parties under either ofthese facilities.

Capital Expenditures and AcquisitionsThe following table sets forth Sunoco’s planned and actual capital expenditures for additions to properties, plants and equipment. Actual capital expenditures areconsistent with the presentation of the 2004 plan amounts in the table as well as with amounts presented in Sunoco’s consolidated financial statements. TheCompany’s significant acquisitions are included as footnotes to the table so that total capital outlays for each business unit can be determined.

(Millions of Dollars) 2004 Plan 2003 2002 2001

Refining and Supply $ 425* $245 $179 $122Retail Marketing** 130 107 124 114Chemicals*** 50* 29 36 30Logistics 27* 39 41† 61Coke 118 5 5 4

Consolidated capital expenditures $ 750 $425 $385 $331

* Excludes $235 million acquisition from El Paso Corporation of the Eagle Point refinery and related pipeline and logistics assets, which includes an estimated $124 millionfor inventory.

** Excludes in 2004, $187 million associated with an agreement, subject to regulatory approval and the completion of due diligence, to purchase from ConocoPhillips 385retail outlets located primarily in Delaware, Maryland, Virginia and Washington, D.C., plus related inventory. Excludes in 2003, the $162 million purchase from a subsidiaryof Marathon Ashland Petroleum LLC of 193 retail gasoline sites located primarily in Florida and South Carolina, which includes $21 million for inventory. Excludes in 2001,the $59 million purchase from The Coastal Corporation of 473 retail gasoline outlets located in the eastern United States, which includes $8 million for inventory.

*** Excludes in 2003, $198 million associated with the formation of a propylene partnership with Equistar Chemicals, L.P. and a related supply contract and the acquisition ofEquistar’s Bayport polypropylene facility, which includes $11 million for inventory. Excludes in 2001, the $649 million acquisition of Aristech Chemical Corporation andrelated working capital.

† Excludes $54 million purchase from an affiliate of Union Oil Company of California (“Unocal”) of interests in three Midwestern and Western U.S. products pipelinecompanies and a $6 million purchase that increased the Partnership’s ownership interest in the West Texas Gulf pipeline from 17.3 percent to 43.8 percent.

In addition to the purchase of the Eagle Point refinery and related pipeline assets in January 2004 and the agreement, subject to regulatory approval and thecompletion of due diligence, to purchase 385 retail outlets in Delaware, Maryland, Virginia and Washington, D.C., the 2004 planned capital outlays include $297million for base spending, $103 million for turnarounds at the Company’s refineries, $175 million for spending associated with meeting clean fuels gasolinespecifications (see “Environmental Matters” below), $112 million towards construction of a $140 million 550,000 tons−per−year cokemaking facility inHaverhill, OH and $63 million for various other income improvement projects. These amounts include spending related to the recently acquired Eagle Pointrefinery subsequent

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to its acquisition. In addition to normal infrastructure and maintenance capital requirements, base spending includes several economic return projects to upgradeSunoco’s existing asset base. These projects include $70 million for new processing equipment, boilers and reinstrumentation projects at the Company’srefineries and $23 million for additional investments to upgrade Sunoco’s existing retail network and enhance its APlus® convenience store presence. Basespending also includes $11 million to complete conversion of the Speedway sites acquired in 2003 to Sunoco branded outlets. With respect to clean fuelsspending, the Company estimates that total capital outlays to comply with Tier II gasoline and diesel specifications will be in the range of $400−$500 million,including amounts attributable to the Eagle Point refinery. The Company expects that most of this spending will occur through 2006. Through year−end 2003,the Company’s Tier II spending totaled $25 million. The Company plans to meet the new gasoline specifications with new gasoline hydrotreaters at its MarcusHook, Philadelphia, Toledo and Eagle Point facilities. Spending in 2004 will include continued engineering and construction work associated with these efforts.The income improvement projects include capital for refinery projects including expenditures to restart an alkylation unit at the Philadelphia refinery and forvarious catalytic cracker upgrades and energy projects. These projects also include capital for new retail units and for production upgrades in certain chemicalsfacilities.In addition to the purchase of the 193 service stations in the Southeast and the transaction with Equistar, the 2003 capital outlays included $284 million for baseinfrastructure and maintenance, $88 million for refinery turnarounds, $23 million for spending to comply with the Tier II low−sulfur gasoline and diesel fuelrequirements and $30 million for various income improvement projects. Base infrastructure spending included $50 million related to the construction of a sulfurplant at the Marcus Hook refinery.In addition to the purchase of interests in three Midwestern and Western U.S. products pipeline companies from Unocal and the increased interest in the WestTexas Gulf pipeline, the 2002 capital outlays included $248 million for base infrastructure, maintenance and regulatory spending, $82 million for refineryturnarounds and $55 million for various income improvement projects.In addition to the Aristech acquisition and the purchase of retail gasoline outlets from The Coastal Corporation, the 2001 capital outlays included $233 millionfor base infrastructure and legally required spending, $54 million for turnarounds at the Company’s refineries and $44 million for income improvement projects.The income improvement projects included expenditures to improve refinery efficiency, grow Sunoco’s retail marketing network and expand certain logisticsassets.

Pension Plan Funded StatusThe following table sets forth the components of the change in market value of the investments in Sunoco’s defined benefit pension plans for 2003 and 2002:

December 31


Market value of investments at beginning of year $ 930 $1,110Increase (reduction) in market value of investments resulting from:Net investment income (loss) 211 (91)Company contributions 89 52Plan benefit payments (159) (141)

$1,071 $ 930

At December 31, 2002, the accumulated benefit obligations of these plans exceeded the market value of plan assets. Accordingly, the Company was required torecord an after−tax charge totaling $176 million to the accumulated other comprehensive loss component of shareholders’ equity in its consolidated balance sheetat December 31, 2002. The increase in the market value of investments during 2003 was substantially offset by an increase in the accumulated benefitobligations, primarily due to a decline in the discount rate from

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6.75 percent at December 31, 2002 to 6.00 percent at December 31, 2003. As a result, the accumulated other comprehensive loss component of shareholders’equity related to pensions declined by $7 million at December 31, 2003.In March 2002, a temporary interest rate relief bill was enacted by Congress that mitigated the impact of a decline in interest rates used in pension fundingcalculations. Congress is currently considering legislation that would extend interest rate relief beyond 2003. The planned employer contributions for 2004 forthe Company’s funded benefit plans, which are estimated to be $50 million, are based on the assumption that this legislation will be enacted. In the event thepending legislation does not become law, the Company’s employer contributions in 2004 and later years could increase significantly. In addition, pensionexpense for 2004 is projected to increase approximately $10 million after tax. Management believes any additional contributions to the pension plans can befunded without a significant impact on liquidity. Future changes in the equity markets and/or the discount rate could result in additional significant increases ordecreases to the accumulated other comprehensive loss component of shareholders’ equity and to future pension expense and funding requirements.

Environmental MattersSunoco is subject to extensive and frequently changing federal, state and local laws and regulations, including, but not limited to, those relating to the dischargeof materials into the environment or that otherwise deal with the protection of the environment, waste management and the characteristics and composition offuels. As with the industry generally, compliance with existing and anticipated laws and regulations increases the overall cost of operating Sunoco’s businesses,including capital costs to construct, maintain and upgrade equipment and facilities. Existing laws and regulations have required, and are expected to continue torequire, Sunoco to make significant expenditures of both a capital and expense nature. The following table summarizes Sunoco’s expenditures for environmentalprojects and compliance activities:


Pollution abatement capital* $114 $ 47 $ 45Remediation 44 49 38Operations, maintenance and administration 127 147 158

$285 $243 $241

* Capital expenditures for pollution abatement are expected to approximate $240 and $270 million in 2004 and 2005, respectively.

These laws and regulations also result in liabilities and loss contingencies for remediation at Sunoco’s facilities and at third−party or formerly owned sites.Sunoco accrues environmental remediation costs for work at identified sites where an assessment has indicated that cleanup costs are probable and reasonablyestimable. Such accruals are undiscounted and are based on currently available information, estimated timing of remedial actions and related inflationassumptions, existing technology and presently enacted laws and regulations. If a range of probable environmental cleanup costs exists for an identified site,FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss,” requires that the minimum of the range be accrued unless some other point in therange is more likely in which case the most likely amount in the range is accrued. Engineering studies, historical experience and other factors are used to identifyand evaluate remediation alternatives and their related costs in determining the estimated accruals for environmental remediation activities. Losses attributable tounasserted environmental claims are also reflected in the accruals to the extent they are probable of occurrence and reasonably estimable. The accrued liabilityfor environmental remediation is classified in the consolidated balance sheets as follows:

December 31


Accrued liabilities $ 44 $ 43Other deferred credits and liabilities 102 116

$146 $159

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The following table summarizes the changes in the accrued liability for environmental remediation activities by category:

(Millions of Dollars) RefineriesMarketing

SitesChemicals

FacilitiesPipelines

and TerminalsHazardous

Waste Sites Other Total

At December 31, 2000 $ 69 $ 42 $ — $ 19 $ 8 $ 3 $141Accruals (2) 21 — 10 2 — 31Payments (6) (19) — (11) (2) — (38)Acquisitions — — 10 — — — 10Other* — 1 — — — — 1

At December 31, 2001 $ 61 $ 45 $ 10 $ 18 $ 8 $ 3 $145Accruals (2) 36 1 7 — — 42Payments (7) (24) (3) (12) (3) — (49)Other* — 15 — 6 — — 21

At December 31, 2002 $ 52 $ 72 $ 8 $ 19 $ 5 $ 3 $159Accruals — 23 1 6 1 (1) 30Payments (9) (22) (2) (10) (1) — (44)Other* — 1 — — — — 1

At December 31, 2003 $ 43 $ 74 $ 7 $ 15 $ 5 $ 2 $146

* Consists of increases in the accrued liability for which recovery from third parties is probable.

Total future costs for the environmental remediation activities identified above will depend upon, among other things, the identification of any additional sites,the determination of the extent of the contamination at each site, the timing and nature of required remedial actions, the technology available and needed to meetthe various existing legal requirements, the nature and terms of cost sharing arrangements with other potentially responsible parties, the availability of insurancecoverage, the nature and extent of future environmental laws, inflation rates and the determination of Sunoco’s liability at the sites, if any, in light of the number,participation level and financial viability of the other parties. Management believes it is reasonably possible (i.e., less than probable but greater than remote) thatadditional environmental remediation losses will be incurred. At December 31, 2003, the aggregate of the estimated maximum additional reasonably possiblelosses, which relate to numerous individual sites, totaled $95 million. However, the Company believes it is very unlikely that it will realize the maximum loss atevery site. Furthermore, the recognition of additional losses, if and when they might occur, would likely extend over many years and, therefore, likely would nothave a material impact on the Company’s financial position.Under various environmental laws, including the Resource Conservation and Recovery Act (“RCRA”) (which relates to solid and hazardous waste treatment,storage and disposal), Sunoco has initiated corrective remedial action at its facilities, formerly owned facilities and third−party sites. At the Company’s majormanufacturing facilities, Sunoco has consistently assumed continued industrial use and a containment/remediation strategy focused on eliminating unacceptablerisks to human health or the environment. The remediation accruals for these sites reflect that strategy. Accruals include amounts to prevent off−site migrationand to contain the impact on the facility property, as well as to address known, discrete areas requiring remediation within the plants. Activities include closure ofRCRA solid waste management units, recovery of hydrocarbons, handling of impacted soil, mitigation of surface water impacts and prevention of off−sitemigration.Many of Sunoco’s current terminals are being addressed with the above containment/remediation strategy. At some smaller or less impacted facilities and somepreviously divested terminals, the focus is on remediating discrete interior areas to attain regulatory closure.Sunoco owns or operates certain retail gasoline outlets where releases of petroleum products have occurred. Federal and state laws and regulations require thatcontamination caused by such releases at these sites and at formerly owned sites be assessed and

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remediated to meet the applicable standards. The obligation for Sunoco to remediate this type of contamination varies, depending on the extent of the release andthe applicable laws and regulations. A portion of the remediation costs may be recoverable from the reimbursement fund of the applicable state, after anydeductible has been met.Future costs for environmental remediation activities at the Company’s marketing sites will also be influenced by the extent of MTBE contamination ofgroundwater aquifers, the cleanup of which will be driven by thresholds based on drinking water protection. Though not all groundwater is used for drinking,several states have initiated or proposed more stringent MTBE cleanup requirements. Cost increases result directly from extended remedial operations andmaintenance on sites that, under prior standards, could otherwise have been completed, installation of additional remedial or monitoring wells and purchase ofmore expensive equipment because of the presence of MTBE. While actual cleanup costs for specific sites are variable and depend on many of the factorsdiscussed above, expansion of similar MTBE remediation thresholds to additional states or adoption of even more stringent requirements for MTBE remediationwould result in further cost increases.The accrued liability for hazardous waste sites is attributable to potential obligations to remove or mitigate the environmental effects of the disposal or release ofcertain pollutants at third−party sites pursuant to the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) (which relates toreleases and remediation of hazardous substances) and similar state laws. Under CERCLA, Sunoco is potentially subject to joint and several liability for the costsof remediation at sites at which it has been identified as a “potentially responsible party” (“PRP”). As of December 31, 2003, Sunoco had been named as a PRPat 49 sites identified or potentially identifiable as “Superfund” sites under federal and state law. The Company is usually one of a number of companies identifiedas a PRP at a site. Sunoco has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon the other partiesinvolved or Sunoco’s negligible participation therein, believes that its potential liability associated with such sites will not be significant.Management believes that none of the current remediation locations, which are in various stages of ongoing remediation, is individually material to Sunoco as itslargest accrual for any one Superfund site, operable unit or remediation area was less than $6 million at December 31, 2003. As a result, Sunoco’s exposure toadverse developments with respect to any individual site is not expected to be material. However, if changes in environmental regulations occur, such changescould impact multiple Sunoco facilities and formerly owned and third−party sites at the same time. As a result, from time to time, significant charges againstincome for environmental remediation may occur.The Company maintains insurance programs that cover certain of its existing or potential environmental liabilities, which programs vary by year, type and extentof coverage. For underground storage tank remediations, the Company can also seek reimbursement through various state funds of certain remediation costsabove a deductible amount. For certain acquired properties, the Company has entered into arrangements with the sellers or others that allocate environmentalliabilities and provide indemnities to the Company for remediating contamination that occurred prior to the acquisition dates. Some of these environmentalindemnifications are subject to caps and limits. No accruals have been recorded for any potential contingent liabilities that will be funded by the prior owners asmanagement does not believe, based on current information, that it is likely that any of the former owners will not perform under any of these agreements. Otherthan the preceding arrangements, the Company has not entered into any arrangements with third parties to mitigate its exposure to loss from environmentalcontamination. Claims for recovery of environmental liabilities that are probable of realization totaled $22 million at December 31, 2003 and are included indeferred charges and other assets in the consolidated balance sheets.

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In December 1999, the U.S. Environmental Protection Agency (“EPA”) adopted a rule under the Clean Air Act (which relates to emissions of materials into theair). This rule phases in limitations on the sulfur content of gasoline beginning in 2004. In January 2001, the EPA adopted another rule which will requirelimitations on the allowable sulfur content of on−road diesel fuel beginning in 2006. The rules include banking and trading credit systems, which could providerefiners flexibility until 2006 for the low−sulfur gasoline and until 2010 for the on−road low−sulfur diesel. These rules are expected to have a significant impacton Sunoco and its operations, primarily with respect to the capital and operating expenditures at its five current refineries. Most of the capital spending is likelyto occur in the 2004−2006 period, while the higher operating costs will be incurred when the low−sulfur fuels are produced. The Company estimates that thetotal capital outlays to comply with the new gasoline and diesel requirements will be in the range of $400−$500 million, including amounts attributable to therecently acquired Eagle Point refinery. Spending to meet these requirements totaled $23 million in 2003. The ultimate impact of the rules may be affected bysuch factors as technology selection, the effectiveness of the systems pertaining to banking and trading credits, timing uncertainties created by permittingrequirements and construction schedules and any effect on prices created by changes in the level of gasoline and diesel fuel production.In April 2002, the EPA issued regulations implementing Phase II of the petroleum refinery Maximum Achievable Control Technology (“MACT II”) rule underthe Clean Air Act. This rule regulates emissions of hazardous air pollutants (including organics, reduced sulfur compounds, inorganics and particulate metals)from certain sources at petroleum refineries, including catalytic cracking and reforming units and sulfur recovery units. The rule requires all petroleum refineriesthat are major sources of hazardous air pollutants to meet emission standards reflecting the application of the maximum achievable control technology at theaffected sources by 2005. Analysis of this rule to determine its impact is ongoing. Although the ultimate impact of the rule cannot be determined at this time, itcould have a significant impact on Sunoco and its operations, primarily with respect to capital expenditures at its refineries.In July 1997, the EPA promulgated new, more stringent National Ambient Air Quality Standards for ozone and fine particles, which is resulting in identificationof non−attainment areas throughout the country, including Texas and Pennsylvania, where Sunoco operates facilities. The EPA is expected to issue final ozonenon−attainment area designations in mid−2004. Fine particle non−attainment areas are not expected to be designated until early 2005. These standards will resultin further controls of both nitrogen oxide and volatile organic compound emissions. Regulatory programs, when established to implement the new standards,could have an impact on Sunoco and its operations. However, the potential financial impact cannot be reasonably estimated until the EPA completes thenon−attainment area designation process and promulgates regulatory programs to attain the standards, and the states, as necessary, develop and implementrevised State Implementation Plans to respond to the new regulations.Since the late 1990s, the EPA has undertaken significant enforcement initiatives under authority of the Clean Air Act, targeting industries with largemanufacturing facilities that are significant sources of emissions, including the refining industry. The EPA has asserted that many of these facilities havemodified or expanded their operations over time without complying with New Source Review regulations that require permits and new emission controls inconnection with any significant facility modifications or expansions that could increase emissions above certain thresholds, and have violated various otherprovisions of the Clean Air Act, including New Source Review and Prevention of Significant Deterioration (“NSR/PSD”) Programs, Benzene Waste OrganicNational Emissions Standards for Hazardous Air Pollutants (“NESHAP”), Leak Detection and Repair (“LDAR”) and flaring requirements. As part of thisenforcement initiative, the EPA has entered into consent agreements with several refiners that require them to pay civil fines and penalties and make significantcapital expenditures to install emissions control equipment at selected

