Edgar Filing: SUNOCO INC

Sunoco, Inc. - Notice & Proxy Statement

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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Sunoco, Inc.

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LOGO

Sunoco, Inc.

Ten Penn Center

1801 Market Street

Philadelphia, PA 19103-1699

NOTICE OF ANNUAL MEETING

Dear Sunoco Shareholder:

On Thursday, May 6, 2004, Sunoco, Inc. will hold its 2004 Annual Meeting of Shareholders at the Moore College of Art and Design, Stewart Auditorium, 20th Street and the Parkway, Philadelphia, PA. The meeting will begin at 9:30 a.m.

Only shareholders who owned stock at the close of business on February 10, 2004 can vote at this meeting or any adjournments that may take place. At the meeting we will consider:

Election of a Board of Directors;

Ratification of the appointment of our independent auditors for the fiscal year 2004; and

Any other business properly presented at the meeting.

At the meeting we will also report on Sunoco’s 2003 business results and other matters of interest to shareholders.

Your Board of Directors recommends that you vote in favor of proposals 1 and 2 above, which are further described in this proxy statement. This proxy statement also outlines the corporate governance practices at Sunoco, discusses our compensation practices and philosophy, and describes the Audit Committee’s recommendation to the Board regarding our 2003 financial statements. We encourage you to read these materials carefully.

Whether or not you expect to attend the meeting, we urge you to vote promptly.

For those shareholders who consented to access the Proxy Statement and Annual Report through our Internet site (www.SunocoInc.com), we thank you for supporting our cost reducing efforts. For shareholders who may be interested in receiving information electronically in the future, you may indicate your preference when you vote.

The approximate date of mailing for this proxy statement and card as well as a copy of Sunoco’s 2003 Annual Report is March 19, 2004. For further information about Sunoco, please visit our web site at www.SunocoInc.com.

By Order of the Board of Directors,

LOGO

ANN C. MULÉ

CHIEF GOVERNANCE OFFICER, ASSISTANT GENERAL COUNSEL

AND CORPORATE SECRETARY

MARCH 19, 2004

TABLE OF CONTENTS



PROXY STATEMENT

Questions and Answers		3

Section 16(a) Beneficial Ownership Reporting Compliance		9

GOVERNANCE OF THE COMPANY

Corporate Governance Guidelines		10

Board Committee Charters		20

Other Governance Matters		21

Board and Committee Membership		22

Directors’ Compensation		23

Directors’ and Officers’ Indemnification Agreements		24

Directors’ and Officers’ Ownership of Sunoco Stock		25

Equity Compensation Plan Information		28

PROPOSALS ON WHICH YOU MAY VOTE

Item 1.	Election of Directors	29

Item 2.	Ratification of the Appointment of Ernst & Young LLP as Independent Auditors for the Fiscal Year 2004	34

Auditor Fees		34

AUDIT COMMITTEE REPORT		35

EXECUTIVE COMPENSATION: REPORT OF THE COMPENSATION COMMITTEE		36

EXECUTIVE COMPENSATION		42

Summary Compensation Table		42

Aggregated Option/SAR Exercises and Year-End Values		45

Option Grant Table		46

Other Long-Term Incentive Awards		47

STOCK PERFORMANCE GRAPH		48

PENSION PLANS		49

SEVERANCE PLANS		51

Appendices

Appendix A:	Audit Committee Charter	A-1

Appendix B:	Compensation Committee Charter	B-1

Appendix C:	Executive Committee Charter	C-1

Appendix D:	Governance Committee Charter	D-1

Appendix E:	Public Affairs Committee Charter	E-1

PROXY STATEMENT

Questions and Answers

1.	Q: Who is entitled to vote?

Shareholders as of the close of business on the record date, February 10, 2004, are entitled to vote at the Annual Meeting.

2.	Q: How do I cast my vote?

There are four different ways you may cast your vote this year. You may vote by:

(1)

telephone, using the toll-free number listed on each proxy card (if you are a shareholder of record) or vote instruction card (if your shares are held by a bank or broker);

(2)

the Internet, at the address provided on each proxy or vote instruction card;

(3)

marking, signing, dating, and mailing each proxy or vote instruction card and returning it in the envelope provided. If you return your signed proxy or vote instruction card but do not mark the boxes showing how you wish to vote, your shares will be voted FOR the two proposals; or

(4)

attending the meeting (if your shares are registered directly in your name on Sunoco’s books and not held through a broker, bank or other nominee).

For voting procedures for shares held in the Sunoco, Inc. Capital Accumulation Plan or “SunCAP,” Sunoco’s 401(k) Plan for employees, see Question 8.

If you are the registered shareholder (that is, if you hold your stock in your name), you can vote by telephone or electronically through the Internet by following the instructions provided on the proxy card.

If your shares are held in “street name” (that is, they are held in the name of a broker, bank or other nominee), or your shares are held in custody for your account by The Vanguard Fiduciary Trust Company (“Vanguard”), as trustee for SunCAP, you will receive instructions with your materials that you must follow in order to have your shares voted. Please review your proxy or vote instruction card to determine whether you will be able to vote by telephone or electronically.

The deadline for voting by telephone or electronically is 11:59 p.m. Eastern U.S. Time, May 5, 2004.

3.	Q: How do I revoke or change my vote?

You may revoke or change your vote by:

(1)

notifying Sunoco’s Corporate Secretary or its designated agent, IVS Associates, Inc., Suite 210, 111 Continental Drive, Newark, DE 19713, in writing at any time before the meeting;

(2)

submitting a later-dated proxy by mail, telephone, or via the Internet; or

(3)

voting in person at the meeting (if your shares are registered directly in your name on Sunoco’s books and not held through a broker, bank, or other nominee).

The latest-dated, timely, properly completed proxy that you submit, whether by mail, telephone or the Internet, will count as your vote. If a vote has been recorded for your shares and you submit a proxy card that is not properly signed or dated, the previously recorded vote will stand.

4.	Q: Who will count the vote?

Representatives of IVS Associates, Inc., an independent tabulator, will count the vote and act as the judge of election.