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facilities. For some of these refineries, the cost of the required emissions control equipment is significant, depending on the size, age and configuration of therefinery. Sunoco received information requests in 2000, 2001 and 2002 in connection with the enforcement initiative pertaining to its Marcus Hook, Philadelphia,Toledo and Tulsa refineries, the Puerto Rico refinery divested in 2001 and its phenol facility in Philadelphia, PA. Sunoco has completed its responses to the EPA.In 2003, Sunoco received an additional information request at its phenol plant in Philadelphia.Sunoco has received Notices of Violation and Findings of Violation from the EPA relating to its Marcus Hook, Philadelphia and Toledo refineries. The Noticesand Findings of Violation allege failure to comply with certain requirements relating to benzene wastewater emissions at the Company’s Marcus Hook, Toledoand Philadelphia refineries and failure to comply with certain requirements relating to leak detection and repair at the Toledo refinery. In addition, the EPA hasalleged that: at the Company’s Philadelphia refinery, certain modifications were made to one of the fluid catalytic cracking units in 1992 and 1998 withoutobtaining requisite permits; at the Company’s Marcus Hook refinery, certain modifications were made to the fluid catalytic cracking unit in 1990 and 1996without obtaining requisite permits; and at the Company’s Toledo refinery, certain physical and operational changes were made to the fluid catalytic crackingunit in 1985 without obtaining requisite permits. The EPA has also alleged that at the Company’s Toledo refinery, certain physical and operational changes weremade to the sulfur plant in 1995, 1998 and 1999 without obtaining requisite permits; certain physical and operational changes were made to a flare systemwithout obtaining requisite permits; and that the flare system was not being operated in compliance with the Clean Air Act. Sunoco has met with representativesof the EPA on these Notices and Findings of Violation and is currently evaluating its position. Although Sunoco does not believe that it has violated any CleanAir Act requirements, as part of this initiative, Sunoco could be required to make significant capital expenditures, incur higher operating costs, operate theserefineries at reduced levels and pay significant penalties. There are no liabilities accrued at December 31, 2003 in connection with this initiative. With respect tothe Company’s recently acquired Eagle Point refinery, El Paso Corporation, its prior owner, has entered into a consent decree with the EPA and the New JerseyDepartment of Environmental Protection as part of EPA’s enforcement initiative. Sunoco does not anticipate substantial capital expenditures on its part as a resultof El Paso’s consent decree.Energy policy legislation continues to be debated in the U.S. Congress. The Bush Administration and the U.S. Senate and House have been unable to reachagreement on final legislation. Both chambers passed energy bills in 2003 and a House−Senate Conference Committee produced a conference report. The U.S.House approved the Conference Committee report but the U.S. Senate failed to bring the matter to a vote. The U.S. Senate leadership has introduced new,pared−down legislation for consideration in 2004. The new legislation, like the conference report, would repeal the oxygenate mandate in the Clean Air Act, setcertain requirements for ethanol or renewable fuels usage and phase out the use of MTBE. However, there is no agreement with the U.S. House leadership and nocertainty of any action in either chamber. Sunoco uses MTBE and ethanol as oxygenates in different geographic areas of its refining and marketing system.While federal action is uncertain, California, New York and Connecticut began enforcing state−imposed MTBE bans on January 1, 2004. Sunoco does notmarket in California but is complying with the bans in New York and Connecticut. These bans have resulted in unique gasoline blends, which could have asignificant impact on market conditions depending on the details of future regulations, the impact on gasoline supplies, the cost and availability of ethanol andother alternate oxygenates if the minimum oxygenate requirements remain in effect, and the ability of Sunoco and the industry in general to recover their costs inthe marketplace. A number of additional states are considering bans on MTBE although no immediate action is anticipated.

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Sunoco, along with other refiners, manufacturers and sellers of gasoline, and owners and operators of retail gasoline sites, are defendants in various cases in 17states alleging MTBE contamination in groundwater. Plaintiffs include private litigants, governments and quasi−governmental entities, including various waterauthorities and towns, and the State of New Hampshire. Plaintiffs generally are alleging product liability for defective product, groundwater contamination,nuisance, trespass, negligence, failure to warn, violation of environmental laws and deceptive business practices. Plaintiffs are seeking compensatory damages,and in some cases injunctive relief and punitive damages. Up to this point, for the group of MTBE cases currently pending, there has been little informationdeveloped about the plaintiffs’ legal theories or the facts that would be relevant to an analysis of potential exposure. Based on the current law and facts availableat this time, Sunoco believes that these cases will not have a material adverse effect on its consolidated financial position.Management believes that the environmental matters discussed above are potentially significant with respect to results of operations or cash flows for any oneyear. However, management does not believe that such matters will have a material impact on Sunoco’s consolidated financial position or, over an extendedperiod of time, on Sunoco’s cash flows or liquidity.

Derivative InstrumentsSunoco uses swaps, options, futures, forwards and other derivative instruments to hedge a variety of risks. Derivative instruments are used from time to time toachieve ratable pricing of crude oil purchases, to convert certain refined product sales to fixed or floating prices, to lock in what Sunoco considers to beacceptable margins for various refined products and to lock in a portion of the Company’s electricity and natural gas costs. In addition, Sunoco uses derivativecontracts from time to time to reduce foreign exchange risk relating to certain export sales denominated in foreign currencies. Sunoco does not hold or issuederivative instruments for trading purposes.Sunoco is at risk for possible changes in the market value of all of its derivative contracts; however, such risk would be mitigated by price changes in theunderlying hedged items. At December 31, 2003, Sunoco had accumulated net derivative losses, before income taxes, of $1 million on its open derivativecontracts. The potential incremental loss on these derivatives from a hypothetical 10 percent adverse change in the year−end market prices of the underlyingcommodities that were being hedged by derivative contracts at December 31, 2003 was estimated to be $8 million. This hypothetical loss was estimated bymultiplying the difference between the hypothetical and the actual year−end market prices of the underlying commodities by the contract volume amounts. TheCompany also had accumulated net derivative gains, before income taxes, of $2 million at December 31, 2003 on closed options and futures contracts, whichrelate to hedged transactions occurring in 2004.Sunoco also is exposed to credit risk in the event of nonperformance by derivative counterparties. Management believes this risk is negligible as itscounterparties are either regulated by exchanges or are major international financial institutions or corporations with investment−grade credit ratings. (See Note16 to the consolidated financial statements.)

Cash Dividends and Share RepurchasesThe Company has paid cash dividends on a regular quarterly basis since 1904. Commencing with the fourth quarter of 2003, the Company increased thequarterly dividend paid on common stock from $.25 per share ($1.00 per year) to $.275 per share ($1.10 per year). The Company expects to continue to pay thequarterly common stock cash dividend at its current level.

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In 2003 and 2001, the Company repurchased 2.9 and 10.7 million shares, respectively, of its common stock for $136 and $393 million, respectively. TheCompany did not repurchase any of its common stock during 2002. At December 31, 2003, the Company had a remaining authorization from its Board ofDirectors to purchase up to $243 million of Company common stock in the open market from time to time depending on prevailing market conditions andavailable cash.

Critical Accounting PoliciesA summary of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements. Management believes that theapplication of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information aboutthe Company’s operating results and financial condition. The preparation of Sunoco’s consolidated financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Significantitems that are subject to such estimates and assumptions consist of retirement benefit liabilities, long−lived assets and environmental remediation activities.Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances,actual results may differ to some extent from the estimates on which the Company’s consolidated financial statements are prepared at any point in time. Despitethese inherent limitations, management believes the Company’s Management’s Discussion and Analysis and consolidated financial statements provide ameaningful and fair perspective of the Company. Management has reviewed the assumptions underlying its critical accounting policies with the Audit Committeeof Sunoco’s Board of Directors.

Retirement Benefit LiabilitiesSunoco has noncontributory defined benefit pension plans which provide retirement benefits for approximately one−half of its employees. Sunoco also haspostretirement benefit plans which provide health care benefits for substantially all of its retirees. The postretirement benefit plans are unfunded and the costs areshared by Sunoco and its retirees. The levels of required retiree contributions to these plans are adjusted periodically, and the plans contain other cost−sharingfeatures, such as deductibles and coinsurance. In addition, in 1993, Sunoco implemented a dollar cap on its future contributions for its principal retirement healthcare benefits plan, which significantly reduces the impact of future cost increases on the estimated postretirement benefit expense and benefit obligation.The principal assumptions that impact the determination of both expense and benefit obligations for Sunoco’s pension plans are the discount rate, the long−termrate of return on plan assets and the rate of compensation increase. The discount rate and the health care cost trend are the principal assumptions that impact thedetermination of expense and benefit obligations for Sunoco’s postretirement health care plans.The discount rates used to determine the present value of future pension payments and medical costs are based on the yields on high−quality, fixed incomeinvestments (such as Moody’s Aa−rated long−term corporate bonds). The present values of Sunoco’s future pension and other postretirement obligations weredetermined using discount rates of 6.00 percent at December 31, 2003 and 6.75 percent at December 31, 2002. Sunoco’s expense under these plans is determinedusing the discount rate as of the beginning of the year, which was 6.75 percent for 2003, 7.25 percent for 2002, 7.50 percent for 2001, and is 6.00 percent for2004.

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The long−term rate of return on plan assets was assumed to be 8.75 percent for 2003 and 9 percent for both 2002 and 2001, while the rate of compensationincrease was assumed to be 4 percent for each of the last three years. A rate of return of 8.75 percent on plan assets and a rate of compensation increase of 4percent will be used to determine Sunoco’s pension expense for 2004. The expected rate of return on plan assets is estimated utilizing a variety of factorsincluding the historical investment return achieved over a long−term period, the targeted allocation of plan assets and expectations concerning future returns inthe marketplace for both equity and debt securities. In determining pension expense, the Company applies the expected rate of return to the market−related valueof plan assets at the beginning of the year, which is determined using a quarterly average of plan assets from the preceding year. The expected return on planassets is designed to be a long−term assumption. It generally will differ from the actual annual return which is subject to considerable year−to−year variability.As permitted by existing accounting rules, the Company does not recognize currently in pension expense the difference between the expected and actual returnon assets. Rather, the difference is deferred along with other actuarial gains or losses resulting from differences between actuarial assumptions used in accountingfor the plans and changes in these assumptions (primarily the discount rate) and actual experience. If such unrecognized gains and losses on a cumulative basisexceed 10 percent of the projected benefit obligation, the excess is amortized into income as a component of pension or postretirement benefits expense over theremaining service period of plan participants still employed with the Company, which currently is approximately 12 years. At December 31, 2003, theunrecognized net loss for defined benefit and postretirement benefit plans was $433 and $83 million, respectively. For 2003, the pension plan assets generated apositive return of 24.1 percent, compared to a negative return of 8.2 percent in 2002 and a negative return of 2.9 percent in 2001. For the fifteen−year periodended December 31, 2003, the compounded annual investment return on Sunoco’s pension plan assets was 10.0 percent.The asset allocation for Sunoco’s pension plans at December 31, 2003 and 2002 and the target allocation of plan assets for 2004, by asset category, are asfollows:

December 31

(In Percentages) 2004 Target * 2003 2002

Asset category:Equity securities 60% 62% 57%Debt securities 35 33 37 Other 5 5 6

Total 100% 100% 100%

* The target allocation has been in effect since 1999.

The rate of compensation increase assumption has been indicative of actual increases during the 2001−2003 period.The initial health care cost trend assumptions used to compute the accumulated postretirement benefit obligation were increases of 11.4 percent, 12.2 percent and8.3 percent at December 31, 2003, 2002 and 2001, respectively. These trend rates were assumed to decline gradually to 5.5 percent in 2008 and to remain at thatlevel thereafter.

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Set forth below are the estimated increases in pension and postretirement benefits expense and benefit obligations that would occur in 2004 from a change in theindicated assumptions:

(Dollars in Millions)Changein Rate Expense

BenefitObligations*

Pension benefits:Decrease in the discount rate .25% $4 $42Decrease in the long−term rate of return on plan assets .25% $2 $—Increase in rate of compensation .25% $2 $9Postretirement benefits:Decrease in the discount rate .25% $— $9Increase in the annual health care cost trend rates 1.00% $1 $13

* Represents the projected benefit obligations for defined benefit plans and the accumulated postretirement benefit obligations for postretirement benefit plans.

Long−Lived AssetsThe cost of plants and equipment is generally depreciated on a straight−line basis over the estimated useful lives of the assets. Useful lives are based on historicalexperience and are adjusted when changes in planned use, technological advances or other factors show that a different life would be more appropriate. Changesin useful lives that do not result in the impairment of an asset are recognized prospectively. There have been no significant changes in the useful lives of theCompany’s plants and equipment during the 2001−2003 period.Long−lived assets, other than those held for sale, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the assetsmay not be recoverable. Such events and circumstances include, among other factors: operating losses; unused capacity; market value declines; technologicaldevelopments resulting in obsolescence; changes in demand for the Company’s products or in end−use goods manufactured by others utilizing the Company’sproducts as raw materials; changes in the Company’s business plans or those of its major customers or suppliers; changes in competition and competitivepractices; uncertainties associated with the United States and world economies; changes in the expected level of environmental capital, operating or remediationexpenditures; and changes in governmental regulations or actions. Additional factors impacting the economic viability of long−lived assets are described under“Forward−Looking Statements” below.A long−lived asset that is not held for sale is considered to be impaired when the undiscounted net cash flows expected to be generated by the asset are less thanits carrying amount. Such estimated future cash flows are highly subjective and are based on numerous assumptions about future operations and marketconditions. The impairment recognized is the amount by which the carrying amount exceeds the fair market value of the impaired asset. It is also difficult toprecisely estimate fair market value because quoted market prices for the Company’s long−lived assets may not be readily available. Therefore, fair market valueis generally based on the present values of estimated future cash flows using discount rates commensurate with the risks associated with the assets beingreviewed for impairment.A decision to dispose of an asset may also necessitate an impairment review. In this situation, an impairment would be recognized for any excess of the carryingamount of the long−lived asset over its fair value less cost to sell.Sunoco had asset impairments totaling $30 and $18 million after tax during 2003 and 2002, respectively. There were no asset impairments during 2001. Theimpairments in 2003 related to the write−down of the Company’s plasticizer assets held for sale to their estimated fair values less costs to sell and thewrite−down by the Company’s one−third−owned BEF joint venture of its MTBE production facility to its estimated fair value. The estimated fair value of thisfacility declined in 2003 as a result of the expected reduction in MTBE demand

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due to enacted and anticipated federal and state bans of this gasoline additive. The impairments in 2002 related to the shutdown of a polypropylene line at theCompany’s LaPorte, TX plant, an aniline and diphenylamine production facility in Haverhill, OH, certain processing units at the Toledo refinery and a refinedproducts pipeline and terminal owned by Sunoco Logistics Partners L.P. The chemical facilities and the Toledo refinery processing units were shut down toeliminate less efficient production capacity, while the pipeline and terminal were idled because they became uneconomic to operate. For a further discussion ofthese asset impairments, see Notes 2 and 3 to the consolidated financial statements.

Environmental Remediation ActivitiesSunoco is subject to extensive and frequently changing federal, state and local laws and regulations, including, but not limited to, those relating to the dischargeof materials into the environment or that otherwise relate to the protection of the environment, waste management and the characteristics and composition offuels. These laws and regulations require environmental assessment and/or remediation efforts at many of Sunoco’s facilities and at formerly owned orthird−party sites.Sunoco’s accrual for environmental remediation activities amounted to $146 million at December 31, 2003. This accrual is for work at identified sites where anassessment has indicated that cleanup costs are probable and reasonably estimable. The accrual is undiscounted and is based on currently available information,estimated timing of remedial actions and related inflation assumptions, existing technology and presently enacted laws and regulations. It is often extremelydifficult to develop reasonable estimates of future site remediation costs due to changing regulations, changing technologies and their associated costs, andchanges in the economic environment. In the above instances, if a range of probable environmental cleanup costs exists for an identified site, FASBInterpretation No. 14, “Reasonable Estimation of the Amount of a Loss,” requires that the minimum of the range be accrued unless some other point in the rangeis more likely, in which case the most likely amount in the range is accrued. Engineering studies, historical experience and other factors are used to identify andevaluate remediation alternatives and their related costs in determining the estimated accruals for environmental remediation activities. Losses attributable tounasserted environmental claims are also reflected in the accruals to the extent they are probable of occurrence and reasonably estimable.Management believes it is reasonably possible (i.e., less than probable but greater than remote) that additional environmental remediation losses will be incurred.At December 31, 2003, the aggregate of the estimated maximum additional reasonably possible losses, which relate to numerous individual sites, totaled $95million. However, the Company believes it is very unlikely that it will realize the maximum loss at every site. Furthermore, the recognition of additional losses, ifand when they might occur, would likely extend over many years and, therefore, likely would not have a material impact on the Company’s financial position.Management believes that none of the current remediation locations, which are in various stages of ongoing remediation, is individually material to Sunoco as itslargest accrual for any one Superfund site, operable unit or remediation area was less than $6 million at December 31, 2003. As a result, Sunoco’s exposure toadverse developments with respect to any individual site is not expected to be material. However, if changes in environmental regulations occur, such changescould impact several of Sunoco’s facilities and formerly owned and third−party sites at the same time. As a result, from time to time, significant charges againstincome for environmental remediation may occur.Under various environmental laws, including the Resource Conservation and Recovery Act (“RCRA”), Sunoco has initiated corrective remedial action at itsfacilities, formerly owned facilities and third−party sites. At the Company’s major manufacturing facilities, Sunoco has consistently assumed continued industrialuse and a containment/remediation strategy focused on eliminating unacceptable risks to human health or the environment.

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The remediation accruals for these sites reflect that strategy. Accruals include amounts to prevent off−site migration and to contain the impact on the facilityproperty, as well as to address known, discrete areas requiring remediation within the plants. Activities include closure of RCRA solid waste management units,recovery of hydrocarbons, handling of impacted soil, mitigation of surface water impacts and prevention of off−site migration.Many of Sunoco’s current terminals are being addressed with the above containment/remediation strategy. At some smaller or less impacted facilities and somepreviously divested terminals, the focus is on remediating discrete interior areas to attain regulatory closure.Sunoco owns or operates certain retail gasoline outlets where releases of petroleum products have occurred. Federal and state laws and regulations require thatcontamination caused by such releases at these sites and at formerly owned sites be assessed and remediated to meet the applicable standards. The obligation forSunoco to remediate this type of contamination varies, depending on the extent of the release and the applicable laws and regulations. A portion of theremediation costs may be recoverable from the reimbursement fund of the applicable state, after any deductible has been met.Future costs for environmental remediation activities at the Company’s marketing sites will also be influenced by the extent of MTBE contamination ofgroundwater aquifers, the cleanup of which will be driven by thresholds based on drinking water protection. Though not all groundwater is used for drinking,several states have initiated or proposed more stringent MTBE cleanup requirements. Cost increases result directly from extended remedial operations andmaintenance on sites that, under prior standards, could otherwise have been completed, installation of additional remedial or monitoring wells and purchase ofmore expensive equipment because of the presence of MTBE. While actual cleanup costs for specific sites are variable and depend on many of the factorsdiscussed above, expansion of similar MTBE remediation thresholds to additional states or adoption of even more stringent requirements for MTBE remediationwould result in further cost increases.In summary, total future costs for environmental remediation activities will depend upon, among other things, the identification of any additional sites, thedetermination of the extent of the contamination at each site, the timing and nature of required remedial actions, the technology available and needed to meet thevarious existing legal requirements, the nature and terms of cost sharing arrangements with other potentially responsible parties, the availability of insurancecoverage and the nature and extent of future environmental laws, inflation rates and the determination of Sunoco’s liability at the sites, if any, in light of thenumber, participation level and financial viability of other parties.