5.	Q: Is my vote confidential?

Proxy cards, vote instruction cards, telephone and Internet voting reports, ballots and voting tabulations that identify individual shareholders are returned directly to IVS Associates, Inc. and are handled in a manner that protects your voting privacy. As a registered shareholder, SunCAP participant, or Non-Objecting Beneficial Owner, your vote will not be disclosed to Sunoco except: (1) as needed to permit IVS Associates, Inc. to tabulate and certify the vote; (2) as required by law; or (3) in limited circumstances such as a proxy contest in opposition to the Board. Additionally, all comments written on the proxy or vote instruction card or elsewhere will be forwarded to Sunoco, but your identity will be kept confidential unless you specifically ask that your name be disclosed.

6.	Q: What does it mean if I get more than one proxy or vote instruction card?

If your shares are registered differently and are in more than one account, you will receive more than one card. Please complete and return all of the proxy or vote instruction cards you receive (or vote by telephone or the Internet all of the shares on all of the proxy or vote instruction cards received) to ensure that all of your shares are voted.

7.	Q: How many shares can vote?

As of the February 10, 2004 record date, 75,698,948 shares of Sunoco common stock were issued and outstanding. Every shareholder of common stock is entitled to one vote for each share held as of the record date.

8.	Q: How is Sunoco common stock in SunCAP voted?

Voting instructions from SunCAP participants are maintained in the strictest confidence and will not be disclosed to Sunoco except as set forth in those limited circumstances discussed in Question 5, which apply to all shareholders. If you hold shares of Sunoco common stock through SunCAP, you may vote by instructing the SunCAP trustee, Vanguard, how to vote your shares pursuant to the vote instruction card that is mailed to you with this proxy statement. If you do not provide voting instructions, or provide unclear voting instructions, then Vanguard will vote the shares in your SunCAP account in proportion to the way the shares of Sunoco common stock are voted by the other SunCAP participants.

9.	Q: What is a “quorum”?

A “quorum” is a majority of the outstanding shares. They may be present at the meeting or represented by proxy. There must be a quorum for the meeting to be held, and a proposal must receive more than 50% of the shares voting at the meeting to be adopted. If you submit a timely, properly executed proxy or vote instruction card, then you will be considered part of the quorum, even if you abstain from voting.

Abstentions: Abstentions are not counted in the tally of votes FOR or AGAINST a proposal. A WITHHELD vote is the same as an abstention. Abstentions and withheld votes are counted as shares present and entitled to be voted.

Broker Non-Votes: Broker non-votes occur when shares held by a broker are not voted with respect to a proposal because (1) the broker has not received voting instructions from the shareholder, and (2) the broker lacks the authority to vote the shares at his/her discretion. Broker non-votes will not affect the outcome of any of the matters being voted upon at this meeting, and they are not counted as shares present and entitled to be voted with respect to the matter on which the broker has not voted expressly.

10.

Q: Who can attend the Annual Meeting and how do I get a ticket?

All shareholders who owned shares on February 10, 2004 may attend. Just check the box on your proxy or vote instruction card, or as indicated on the Internet site, or press the appropriate key if voting by telephone. If your shares are held through a broker and you’d like to attend, please write to Ann C. Mulé, Chief Governance Officer, Assistant General Counsel and Corporate Secretary, Sunoco, Inc., Ten Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699. Include a copy of your brokerage account statement or an omnibus proxy (which you can get from your broker), and we will send you a ticket.

11.

Q: How will voting on any other business be conducted?

Although we do not know of any business to be considered at the 2004 Annual Meeting other than the proposals described in this proxy statement, if any other business is presented at the Annual Meeting, your signed proxy or vote instruction card, or your authenticated Internet or telephone proxy, gives authority to John G. Drosdick, Sunoco’s Chairman, Chief Executive Officer and President, and Ann C. Mulé, Sunoco’s Chief Governance Officer, Assistant General Counsel and Corporate Secretary, to vote on such matters at their discretion.

12.

Q: Can I, in the future, receive my proxy statement and annual report over the Internet?

Yes. You can receive this information over the Internet.

(1)

If you are a registered shareholder: You can agree to access the annual report and proxy statement on the Internet by completing the question regarding consent included on your proxy or vote instruction card, on the Internet site, or on the telephone. You will be notified when you receive your proxy card that the materials are available on our web site (www.SunocoInc.com). Your choice of electronic delivery will remain in effect until you contact us by sending a written request to the Corporate Secretary, Sunoco, Inc., Ten Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699.

(2)

If you hold shares through a broker or bank: Please refer to the information provided by that entity in the proxy materials mailed to you; or contact your broker or bank and indicate your preference to access the documents on the Internet.

13.

Q: If I am receiving multiple copies of the proxy statement and annual report at my residence, what do I need to do to receive only one copy?

With your consent and the consent of other shareholders in your household, we may send one set of the proxy statement and annual report to a household where two or more Sunoco shareholders reside if we believe they are members of the same family. Each consenting shareholder would continue to receive a separate notice of annual meeting and proxy card. This procedure, referred to as “householding,” would reduce the volume of duplicate information you receive, and would also reduce the Company’s printing and mailing costs. If you are an eligible shareholder and would be interested in receiving only one copy of the proxy statement and annual report, please complete the question regarding consent relating to multiple copies included on your proxy or vote instruction card, on the Internet site, or on the telephone; or you may contact the Company by sending a written request to the Corporate Secretary, Sunoco, Inc., Ten Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699. Your consent will remain in effect unless Sunoco receives contrary instructions from you or other shareholders in your household. Should you revoke your consent, Sunoco will begin sending individual copies of the annual report and proxy statement to you within thirty (30) days of your revocation. Also, if you would like to obtain a separate copy of the annual report or proxy statement, you may direct your request to the address above, or you may call 215-977-6082. If you hold your shares in street name, please contact your broker.

14.

Q: I have Sunoco shares that are held in street name, as do others in my household. We received only one copy of the proxy statement and annual report. What if I would like additional copies of these materials?

Some brokerage firms have instituted “householding” in connection with the delivery of annual reports and proxy statements (see Question 13). If your family holds Sunoco shares in multiple brokerage accounts, you may have previously received “householding” notification from your broker or bank. If you wish to revoke your decision to household and thereby receive multiple reports, please contact your broker directly. If any shareholder residing at the same address would like additional copies of the annual report or proxy statement, please contact your broker or bank, or you may contact Sunoco at Ten Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699, Attention: Corporate Secretary.