New Accounting PronouncementsFor a discussion of recently issued accounting pronouncements requiring adoption subsequent to December 31, 2003, see Note 1 to the consolidated financialstatements.

Forward−Looking StatementsStatements and financial discussion and analysis contained in this Annual Report to Shareholders that are not historical facts are forward−looking statementsmade pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements discuss goals, intentions and expectationsas to future trends, plans, events, results of operations or financial condition, or state other information relating to the Company, based on current beliefs ofmanagement as well as assumptions made by, and information currently available to, Sunoco. Forward−looking statements generally will be accompanied bywords such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similarwords, phrases or expressions that convey the uncertainty of future events or outcomes. Although Sunoco believes these forward−looking statements arereasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate.Forward−looking statements involve a number of risks and

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uncertainties. Important factors that could cause actual results to differ materially from the forward−looking statements include, without limitation:

• Changes in refining, marketing and chemical margins;

• Variation in petroleum−based commodity prices and availability of crude oil and feedstock supply or transportation;

• Volatility in the marketplace which may affect supply and demand for Sunoco’s products;

• Changes in competition and competitive practices, including the impact of foreign imports;

• Changes in the reliability and efficiency of the Company’s operating facilities or those of third parties;

• Changes in the level of operating expenses and hazards common to operating facilities (including equipment malfunction, explosions, fires, oil spills, and theeffects of severe weather conditions);

• Changes in the expected level of environmental capital, operating or remediation expenditures;

• Delays related to construction of or work on facilities and the issuance of applicable permits;

• Changes in product specifications;

• Availability and pricing of oxygenates such as MTBE and ethanol;

• Phase−outs or restrictions on the use of MTBE;

• Political and economic conditions in the markets in which the Company operates, including the impact of potential terrorist acts and international hostilities;

• Military conflicts between, or internal instability in, one or more oil producing countries, governmental actions and other disruptions in the ability to obtaincrude oil;

• Changes in the availability and cost of debt and equity financing;

• Changes in insurance markets impacting costs and the level and types of coverage available;

• Changes in financial markets impacting pension expense and funding requirements;

• Risks related to labor relations;

• Nonperformance by major customers, suppliers or other business partners;

• General economic, financial and business conditions which could affect Sunoco’s financial condition and results of operations;

• Changes in applicable statutes and government regulations or their interpretations, including those relating to the environment and global warming;

• Claims of the Company’s noncompliance with statutory and regulatory requirements; and

• Changes in the status of, or initiation of new, litigation to which the Company is a party or liability resulting from litigation or administrativeproceedings, including natural resource damage claims.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differmaterially from those expressed in any forward−looking statement made by Sunoco. Unpredictable or unknown factors not discussed herein could also havematerial adverse effects on the Company. All forward−looking statements included in this Annual Report to Shareholders are expressly qualified in their entiretyby the foregoing cautionary statements. The Company undertakes no obligation to update publicly any forward−looking statement (or its associated cautionarylanguage) whether as a result of new information or future events.

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Consolidated Statements of Operations Sunoco, Inc.and

Subsidiaries

(Millions of Dollars and Shares Except Per Share Amounts)

For the Years Ended December 31 2003 2002 2001

RevenuesSales and other operating revenue (including consumer excise taxes) $17,866 $14,299 $14,063Interest income 9 7 9Other income (Note 2) 54 78 71

17,929 14,384 14,143Costs and ExpensesCost of products sold and operating expenses 14,087 11,430 10,699Consumer excise taxes 1,999 1,834 1,741Selling, general and administrative expenses 742 622 583Depreciation, depletion and amortization 363 329 321Payroll, property and other taxes 104 100 103Provision for write−down of assets and other matters (Note 3) 28 34 6Interest cost and debt expense 114 111 103Interest capitalized (3) (3) —

17,434 14,457 13,556Income (loss) before income tax expense (benefit) 495 (73) 587Income tax expense (benefit) (Note 4) 183 (26) 189

Net Income (Loss) $312 $ (47) $ 398

Earnings (Loss) Per Share of Common Stock:Basic $4.07 $(.62) $4.92Diluted $4.03 $(.62) $4.85

Weighted Average Number of Shares Outstanding (Note 5):Basic 76.7 76.2 80.9Diluted 77.5 76.2 82.0

Cash Dividends Paid Per Share of Common Stock (Note 14) $1.025 $1.00 $1.00

(See Accompanying Notes)

40

Consolidated Balance Sheets Sunoco, Inc.and

Subsidiaries

(Millions of Dollars)

At December 31 2003 2002

AssetsCurrent AssetsCash and cash equivalents $ 431 $ 390Accounts and notes receivable, net 1,072 923Inventories (Note 6) 474 491Deferred income taxes (Note 4) 91 94

Total Current Assets 2,068 1,898

Investments and long−term receivables (Note 7) 192 220Properties, plants and equipment, net (Note 8) 4,277 4,099Prepaid retirement costs (Note 9) 11 5Deferred charges and other assets (Note 3) 374 219

Total Assets $ 6,922 $ 6,441

Liabilities and Shareholders’ EquityCurrent LiabilitiesAccounts payable $ 1,391 $ 1,316Accrued liabilities 434 339Current portion of long−term debt (Note 11) 103 2Taxes payable 242 119

Total Current Liabilities 2,170 1,776

Long−term debt (Note 11) 1,350 1,453Retirement benefit liabilities (Note 9) 604 653Deferred income taxes (Note 4) 602 490Other deferred credits and liabilities (Note 12) 208 196Commitments and contingent liabilities (Note 12)Minority interests (Note 13) 432 479Shareholders’ Equity (Notes 14 and 15)Common stock, par value $1 per shareAuthorized—200,000,000 shares;Issued, 2003—136,801,064 shares;Issued, 2002—134,760,400 shares 137 135Capital in excess of par value 1,552 1,489Earnings employed in the business 2,376 2,143Accumulated other comprehensive loss (187) (195)Common stock held in treasury, at cost2003—61,420,158; 2002—58,321,433 shares (2,322) (2,178)

Total Shareholders’ Equity 1,556 1,394

Total Liabilities and Shareholders’ Equity $ 6,922 $ 6,441


41

Consolidated Statements of Cash Flows Sunoco, Inc.and

Subsidiaries


For the Years Ended December 31 2003 2002 2001

Increases (Decreases) in Cash and Cash EquivalentsCash Flows from Operating Activities:Net income (loss) $ 312 $ (47) $ 398Adjustments to reconcile net income (loss) to net cash provided by operating activities:Asset write−downs and other matters 37 34 6Noncash reduction in minority interest in cokemaking operations (Note 13) (3) (35) (37)Depreciation, depletion and amortization 363 329 321Deferred income tax expense 111 19 203Payments in excess of expense for retirement plans (45) (42) (12)Changes in working capital pertaining to operating activities, net of effect of acquisitions:Accounts and notes receivable (145) (230) 357Inventories 49 161 (59)Accounts payable and accrued liabilities 137 319 (276)Taxes payable 131 10 (110)Other 46 29 (12)

Net cash provided by operating activities 993 547 779

Cash Flows from Investing Activities:Capital expenditures (425) (385) (331)Acquisitions, net of seller financing of $4 in 2003 and debt assumed of $163 in 2001(Note 3) (356) (54) (545)Proceeds from divestments 82 22 47Other (21) (15) (4)

Net cash used in investing activities (720) (432) (833)

Cash Flows from Financing Activities:Net proceeds from (repayments of) short−term borrowings — (299) 299Proceeds from issuance of long−term debt — 311 200Repayments of long−term debt (6) (3) (152)Net proceeds from issuance of Sunoco Logistics Partners L.P. limited partnership units(Note 13) — 96 —Proceeds from transferred interests in cokemaking operations — 215 —Cash distributions to investors in cokemaking operations (48) (24) (56)Cash dividend payments (79) (76) (82)Purchases of common stock for treasury (136) — (393)Proceeds from issuance of common stock under management incentive and employeeoption plans 52 23 41Other (15) (10) —

Net cash provided by (used in) financing activities (232) 233 (143)

Net increase (decrease) in cash and cash equivalents 41 348 (197)Cash and cash equivalents at beginning of year 390 42 239

Cash and cash equivalents at end of year $ 431 $ 390 $ 42


42

Consolidated Statements of Comprehensive Income and Shareholders’ Equity(Dollars in Millions, Shares in Thousands) Sunoco, Inc. and Subsidiaries

Shareholders’ Equity

Common Stock

Capital inExcess ofPar Value

EarningsEmployed

in theBusiness

AccumulatedOther

ComprehensiveLoss

Common Stock

Held in Treasury

ComprehensiveIncome(Loss)

Number ofShares

ParValue Shares Cost

At December 31, 2000 132,375 $132 $ 1,403 $ 1,950 $ — 47,544 $1,783Net income $ 398 — — — 398 — — —Other comprehensive loss:Minimum pension liability adjustment (netof related tax benefit of $12) (21) — — — — (21) — —Net hedging losses (net of related taxbenefitof $6) (11) — — — — (11) — —Reclassifications of net hedging losses toearnings (net of related tax expense of $2) 4 — — — — 4 — —Cash dividend payments — — — — (82) — — —Purchases for treasury — — — — — — 10,717 393Issued under management incentive andemployee option plans — 1,421 1 40 — — — —Other — — 1 3 — — 6 —

Total $ 370

At December 31, 2001 133,796 $134 $ 1,446 $ 2,266 $ (28) 58,267 $2,176Net loss $ (47) — — — (47) — — —Other comprehensive loss:Minimum pension liability adjustment (netof related tax benefit of $94) (176) — — — — (176) — —Net hedging gains (net of related taxexpenseof $2) 5 — — — — 5 — —Reclassifications of net hedging losses toearnings (net of related tax expense of $2) 4 — — — — 4 — —Cash dividend payments — — — — (76) — — —Issued under management incentive andemployee option plans — 964 1 27 — — — —Net increase in equity related to unissuedshares under management incentive plans — — — 15 — — — —Other — — — 1 — — 54 2

Total $ (214)

At December 31, 2002 134,760 $135 $ 1,489 $ 2,143 $(195) 58,321 $2,178Net income $ 312 — — — 312 — — —Other comprehensive loss:Minimum pension liability adjustment (netof related tax expense of $4) 7 — — — — 7 — —Net hedging gains (net of related taxexpenseof $4) 7 — — — — 7 — —Reclassifications of net hedging gains toearnings (net of related tax benefit of $3) (6) — — — — (6) — —Cash dividend payments — — — — (79) — — —Purchases for treasury — — — — — — 2,904 136Issued under management incentive andemployee option plans — 2,041 2 55 — — — —Net decrease in equity related to unissuedshares under management incentive plans(Note 15) — — — (1) — — — —Other — — — 9 — — 195 8

Total $ 320

At December 31, 2003 136,801 $137 $ 1,552 $ 2,376 $(187) 61,420 $2,322


43

Notes to Consolidated Financial Statements Sunoco, Inc.and

Subsidiaries

1. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe consolidated financial statements of Sunoco, Inc. and subsidiaries (collectively, “Sunoco” or the “Company”) contain the accounts of all entities that arecontrolled (generally more than 50 percent owned). Corporate joint ventures and other investees over which the Company has the ability to exercise significantinfluence but that are not consolidated are accounted for by the equity method.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimates.

Revenue RecognitionThe Company sells various refined products (including gasoline, middle distillates, residual fuel, petrochemicals and lubricants), coke and coal and also sellscrude oil in connection with the crude oil gathering and marketing activities of its logistics operations. In addition, the Company sells a broad mix of merchandisesuch as groceries, fast foods and beverages at its convenience stores and provides a variety of car care services at its retail gasoline outlets. Revenues related tothe sale of products are recognized when title passes, while service revenues are recognized when services are provided. Title passage generally occurs whenproducts are shipped or delivered in accordance with the terms of the respective sales agreements. In addition, revenues are not recognized until sales prices arefixed or determinable and collectability is reasonably assured.Crude oil exchange transactions, which are entered into primarily to acquire crude oil of a desired quality or at a desired location, are netted in cost of productssold and operating expenses in the consolidated statements of operations.Consumer excise taxes on sales of refined products and merchandise are included in both revenues and costs and expenses, with no effect on net income.

Cash EquivalentsSunoco considers all highly liquid investments with a remaining maturity of three months or less at the time of purchase to be cash equivalents. These cashequivalents consist principally of time deposits and money market investments.

InventoriesInventories are valued at the lower of cost or market. The cost of crude oil and petroleum and chemical product inventories is determined using the last−in,first−out method (“LIFO”). The cost of materials, supplies and other inventories is determined using principally the average cost method.

Depreciation and RetirementsPlants and equipment are generally depreciated on a straight−line basis over their estimated useful lives. Gains and losses on the disposals of fixed assets aregenerally reflected in net income.

Impairment of Long−Lived AssetsLong−lived assets other than those held for sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount ofthe assets may not be recoverable. An asset is considered to be impaired when the undiscounted estimated net cash flows expected to be generated by the assetare less than its carrying amount. The impairment recognized is the amount by which the carrying amount exceeds the fair market value of the impaired asset.Long−lived assets held for sale are recorded at the lower of their carrying amount or fair market value less cost to sell. Effective January 1, 2002, Sunoco adoptedStatement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long−Lived Assets” (“SFAS No. 144”) which, amongother things, changed the criteria that have to be met to classify an asset as held−for−sale. SFAS No. 144 had no impact on Sunoco’s consolidated financialstatements during 2002.

Goodwill and Intangible AssetsEffective January 1, 2002, Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), was adopted.SFAS No. 142 requires the testing of goodwill, which represents the excess of the purchase price over the fair value of net assets acquired, and indefinite−livedintangible assets for impairment at least annually rather than amortizing them. Sunoco ceased amortizing goodwill and indefinite−lived intangible assets effectiveJanuary 1, 2002 and determined during 2003 and 2002 that such assets were not impaired. Prior to January 1, 2002, goodwill and indefinite−lived intangibleassets were amortized on a

44

straight−line basis over 40 years or their estimated useful lives, if shorter. Sunoco’s amortization of goodwill and indefinite−lived intangible assets amounted to$5 million after tax during 2001. Intangible assets with finite useful lives continue to be amortized over their useful lives in a manner that reflects the pattern inwhich the economic benefit of the intangible assets is consumed.

Environmental RemediationSunoco accrues environmental remediation costs for work at identified sites where an assessment has indicated that cleanup costs are probable and reasonablyestimable. Such accruals are undiscounted and are based on currently available information, estimated timing of remedial actions and related inflationassumptions, existing technology and presently enacted laws and regulations. If a range of probable environmental cleanup costs exists for an identified site, theminimum of the range is accrued unless some other point in the range is more likely in which case the most likely amount in the range is accrued.

Maintenance ShutdownsMaintenance and repair costs in excess of $500 thousand incurred in connection with major maintenance shutdowns are capitalized when incurred and amortizedover the period benefited by the maintenance activities.

Derivative InstrumentsFrom time to time, Sunoco uses swaps, options, futures, forwards and other derivative instruments to hedge its exposure to crude oil, petroleum product,electricity and natural gas price volatility and to reduce foreign exchange risk relating to certain export sales denominated in foreign currencies. Such contractsare recognized in the consolidated balance sheets at their fair value. Changes in fair value of derivative contracts that are not hedges are recognized in income asthey occur. If the derivative contracts are designated as hedges, depending on their nature, the effective portions of changes in their fair values are either offset inincome against the changes in the fair values of the items being hedged or reflected initially as a separate component of shareholders’ equity and subsequentlyrecognized in income when the hedged items are recognized in income. The ineffective portions of changes in the fair values of derivative contracts designated ashedges are immediately recognized in income. Sunoco does not hold or issue derivative instruments for trading purposes.

Minority Interests in Cokemaking OperationsCash investments by third parties are recorded as an increase in minority interests in the consolidated balance sheets. There is no recognition of any gain at thedatescash investments are made as the third−party investors are entitled to a preferential return on their investments.

Nonconventional fuel credit and other net tax benefits generated by the Company’s cokemaking operations and allocated to third−party investors are recorded asa reduction in minority interests and are included as income in the Coke segment. The investors’ preferential return is recorded as an increase in minorityinterests and is recorded as expense in the Corporate and Other segment. The net of these two amounts represents a noncash reduction in minority interests incokemaking operations, which is recognized in other income in the consolidated statements of operations.Cash payments, representing the distributions of the investors’ share of cash generated by the cokemaking operations, also are recorded as a reduction in minorityinterests.

Stock−Based CompensationDuring the fourth quarter of 2002, Sunoco adopted the fair value method of accounting for employee stock compensation plans as prescribed by Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock−Based Compensation” (“SFAS No. 123”) and amended by Statement of Financial AccountingStandards No. 148, “Accounting for Stock−Based Compensation—Transition and Disclosure” (“SFAS No. 148”). The Company recognized $6 million ofexpense ($4 million after tax) in 2002 for all unvested stock options attributable to the vesting that occurred in 2002 retroactive to January 1, 2002 using the“modified prospective method” transition rules of SFAS No. 148. Prior to January 1, 2002, the Company followed the intrinsic value method of accounting foremployee stock compensation plans prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).Under APB No. 25, the Company did not recognize compensation expense for stock options because the exercise price of the options equaled the market price ofthe underlying stock on the date of grant (Note 15).

Asset Retirement ObligationsEffective January 1, 2003, Sunoco adopted the provisions of Statement of Financial Accounting Standards No. 143, “Accounting for Asset RetirementObligations” (“SFAS No. 143”). This statement significantly changed the method of accruing costs that an entity is legally obligated to incur associated with theretirement of fixed assets. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred ifa reasonable estimate of fair

45

value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the fixed asset and depreciated over its estimated usefullife. Prior to January 1, 2003, a liability for an asset retirement obligation was recognized using a cost−accumulation measurement approach.In conjunction with the adoption of SFAS No. 143 in January 2003, Sunoco recorded an increase in asset retirement obligations of $5 million and a relatedincrease in net properties, plants and equipment of $3 million related to certain of its branded marketing retail sites, coal and cokemaking facilities and chemicalassets. The $2 million cumulative effect of this accounting change ($1 million after tax) has been included in cost of products sold and operating expenses in the2003 consolidated statement of operations. Sunoco did not reflect the $1 million after−tax charge as a cumulative effect of accounting change as it was notmaterial. Other than the cumulative effect, this change did not have a significant impact on Sunoco’s results of operations during 2003. At December 31, 2003,Sunoco’s liability for asset retirement obligations amounted to $8 million. Sunoco has legal asset retirement obligations for several other assets, including itsrefineries, pipelines and terminals, for which it is not possible to estimate when the obligations will be settled. Consequently, the retirement obligations for theseassets cannot be measured at this time.

Exit or Disposal ActivitiesIn July 2002, Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”), wasissued. SFAS No. 146 supersedes Emerging Issues Task Force (“EITF”) Issue No. 94−3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes fair value as the objective for initial measurement of the liability.The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Under prior accounting principles, certaincosts associated with restructuring plans were recognized as of the date of commitment to the plan. Adoption of SFAS No. 146 had no impact on Sunoco’sconsolidated financial statements during 2003.

GuaranteesIn November 2002, FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (“FASB Interpretation No. 45”), was issued. The accounting recognition provisions ofFASB Interpretation No. 45 became effectiveJanuary 1, 2003 on a prospective basis. FASB Interpretation No. 45 requires that a guarantor recognize, at the inception or subsequent modification of aguarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Under prior accounting principles, a guarantee would not result inrecognition of a liability until a loss was probable and reasonably estimable. Adoption of the accounting recognition provisions of FASB Interpretation No. 45did not materially impact Sunoco’s consolidated financial statements during 2003.

New Accounting PrinciplesIn January 2003, FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46”), was issued. Among other things,FASB Interpretation No. 46 defines a variable interest entity (“VIE”) as an entity that either has investor voting rights that are not proportional to their economicinterests or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FASB Interpretation No. 46 requires a VIEto be consolidated by a company if that company is the primary beneficiary. The primary beneficiary is the company that is subject to a majority of the risk ofloss from the VIE’s activities or, if no company is subject to a majority of such risk, the company that is entitled to receive a majority of the VIE’s residualreturns.Sunoco currently intends to adopt FASB Interpretation No. 46 effective January 1, 2004. Upon adoption, the Company will be required to consolidate its EpsilonProducts Company, LLC (“Epsilon”) polypropylene joint venture. The Epsilon joint venture, which had revenues totaling $226 million for the year endedDecember 31, 2003 and assets totaling $194 million at December 31, 2003, consists of polymer−grade propylene operations at Sunoco’s Marcus Hook, PArefinery and an adjacent polypropylene plant. Sunoco’s maximum exposure to loss as a result of its involvement with Epsilon amounted to $224 million atDecember 31, 2003, consisting of its $49 million investment in Epsilon, $15 million of trade accounts receivable and the guarantee of the joint venture’s $120million term loan and $40 million revolving credit facility.

ReclassificationsCertain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.

46

2. Other Income


Equity income (loss):Belvieu Environmental Fuels (Note 7) $(29) $ 9 $ 5Epsilon Products Company, LLC (Notes 1, 7 and 12) 10 (3) (11)Pipeline joint ventures(Notes 3 and 7) 20 14 11Other 2 3 3Noncash reduction in minority interests in cokemaking operations(Note 13) 3 35 37Gain on divestments 32 6 5Other 16 14 21

$ 54 $ 78 $ 71

Sunoco has a one−third partnership interest in Belvieu Environmental Fuels (“BEF”), a joint venture that owns and operates an MTBE production facility inMont Belvieu, TX. Various governmental authorities have banned or are considering the ban or phase−down of MTBE. These governmental actions have had,and are expected to continue to have, a materially adverse impact on MTBE industry demand. As a result, the joint venture is currently evaluating alternativeuses for its MTBE production facility, including the conversion from the production of MTBE to the production of iso−octane or alkylate, which are used asgasoline blending components. Although industry MTBE production capacity has been contracting, MTBE supply is expected to exceed future demand.Accordingly, during the third quarter of 2003, the joint venture recorded a provision to write down its MTBE production facility to its estimated fair value. Theestimated fair value was determined by an independent appraiser using present value techniques which reflect various alternative operating assumptions.Sunoco’s share of this provision amounted to $23 million ($15 million after tax). If the assumptions used to estimate the fair market value of the MTBEproduction facility change, an additional write−down of this facility may be necessary. In order to obtain a secure supply of oxygenates for the manufacture ofreformulated gasoline, in 1995, Sunoco entered into an off−take agreement with BEF, which expires in 2004, whereby Sunoco agreed to purchase all of theMTBE production from the plant. Sunoco’s total MTBE purchases under this agreement, which are included in cost of products sold and operating expenses inthe consolidated statements of operations, were $183, $234 and $207 million during 2003, 2002 and 2001, respectivelyIn April 2003, Sunoco announced its intention to sell its interest in 190 retail sites in Michigan and the southern Ohio markets of Columbus, Dayton andCincinnati (“Midwest Marketing Divestment Program”). During2003, 75 Company−owned or leased properties and contracts to supply 23 dealer−owned siteswere divested under this program. The cash generated from these divestments totaled $46 million, which represents substantially all of the proceeds expectedfrom the program. The remaining 92 sites are virtually all dealer−owned locations that are expected to be converted to distributor outlets in 2004. During 2003, a$14 million gain ($9 million after tax) was recognized in connection with the Midwest Marketing Divestment Program. Sunoco continues to supply brandedgasoline to substantially all of the divested outlets.

3. Changes in BusinessWrite−Down of Assets and Other MattersThe following table sets forth summary information regarding the provisions for write−down of assets and other matters:

(Millions of Dollars)Pretax

ProvisionsAfter−TaxProvisions

2003Plasticizer business $ 28 $ 17

2002Chemical facilities $ 21 $ 14Toledo refinery processing units 4 2Pipeline and related terminal 5 3Litigation accrual 4 3

$ 34 $ 22

2001Value Added and Eastern Lubricants:Exit costs $ 15 $ 10Employee terminations 16 11Puerto Rico refinery sale (12) (11)Other employee terminations 4 2Real estate accrual adjustment (17) (11)

$ 6 $ 1

During 2003, Sunoco announced its decision to sell its plasticizer business and recorded a $23 million provision ($15 million after tax) to write down the assetsheld for sale to their estimated fair values less costs to sell and established a $5 million accrual ($2 million after tax) for employee terminations under apostemployment plan and other required exit costs. Sunoco sold this business and related inventory in January 2004 to BASF for approximately $90 million incash. The sale included the Company’s plasticizer facility in Pasadena, TX. The Company’s Neville Island, PA, site was not part of the transaction and willcontinue to produce plasticizers exclusively for BASF under a three−year tolling agreement. Sunoco also agreed to provide terminalling services at this facility toBASF for a 15−year period.

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During 2002, Sunoco shut down a polypropylene line at its LaPorte, TX plant, an aniline and diphenylamine production facility in Haverhill, OH, certainprocessing units at its Toledo refinery and a pipeline located in Pennsylvania and New York and a related refined products terminal. The chemical facilities andthe Toledo refinery processing units were shut down to eliminate less efficient production capacity, while the pipeline and terminal were idled because theybecame uneconomic to operate. In connection with these shutdowns, Sunoco recorded provisions to write off the affected units and established accruals forrelated exit costs. During 2002, the Company also established an accrual relating to a lawsuit concerning the Puerto Rico refinery, which was divested inDecember 2001.During 2000, Sunoco announced its intention to sell its Puerto Rico refinery, lubricants blending and packaging facilities in Marcus Hook, PA, Tulsa, OK andRichmond, CA and lubricants branded marketing assets (which included the Kendall® motor oil brand and the customer lists for both the Sunoco® and theKendall® lubricants brands) (collectively, “Value Added and Eastern Lubricants”). The Company elected to exit the Value Added and Eastern Lubricantsbusiness due to its inability to achieve an adequate return on capital employed in this business. During 2000, Sunoco recorded a $177 million non−cash charge($123 million after tax) to write down the assets held for sale to their estimated fair values less costs to sell. In connection with this decision, Sunoco sold itslubricants branded marketing assets in March 2001, closed its lubricants blending and packaging facilities in July 2001 and sold the Puerto Rico refinery inDecember 2001 to conclude the lubricants restructuring plan. As part of the restructuring, in 2001, Sunoco recorded a $15 million accrual ($10 million after tax)for required exit costs including amounts for contract settlements, lease abandonments and environmental and other cleanup activities, a $16 million accrual ($11million after tax) for employee terminations and a $12 million gain ($11 million after tax) on the sale of the Puerto Rico refinery.Value Added and Eastern Lubricants incurred after−tax operating losses of $2 million in 2001. The disposal of the lubricants assets generated cash ofapproximately $125 million in 2001, which included $27 million attributable to the sale of the branded marketing operations and the Puerto Rico refinery withthe balance generated from the liquidation of working capital in the normal course of business.

Sunoco also established an employee termination accrual totaling $4 million ($2 million after tax) in 2001. The termination accruals recorded in 2001 were forapproximately 350 employee terminations, primarily in the lubricants business. Payments charged against these accruals are expected to continue through 2004.The following table summarizes the changes in the accrual for exit costs and terminations:


Balance at beginning of year $ 10 $ 24 $ 26Additional accruals 15 1 35Payments charged against the accruals (8) (15) (37)

Balance at end of year $ 17 $ 10 $ 24

The Company reversed an accrual for warranty claims and other contingent liabilities associated with its former real estate business during 2001. The accrual wasestablished in 1991 as part of the costs expected to be incurred in connection with the disposal of this business. The accrual reversal resulted from the favorablesettlement of certain litigation claims and upon expiration of various statute−of−limitation periods during 2001.

AcquisitionsService Stations—In the second quarter of 2003, Sunoco completed the purchase of 193 Speedway retail gasoline sites from a subsidiary of Marathon AshlandPetroleum LLC for $162 million, including inventory. The sites, which are located primarily in Florida and South Carolina, are all Company−operated locationswith convenience stores. Of the 193 outlets, Sunoco is the lessee for 54 sites under long−term lease agreements. The Speedway sites are being re−branded asSunoco locations in 2003 and 2004. In addition, Sunoco acquired 473 Coastal retail outlets during 2001 from El Paso Corporation for $59 million, includinginventory. The acquisition consisted of 166 Company−owned or leased outlets, 150 dealer−owned traditional outlets and 157 distributor−owned or suppliedoutlets. These outlets, which include approximately 110 convenience−store locations, are located primarily in the Northeastern and Southeastern United States.

48

The Company believes these acquisitions fit its long−term strategy to build a retail and convenience store network that will provide attractive long−term returns.The addition of these convenience stores gives Sunoco critical mass in the high−growth market in the Southeast.The purchase prices have been allocated to the assets acquired and liabilities assumed based on their relative estimated fair market values at the acquisition dates.The following is a summary of the effects of these transactions on Sunoco’s consolidated financial position as of the acquisition dates:


Increase in:Inventories $ 21 $ 8Properties, plants and equipment, net 143 51Other deferred credits and liabilities (2) —

Cash paid on acquisition dates $162 $ 59

Transaction with Equistar Chemicals, L.P.—Effective March 31, 2003, Sunoco formed a limited partnership with Equistar Chemicals, L.P. (“Equistar”)involving Equistar’s ethylene facility in LaPorte, TX. Equistar is a joint venture between Lyondell Chemical Company and Millennium Chemicals Inc. Inconnection with this transaction, Equistar and the new partnership entered into a 700 million pounds−per−year, 15−year propylene supply contract with Sunoco.Of this amount, 500 million pounds per year is priced on a cost−based formula that includes a fixed discount that declines over the life of the contract, while theremaining 200 million pounds per year is based on market prices. Sunoco also purchased Equistar’s polypropylene facility in Bayport, TX. Sunoco paid $194million in cash and borrowed $4 million from the seller to form the partnership and acquire the Bayport facility.Through the new partnership, the Company believes it has secured a favorable long−term supply of propylene for its Gulf Coast polypropylene business, whilethe acquisition of the Bayport facility has increased the Company’s polypropylene capacity. This transaction complements and enhances the Company’spolypropylene business and strengthens its market position.

The purchase price has been allocated to the assets acquired and liabilities assumed based on their relative fair market values at the acquisition date. Thefollowing is a summary of the effects of the transaction on Sunoco’s consolidated financial position:

(Millions of Dollars):

Increase in:Inventories $ 11Properties, plants and equipment, net 30Deferred charges and other assets 160*Accrued liabilities (2)Retirement benefit liabilities (1)

198

Seller financing:Current portion of long−term debt (1)Long−term debt (3)

(4)

Cash paid on acquisition date $194

* Represents the amounts allocated to the propylene supply contract and the related partnership. The Company will amortize this deferred cost into income over the 15−yearlife of the supply contract in a manner that reflects the future decline in the fixed discount over the contract period. Following the acquisition, this amortization expenseamounted to $11 million in 2003 and is expected to approximate $15 million in 2004, $14 million in 2005, $13 million in 2006, $11 million in 2007 and $11 million in 2008.

Pro Forma Data for 2003 Acquisitions—The unaudited pro forma sales and other operating revenue, net income (loss) and net income (loss) per share ofcommon stock of Sunoco, as if the acquisition of the 193 Speedway service stations and the Bayport polypropylene facility had occurred on January 1, 2002, areas follows:

(Millions of Dollars, Except Per Share Amounts) 2003 2002

Sales and other operating revenue $ 18,224 $ 15,128Net income (loss) $313 $(52)Net income (loss) per share of common stock—diluted $4.04 $(.68)

The pro forma amounts above do not include any effects attributable to the propylene supply contract or the related partnership with Equistar since the supplycontract did not exist prior to the transaction date. In addition, no pro forma information has been presented relating to the 473 Coastal retail outlets acquired in2001 since this acquisition was not material in relation to Sunoco’s consolidated results of operations.The pro forma information does not purport to be indicative of the results that actually would have been obtained if the 193 Speedway service stations and theBayport polypropylene facility had been part of Sunoco’s businesses during the periods presented and is not intended to be a projection of future results.Accordingly, the pro forma results do not reflect any restructuring costs, changes in operating levels, or potential cost savings and other synergies.

49

Pipeline Interests—In November 2002, Sunoco Logistics Partners L.P. (the “Partnership”), a master limited partnership which is 75.3 percent owned by Sunocoand operates a substantial portion of the Company’s logistics operations, completed the acquisition from an affiliate of Union Oil Company of California(“Unocal”) of interests in three Midwestern and Western U.S. products pipeline companies. The acquisition consisted of a 31.5 percent interest in Wolverine PipeLine Company, a 9.2 percent interest in West Shore Pipe Line Company and a 14.0 percent interest in Yellowstone Pipe Line Company, for $54 million in cash.During September 2003, the Partnership acquired an additional 3.1 percent interest in West Shore Pipe Line Company for $4 million, increasing its overallownership interest in West Shore to 12.3 percent. In November 2002, the Partnership also completed the acquisition of an additional interest in West Texas Gulfpipeline for $6 million in cash, which increased its ownership interest in this pipeline from 17.3 percent to 43.8 percent. The purchase prices for the acquiredpipeline interests have been reflected as investments and long−term receivables in the consolidated balance sheets. No pro forma information has been presentedrelating to these pipeline interests since the acquisitions were not material in relation to Sunoco’s consolidated results of operations.Aristech Chemical Corporation—Effective January 1, 2001, Sunoco completed the acquisition of Aristech Chemical Corporation (“Aristech”), a wholly ownedsubsidiary of Mitsubishi Corporation (“Mitsubishi”), for $506 million in cash and the assumption of $163 million of debt. The purchase price included $107million for working capital. Contingent payments with a net present value as of the acquisition date of up to $167 million (the “earn out”) may also be made ifrealized margins for polypropylene and phenol exceed certain agreed−upon thresholds through 2006. As of December 31, 2003, no such payments have beenearned. Since the $167 million represents a present value as of January 1, 2001, the actual amounts that could ultimately be paid under the earn out provisionsincrease over time by a contract−specified 11 percent per year. However, the contingent payments are limited to $90 million per year. Any earn out paymentswould be treated as adjustments to the purchase price. Sunoco also entered into a margin hedge agreement with Mitsubishi whereby Mitsubishi providedpolypropylene margin protection for 2001 of up to $6.5 million per quarter. In connection with the margin hedge agreement, Sunoco received $19.5 million fromMitsubishi in 2001 related to Aristech’s operations for the first nine months and an additional $6.5 million in the first quarter of 2002 related to the 2001 fourthquarter’s operations. These payments were reflected as reductions in the purchase price when received. In addition, Mitsubishi is responsible during a 25−yearindemnification period forup to $100 million of potential environmental liabilities of the business arising out of or related to the period prior to the acquisitiondate.Included in the purchase were Aristech’s five chemical plants located at Neal, WV; Haverhill, OH; Neville Island, PA; and Pasadena and LaPorte, TX and aresearch center in Pittsburgh, PA. These facilities produce polypropylene, phenol and related derivatives (including biphenol−A) and plasticizers. The facility inPasadena, TX, which produces plasticizers, was sold to BASF in January 2004, while the facility in Neville Island, PA will continue to produce plasticizersexclusively for BASF under a three−year tolling agreement.The purchase price has been allocated to the assets acquired and liabilities assumed based on their relative estimated fair market values at the acquisition date.The following is a summary of the effects of this transaction on Sunoco’s consolidated financial position:

(Millions of Dollars):

Allocation of purchase price:Accounts and notes receivable, net $ 156Inventories 130Investments and long−term receivables 8Properties, plants and equipment, net 674Accounts payable (110)Accrued liabilities (57)Current portion of long−term debt (1)Taxes payable (10)Long−term debt (162)Retirement benefit liabilities (25)Deferred income taxes (103)Other deferred credits and liabilities (20)

Cash paid, net of cash received under margin hedge agreement and cash acquired $ 480

4. Income TaxesThe components of income tax expense (benefit) are as follows:


Income taxes currently payable:U.S. federal $ 61 $(47) $ (19)State and other 11 2 5

72 (45) (14)

Deferred taxes:U.S. federal 101 18 195State and other 10 1 8

111 19 203

$ 183 $(26) $189

50

The reconciliation of income tax expense (benefit) at the U.S. statutory rate to the income tax expense (benefit) is as follows:


Income tax expense (benefit) at U.S. statutory rate of 35 percent $173 $(26) $205Increase (reduction) in income taxes resulting from:Income tax settlements — — (21)State income taxes net of Federal income tax effects 14 2 9Dividend exclusion for affiliated companies (4) (3) (3)Nonconventional fuel credit (1) — (2)Other 1 1 1

$183 $(26) $189

The tax effects of temporary differences which comprise the net deferred income tax liability are as follows:

December 31


Deferred tax assets:Retirement benefit liabilities $ 205 $ 219Environmental remediation liabilities 52 46Other liabilities not yet deductible 209 261Alternative minimum tax credit carryforward* 63 71Other 87 72Valuation allowance** (8) (15)

608 654

Deferred tax liabilities:Properties, plants and equipment (1,043) (1,001)Other (76) (49)

(1,119) (1,050)

Net deferred income tax liability $ (511) $ (396)

* Alternative minimum tax credit carryforwards may be carried forward indefinitely.