15.

Q: Does any shareholder own 5% or more of Sunoco’s common stock?

Capital Research and Management Company and Goldman Sachs Asset Management, L.P. have reported the following ownership of Sunoco’s common stock, as of December 31, 2003. The information below is based on the most recent Schedules 13G filed with the Securities and Exchange Commission, except as otherwise known by the Company.



Shareholder Name and Address	Shares	Percent of Outstanding Shares




Capital Research and Management Company 333 South Hope Street Los Angeles, CA 90071	8,745,000¹	11.6	%


Goldman Sachs Asset Management, L.P. 32 Old Slip New York, NY 10005	4,653,710²	6.2	%

NOTES TO TABLE:

According to a Schedule 13G dated February 10, 2004 filed with the Securities and Exchange Commission, Capital Research and Management Company holds sole dispositive power of 8,745,000 shares.

According to a Schedule 13G dated February 12, 2004 filed with the Securities and Exchange Commission, Goldman Sachs Asset Management, L.P., holds sole voting power of 3,805,450 and sole dispositive power of 4,653,710 shares.

16.

Q: When are the shareholder proposals for the 2005 Annual Meeting due?

All shareholder proposals to be considered for inclusion in next year’s proxy statement must be submitted in writing to Ann C. Mulé, Chief Governance Officer, Assistant General Counsel and Corporate Secretary, Sunoco, Inc., Ten Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699 by November 19, 2004.

Additionally, Sunoco’s advance notice bylaw provisions require that any shareholder proposal to be presented from the floor of the 2005 Annual Meeting must be submitted in writing to Ann C. Mulé, at the above address, by December 31, 2004, and must be accompanied by:

the name, residence and business address of the proposing shareholder;

a representation that the shareholder is a record holder of Sunoco stock or holds Sunoco stock through a broker and the number of shares held; and

a representation that the shareholder intends to appear in person or by proxy at the 2005 Annual Meeting to present the proposal.

A proposal may be presented from the floor only after Sunoco’s Board of Directors has determined that it is a proper matter for consideration under our bylaws.

17.

Q: What is Sunoco’s process for nominating director candidates?

All of Sunoco’s directors are elected each year by its shareholders at the annual meeting of shareholders. The Board of Directors is responsible for filling vacancies on the Board at any time during the year, and for nominating director nominees to stand for election at the annual meeting of shareholders. The Governance Committee of the Board of Directors reviews all potential director candidates, and recommends potential director candidates to the full Board. Director candidates may be identified by current directors of the Company, as well as by shareholders. The Governance Committee is comprised entirely of independent directors, as defined in the New York Stock Exchange listing standards and Sunoco’s Categorical Standards of Independence. The Governance Committee does not generally utilize the services of search firms or consultants to assist in identifying and screening potential candidates. The Governance Committee has an extensive diligence process for reviewing potential candidates, including an assessment of each candidate’s education, experience, independence and other relevant factors, as described under “Director Qualifications” in Sunoco’s Corporate Governance Guidelines (page 10 in this proxy statement) and in the Governance Committee Charter attached as Appendix D. The full Board reviews and has final approval authority on all potential director candidates being recommended to the shareholders for election. See Question 18 below regarding the process for shareholder nominations of director candidates.

18.

Q: Can a shareholder nominate someone to be a director of Sunoco?

As a shareholder, you may recommend any person as a nominee for director of Sunoco for consideration by the Governance Committee by submitting the name and supporting information in writing to the Governance Committee of the Board of Directors, c/o Sunoco, Inc., Ten Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699. Recommendations must be received by December 31, 2004 for the 2005 Annual Meeting, and must be accompanied by:

the name, residence and business address of the nominating shareholder;

a representation that the shareholder is a record holder of Sunoco stock or holds Sunoco stock through a broker and the number of shares held, the length of time such shares have been held, and that the shareholder intends to hold such shares through the date of the Annual Meeting;

a representation that the shareholder intends to appear in person or by proxy at the 2005 Annual Meeting to nominate the individual(s) if the nominations are to be made at a shareholder meeting;

information regarding each nominee which would be required to be included in a proxy statement;

a description of any arrangements or understandings between and among the shareholder and each and every nominee; and

the written consent of each nominee to serve as a director, if elected.

19.

Q: How can shareholders communicate with Sunoco’s Directors?

Sunoco’s Board of Directors provides a process for shareholders to send communications to the Board. Shareholders may communicate with any of Sunoco’s directors, any committee chairperson or the Board of Directors by writing to the director, committee chairperson or the Board in care of Sunoco’s Chief Governance Officer, Assistant General Counsel and Corporate Secretary, Ann C. Mulé, at Sunoco, Inc., Ten Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699. Communications received by the Corporate Secretary for any Sunoco director are forwarded directly to the director. If the communication is addressed to the Board and no particular director is named, the communication will be forwarded, depending on the subject matter, to the appropriate Committee chairperson or to all non-management directors.

There were no material actions taken by the Board of Directors during 2003 as a result of communications from shareholders.

20.

Q: How much did this proxy solicitation cost?

Morrow & Co., Inc. was hired by Sunoco to assist in the distribution of proxy materials and the solicitation of votes for a fee of $10,000, plus estimated out-of-pocket expenses of $10,000. We also reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to shareholders.

21.

Q: Who is soliciting my vote?

Your vote is being solicited by the Board of Directors of Sunoco, Inc. for the 2004 Annual Meeting of Shareholders to be held on Thursday, May 6, 2004 at 9:30 a.m.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, executive officers, and persons who own more than 10% of Sunoco’s common stock to file reports of ownership and changes of ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission. Sunoco believes that during 2003, all SEC filings of its officers and directors complied with the requirements of Section 16 of the Securities Exchange Act, based on a review of forms filed, or written notice that no annual forms were required, except (1) reports filed in May 2003 on behalf of Sunoco’s outside directors (Mr. Darnall, Ms. Fairbairn, Mr. Gerrity, Ms. Greco, Mr. Kaiser, Mr. Kennedy, Mr. Lenny, Mr. Matthews, Mr. Pew and Mr. Ratcliffe), which were inadvertently filed late due to an administrative error; and (2) reports filed in September 2003 on behalf of Mr. Darnall, Ms. Fairbairn, Ms. Greco, Mr. Lenny, Mr. Matthews and Mr. Ratcliffe, which were inadvertently filed late due to an administrative error. All of these filings related to transactions pertaining to the payment of routine director compensation.