** The valuation allowance reduces the benefit of certain state net operating loss carryforwards to the amount that will more likely than not be realized.

The net deferred income tax liability is classified in the consolidated balance sheets as follows:

December 31


Current asset $ 91 $ 94Noncurrent liability (602) (490)

$(511) $(396)

Cash payments for (refunds of) income taxes were $(42), $(49) and $100 million in 2003, 2002 and 2001, respectively.

5. Earnings Per Share DataThe following table sets forth the reconciliation of the weighted average number of common shares used to compute basic earnings per share (“EPS”) to thoseused to compute diluted EPS:

(In Millions) 2003 2002* 2001

Weighted average number of common shares outstanding—basic 76.7 76.2 80.9Add effect of dilutive stock incentive awards .8 — 1.1

Weighted average number of shares—diluted 77.5 76.2 82.0

* Since the assumed issuance of common stock under stock incentive awards would not have been dilutive, the weighted average number of shares used to compute dilutedEPS is equal to the weighted average number of shares used in the basic EPS computation.

6. Inventories

December 31


Crude oil $ 150 $ 153Petroleum and chemical products 203 227Materials, supplies and other 121 111

$ 474 $ 491

The current replacement cost of all inventories valued at LIFO exceeded their carrying value by $1,025 and $962 million at December 31, 2003 and 2002,respectively. During 2002, Sunoco reduced certain inventory quantities which were valued at lower LIFO costs prevailing in prior years. The effect of thisreduction was to increase 2002 results of operations by $5 million after tax.

7. Investments and Long−Term Receivables

December 31


Investments in and advances to affiliated companies:Belvieu Environmental Fuels (Note 2) $ 25 $ 51Epsilon Products Company, LLC(Notes 1, 2 and 12) 49 50Pipeline joint ventures (Notes 2 and 3) 85 81Other 12 16

171 198Accounts and notes receivable 21 22

$ 192 $ 220

51

Dividends received from affiliated companies amounted to $32, $27 and $18 million in 2003, 2002 and 2001, respectively. Earnings employed in the business atDecember 31, 2003 include $16 million of undistributed earnings of affiliated companies.Summarized financial information for all entities accounted for using the equity method is set forth below. Amounts attributable to acquired interests (Note 3)have been included in the table since the acquisition dates.

100 Percent Sunoco Proportionate Share

(Millions of Dollars) 2003 2002 2001 2003 2002 2001

Balance Sheet Information, at December 31:Current assets $281 $297 $203 $86 $94 $67Other assets $735 $762 $498 $191 $211 $161Current liabilities $169 $166 $90 $46 $49 $28Other liabilities $620 $596 $344 $160 $159 $108Income Statement Information, for the years ended December 31:Revenues $1,197 $992 $927 $542 $358 $339Income before income tax expense $101 $166 $104 $15 $31 $15Net income $36 $115 $65 $3 $23 $8

8. Properties, Plants and Equipment

(Millions of Dollars)December 31

GrossInvestments,

at Cost

AccumulatedDepreciation,

Depletionand

AmortizationNet

Investment

2003Refining and supply $3,891 $2,187 $1,704Retail marketing* 1,512 650 862Chemicals 1,131 240 891Logistics 1,039 447 592Coke 408 180 228

$7,981 $3,704 $4,277

2002Refining and supply $3,637 $2,019 $1,618Retail marketing* 1,400 639 761Chemicals 1,072 171 901Logistics 1,012 427 585Coke 401 167 234

$7,522 $3,423 $4,099

* Includes retail sites leased to third parties with a gross investment totaling $543 and $563 million at December 31, 2003 and 2002, respectively. Related accumulateddepreciation totaled $303 and $302 million at December 31, 2003 and 2002, respectively.

Annual future minimum rentals due Sunoco, as lessor, on noncancelable operating leases at December 31, 2003 for retail sites are as follows (in millions ofdollars):

Year ending December 31:2004 $332005 202006 92007 22008 1Thereafter —

$65

9. Retirement Benefit PlansDefined Benefit Pension Plans and Postretirement Health Care PlansSunoco has noncontributory defined benefit pension plans (“defined benefit plans”) which provide retirement benefits for approximately one−half of itsemployees. Sunoco also has plans which provide health care benefits for substantially all of its retirees (“postretirement benefit plans”). The postretirementbenefit plans are unfunded and the costs are shared by Sunoco and its retirees. The levels of required retiree contributions to postretirement benefit plans areadjusted periodically, and the plans contain other cost−sharing features, such as deductibles and coinsurance. In addition, in 1993, Sunoco implemented a dollar

cap on its future contributions for its principal postretirement health care benefits plan. In the fourth quarter of 2003, Congress passed the Medicare PrescriptionDrug Act of 2003. As permitted, no accounting recognition has been given to this new legislation because authoritative accounting guidance has not yet beenissued and the Company cannot reasonably estimate its impact at this time.

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Defined benefit plans and postretirement benefit plans expense consisted of the following components:

Defined Benefit Plans Postretirement Benefit Plans

(Millions of Dollars) 2003 2002 2001 2003 2002 2001

Service cost (cost of benefits earned during the year) $ 38 $ 33 $ 32 $ 6 $ 7 $ 6Interest cost on benefit obligations 89 89 92 25 28 26Expected return on plan assets (85) (100) (120) — — —Amortization of:Prior service cost (benefit) 3 2 2 (12) (10) (9)Unrecognized (gains) losses 21 2 (2) 3 2 —Net curtailment (gains) losses — — 1 (1) — 2

$ 66 $ 26 $ 5 $ 21 $ 27 $ 25

Defined benefit plans and postretirement benefit plans expense is determined using actuarial assumptions as of thebeginning of the year. The following weighted−average assumptions were used to determine defined benefit plans andpostretirement benefit plans expense:

Defined Benefit Plans Postretirement Benefit Plans

2003 2002 2001 2003 2002 2001

Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%

Long−term rate of return on plan assets 8.75% 9.00% 9.00%Rate of compensation increase 4.00% 4.00% 4.00%

The expected rate of return on plan assets was estimated based on a variety of factors including the historical investment return achieved over a long−termperiod, the targeted allocation of plan assets and expectations concerning future returns in the marketplace for both equity and debt securities.

The following tables set forth the components of the changes in benefit obligations and fair value of plan assets during 2003 and 2002 as well as the funded statusand amounts both recognized and not recognized in the consolidated balance sheets at December 31, 2003 and 2002:

Defined Benefit Plans

Postretirement

Benefit Plans2003 2002

(Millions of Dollars)Funded

PlansUnfunded

PlansFunded

PlansUnfunded

Plans 2003 2002

Benefit obligations at beginning of year* $1,235 $ 118 $1,143 $ 122 $ 398 $ 374Service cost 36 2 32 1 6 7Interest cost 81 8 81 8 25 28Actuarial losses 120 11 118 2 34 19Plan amendments — 4 2 (2) (26) —Benefits paid (159) (15) (141) (13) (36) (37)Premiums paid by participants — — — — 8 7

Benefit obligations at end of year* $1,313 $ 128 $1,235 $ 118 $ 409 $ 398

Fair value of plan assets at beginning of year** $ 930 $1,110Actual return (loss) on plan assets 211 (91)Employer contributions 89 52Benefits paid from plan assets (159) (141)

Fair value of plan assets at end of year** $1,071 $ 930

Unfunded accumulated obligation $ (121) $ (120) $ (176) $ (110)Provision for future salary increases (121) (8) (129) (8)

Benefit obligations in excess of plan assets at end of year (242) (128) (305) (118) $(409) $(398)Unrecognized prior service cost (benefit) 18 (1) 20 (4) (34) (20)Unrecognized net loss 382 51 407 43 83 52

Net amount recognized in balance sheet at end of year $ 158 $ (78) $ 122 $ (79) $(360) $(366)

* Represents the projected benefit obligations for defined benefit plans and the accumulated postretirement benefit obligations (“APBO”) for postretirement benefitplans. The accumulated benefit obligations for funded and unfunded defined benefit plans amounted to $1,192 and $120 million, respectively, at December 31,

2003, and $1,106 and $110 million, respectively, at December 31, 2002.

** There are no plan assets invested in Company stock.

53

The net amount recognized in the consolidated balance sheets at December 31, 2003 and 2002 is classified as follows:

Defined

Benefit Plans

Postretirement

Benefit Plans

(Millions of Dollars) 2003 2002 2003 2002

Prepaid retirement costs $ 11 $ 5 $ — $ —Retirement benefit liabilities (244) (287) (360) (366)Deferred charges and other assets* 21 22 — —Accumulated other comprehensive loss (before related tax benefit)** 292 303 — —

$ 80 $ 43 $(360) $(366)

* Represents an intangible asset for which an equivalent additional minimum liability is included in retirement benefit liabilities.

** Represents a separate component of shareholders’ equity for which an equivalent additional minimum liability is included in retirement benefit liabilities.

The asset allocations attributable to the funded defined benefit plans at December 31, 2003 and 2002 and the target allocation of plan assets for 2004, by assetcategory, are as follows:

December 31

(In Percentages) 2004 Target * 2003 2002

Asset category:Equity securities 60% 62% 57%Debt securities 35 33 37 Other 5 5 6

Total 100% 100% 100%

* The target allocation has been in effect since 1999.

The investment strategy of the Company’s funded defined benefit plans is to achieve consistent positive returns, after adjusting for inflation, and to maximizelong−term total return within prudent levels of risk through a combination of income and capital appreciation. Risk to capital is minimized through thediversification of investments across and within various asset categories.In March 2003, a temporary interest rate relief bill was enacted by Congress that mitigated the impact of a decline in interest rates used in pension fundingcalculations. Congress is currently considering legislation that would extend interest rate relief beyond 2003. The planned employer contributions for 2004 forthe Company’s funded defined benefit plans, which are estimated to be $50 million, are based on the assumption that this legislation will be enacted. In the eventthe pending legislation does not become law, the Company’s employer contributions in 2004 and later years could increase significantly.The expected benefit payments through 2013 for the defined benefit plans and postretirement benefit plans are as follows:

Defined Benefit Plans

(Millions of Dollars)Funded

Plans Unfunded Plans

Postretirement Benefit Plans*

Year ending December 31:2004 $121 $ 13 $322005 $122 $ 12 $332006 $125 $ 12 $342007 $129 $ 14 $362008 $131 $ 17 $352009 through 2013 $666 $ 59 $170

* Before premiums paid by participants.

The measurement date for the Company’s defined benefit plans and its postretirement benefit plans is December 31. The following weighted−averageassumptions were used at December 31, 2003 and 2002 to determine benefit obligations for the plans:

Defined

Benefit PlansPostretirementBenefit Plans

2003 2002 2003 2002

Discount rate 6.00% 6.75% 6.00% 6.75%

Rate of compensation increase 4.00% 4.00%

54

The health care cost trend assumption used at December 31, 2003 to compute the APBO for the postretirement benefit plans was an increase of 11.4 percent(12.2 percent at December 31, 2002), which is assumed to decline gradually to 5.5 percent in 2008 and to remain at that level thereafter. A one−percentage pointchange each year in assumed health care cost trend rates would have the following effects at December 31, 2003:


1−PercentagePoint

Increase

1−PercentagePoint

Decrease

Effect on total of service and interest cost components of postretirementbenefits expense $1 $(1)Effect on APBO $13 $(12)

Defined Contribution Pension PlansSunoco has defined contribution pension plans which provide retirement benefits for most of its employees. Sunoco’s contributions, which are principally basedon a percentage of employees’ annual base compensation and are charged against income as incurred, amounted to $20, $19 and $19 million in 2003, 2002 and2001, respectively.Sunoco’s principal defined contribution plan is SunCAP. Sunoco matches 100 percent of employee contributions to this plan up to 5 percent of an employee’sbase compensation. SunCAP is a combined profit sharing and employee stock ownership plan which contains a provision designed to permit SunCAP, only uponapproval by the Company’s Board of Directors (“Board”), to borrow in order to purchase shares of Company common stock. As of December 31, 2003, no suchborrowings had been approved.

10. Short−Term Borrowings and Credit FacilitiesThe Company has a revolving credit facility (the “Facility”) totaling $785 million, which consists of a $385 million commitment through July 2005 and a $400million commitment that matures in July 2004. The Facility provides the Company with access to short−term financing and is intended to support the issuance ofcommercial paper and letters of credit. The Company also can borrow directly from the participating banks under the Facility. The Facility is subject tocommitment fees, which are not material. Under the terms of the Facility, Sunoco is required to maintain tangible net worth (as defined in the Facility) in anamount greater than or equal to targeted tangible net worth (targeted tangible net worth being determined by adding $1.0 billion and 50 percent of the excess ofnet income over share repurchases (as defined in the Facility) for each quarter ended after March 31, 2002). At December 31, 2003, the Company’s tangible networth was $1.6 billion and its targeted tangible net worth was $1.1 billion. The Facility also requires thatSunoco’s ratio of consolidated net indebtedness,including borrowings of Sunoco Logistics Partners L.P. (Notes 11 and 13), to consolidated capitalization (as those terms are defined in the Facility) not exceed.60 to 1. At December 31, 2003, this ratio was .42 to 1. There were no short−term borrowings at December 31, 2003 and 2002.Sunoco Logistics Partners L.P. has a three−year $250 million revolving credit facility through January 2005, which is available to fund the Partnership’s workingcapital requirements, to finance acquisitions, and for general partnership purposes. It includes a $20 million distribution sublimit that is available for distributionsto third−party unitholders and Sunoco. At December 31, 2003 and 2002, $65 million was outstanding under this credit facility (Note 11). The credit facilitycontains covenants requiring the Partnership to maintain a ratio of up to 4 to 1 of its consolidated total debt to its consolidated EBITDA (each as defined in thecredit facility) and an interest coverage ratio (as defined in the credit facility) of at least 3.5 to 1. At December 31, 2003, the Partnership’s ratio of its consolidateddebt to its consolidated EBITDA was 3.0 to 1 and the interest coverage ratio was 5.1 to 1.

11. Long−Term Debt

December 31


9 3

/8% debentures, $20 payable annually2007−2016 $ 200 $ 2009% debentures due 2024 100 1007¾% notes due 2009 200 2007.60% environmental industrial revenuebonds due 2024 100 1007¼% notes due 2012 (Note 13) 250 2507

1/8% notes due 2004 100 100

6 7

/8% notes due 2006 150 1506¾% notes due 2011 200 2006¾% convertible debentures due 2012(Note 14) 10 10Revolving credit loan, floating interestrate (1.85% at January 1, 2004) due2005 (Note 10) 65 65Other 85 87

1,460 1,462Less: unamortized discount 7 7current portion 103 2

$ 1,350 $ 1,453

The aggregate amount of long−term debt maturing and sinking fund requirements in the years 2004 through 2008 is as follows (in millions of dollars):

2004 $103 2007 $282005 $68 2008 $25

2006 $154

55

Cash payments for interest related to short−term borrowings and long−term debt (net of amounts capitalized) were $108, $100 and $98 million in 2003, 2002 and2001, respectively.The following table summarizes Sunoco’s long−term debt (including current portion) by issuer:

December 31


Sunoco, Inc. $ 807 $ 807Sunoco Logistics Partners L.P. 313 317Other 333 331

$ 1,453 $ 1,455

12. Commitments and Contingent LiabilitiesSunoco, as lessee, has noncancelable operating leases for marine transportation vessels, service stations, office space and other property and equipment. Totalrental expense for such leases for the years 2003, 2002 and 2001 amounted to $137, $136 and $145 million, respectively, which include contingent rentalstotaling $17, $16 and $14 million, respectively. Approximately 6 percent of total rental expense was recovered through related sublease rental income during2003.The aggregate amount of future minimum annual rentals applicable to noncancelable operating leases are as follows (in millions of dollars):

Year ending December 31:2004 $ 1232005 1052006 922007 862008 81Thereafter 293

$ 780

Approximately one half of the aggregate amount of future minimum annual rentals applicable to noncancelable operating leases relates to time charters formarine transportation vessels. Most of these time charters were recently entered into by the Company and contain seven−year terms with renewal and subleaseoptions. The lease payments consist of a fixed−price minimum and a variable component based on spot−market rates. In the table above, the variable componentof the lease payments has been estimated utilizing the average spot market prices for the year 2003. The actual variable component of the lease paymentsattributable to these time charters could vary significantly from the estimates included in the table.Sunoco is contingently liable under an arrangement that guarantees a $120 million term loan due in 2006 of the Epsilon Products Company, LLC polypropylenejoint venture in which the Company is a partner. Under this arrangement, Sunoco also guarantees borrowings under the joint venture’s $40 million revolvingcredit facility maturing in September 2006, which amounted to $28 million at December 31, 2003. Sunoco is also contingently liable under various arrangementswhich guarantee debt of third parties aggregating to approximately $12 million at December 31, 2003. At this time, management does not believe that it is likelythat the Company will have to perform under any of these guarantees.Over the years, Sunoco has sold thousands of retail gasoline outlets as well as refineries, terminals, coal mines, oil and gas properties and various other assets. Inconnection with these sales, the Company has indemnified the purchasers for potential environmental and other contingent liabilities related to the period prior tothe transaction dates. In most cases, the effect of these arrangements was to afford protection for the purchasers with respect to obligations for which theCompany was already primarily liable. While some of these indemnities have spending thresholds which must be exceeded before they become operative, orlimits on Sunoco’s maximum exposure, they generally are not limited. The Company accrues for any obligations under these agreements when a loss is probableand reasonably estimable. The Company cannot reasonably estimate the maximum potential amount of future payments under these agreements.Sunoco is a party under agreements which provide for future payments to secure wastewater treatment services at its Toledo refinery and coal handling servicesat its Indiana Harbor cokemaking facility. The fixed and determinable amounts of the obligations under these agreements are as follows (in millions of dollars):

Year ending December 31:2004 $ 92005 92006 92007 92008 82009 through 2018 53

Total 97Less: Amount representing interest (32)

Total at present value $ 65

Payments under these agreements, including variable components, totaled $18 million in each of the years 2003, 2002 and 2001.Sunoco is subject to extensive and frequently changing federal, state and local laws and regulations, including, but not limited to, those relating to the discharge

of materials into the environment or that otherwise deal

56

with the protection of the environment, waste management and the characteristics and composition of fuels. As with the industry generally, compliance withexisting and anticipated laws and regulations increases the overall cost of operating Sunoco’s businesses, including capital costs to construct, maintain andupgrade equipment and facilities. Existing laws and regulations result in liabilities and loss contingencies for remediation at Sunoco’s facilities and at third−partyor formerly owned sites. The accruedliability for environmental remediation is classified in the consolidated balance sheets as follows:

December 31


Accrued liabilities $ 44 $ 43Other deferred credits and liabilities 102 116

$ 146 $ 159

The following table summarizes the changes in the accrued liability for environmental remediation activities by category:

(Millions of Dollars) RefineriesMarketing

SitesChemicals

FacilitiesPipelines

and TerminalsHazardous

Waste Sites Other Total

At December 31, 2000 $ 69 $ 42 $ — $ 19 $ 8 $ 3 $141Accruals (2) 21 — 10 2 — 31Payments (6) (19) — (11) (2) — (38)Acquisitions — — 10 — — — 10Other* — 1 — — — — 1

At December 31, 2001 $ 61 $ 45 $ 10 $ 18 $ 8 $ 3 $145Accruals (2) 36 1 7 — — 42Payments (7) (24) (3) (12) (3) — (49)Other* — 15 — 6 — — 21

At December 31, 2002 $ 52 $ 72 $ 8 $ 19 $ 5 $ 3 $159Accruals — 23 1 6 1 (1) 30Payments (9) (22) (2) (10) (1) — (44)Other* — 1 — — — — 1

At December 31, 2003 $ 43 $ 74 $ 7 $ 15 $ 5 $ 2 $146

* Consists of increases in the accrued liability for which recovery from third parties is probable.

Sunoco’s accruals for environmental remediation activities reflect its estimates of the most likely costs that will be incurred over an extended period to remediateidentified conditions for which the costs are both probable and reasonably estimable. Engineering studies, historical experience and other factors are used toidentify and evaluate remediation alternatives and their related costs in determining the estimated accruals for environmental remediation activities. Lossesattributable to unasserted environmental claims are also reflected in the accruals to the extent they are probable of occurrence and reasonably estimable.Total future costs for the environmental remediation activities identified above will depend upon, among other things, the identification of any additional sites,the determination of the extent of the contamination at each site, the timing and nature of required remedial actions, the technology available and needed to meetthe various existing legal requirements, the nature and terms of cost sharing arrangements with other potentially responsible parties, the availability of insurancecoverage, the nature and extent of future environmental laws, inflation rates and the determination of Sunoco’s liability at the sites, if any, in light of the number,participation level and financial viability of the other parties. Management believes it is reasonably possible (i.e., less than probable but greater than remote) thatadditional environmental remediation losses will be incurred. At December 31, 2003, the aggregate of the estimated maximum additional reasonably possiblelosses, which relate to numerous individual sites, totaled $95 million. However, the Company believes it is very unlikely that it will realize the maximum loss atevery site. Furthermore, the recognition of additional losses, if and when they were to occur, would likely extend over many years and, therefore, likely wouldnot have a material impact on the Company’s financial position.Under various environmental laws, including the Resource Conservation and Recovery Act (“RCRA”) (which relates to solid and hazardous waste treatment,storage and disposal), Sunoco has initiated corrective remedial action at its facilities, formerly owned facilities and third−party sites. At the Company’s majormanufacturing facilities, Sunoco has consistently assumed continued industrial use and a containment/remediation strategy focused on eliminating unacceptablerisks to human health or the environment. The remediation accruals for these sites reflect that strategy. Accruals include amounts to prevent off−site migrationand to contain the impact on the facility property, as well as to address known, discrete areas requiring remediation within the plants. Activities include closure ofRCRA solid waste management units, recovery of hydrocarbons, handling of impacted soil, mitigation of surface water impacts and prevention of off−sitemigration.

57

Many of Sunoco’s current terminals are being addressed with the above containment/remediation strategy. At some smaller or less impacted facilities and somepreviously divested terminals, the focus is on remediating discrete interior areas to attain regulatory closure.Sunoco owns or operates certain retail gasoline outlets where releases of petroleum products have occurred. Federal and state laws and regulations require thatcontamination caused by such releases at these sites and at formerly owned sites be assessed and remediated to meet the applicable standards. The obligation forSunoco to remediate this type of contamination varies, depending on the extent of the release and the applicable laws and regulations. A portion of theremediation costs may be recoverable from the reimbursement fund of the applicable state, after any deductible has been met.Future costs for environmental remediation activities at the Company’s marketing sites will also be influenced by the extent of MTBE contamination ofgroundwater aquifers, the cleanup of which will be driven by thresholds based on drinking water protection. Though not all groundwater is used for drinking,several states have initiated or proposed more stringent MTBE cleanup requirements. Cost increases result directly from extended remedial operations andmaintenance on sites that, under prior standards, could otherwise have been completed, installation of additional remedial or monitoring wells and purchase ofmore expensive equipment because of the presence of MTBE. While actual cleanup costs for specific sites are variable and depend on many of the factorsdiscussed above, expansion of similar MTBE remediation thresholds to additional states or adoption of even more stringent requirements for MTBE remediationwould result in further cost increases.The accrued liability for hazardous waste sites is attributable to potential obligations to remove or mitigate the environmental effects of the disposal or release ofcertain pollutants at third−party sites pursuant to the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) (which relates toreleases and remediation of hazardous substances) and similar state laws. Under CERCLA, Sunoco is potentially subject to joint and several liability for the costsof remediation at sites at which it has been identified as a “potentially responsible party” (“PRP”). As of December 31, 2003, Sunoco had been named as a PRPat 49 sites identified or potentially identifiable as “Superfund” sites under federal and state law. The Company is usually one of a number of companies identifiedas a PRP at a site. Sunoco has reviewed the nature and extent of its involvement at each site and other relevant circumstances and, based upon the other partiesinvolved or Sunoco’s negligible participation therein, believes that its potential liability associated with such sites will not be significant.

Management believes that none of the current remediation locations, which are in various stages of ongoing remediation, is individually material to Sunoco as itslargest accrual for any one Superfund site, operable unit or remediation area was less than $6 million at December 31, 2003. As a result, Sunoco’s exposure toadverse developments with respect to any individual site is not expected to be material. However, if changes in environmental regulations occur, such changescould impact multiple Sunoco facilities and formerly owned and third−party sites at the same time. As a result, from time to time, significant charges againstincome for environmental remediation may occur.The Company maintains insurance programs that cover certain of its existing or potential environmental liabilities, which programs vary by year, type and extentof coverage. For underground storage tank remediations, the Company can also seek reimbursement through various state funds of certain remediation costsabove a deductible amount. For certain acquired properties, the Company has entered into arrangements with the sellers or others that allocate environmentalliabilities and provide indemnities to the Company for remediating contamination that occurred prior to the acquisition dates. Some of these environmentalindemnifications are subject to caps and limits. No accruals have been recorded for any potential contingent liabilities that will be funded by the prior owners asmanagement does not believe, based on current information, that it is likely that any of the former owners will not perform under any of these agreements. Otherthan the preceding arrangements, the Company has not entered into any arrangements with third parties to mitigate its exposure to loss from environmentalcontamination. Claims for recovery of environmental liabilities that are probable of realization totaled $22 million at December 31, 2003 and are included indeferred charges and other assets in the consolidated balance sheets.Since the late 1990s, the Environmental Protection Agency (“EPA”) has undertaken significant enforcement initiatives under authority of the Clean Air Act,targeting industries with large manufacturing facilities that are significant sources of emissions, including the refining industry. The EPA has asserted that manyof these facilities have modified or expanded their operations over time without complying with New Source Review regulations that require permits and newemission controls in connection with any significant facility modifications or expansions that could increase emissions above certain thresholds, and haveviolated various other provisions of the Clean Air Act, including New Source Review and Prevention of Significant Deterioration (“NSR/PSD”) Program,Benzene Waste Organic National Emissions

58

Standards for Hazardous Air Pollutants (“NESHAP”), Leak Detection and Repair (“LDAR”) and flaring requirements. As part of this enforcement initiative, theEPA has entered into consent agreements with several refiners that require them to pay civil fines and penalties and make significant capital expenditures toinstall emissions control equipment at selected facilities. For some of these refineries, the cost of the required emissions control equipment is significant,depending on the size, age and configuration of the refinery. Sunoco received information requests in 2000, 2001 and 2002 in connection with the enforcementinitiative pertaining to its Marcus Hook, Philadelphia, Toledo and Tulsa refineries, the Puerto Rico refinery divested in 2001 and its phenol facility inPhiladelphia, PA. Sunoco has completed its responses to the EPA. In 2003, Sunoco received an additional information request at its phenol plant in Philadelphia.Sunoco has received Notices of Violation and Findings of Violation from the EPA relating to its Marcus Hook, Philadelphia and Toledo refineries. The Noticesand Findings of Violation allege failure to comply with certain requirements relating to benzene wastewater emissions at the Company’s Marcus Hook, Toledoand Philadelphia refineries and failure to comply with certain requirements relating to leak detection and repair at the Toledo refinery. In addition, the EPA hasalleged that: at the Company’s Philadelphia refinery, certain modifications were made to one of the fluid catalytic cracking units in 1992 and 1998 withoutobtaining requisite permits; at the Company’s Marcus Hook refinery, certain modifications were made to the fluid catalytic cracking unit in 1990 and 1996without obtaining requisite permits; and at the Company’s Toledo refinery, certain physical and operational changes were made to the fluid catalytic crackingunit in 1985 without obtaining requisite permits. The EPA has also alleged that at the Company’s Toledo refinery, certain physical and operational changes weremade to the sulfur plant in 1995, 1998 and 1999 without obtaining requisite permits; certain physical and operational changes were made to a flare systemwithout obtaining requisite permits; and that the flare system was not being operated in compliance with the Clean Air Act. Sunoco has met with representativesof the EPA on these Notices and Findings of Violation and is currently evaluating its position. Although Sunoco does not believe that it has violated any CleanAir Act requirements, as part of this initiative, Sunoco could be required to make significant capital expenditures, incur higher operating costs, operate theserefineries at reduced levels and pay significant penalties. There are no liabilities accrued at December 31, 2003 in connection with this initiative. With respect tothe Company’s recently acquired Eagle Point refinery (Note 18), El Paso Corporation, its prior owner, has entered into a consent decree with the EPA and theNew Jersey Department of EnvironmentalProtection as part of EPA’s enforcement initiative. Sunoco does not anticipate substantial capital expenditures on itspart as a result of El Paso’s consent decree.Energy policy legislation continues to be debated in the U.S. Congress. The Bush Administration and the U.S. Senate and House have been unable to reachagreement on final legislation. Both chambers passed energy bills in 2003 and a House−Senate Conference Committee produced a conference report. The U.S.House approved the Conference Committee report but the U.S. Senate failed to bring the matter to a vote. The U.S. Senate leadership has introduced new,pared−down legislation for consideration in 2004. The new legislation, like the conference report, would repeal the oxygenate mandate in the Clean Air Act, setcertain requirements for ethanol or renewable fuels usage and phase out the use of MTBE. However, there is no agreement with the U.S. House leadership and nocertainty of any action in either chamber. Sunoco uses MTBE and ethanol as oxygenates in different geographic areas of its refining and marketing system.While federal action is uncertain, California, New York and Connecticut began enforcing state−imposed MTBE bans on January 1, 2004. Sunoco does notmarket in California but is complying with the bans in New York and Connecticut. These bans have resulted in unique gasoline blends, which could have asignificant impact on market conditions depending on the details of future regulations, the impact on gasoline supplies, the cost and availability of ethanol andother alternate oxygenates if the minimum oxygenate requirements remain in effect, and the ability of Sunoco and the industry in general to recover their costs inthe marketplace. A number of additional states are considering bans on MTBE although no immediate action is anticipated.Sunoco, along with other refiners, manufacturers and sellers of gasoline, and owners and operators of retail gasoline sites, are defendants in various cases in 17states alleging MTBE contamination in groundwater. Plaintiffs include private litigants, governments and quasi−governmental entities, including various waterauthorities and towns, and the State of New Hampshire. Plaintiffs generally are alleging product liability for defective product, groundwater contamination,nuisance, trespass, negligence, failure to warn, violation of environmental laws and deceptive business practices. Plaintiffs are seeking compensatory damagesand in some cases injunctive relief and punitive damages. Up to this point, for the group of MTBE cases currently pending, there has been little informationdeveloped about the plaintiffs’ legal theories or the facts that would be relevant to an analysis of potential exposure. Based on the current law and facts availableat this time, Sunoco believes that these cases will not have a material adverse effect on its consolidated financial position.

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Many other legal and administrative proceedings are pending or possible against Sunoco from its current and past operations, including proceedings related tocommercial and tax disputes, product liability, antitrust, employment claims, leaks from pipelines and underground storage tanks, natural resource damageclaims, premises−liability claims, allegations of exposures of third parties to toxic substances (such as benzene or asbestos) and general environmental claims.The ultimate outcome of these proceedings and the matters discussed above cannot be ascertained at this time; however, it is reasonably possible that some ofthem could be resolved unfavorably to Sunoco. Management believes that these matters could have a significant impact on results of operations for any one year.However, management does not believe that any additional liabilities which may arise pertaining to such matters would be material in relation to the consolidatedfinancial position of Sunoco at December 31, 2003.

13. Minority InterestsCokemaking OperationsIn July 2002, Sunoco transferred an additional interest in its Indiana Harbor cokemaking operation to a third−party investor for $215 million in cash. Since 1995,Sunoco has received $724 million in exchange for interests in its Indiana Harbor and Jewell cokemaking operations in four separate transactions. Sunoco did notrecognize any gain at the dates of these transactions as the third−party investors are entitled to a preferential return on their investments, currently equal to 98percent of the cash flows and tax benefits from the respective cokemaking operations, during preferential return periods which continue until they recover theirinvestments and achieve a cumulative return that averages approximately 10 percent after tax thereon. Income is recognized as coke production and salesgenerate cash flows and tax benefits which are allocated to Sunoco and the third−party investors, while expense is recognized to reflect the investors’ preferentialreturns.The preferential return period for the Jewell operation is expected to end in 2011. The preferential return period for the first investor in the Indiana Harboroperation ended in July 2002, at which time the first investor’s interest in the cash flows and tax benefits from Indiana Harbor decreased from 95 percent to 5percent. As a result of the additional investment in July 2002, third−party investors’ interests in Indiana Harbor increased from 5 percent to 98 percent. The newinvestor’s preferential return period for the Indiana Harbor operation is expected to end in 2007. The estimated lengths of these preferential return periods arebased upon the Company’s current expectations of future operations, including sales volumes and prices, raw material and operating costs andcapitalexpenditure levels. Better−than−expected results will shorten the investors’ preferential return periods, while lower−than−expected results will lengthen theperiods.After these preferential return periods, the investor in the Jewell operation will be entitled to a minority interest in the cash flows and tax benefits from Jewellamounting to 18 percent, while the investors in the Indiana Harbor operation will be entitled to a minority interest in the cash flows and tax benefits from IndianaHarbor initially amounting to 34 percent and declining to 10 percent by 2038.The following table sets forth the minority interest balances and the changes in these balances attributable to the third−party investors’ interests in cokemakingoperations:


Balance at beginning of year $379 $223 $316Nonconventional fuel credit andother tax benefits* (58) (77) (69)Preferential return* 55 42 32Additional cash investments bythird−party investors — 215 —Cash distributions to third−partyinvestors (48) (24) (56)

Balance at end of year $328 $379 $223

* The nonconventional fuel credit and other tax benefits and the preferential return, which comprise the noncash reduction in the minority interest in cokemaking operations, areincluded in other income in the consolidated statements of operations (Note 2).

In each of the four transactions in which the Company transferred interests in its cokemaking operations to third−party investors, Sunoco has provided taxindemnifications to the third parties for certain tax benefits allocated to them during the preferential return periods. In certain of these cases, the Company alsohas the option to purchase the third−party investors’ interests. These indemnifications would require the Company to make payments in the event the InternalRevenue Service disallows the tax deductions and benefits allocated to the third parties or if there is a change in the tax laws that reduces the amount ofnonconventional fuel tax credits which would be available to them. These tax indemnifications are in effect until the applicable tax returns are no longer subjectto Internal Revenue Service review. Although the Company believes it is remote that it will be required to make any payments under these indemnifications, atDecember 31, 2003, the maximum potential payment under the tax indemnifications and the options to purchase the third−party investors’ interests, if exercised,would have been approximately $770 million. If this were to occur, the minority interest balance would be reduced by approximately $290 million.

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Logistics OperationsOn February 8, 2002, the Company contributed a substantial portion of its Logistics business to Sunoco Logistics Partners L.P., a master limited partnershipformed in 2001, in exchange for a 73.2 percent limited partnership interest, a 2 percent general partnership interest, incentive distribution rights and a specialdistribution, representing the net proceeds from the Partnership’s issuance of $250 million of ten−year 7 1/4 percent senior notes (Note 11). The Partnershipconcurrently issued 5.75 million limited partnership units, representing a 24.8 percent interest in the Partnership, in an initial public offering at a price of $20.25per unit. Proceeds from the offering were used by the Partnership to establish working capital that was not contributed to the Partnership by Sunoco. Sunocoliquidated this retained working capital subsequent to the Partnership’s formation. The accounts of the Partnership continue to be included in Sunoco’sconsolidated financial statements. No gain or loss was recognized on this transaction.Concurrent with the offering, Sunoco entered into various agreements with the Partnership which require Sunoco to pay for minimum storage and throughputusage of certain Partnership assets. These agreements also establish fees for administrative services provided by Sunoco to the Partnership and provideindemnifications by Sunoco to the Partnership for certain environmental, toxic tort and other liabilities.The following table sets forth the minority interest balance and the changes to this balance attributable to the third−party investors’ interests in Sunoco LogisticsPartners L.P.:


Balance at beginning of year $100 $ —Net proceeds from the initial public offering on February 8, 2002 — 96Minority interest share of income * 15 11Cash distributions to third−party investors** (11) (7)

Balance at end of year $104 $100

* Included in selling, general and administrative expenses in the consolidated statements of operations.

** The Partnership increased its quarterly cash distribution per unit from $.45 to $.4875 for the fourth quarter of 2002 and then to $.50 for the second quarter of 2003,$.5125 for the third quarter of 2003 and $.55 for the fourth quarter of 2003.

14. Shareholders’ EquityEach share of Company common stock is entitled to one full vote. The $10 million of outstanding 6 3/4 percent debentures are convertible into shares of Sunococommon stock 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 December 31, 2003,there were 242,981 shares of common stock reserved for this potential conversion (Note 11).