GOVERNANCE OF THE COMPANY

Corporate Governance Guidelines

INTRODUCTION

Sunoco’s corporate governance practices are designed to ensure that qualified directors are elected, that—other than the CEO—Sunoco’s directors are independent directors, and that directors are provided with full and transparent information from management so that the Board can function at a high level. Corporate governance practices also help to ensure that full and transparent disclosures are made by Sunoco to its shareholders, the securities markets and the Securities and Exchange Commission.

Sunoco’s Board has been focused on corporate governance practices for many years. Sunoco published its first set of formal corporate governance guidelines in 1998 and has updated and republished these guidelines each year in its proxy statement so that its shareholders would be well informed as to the manner in which Sunoco is governed.

Sunoco’s Board has specifically charged its Governance Committee with the responsibility of keeping up with “best practices” in corporate governance so that Sunoco’s practices can continually be updated. Recognizing that corporate governance is of critical importance to the enterprise and thus merits adequate resources, the Board elected in 2002 a Chief Governance Officer—a senior level executive whose job duties are dedicated to corporate governance and providing guidance with respect to compliance with the federal securities laws and the New York Stock Exchange listing standards. With respect to corporate governance matters, this executive reports directly to the Governance Committee and the full Board to help ensure that governance practices, consistent with Sunoco’s “best practices” philosophy, are implemented over time and in the context of an ever-changing and increasingly complex corporate environment.

The following Corporate Governance Guidelines were adopted by Sunoco’s Board of Directors on March 4, 2004.

ROLE OF BOARD AND MANAGEMENT:

Sunoco’s business is conducted by its employees under the direction of the CEO and the oversight of the Board, to enhance the long-term value of Sunoco for its shareholders. The Board is elected by the shareholders to oversee management and to assure that the long-term interests of the shareholders are being served. Both the Board and management recognize that the long-term interests of Sunoco are advanced by responsibly addressing the concerns of other constituencies, including employees, customers, suppliers and the communities in which Sunoco operates.

BOARD COMPOSITION

Annual Director Election: Each director is elected annually by shareholders for a one-year term. Sunoco does not have a “staggered board.”

Director Independence: A director is “independent” only if he or she is a non-management director and is free of any direct or indirect material relationship with Sunoco or its management. Except for Sunoco’s Chairman and CEO, all current directors meet the “independence” standards of the New York Stock Exchange Listing Standards and the Categorical Standards of Independence set forth below.

Categorical Standards of Independence: To be considered “independent” for purposes of these Standards, a director must be determined by resolution of the full Board, after due deliberation, to have no direct or indirect material relationship with the Company other than as a director. In each case, the Board, through its Governance Committee, shall consider all relevant facts and circumstances, and shall apply the following standards when assessing the independence of a director:

A director will not be considered “independent” if, within the preceding three years:

(i)

the director was employed by the Company or any of its direct or indirect subsidiaries;

(ii)

an immediate family member of the director was employed by the Company as an executive officer;

(iii)

the director received more than $100,000 per year in direct compensation from the Company, other than director and committee fees, and pensions and other forms of deferred compensation for prior service (provided it is not contingent on continued service);

(iv)

an immediate family member of the director received more than $100,000 in a year in direct compensation from the Company, other than director and committee fees, and pensions and other forms of deferred compensation for prior service (provided it is not contingent on continued service);

(v)

the director was affiliated with or employed by a present or past internal or independent auditor of the Company or any of its subsidiaries;

(vi)

an immediate family member of the director was affiliated with or employed in a professional capacity by a present or past internal or independent auditor of the Company or any of its subsidiaries; or

(vii)

an officer of the Company was on the compensation committee of the board of directors of a company that employed as an executive officer the director or an immediate family member of the director.

The following commercial relationships will not be considered material relationships that would impair a director’s independence:

(i)

if a director is an executive officer or an employee, or whose immediate family member is an executive officer, of another company that made payments to, or received payments from, the Company for property or services in an amount, which in any single year, did not exceed the greater of $1 million or two percent (2%) of the other company’s consolidated gross revenues within the preceding three years;

(ii)

if a director of the Company is an executive officer of another company which is indebted to the Company, or to which the Company is indebted, and the total amount of either company’s indebtedness to the other is less than two percent (2%) of the total consolidated assets of either company; or

(iii)

if a director is an executive officer of a charitable organization and the Company made, within the last three years, contributions that in any single year were less than the greater of $1 million or two percent (2%) of the charitable organization’s consolidated gross revenues, as determined from the charitable organization’s latest publicly available financial information.

An Audit Committee member may not have a direct or indirect financial relationship with the Company or any of its subsidiaries (i.e., accept directly or indirectly any consulting, advisory or other compensatory fee) other than compensation for service as a director. Audit Committee members may receive directors’ fees (in the form of cash, stock, stock units or other in-kind consideration ordinarily available to directors, as well as regular benefits that other directors receive).

An Audit Committee member may not be an “affiliated person” of the Company or any of its subsidiaries. “Affiliated person” is defined in Rule 10A-3 of the Securities Exchange Act of 1934 to mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.

With respect to any relationship not covered by paragraphs “a” and “b” above, the determination of whether the relationship is material, and therefore whether the director would be independent, will be made by the directors who satisfy the independence criteria set forth in paragraphs “a” and

“b” above. The Company will describe and explain in the next proxy statement the basis for any determination by the Board of Directors that a relationship is not material despite the fact that it does not meet the categorical standards set for in paragraph “b” above. The Company will also disclose and explain the basis for any determination of independence for a director that does not meet the criteria in paragraphs “a” and “b” above.

Board Size and Mix: Annually by resolution, Sunoco’s Board fixes the number of directors that will constitute the Board for the following year. The Board believes that a board size of between 10 and 12 directors is the ideal size for Sunoco, although at times the size may vary due to transition periods for new directors in anticipation of planned director retirements.

Director Qualifications: The Governance Committee and the full Board of Directors considers, at a minimum, the following factors in recommending potential new Board members or the continued service of existing members:

A director is nominated based on his or her professional experience. He or she should be accomplished and have recognized achievements in his or her respective field.

A director should have relevant education, expertise and experience, and be able to offer advice and guidance to the Chief Executive Officer based on that expertise and experience.

A director should possess high personal and professional ethics, integrity and values.

A director must be inquisitive and objective, have the ability to exercise practical and sound business judgment, and have an independent mind.

A director must be willing to devote sufficient time and effort to carrying out his or her duties and responsibilities effectively.

All of the directors, except for the Chief Executive Officer, should be “independent,” as outlined in Sunoco’s Categorical Standards of Independence, and be without the appearance of any conflict while serving as a Director.

A director should have the ability to work effectively with others.

In selecting a director, the Board generally seeks active or former chief executive officers or senior level executives of public companies, or leaders of major complex organizations, with experience at a strategy/policy setting level or with high level management experience.

In selecting a director, the Board of Directors seeks qualified individuals who, taken together, represent a diversity of skills, backgrounds and experience, including age, ethnic background, gender and professional experience.

The Board, through the Governance Committee, is continually assessing which functional skills or areas of expertise are needed to round out the existing strengths of the Board as part of its director selection process.

A director will not be nominated for election after his or her 72nd birthday.

Director Candidate Selection: All of Sunoco’s directors are elected each year by its shareholders at the annual meeting of shareholders. The Board of Directors is responsible for filling vacancies on the Board at any time during the year, and for nominating director nominees to stand for election at the annual meeting of shareholders. The Governance Committee of the Board of Directors reviews all potential director candidates, and recommends potential director candidates to the full Board. Director candidates may be identified by current directors of the Company, as well as by shareholders. The full

Board reviews and has final approval authority on all potential director candidates being recommended to the shareholders for election.

Changes to a Director’s Current Position: If the position held by an independent director at the time of election (including retirement) changes, he or she must offer to tender his or her resignation as a director to the Governance Committee.

Service by Independent Directors on Other Boards and Other Audit Committees:

Other Boards. Sunoco does not limit the number of other public company boards on which an independent director may serve. However, Sunoco does expect all directors to devote sufficient time and effort to their duties as a Sunoco Board member. This is a factor that is considered in the annual individual director evaluation process.

Other Audit Committees. As a general rule, Sunoco’s independent directors are expected to serve on not more than two other public company audit committees in addition to Sunoco’s.

Directors should advise Sunoco’s Governance Committee prior to joining the board of another public company so that a review can be performed to ensure there are no conflicts or other issues.

Service by CEO on Other Boards: The CEO must obtain the approval of the Governance Committee prior to accepting an invitation to serve on the board of another public company. The Governance Committee is of the view that the CEO should be limited to two outside public company directorships in addition to board service on Sunoco Partners LLC, the general partner of Sunoco Logistics Partners L.P., the master limited partnership in which Sunoco has a 75.3% interest.

The CEO may not serve on the board of a company on which a Sunoco independent director serves as an officer.

Retirement Age: Sunoco’s independent directors retire from the Board at the annual meeting following their 72nd birthday. Because Sunoco’s Board has adopted a mandatory retirement age and because Sunoco’s Governance Committee annually performs an individual director evaluation for each director prior to recommending his or her nomination for election by the shareholders, the Board has decided not to adopt arbitrary term limits for its directors.

No Former CEO on Board: It is Sunoco’s policy that when the CEO retires from Sunoco, he or she must also resign from the Board at that time.

BOARD OPERATIONS

Board Leadership: Sunoco’s CEO also holds the position “Chairman of the Board.” Sunoco’s Chairman and CEO is not a member of any standing Board committee, other than the Executive Committee. Sunoco believes the unified position of Chairman and CEO serves the corporation well because the remainder of Sunoco’s directors, who are all independent, have many opportunities to be involved with the agenda setting process and to significantly influence the Board process.

Executive Sessions. Executive Sessions of only independent directors are regularly scheduled at the conclusion of each board meeting. A “Presiding Director” leads each Executive Session. The “Presiding Director” is responsible for leading and facilitating the agenda and discussions. Sunoco’s independent directors each serve as “Presiding Director” for an Executive Session on a rotating basis.

Independent Director Only Meetings. In addition to the Executive Sessions, two separate meetings of independent directors are held each year. The Chair of the Governance Committee leads these meetings and is responsible for agenda preparation.

Board Meetings: Sunoco’s Board usually meets seven times per year in regularly scheduled meetings, but meets more often if necessary. Six of these regularly scheduled meetings occur over a 2-day period, including Committee meetings. During these meetings, strategic and other issues, as well as major corporate actions are reviewed and approved. In addition, annually, the Board meets over a longer 3-day period to summarize, review and approve strategic and other issues, as well as major corporate actions.

Meeting Agendas: The Chairman and CEO establishes a preliminary agenda for each Board meeting. Any director may request items to be included on the agenda.

While the Board believes that a carefully planned agenda is important for effective Board meetings, the agenda is flexible enough to accommodate new developments. Ample time is scheduled at each Board meeting to assure full discussion of important matters. Agendas, in addition to including financial and operating reports, also include other reports, such as current issues that could affect Sunoco’s short-term and/or long-term strategy and business, critical measures and comparisons, and other types of presentations that could enhance a director’s perspective on various matters. Management presentations are scheduled to permit a substantial proportion of Board meeting time to be available for discussion and comments.

The Corporate Secretary maintains a list of recurring agenda items and the timing of such agenda items throughout the year. This list is circulated to all Board members, who are free to add additional agenda items.

Information Flow: Board members receive agendas and other information well in advance of Board meetings so they will have an opportunity to prepare for discussion of the items at the meeting.