Commencing with the fourth quarter of 2003, the Company increased the quarterly dividend paid on common stock from $.25 per share ($1.00 per year) to $.275per share ($1.10 per year).In 2003 and 2001, the Company repurchased 2.9 and 10.7 million shares, respectively, of its common stock for $136 and $393 million, respectively. TheCompany did not repurchase any of its common stock during 2002. At December 31, 2003, the Company had a remaining authorization from its Board topurchase up to $243 million of Company common stock in the open market from time to time depending on prevailing market conditions and available cash.The Company’s Articles of Incorporation authorize the issuance of up to 15,000,000 shares of preference stock without par value, subject to approval by theBoard. The Board also has authority to fix the number, designation, rights, preferences and limitations of these shares, subject to applicable laws and theprovisions of the Articles of Incorporation. At December 31, 2003, no such shares had been issued.On February 1, 1996, the Company adopted a shareholder rights plan and designated 1,743,019 shares of its preference stock as Series B participating cumulativepreference stock. Pursuant to the plan, the Company declared a dividend of one stock purchase right (“Right”) for each share of common stock outstanding onFebruary 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. The Rightsare attached to the common stock until they become exercisable. Generally, the Rights become exercisable a specified period after a party acquires 15 percent ormore of the aggregate outstanding common stock or announces a tender offer for 15 percent or more of the common stock. Each Right initially entitles a holderto 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 thecommon stock, each Right will entitle a holder to pay $100 for the number of shares of Company common stock (or in certain situations, common stock of theacquiring party) having a then current market value of $200. Alternatively, the Company has the option to exchange one share of Company common stock foreach Right at any time after a party has acquired at least 15 percent but less than 50 percent of the common stock. The Company may redeem each Right for $.01per Right at any time until a party has acquired 15 percent or more of the common stock. In general, none of the benefits of the Rights will be available to aholder of 15 percent or more of the common stock. The Rights will expire on February 12, 2006, unless earlier exchanged or redeemed.

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The following table sets forth the components (net of related income taxes) of the accumulated other comprehensive loss balances in shareholders’ equity:

December 31


Minimum pension liability adjustment $(190) $(197)Hedging activities 3 2

$(187) $(195)

15. Management Incentive PlansSunoco’s principal management incentive plans are the Executive Incentive Plan (“EIP”) and the Long−Term Performance Enhancement Plan II (“LTPEP II”).The EIP provides for the payment of annual cash incentive awardswhile the LTPEP II provides for the award of stock options, common stock units and relatedrights to directors, officers and other key employees of Sunoco. The options granted under LTPEP II have a ten−year term, are not exercisable until two yearsafter the date of grant and permit optionees to purchase Company common stock at its fair market value on the date of grant. LTPEP II authorizes the use of fourmillion shares of common stock for awards. No awards may be granted under LTPEP II after December 31, 2006, unless the Board extends this date to a date nolater than December 31, 2011.The following table summarizes information with respect to common stock option awards under Sunoco’s management incentive plans as well as the EmployeeOption Plan:

Management Incentive Plans Employee Option Plan*

SharesUnderOption

Weighted−Average

Option PricePer Share

SharesUnderOption

OptionPrice

Per Share

Outstanding, December 31, 2000 5,055,354 $29.63 509,019 $28.00Granted 754,960 $37.61 —Exercised (1,279,910) $29.38 (118,100) $28.00Canceled (32,710) $32.12 (12,020) $28.00

Outstanding, December 31, 2001 4,497,694 $31.02 378,899 $28.00Granted 733,360 $30.27 —Exercised (604,264) $27.34 (213,470) $28.00Canceled (95,480) $35.60 (6,225) $28.00

Outstanding, December 31, 2002 4,531,310 $31.29 159,204 $28.00Granted 504,800 $48.80 —Exercised (1,803,310) $30.31 (93,695) $28.00Canceled (32,760) $37.95 (41,619) $28.00

Outstanding, December 31, 2003 3,200,040 $34.53 23,890 $28.00

Exercisable, December 31

2001 3,051,724 $30.02 378,899 $28.002002 3,111,490 $30.13 159,204 $28.002003 1,964,380 $32.46 23,890 $28.00

Available for Grant, December 31

2001 3,547,040 —2002 2,526,780 —2003 2,385,580 —

* Options were granted to employees (other than executives) during 1993 and 1994.

The following table provides additional information concerning all options outstanding at December 31, 2003:

Options Outstanding Options Exercisable

Range of Exercise Prices

SharesUnderOption

Weighted−Average

RemainingContractual

Life(Years)

Weighted−AverageExercise

Price

SharesUnderOption

Weighted−AverageExercise

Price

$24.63—$26.44 349,330 6 $ 25.19 349,330 $ 25.19$27.25—$28.88 480,410 6 $ 27.85 480,410 $ 27.85$30.15—$32.88 1,070,040 8 $ 30.85 355,840 $ 32.26$35.24—$39.88 829,350 7 $ 38.26 802,690 $ 38.33$49.02 494,800 10 $ 49.02 —

$24.63—$49.02 3,223,930 8 $ 34.49 1,988,270 $ 32.40

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Common stock unit awards mature upon completion of a restriction period or upon attainment of predetermined performance targets. At December 31, 2002, alloutstanding common stock units were payable in Company common stock. In December 2003, the Company changed the method of payment for certainoutstanding common stock unit awards to cash. As a result, the Company recorded a $12 million charge to the capital in excess of par value component ofshareholders’ equity at December 31, 2003. At December 31, 2003, 402,600 of the outstanding common stock unit awards were payable in cash and 92,834 werepayable in Company common stock. The following table summarizes information with respect to all common stock unit awards under Sunoco’s managementincentive plans:

2003 2002 2001

Outstanding at beginning of year 462,212 519,290 436,292Granted* 144,565 151,650 114,500Performance factor adjustment** 33,931 (53,372) —Matured (143,674) (147,061) (22,902)Canceled (1,600) (8,295) (8,600)

Outstanding at end of year 495,434 462,212 519,290

* The weighted average price for common stock awards on the date of grant was $48.40, $30.14 and $37.07 for awards granted in 2003, 2002 and 2001, respectively.

** Consists of adjustments to performance−based awards to reflect actual performance. The adjustments are required since the original grants of these awards were at 100percent of the targeted amounts.

During the fourth quarter of 2002, Sunoco adopted the fair value method of accounting for employee stock compensation plans, retroactive to January 1, 2002(Note 1). Stock−based compensation expense for 2003 and 2002 determined utilizing this method amounted to $13 and $11 million, respectively ($8 and $7million after tax, respectively), which consisted of $6 and $6 million, respectively, related to stock option awards and $7 and $5 million, respectively, related tocommon stock unit awards. Had the fair value method been followed during 2001, the pro forma impact on Sunoco’s net income and net income per share ofcommon stock on a diluted basis would have been as follows:

(Millions of Dollars, Except Per Share Amounts)

Net income, as reported: $398Add back after−tax stock−based compensationexpense included in reported net income 4Less after−tax stock−based compensationexpense determined under SFAS No. 123 (7)

Net income, pro forma $395

Net income per share:As reported $4.85Pro forma $4.82

The 2003 and 2002 historical amounts and the 2001 pro forma amounts above have been computed in accordance with the fair value method and reflect theestimated fair values of $13.07, $7.08 and $10.38 per option granted during 2003, 2002 and 2001, respectively. These values are calculated using theBlack−Scholes option pricing model based on the following weighted−average assumptions:

2003 2002 2001

Expected life (years) 6 6 6Risk−free interest rate 3.7% 3.7% 4.8%Dividend yield 2.2% 3.3% 2.7%Expected volatility 28.8% 29.3% 29.3%

16. Financial InstrumentsThe estimated fair value of financial instruments has been determined based on the Company’s assessment of available market information and appropriatevaluation methodologies. However, these estimates may not necessarily be indicative of the amounts that the Company could realize in a current marketexchange.Sunoco’s current assets (other than inventories and deferred income taxes) and current liabilities are financial instruments. The estimated fair value of thesefinancial instruments approximates their carrying amounts. At December 31, 2003 and 2002, the estimated fair value of Sunoco’s long−term debt was $1,536 and$1,593 million, respectively, compared to carrying amounts of $1,350 and $1,453 million, respectively. Long−term debt that is publicly traded was valued basedon quoted market prices while the fair value of other debt issues was estimated by management based upon current interest rates available to Sunoco at therespective balance sheet dates for similar issues.The Company guarantees the debt of affiliated companies and others. Due to the complexity of these guarantees and the absence of any market for these financialinstruments, the Company does not believe it is practicable to estimate their fair value. The accounting recognition provisions of FASB Interpretation No. 45 donot apply to these guarantees as they were entered into prior to January 1, 2003, the date prospective application of the provisions is required (Note 1).Sunoco uses swaps, options, futures, forwards and other derivative instruments for hedging purposes. Sunoco is at risk for possible changes in the market valuefor these derivative instruments. However, it is anticipated that such risk would be mitigated by price changes in the underlying hedged items. In addition,Sunoco is exposed to credit risk in the event of nonperformance by counterparties. Management believes this risk is negligible as its counterparties are eitherregulated by exchanges or are

major international financial institutions or corporations with investment−grade credit ratings. Market and credit risks associated with all of Sunoco’s derivativecontracts are reviewed regularly by management.Derivative instruments are used from time to time to achieve ratable pricing of crude oil purchases, to convert certain refined product sales to fixed or floatingprices, to lock in what Sunoco considers to be acceptable margins for various refined products and to lock in a portion of the Company’s electricity and naturalgas costs. In addition, Sunoco uses derivative contracts from time to time to reduce foreign exchange risk relating to certain export sales denominated in foreigncurrencies.At December 31, 2003, the Company had recorded liabilities totaling $1 million for hedging losses, which represented their fair value as determined usingvarious indices and dealer quotes. The amount of hedge ineffectiveness on derivative contracts during the 2001−2003 period was not material. Open contracts asof December 31, 2003 vary in duration but do not extend beyond 2004.

17. Business Segment InformationSunoco is principally a petroleum refiner and marketer and chemicals manufacturer with interests in logistics and cokemaking. Sunoco’s operations are organizedinto five business segments.The Refining and Supply segment manufactures petroleum products at Sunoco’s Marcus Hook, Philadelphia, Toledo and Tulsa refineries and commoditypetrochemicals at Sunoco’s Marcus Hook, Philadelphia and Toledo refineries and sells these products to other Sunoco businesses and to wholesale and industrialcustomers. This segment also manufactures lubricant products at Sunoco’s Tulsa refinery which are sold into process oil, wholesale base oil and wax markets(“Western Lubricants”) and, prior to the completion of the restructuring of lubricants operations in December 2001, included Value Added and EasternLubricants (Note 3).The Retail Marketing segment sells gasoline and middle distillates at retail and operates convenience stores in 25 states primarily on the East Coast and in theMidwest region of the United States.

The Chemicals segment manufactures phenol and related products at chemical plants in Philadelphia, PA and Haverhill OH; polypropylene at facilities in LaPorte, TX, Neal, WV and Bayport, TX; and cumene at the Philadelphia refinery. In addition, propylene and polypropylene are produced at its Marcus Hook, PA,Epsilon joint venture facility and MTBE is produced at its Mont Belvieu, TX, BEF joint venture facility. This segment also distributes and markets theseproducts. A facility in Pasadena, TX, which produces plasticizers, was sold to BASF in January 2004, while a facility in Neville Island, PA will continue toproduce plasticizers exclusively for BASF under a three−year tolling agreement (Note 3).The Logistics segment operates refined product and crude oil pipelines and terminals and conducts crude oil acquisition and marketing activities primarily in theNortheast, Midwest and South Central regions of the United States. In addition, the Logistics segment has an ownership interest in several refined product andcrude oil pipeline joint ventures. Since February 8, 2002, the date of the initial public offering, logistics operations have been conducted primarily throughSunoco Logistics Partners L.P. (Note 13).The Coke segment makes high−quality, blast−furnace coke at Sunoco’s Indiana Harbor facility in East Chicago, IN and Jewell facility in Vansant, VA, andproduces metallurgical coal from mines in Virginia primarily for use at the Jewell cokemaking facility. Substantially all of the coke sales are made underlong−term contracts with two steel companies.Income tax amounts give effect to the tax credits earned by each segment. Overhead expenses that can be identified with a segment have been included asdeductions in determining pretax and after−tax segment income. The remainder are included in Corporate and Other. Also included in Corporate and Other arenet financing expenses and other, which consist principally of interest cost, debt and other financing expenses less interest income and interest capitalized, andsignificant unusual and infrequently occurring items not allocated to a segment for purposes of reporting to the chief operating decision maker. Corporate andOther also includes the preferential return of third−party investors in the Company’s cokemaking operations (Note 13). Intersegment revenues are accounted forbased on the prices negotiated by the segments which approximate market. Identifiable assets are those assets that are utilized within a specific segment.

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Segment Information

(Millions of Dollars)Refining and

SupplyRetail

Marketing Chemicals Logistics CokeCorporateand Other Consolidated

2003Sales and other operatingrevenue (including consumerexcise taxes):Unaffiliated customers $ 7,174 $ 7,539 $ 1,627 $1,275 $251 $ — $ 17,866

Intersegment $ 4,852 $ — $ — $1,383 $ — $ — $ —

Pretax segment income (loss) $ 416 $ 145 $ 84 $ 34 $ 66 $ (250) $ 495Income tax (expense) benefit (155) (54) (31) (8) (23) 88 (183)

After−tax segment income (loss) $ 261 $ 91 $ 53 $ 26 $ 43 $ (162)* $ 312

Equity income (loss) $ 2 $ — $ 4 $ 20 $ — $ (23)** $ 3

Depreciation, depletion andamortization $ 165 $ 99 $ 59 $ 27 $ 13 $ — $ 363

Capital expenditures $ 245 $ 107*** $ 29† $ 39 $ 5 $ — $ 425

Investments in and advances toaffiliated companies $ 12 $ — $ 74 $ 85 $ — $ — $ 171

Identifiable assets $ 2,344 $ 1,274 $ 1,455 $1,121 $268 $ 485†† $ 6,922†††

* Consists of $40 million of after−tax corporate expenses, $99 million of after−tax net financing expenses and other and a $23 million after−tax provision for assetwrite−downs and other matters (Notes 2 and 3).** Represents Sunoco’s share of a provision recorded by the Chemicals segment’s one−third−owned BEF joint venture to write down its MTBE production facility to its

estimated fair value (Note 2).*** Excludes $162 million purchase of 193 Speedway retail gasoline sites located primarily in Florida and South Carolina, including related inventory (Note 3).† Excludes $198 million associated with the formation of a propylene partnership with Equistar Chemicals, L.P. and a related supply contract and the acquisition ofEquistar’s Bayport polypropylene facility (Note 3).†† Consists of Sunoco’s $91 million consolidated deferred income tax asset, $11 million of prepaid retirement costs and $383 million attributable to corporate activities.††† After elimination of intersegment receivables.


Refiningand

SupplyRetail

Marketing Chemicals Logistics Coke

Corporateand

Other Consolidated

2002Sales and other operatingrevenue (including consumerexcise taxes):Unaffiliated customers $ 5,827 $ 6,172 $ 1,362 $ 690 $248 $ — $ 14,299

Intersegment $ 3,828 $ — $ — $1,158 $ — $ — $ —

Pretax segment income (loss) $ (46) $ 31 $ 43 $ 47 $ 65 $ (213) $ (73)Income tax (expense) benefit 15 (11) (15) (14) (23) 74 26

After−tax segment income (loss) $ (31) $ 20 $ 28 $ 33 $ 42 $ (139)* $ (47)

Equity income $ 3 $ — $ 6 $ 14 $ — $ — $ 23


Capital expenditures $ 179 $ 124 $ 36 $ 41** $ 5 $ — $ 385


Identifiable assets $ 2,252 $ 1,135 $ 1,325 $1,021 $278 $ 452*** $ 6,441†

* Consists of $26 million of after−tax corporate expenses, $91 million of after−tax net financing expenses and other and a $22 million after−tax provision for assetwrite−downs and other matters (Note 3).

** Excludes $54 million purchase from Unocal of interests in three Midwestern and Western U.S. products pipeline companies and a $6 million purchase which increased theCompany’s ownership interest in the West Texas Gulf pipeline (Note 3).

*** Consists of Sunoco’s $94 million consolidated deferred income tax asset, $5 million of prepaid retirement costs and $353 million attributable to corporate activities.

† After elimination of intersegment receivables.

65

Segment Information


Refiningand

Supply*Retail

Marketing Chemicals Logistics Coke

Corporateand

Other Consolidated

2001Sales and other operatingrevenue(including consumer excisetaxes):Unaffiliated customers $5,999 $ 6,019 $ 1,264 $ 545 $236 $ — $ 14,063

Intersegment $3,711 $ — $ — $1,068 $ — $ — $ —

Pretax segment income (loss) $ 459 $ 137 $ 9 $ 61 $ 91 $ (170) $ 587Income tax (expense) benefit (171) (50) (3) (19) (30) 84 (189)

After−tax segment income (loss) $ 288 $ 87 $ 6 $ 42 $ 61 $ (86)** $ 398

Equity income (loss) $ 3 $ — $ (6) $ 11 $ — $ — $ 8


Capital expenditures $ 122 $ 114*** $ 30† $ 61 $ 4 $ — $ 331


Identifiable assets $2,346 $ 1,131 $ 1,325 $ 699 $293 $ 241†† $ 6,019†††

* Includes Value Added and Eastern Lubricants operations (Note 3).

** Consists of $24 million of after−tax corporate expenses, $82 million of after−tax net financing expenses and other, a $21 million after−tax gain on income taxsettlement and a $1 million after−tax provision for asset write−downs and other matters (Note 3).

*** Excludes the $59 million purchase from The Coastal Corporation of 473 retail gasoline outlets located in the eastern United States and related working capital.

† Excludes the $649 million acquisition of Aristech Chemical Corporation and related working capital (Note 3).

†† Consists of Sunoco’s $116 million consolidated deferred income tax asset, $87 million of prepaid retirement costs and $38 million attributable to corporate activities.

††† After elimination of intersegment receivables.

The following table sets forth Sunoco’s sales to unaffiliated customers and other operating revenue by product or service:


Gasoline:Wholesale $ 2,167 $ 1,787 $ 1,690Retail 4,529 3,545 3,542Middle distillates 3,518 2,736 2,861Residual fuel 797 549 525Petrochemicals 1,884 1,599 1,508Lubricants 295 263 476Other refined products 505 510 450Other products and services 703 596 543Resales of purchased crude oil 1,218 632 491Coke and coal 251 248 236Consumer excise taxes 1,999 1,834 1,741

$ 17,866 $ 14,299 $ 14,063

18. Subsequent EventsIn January 2004, Sunoco completed the purchase of the 150 thousand barrels−per−day Eagle Point refinery and related assets from El Paso Corporation for $235million, including an estimated $124 million for crude oil and refined product inventory. In connection with this transaction, Sunoco assumed certainenvironmental and otherliabilities. The Eagle Point refinery is located in Westville, NJ near the Company’s existing Northeast refining operations. Managementbelieves the acquisition of the Eagle Point refinery complements and enhances the Company’s refining operations in the Northeast and enables the capture ofsignificant synergies in the larger Northeast Refining Complex. The related assets acquired include certain pipeline and other logistics assets associated with the

refinery which Sunoco intends to sell to Sunoco Logistics Partners L.P.In January 2004, Sunoco agreed to purchase 385 retail outlets currently operated under the Mobil® brand from ConocoPhillips for $187 million, plus inventory.The acquisition consists of 114 Company−owned or leased outlets, 36 dealer−owned locations and 235 distributor−supplied outlets. These outlets, which include31 sites that are Company−operated and have convenience stores, are located primarily in Delaware, Maryland, Virginia and Washington, D.C. The transaction,which is subject to certain conditions including regulatory approval and the completion of due diligence, is expected to be completed in the second quarter of2004.

66

Report of ManagementTo the Shareholders of Sunoco, Inc.

The accompanying consolidated financial statements of Sunoco, Inc. and its subsidiaries (“Sunoco”) and the related information are the responsibility ofmanagement. The financial statements, which include amounts based on informed estimates and judgments, were prepared using accounting principles generallyaccepted in the United States and deemed appropriate in the circumstances. Management believes that these financial statements present fairly, in all materialrespects, Sunoco’s financial position, results of operations and cash flows. Other financial information presented in this Annual Report is consistent with that inthe financial statements.To fulfill its responsibility for the financial statements, Sunoco maintains a system of internal control which in management’s opinion provides reasonableassurance of achieving the objectives of internal control. These objectives include safeguarding of assets from loss through unauthorized use or disposition andmaintaining reliable records permitting the preparation of financial statements and accountability for assets. The system of internal control is subject to ongoingevaluation of its continuing effectiveness.Sunoco’s independent auditors, Ernst & Young LLP, have expressed an opinion on the fairness of the Company’s financial statements in their report presentedon this page.The Audit Committee of the Board of Directors, which met fourteen times during 2003, is comprised only of directors who meet the independence requirementsof the New York Stock Exchange and the rules and regulations of the Securities and Exchange Commission. It assists the Board of Directors in discharging itsduties relating to accounting and reporting practices and internal control, and it assesses the performance and approves the appointment of the independentauditors, and recommends the ratification of their appointment to the shareholders. Both the independent auditors and Sunoco’s internal auditors haveunrestricted access to the Committee to discuss audit findings and other financial matters.

John G. DrosdickChairman, Chief Executive Officer & President

Thomas W. HofmannSenior Vice President & Chief Financial Officer

Report of Independent AuditorsTo the Shareholders and Board of Directors, Sunoco, Inc.

We have audited the accompanying consolidated balance sheets of Sunoco, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidatedstatements of operations, comprehensive income and shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003.These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform theaudit 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 significantestimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ouropinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunoco, Inc. andsubsidiaries at December 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2003, in conformity with accounting principles generally accepted in the United States.As discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for goodwill and other indefinite−livedintangible assets and employee stock compensation plans in 2002.

Philadelphia, PennsylvaniaFebruary 13, 2004

67

Supplemental Financial and Operating Information (Unaudited)

Refining and Supply and Retail Marketing Segments Data

Refinery Utilization* 2003 2002 2001

Refinery crude unit capacity at December 31** 730.0 730.0 730.0Input to crude units 708.1 689.9 687.7Refinery crude unit capacity utilized 97% 95% 94%

* Thousands of barrels daily except percentages.

** In January 2004, crude unit capacity increased to 890 thousands of barrels daily. This change reflects the acquisition of the 150 thousand barrels−per−dayEagle Point refinery and a 10 thousand barrels−per−day adjustment at the Toledo refinery reflecting the increased reliability and enhanced operations at thisfacility in recent years.

Products Manufactured* 2003 2002 2001

Gasoline 375.6 375.2 356.1Middle distillates 236.7 231.2 230.0Residual fuel 59.8 55.9 56.4Petrochemicals 27.9 30.5 30.0Lubricants 13.6 13.1 12.2Other 77.6 73.4 82.5

Total production 791.2 779.3 767.2Less: Production used as fuel in refinery operations 37.1 37.0 37.0

Total production available for sale 754.1 742.3 730.2

*Thousands of barrels daily.

Inventories* 2003 2002 2001

Crude oil 16.8 17.0 20.2Refined products** 17.0 17.4 19.8

* Millions of barrels at December 31.

** Includes petrochemical inventories produced at Sunoco’s Marcus Hook, Philadelphia and Toledo refineries excluding cumene, which is included in the Chemicalssegment.

Retail Sales* 2003 2002 2001

Gasoline 276.5 262.3 244.1Middle distillates 40.3 36.4 35.0

316.8 298.7 279.1

* Thousands of barrels daily.

Retail Gasoline Outlets 2003 2002 2001

Direct outlets:Company owned or leased 1,442 1,384 1,433Dealer owned 594 682 686

Total direct outlets 2,036 2,066 2,119Distributor outlets 2,492 2,315 2,032

4,528 4,381 4,151

Other Data 2003 2002 2001

Throughput per Company owned or leased outlet 124.4 121.7 116.3

* Thousands of gallons of gasoline and diesel monthly.

Chemicals Segment Data

Chemical Sales* 2003 2002 2001

Phenol and related products 2,629 2,831 2,605Polypropylene** 1,562 1,346 1,384Plasticizers*** 591 615 532Propylene 774 774 715Other 162 178 175

5,718 5,744 5,411

* Millions of pounds.** Excludes Epsilon joint venture. Includes Bayport facility subsequent to its purchase effective March 31, 2003.*** Consists of amounts attributable to the plasticizer business, which was divested in January 2004.

Other Data 2003 2002 2001

Chemical inventories* 420 499 453

*Millions of pounds.

Logistics Segment Data

Pipeline Shipments* 2003 2002 2001

Crude oil 12.9 12.6 13.5Refined products 15.2 15.5 14.9

*Billions of barrel miles. Consists of 100 percent of the pipeline shipments of pipelines owned and operated by Sunoco Logistics Partners L.P., the master limited partnershipthat is 75.3 percent owned by Sunoco.

Other Data 2003 2002 2001

Crude oil inventory* 2.0 1.9 2.4

* Millions of barrels at December 31.

Coke Segment Data*

2003 2002 2001

Coke production 2,024 2,001 2,006Coke sales 2,024 2,158 2,002

* Thousands of tons.

68

Quarterly Financial and Stock Market Information (Unaudited)

(Millions of Dollars Except Per Share Amounts and Common Stock Prices)

2003 2002

FirstQuarter

SecondQuarter

ThirdQuarter

FourthQuarter

FirstQuarter

SecondQuarter

ThirdQuarter

FourthQuarter

Sales and other operating revenue(including consumer excise taxes) $4,560 $4,169 $4,601 $4,536 $2,918 $3,527 $3,789 $4,065Gross profit* $324 $327 $425 $291 $16 $193 $170 $279Net income (loss) $86 $81 $109** $36*** $(107) $9† $(10) $61††

Net income (loss) per share of commonstock:Basic $1.12 $1.05 $1.41 $.47 $(1.41) $.12 $(.13) $.80Diluted $1.12 $1.04 $1.40 $.47 $(1.41)††† $.12 $(.13)††† $.79Cash dividends per share of commonstock $.25 $.25 $.25 $.275 $.25 $.25 $.25 $.25Common stock price

#—high $38.04 $39.00 $41.42 $52.60 $42.25 $40.81 $37.58 $33.57

—low $29.67 $35.40 $35.93 $40.10 $36.25 $34.11 $29.65 $27.02—end of period $36.57 $37.74 $40.22 $51.15 $40.01 $35.63 $30.16 $33.18

* 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 $15 million after−tax provision for asset write−downs and other matters.

*** Includes an $8 million after−tax provision for asset write−downs and other matters.

† Includes a $17 million after−tax provision for asset write−downs and other matters.

†† Includes a $5 million after−tax provision for asset write−downs and other matters.

††† Since the assumed issuance of common stock related to stock incentive awards would have resulted in a reduction in the loss per share, the diluted per share amountsare equal to the basic per share amounts.

# The Company’s common stock is principally traded on the New York Stock Exchange, Inc. under the symbol “SUN.” The Company had approximately 25,000holders of record of common stock as of January 30, 2004.

69

Exhibit 21

50% or greater DECEMBER 31, 2003

SUNOCO, INC.SUBSIDIARIES OF THE REGISTRANT

COMPANY NAME: INC./REG.

Mascot, Inc. (MA) MA

Mascot Petroleum Company, Inc. DE

Radnor Corporation PA—Radnor/California Service Corporation DE—Radnor/Credit Corporation DE—Radnor/Dutton Mill Corporation PA—Radnor/Edgewater, Inc. DE—Radnor/Fulton Industrial Corporation DE—Radnor/Investment Corporation DE—Radnor/Island Corporation DE—Radnor/Lakeside Corporation DE—Radnor/Loudoun Corporation DE—Radnor/Murrieta Corporation DE—Radnor/North Corporation DE—Radnor/Plantation Corporation DE—Radnor/Plymouth Corporation PA—Radnor/Sarasota Corporation DE——Laurel Oak Realty Corporation DE—Radnor/Spring Ridge Corporation DE——Radnor/Frederick Corporation DE—Radnor/Sun Village Construction Corporation DE—Radnor/Sun Village Corporation DE—Radnor Suncoast Corporation DE—Radnor/Vail Ranch Corporation DE—Radnor/Vanguard Corporation DE—Radnor/Victorville Corporation DE—Radnor/Willoughby Corporation DE—Radnor/Yorba Linda−I Corporation DE

Sun Alternate Energy Corporation DE

PAGE 1 OF 4




Sun Atlantic Refining and Marketing Company DE—Sun Atlantic Refining and Marketing B.V., Inc. DE—Sun Atlantic Refining and Marketing B.V. Netherlands——Atlantic Petroleum Corporation DE———Atlantic Petroleum Delaware Corporation DE———Atlantic Petroleum (Out) LLC DE————Atlantic Pipeline (Out) L.P. TX————Atlantic R&M (Out) L.P. TX———Atlantic Refining & Marketing Corp. DE

Sun Canada, Inc. DE—Helios Assurance Company Limited Bermuda—Sun International Limited Bermuda—Sun Mexico One, Inc. DE——Sunoco de Mexico, S.A. de C.V. Mexico—Sun Mexico Two, Inc. DE

Sun Coal & Coke Company DE—Elk River Minerals Corporation DE—Haverhill North Coke Company DE—Indiana Harbor Coke Company 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—Sun Coke International, Inc. DE——Sun Coqueria Tubarão Ltda. Brazil

Sun Coke Company DE

Sun Company, Inc.(name saver company)

DE

PAGE 2 OF 4




Sun Company, Inc.(name saver company)

PA

Sun Executive Services Company PA(name saver company)

Sun Geologic and Seismic, Inc. DE

Sun Oil Argentina Limited Bermuda

Sun Oil Company(name saver company) DE

Sun Oil Company (U.K.) Ltd. DE

Sun Oil Export Company DE

Sun Oil International, Inc. DE

Sun Pipe Line Company of Delaware DE—Mid−Continent Pipe Line (Out) LLC TX—Mid−Valley Pipeline Company OH—Sun Oil Line of Michigan (Out) LLC TX—Sun Pipe Line Company TX—Sun Pipe Line Services (Out) LLC DE

Sun Refining and Marketing Company(name saver company)

DE

Sun Services Corporation PA

Sun Transport, LLC PA—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—Lesley Corporation DE—Libre Insurance Company, Ltd. Bermuda

PAGE 3 OF 4




Sun−Del Services, Inc. DE

Sunoco Caribbean, Inc.(name saver company)

DE

Sunoco, Inc. (R&M) PA—Aristech Chemical Corporation DE——Aristech Investment Corporation DE—Epsilon Products Company, LLC PA—Mid−State Oil Company DE——Mid−Valley Products Pipeline, L.L.C. PA—Puerto Rico Sun Oil Company LLC DE—Sun Lubricants and Specialty Products Inc. Quebec—Sun Petrochemicals, Inc. DE——Sun Petrochemicals Company PA—Sunmarks, Inc. DE—Sunoco LaPorte LLC DE—Sunoco Olefins #3 Inc. DE—Sunoco Olefins #4 Inc. DE——Sunoco Olefins L.P. DE—Sunoco Polyolefins Inc. #1 DE—Sunoco Polyolefins Inc. #2 DE——Sunoco Polyolefins L.P. DE—Sunoco Power Marketing L.L.C. PA

Sunoco Overseas, Inc. DE—Lugrasa, S.A. Panama

Sunoco Partners LLC PA

Sunoco Receivables Corporation, Inc. DE

The Claymont Investment Company DE

Triad Carriers, Inc. PA—BBQ, Inc. PA—Carrier Systems Motor Freight, Inc. DE

PAGE 4 OF 4

Exhibit 23Consent of Ernst & Young LLP

We consent to the incorporation by reference in this Annual Report (Form 10−K) of Sunoco, Inc. of our report dated February 13, 2004, included in the2003 Annual Report to Shareholders of Sunoco, Inc.

Our audits also included the financial statement schedule of Sunoco, Inc. for the years ended December 31, 2003, 2002, and 2001, listed in Item 15(a). Theschedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, the financialstatement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects theinformation set forth therein.

We also consent to the incorporation by reference of this report on the financial statement schedule and our report dated February 13, 2004 with respect tothe consolidated financial statements of Sunoco, Inc. incorporated by reference in this Annual Report (Form 10−K) for the year ended December 31, 2003, in thefollowing registration statements:

Sunoco, Inc. Capital Accumulation Plan Form S−8 Registration Statement(Registration No. 33−9931);Sunoco, Inc. Long−Term Performance Enhancement Plan II Form S−8 Registration Statement(Registration No. 333−60110);Sunoco, Inc. Long−Term Performance Enhancement Plan Form S−8 Registration Statement(Registration No. 333−30941);Sunoco, Inc. Long−Term Incentive Plan Form S−8 Registration Statement(Registration No. 33−10055);Sunoco, Inc. and Subsidiaries Stock Supplement Plan Form S−8 Registration Statement(Registration No. 2−53283);Sunoco, Inc. Executive Long−Term Stock Investment Plan Form S−8 RegistrationStatement (Registration No. 33−44059);Sunoco, Inc. Employee Option Plan Form S−8 Registration Statement(Registration No. 33−49275);

Sunoco, Inc. Shareholder Access and Reinvestment Plan Form S−3 Registration Statement(Registration No. 333−78881);Sunoco, Inc. Form S−3 Registration Statement(Registration No. 333−40876);Sunoco, Inc. Dividend Reinvestment Plan Form S−3 Registration Statement(Registration No. 33−39834);Sunoco, Inc. Dividend Reinvestment Plan Form S−3 Registration Statement(Registration No. 33−52615);Sunoco, Inc. Deferred Compensation Plan Form S−8 Registration Statement(Registration No. 333−49340); andSunoco, Inc. Savings Restoration Plan Form S−8 Registration Statement(Registration No. 333−49342).

/s/ ERNST & YOUNG LLP

Ernst & Young LLPPhiladelphia, PennsylvaniaMarch 4, 2004

EXHIBIT 24.1POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, That the undersigned officers and/or directors of Sunoco, Inc., a Pennsylvania corporation, do and each ofthem does, hereby constitute and appoint Thomas W. Hofmann, Michael S. Kuritzkes and Joseph P. Krott, his or her true and lawful attorneys−in−fact andagents, 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 Sunoco, Inc. Form 10−K forthe year ending December 31, 2003 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 saidattorneys−in−fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 4th day of March, 2004.

/s/ ROBERT J. DARNALL /s/ ROBERT D. KENNEDY

Robert J. Darnall Robert D. KennedyDirector Director

/s/ JOHN G. DROSDICK /s/ JOSEPH P. KROTT

John G. Drosdick Joseph P. KrottChairman, Chief Executive Officer, ComptrollerPresident and Director (Principal Accounting Officer)(Principal Executive Officer)

/s/ URSULA F. FAIRBAIRN /s/ RICHARD H. LENNY

Ursula F. Fairbairn Richard H. LennyDirector Director

/s/ THOMAS P. GERRITY /s/ NORMAN S. MATTHEWS

Thomas P. Gerrity Norman S. MatthewsDirector Director

/s/ ROSEMARIE B. GRECO /s/ R. ANDERSON PEW

Rosemarie B. Greco R. Anderson PewDirector Director

/s/ THOMAS W. HOFMANN /s/ G. JACKSON RATCLIFFE

Thomas W. Hofmann G. Jackson RatcliffeSenior Vice President and DirectorChief Financial Officer(Principal Financial Officer)

/s/ JAMES G. KAISER /s/ JOHN W. ROWE

James G. Kaiser John W. RoweDirector Director

EXHIBIT 24.2I, Ann C. Mulé, Secretary of Sunoco, 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 Sunoco, Inc., duly called and held on March 4, 2004, at which a quorum was present and acting throughout andthat 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 Annual Report of Sunoco, Inc. (the “Company”) to the Securities and Exchange Commission on Form 10−K, for the yearended December 31, 2003, 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 Chairman, Chief Executive Officer and President; the Senior Vice Presidentand Chief Financial Officer; or the Senior Vice President and General Counsel;

FURTHER RESOLVED, That each of the above−named officers and the Comptroller (collectively, the “Authorized Officers”) is authorized to signand file, or cause to be filed, on behalf of the Company, the Form 10−K, together with any such other certificates, documents, instruments or notices asmay 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 foregoingresolutions, 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 andintent of the foregoing resolutions are hereby ratified, adopted and approved.

(Corporate Seal) /s/ Ann C. Mulé

Ann C. MuléSecretary

March 4, 2004Philadelphia, PA

Exhibit 31.1Certification

Pursuant to Section 302 of the Sarbanes−Oxley Act of 2002

I, John G. Drosdick, Chairman, Chief Executive Officer and President of Sunoco, Inc., certify that:

1. I have reviewed this annual report on Form 10−K of Sunoco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a−15(e) and 15d−15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control for financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.

/s/ JOHN G. DROSDICK

John G. DrosdickChairman, Chief Executive Officer and President

Date: March 4, 2004

Exhibit 31.2Certification

Pursuant to Section 302 of the Sarbanes−Oxley Act of 2002

I, Thomas W. Hofmann, Senior Vice President and Chief Financial Officer of Sunoco, Inc., certify that:

1. I have reviewed this annual report on Form 10−K of Sunoco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a−15(e) and 15d−15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.

/s/ THOMAS W. HOFMANN


Date: March 4, 2004

Exhibit 32.1

Certificationof

Periodic Financial ReportPursuant to Section 906 of the Sarbanes−Oxley Act of 2002

I, John G. Drosdick, Chairman, Chief Executive Officer and President of Sunoco, Inc., hereby certify that the Annual Report on Form 10−K for the fiscalyear ended December 31, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the informationcontained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Sunoco, Inc.

/s/ JOHN G. DROSDICK

John G. DrosdickChairman, Chief Executive Officer and President

Date: March 4, 2004

Exhibit 32.2

Certificationof

Periodic Financial ReportPursuant to Section 906 of the Sarbanes−Oxley Act of 2002

I, Thomas W. Hofmann, Senior Vice President and Chief Financial Officer of Sunoco, Inc., hereby certify that the Annual Report on Form 10−K for thefiscal year ended December 31, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that theinformation contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Sunoco, Inc.

/s/ THOMAS W. HOFMANN


Date: March 4, 2004

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sunoco 2003 form 10-k

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