Information is provided from a variety of sources, including management reports, periodic SEC reports, a comparison of performance to operating and financial plans, reports on Sunoco’s stock performance and operations prepared by third parties, and articles from various business publications.

In many cases, significant items requiring Board approval may be reviewed at one or more meetings and voted upon in subsequent meetings, with the intervening time being used for clarification and discussion of relevant issues.

Regular Attendance of Non-Directors at Board Meetings: Board meetings generally begin in executive session with only Board members and Sunoco’s General Counsel and its Corporate Secretary in attendance. Thereafter, the Board meets in plenary session joined by the other Sunoco senior executives. At each meeting, various senior executives report to the Board on their respective areas of responsibility. At times, other Sunoco personnel are asked to make specific presentations to the Board.

New Director Orientation: Sunoco’s new directors are required to attend an orientation session which includes receiving and reviewing extensive materials relative to Sunoco’s business and operations, visiting Sunoco facilities and meeting key personnel. The orientation also includes an overview of Sunoco’s strategic plan, goals and objectives, Sunoco’s governance practices, Sunoco’s disclosure procedures and practices, Sunoco’s compensation philosophy and an overview of Sunoco’s investor relations program.

New directors attend meetings of all Board committees to acquaint them with the work and operations of each committee. After this rotation, new directors are assigned to particular committees.

Ongoing Director Education: Sunoco conducts ongoing training or continuing director education for its Board members. In addition to plant and site visits, Sunoco has an ongoing program of continuing director education on emerging issues and topics that could assist directors in discharging their duties. Sunoco is supportive of its directors attending outside director education programs.

Performance Evaluations: Sunoco’s Board has a three-tier performance evaluation process which enables continuous improvements at all three tiers.

Full Board Evaluation. The Board, through the Governance Committee, conducts an annual evaluation of how it is functioning as a whole. The results are reviewed with the Board.

Committee Evaluation. Sunoco’s individual committees conduct annual self-evaluations. The results are reviewed with the Governance Committee and the Board.

Individual Director Performance Evaluation. Individual director evaluations are conducted annually by the Governance Committee. The results are shared with the individual director.

BOARD STRUCTURE

Committees of the Board: The Board makes all decisions of major importance to Sunoco; however, the Board has established five standing committees so that certain areas can be addressed in more depth.

Committee Structure: Sunoco’s five standing committees are: the Audit Committee, the Compensation Committee, the Governance Committee, the Public Affairs Committee, and the Executive Committee. Each Committee has the authority to, as it deems appropriate, independently engage outside legal, accounting or other advisors or consultants. Additionally, each committee annually conducts a review and evaluation of the performance of the committee and its members. The current charters of each committee are published on Sunoco’s website and will be mailed to shareholders upon written request. A summary of the responsibilities of each of the committees follows:

Audit Committee. The Audit Committee assists the Board in its oversight of the integrity of Sunoco’s financial statements and disclosures and other internal control processes and Sunoco’s compliance with ethics policies and legal and regulatory requirements. This Committee prepares a report that is included in Sunoco’s proxy statement. The Committee appoints, retains, compensates, terminates and oversees the work of, and evaluates the independence and ability of, the independent auditors, as well as selects, appoints and evaluates Sunoco’s General Auditor. The Committee also provides oversight on Sunoco’s guidelines and policies with respect to business risk matters and other matters deemed appropriate by the Committee. The Committee establishes procedures for handling complaints, including the anonymous, confidential treatment of those employees raising such complaints regarding Sunoco’s accounting, internal accounting controls or auditing matters.

Compensation Committee. The Compensation Committee reviews and approves Sunoco’s compensation philosophy, reviews and approves the executive compensation programs, plans and awards, and reviews and approves Sunoco’s short-term and long-term incentive plans. The Committee prepares an annual report on executive compensation, which is included in Sunoco’s proxy statement. The Committee also reviews the general employee pension and employee welfare benefit plans, as appropriate.

Governance Committee. The Governance Committee reviews the role, composition, and structure of the Board and its committees. The Committee reviews and evaluates individual Board members each year prior to recommending the annual directors’ slate for election by shareholders at the Annual Meeting. The Committee identifies and reviews qualified individuals as potential new director candidates. The Committee consults with the CEO to review and consider recommendations regarding CEO succession and succession and development plans for the other executive officers. Additionally, the Committee sets and administers policies governing the level and form of directors’ compensation.

The Governance Committee monitors and reviews corporate governance issues and emerging trends and continually benchmarks the “best practices” and governance guidelines of its proxy peers, leading governance authorities and experts, as well as Sunoco’s institutional investors. The Committee has specifically been charged with recommending to the Board, on an on-going basis, a set of corporate governance guidelines.

Public Affairs Committee. The Public Affairs Committee reviews Sunoco’s policies, practices and performance in the areas of environmental protection, health and safety, equal employment opportunity and diversity practices, government affairs and corporate charitable contributions. The Committee assesses Sunoco’s performance as a responsible corporate citizen and keeps the Board apprised of Sunoco’s relationship with its constituencies. The Committee reviews management’s position on important public affairs issues, and assures that Sunoco addresses critical public affairs issues from a perspective that considers the interests of Sunoco’s various constituencies. The Committee also assumes oversight responsibility for the resolution of significant complaints from shareholders, and the proper handling of shareholder proposals that concern topics within its purview for inclusion in Sunoco’s proxy statement.

Executive Committee. The Executive Committee exercises the authority of the Board during the intervals between meetings of the Board except for Board actions specifically excluded by law and except that no action shall be taken by this Committee if any member of the Committee has voted in opposition.

Committee Membership:

Independence. Each committee of the Board, except for the Executive Committee, is composed entirely of independent directors, as defined in the New York Stock Exchange Listing Standards and Sunoco’s Categorical Standards of Independence.

Other Qualifications. The individual qualifications of committee members are reviewed annually for compliance with the various regulatory requirements mandated for the members of each particular committee. The Governance Committee recommends the members and chairs of the Committees to the Board.

Rotation Policy. Sunoco’s Board does not have a practice of automatic rotation of committee chairs and members after a set time period. There are many reasons to maintain an individual director on a specific committee, including continuity and subject matter expertise necessary for an effective committee. However, the Governance Committee reviews the strengths and expertise of each director, as well as the current and anticipated needs for each committee and, at times, may rotate members based on committee needs.

Committee Agendas: Committee agendas are prepared by the Committee Secretary in consultation with the Committee Chair. Annual recurring events for each committee are circulated each year and used as preliminary agenda items. All committee members are free to include additional items on an agenda.

Committee Reporting: Each Committee Chair reports to the full Board on committee actions in a timely manner, but in no event later than the next Board meeting.

BOARD RESPONSIBILITIES

Review and Approve Sunoco’s Strategic Plan, Annual Operating Plan and Major Corporate Actions:

Annually the Board reviews and approves Sunoco’s three-year strategic plan and the annual operating plan.

On an on-going basis, the Board reviews and approves all major corporate actions. The Board also reviews political, regulatory and economic trends and developments that may impact Sunoco.

Monitor Sunoco’s Performance:

On an on-going basis during the year, the Board monitors Sunoco’s performance against its annual operating plan and against the performance of its peers.

On a regular basis at Board meetings and through periodic updating, the Board reviews Sunoco’s financial performance with a particular focus on peer and competitive comparisons. These reviews include the views of management, as well as those of key investors and securities analysts.

Evaluate the CEO:

The CEO is the highest-ranking member of the management team. As such, he or she is accountable to the Board for Sunoco’s management and performance.

Annually, the CEO meets with the independent directors to discuss the overall performance and direction of the Company, as well as his or her individual performance.

Following that discussion, the independent directors meet separately, at a meeting which is led by the Chair of the Governance Committee, to evaluate Sunoco’s direction and performance and the individual performance of the CEO.

The results of this evaluation are communicated to the CEO at an executive session of the Board.

Review and Approve Executive Compensation:

The Board, through the Compensation Committee, reviews and approves the compensation plans for senior management to ensure they are appropriate, competitive and properly reflect Sunoco’s goals and objectives.

Annually, the CEO meets with the Compensation Committee to develop appropriate goals and objectives for the annual and longer term executive incentive plans, which are then reviewed with the entire Board.

The Compensation Committee evaluates the CEO’s performance in determining the CEO’s compensation.

Review and Approve CEO and Management Succession Planning:

The Board plans for succession of the CEO as well as the other senior management positions.

To assist the Board, the CEO annually provides the Governance Committee with an assessment of senior managers and their potential to succeed him.

The CEO also provides the Governance Committee with an assessment of persons considered potential successors to certain senior management positions.

Advise and Counsel Management:

Advice and counsel to management occurs both through formal Board and Committee meetings and through informal, individual director’s contacts with the CEO and other members of management at various levels throughout the Company.

The information needed for the Board’s decision-making will often be found within Sunoco, and directors have full access to management.

The Board and its Committees have the right to, at any time, retain outside financial, legal or other advisors or consultants.

Monitor Ethical and Legal Compliance

The Board monitors ethical and legal compliance by overseeing the processes which are in place to maintain the integrity of the company—the integrity of the financial statements and the integrity of compliance with laws and ethics (and with Sunoco’s Code of Business Conduct and Ethics).

BOARD AND EXECUTIVE COMPENSATION PROGRAM

Sunoco attempts to maintain fair and straightforward compensation programs at both the Board and executive levels which are designed to enhance shareholder value.

Director Compensation:

Sunoco’s Governance Committee, which is composed entirely of independent directors, sets and administers the policies that govern the level and form of director’s compensation.

Sunoco’s Governance Committee directly engages an independent compensation consultant to advise it as to “best practices” and emerging trends in director compensation. The independent consultant also benchmarks Sunoco’s director compensation compared to the proxy performance peer group and general industry data, which is adjusted for each company’s relative revenue base.

Sunoco’s Governance Committee believes that a substantial portion of the total director compensation package should be in the form of Sunoco common shares and share equivalents in order to better align the interests of Sunoco’s directors with the long-term interests of its shareholders.

In 2003, the Governance Committee recommended, and the full Board approved, the discontinuance of the granting of stock options to the Company’s outside directors as a form of compensation which was previously part of the outside directors’ compensation package.

In order to further encourage a link between director and shareholder interests, the Committee adopted Director Stock Ownership Guidelines to which members of the Board of Directors are expected to adhere. Directors are expected to own shares or share equivalents equal to 5 times the total annual retainer within 5 years of joining the Sunoco Board.

In addition to the Director Stock Ownership Guidelines, director-nominees are required to own at least $2,000 worth of Sunoco common shares prior to standing for election as a director for the first time.

Executive Compensation:

Sunoco’s Compensation Committee consists entirely of independent directors who have the sole authority to retain an independent compensation consultant to assist in the evaluation of CEO and senior executive compensation.

Total compensation (cash and non-cash) for Sunoco’s CEO and the senior executives is targeted at median levels as determined from an annual review of proxy performance peers, industry peers and general industry data, which is adjusted for each company’s relative revenue base.

Sunoco’s annual incentive program results in payments that are closely correlated with Sunoco’s earnings, return on capital employed and health, environmental and safety performance.

Most Sunoco salaried employees and hourly employees participate in an annual bonus plan. The performance factors for the executive bonus plan are the same as those used for the employee bonus plan so that annual incentive compensation of the executives and these Sunoco employees is aligned with Company performance.

Sunoco’s long-term incentive awards (options and performance units) have generally been less than 1% of outstanding shares, even though since 1997, Sunoco has repurchased 25% of its outstanding shares.

The long-term executive incentive plan does not permit re-pricing of options, strike prices below market prices or reloads of options.

All of Sunoco’s executive incentive plans qualify under IRS Section 162(m) as performance-based plans that enable Sunoco to fully deduct the plan payments.

Sunoco maintains stock ownership guidelines for its approximately top 35 executives. The amount of stock required to be owned increases with the level of responsibility of each executive, with the CEO expected to own stock with a value at least equal to four times his base salary.

Sunoco policy prohibits hedging in connection with Sunoco stock, so all Sunoco employees are prohibited from hedging their exposure in connection with transactions in Sunoco stock.

Sunoco policy prohibits any executive of the Company from utilizing, engaging, retaining, or hiring the independent auditor that has been appointed/engaged by the Audit Committee for personal financial counseling, including tax services.

Board Committee Charters

The Board of Directors has five standing committees consisting of the Audit Committee, Compensation Committee, Executive Committee, Governance Committee, and Public Affairs Committee. Each committee has its own charter. The charters are included as appendices to this proxy statement. Copies of the charters can also be found at Sunoco’s internet web site at www.SunocoInc.com, and printed copies are available upon request.

Other Governance Matters

Director Independence

It is the policy of Sunoco and the Board of Directors that all of the directors, except for the Chief Executive Officer, be independent as defined by the New York Stock Exchange rules, and as further defined by the Board under the Company’s Categorical Standards of Independence (the “Standards”). The Standards were recommended by the Governance Committee and adopted by the Board of Directors. In accordance with the Standards, a director must be determined by the Board to have no material relationship with the Company. The Standards specify the criteria by which the independence of Sunoco’s directors will be determined. When making an independence determination, the Board considers all relevant facts and circumstances.

The full text of the Standards is included in Sunoco’s Corporate Governance Guidelines under “Categorical Standards of Independence” on page 10 of this proxy statement.

Pursuant to the Standards and a review of all relevant facts and circumstances, the Board has affirmatively determined that the following directors, with the exception of John G. Drosdick, Sunoco’s Chairman, Chief Executive Officer and President, are independent: Robert J. Darnall, Ursula F. Fairbairn, Thomas P. Gerrity, Rosemarie B. Greco, James G. Kaiser, Robert D. Kennedy, Richard H. Lenny, Norman S. Matthews, R. Anderson Pew, G. Jackson Ratcliffe, John W. Rowe, and John K. Wulff.

Certain Relationships and Related Transactions

Sunoco does business with entities with whom certain of the directors are affiliated, either as an executive officer or by serving on the entity’s board. The Board, through its Governance Committee, has carefully reviewed each of these relationships, and has concluded that they relate to activities conducted in the normal course of business and none requires additional disclosure.

Communications with Directors

Interested persons with concerns may communicate with Sunoco’s non-management directors by calling Sunoco’s toll-free, confidential Employee and Compliance Hotline at 1-800-228-5687. The hotline is available 24 hours a day, seven days a week.

Director Attendance at Annual Meetings

It is the Company’s policy that the directors who are up for election at the annual meeting attend the annual meeting. All nominees for election at the 2003 Annual Meeting of Shareholders attended the 2003 Annual Meeting.

Board and Committee Membership

During 2003, the Board of Directors held 7 meetings and had five committees consisting of an Audit Committee, a Compensation Committee, an Executive Committee, a Governance Committee, and a Public Affairs Committee. For a description of the functions performed by each of these committees, see Sunoco’s Corporate Governance Guidelines on page 10, and the committee charters contained in the appendices to this proxy statement. All directors attended at least 75% of the total number of Board meetings and committee meetings during the period that they served on the Board and committees in 2003.

The table below provides Board committee membership as of March 8, 2004. The table also indicates the number of meetings held by each of the Board committees in 2003.

Name

Audit¹

Compensation

Executive

Governance

Public
Affairs

R. J. Darnall

J. G. Drosdick

x²

U. F. Fairbairn

T. P. Gerrity

x²

R. B. Greco

J. G. Kaiser

x²

R. D. Kennedy

x²

R. H. Lenny

N. S. Matthews

R. A. Pew

G. J. Ratcliffe

x²

J. W. Rowe³

J. K. Wulff⁴

Number of Meetings

in 2003

NOTES TO TABLE:

All members of the Audit Committee are “independent” as defined in the listing standards of the New York Stock Exchange, Sunoco’s Categorical Standards of Independence, and the rules and regulations of the Securities and Exchange Commission.

Committee Chairperson.

J. W. Rowe was elected a director of Sunoco effective November 6, 2003. He was appointed to the Compensation Committee and Public Affairs Committee effective February 5, 2004.

⁴

Information in the table is presented as of March 8, 2004. J. K. Wulff was elected a director effective March 8, 2004.

Audit Committee Financial Expert

Mr. John K. Wulff was elected as an independent member of the Board of Directors, effective March 8, 2004. Mr. Wulff will serve on the Audit Committee. The Board has determined that Mr. Wulff qualifies as an “audit committee financial expert,” as defined by the applicable rules of the Securities and Exchange Commission, based on his financial and accounting education and experience, and has designated Mr. Wulff as the “audit committee financial expert.” Mr. Wulff is currently the Non-Executive Chairman of Hercules Incorporated. He was with KPMG and predecessor certified public accounting firms from 1971 until 1987. He was an audit partner at KPMG and its predecessor firms for ten years. He served as Chief Financial Officer of Union Carbide for five years until its merger with Dow Chemical Company, and he was a member of the Financial Accounting Standards Board (“FASB”) for two years.

Directors’ Compensation

As discussed in the Corporate Governance Guidelines, directors are compensated partially in Sunoco common stock or stock equivalents to better align their interests with those of shareholders. Currently, equity-based compensation represents a substantial portion of the total compensation package. The Chief Executive Officer (“CEO”) is not paid for his services as a director. The following table summarizes the annual compensation of Sunoco’s directors beginning in May 2003.

Directors’ Compensation Table



Type of Compensation	Value




Retainer (Cash Portion)	$	22,400


Retainer (Stock-Based Portion)	$	33,000¹


Restricted Share Credit under Directors’ Deferred Compensation Plan	$	22,000²




TOTAL (excluding Committee Chair Retainer, Committee Chair Fee, and meeting fees)	$	77,400


Annual Retainer for Committee Chair	$	2,000


Committee Chair Fee (per meeting attended for which a director serves as chair)	$	500


Board or Committee Attendance Fee (per meeting)³	$	2,000

NOTES TO TABLE:

Represents the approximate dollar value on the date of grant of 870 shares of Sunoco common stock paid under the Directors’ Retainer Stock Plan.

Represents the approximate dollar value on the date of grant of 587 restricted share units, calculated in accordance with the terms of the Directors’ Deferred Compensation Plan.

A fee of $2,000 per day is also paid in cash for special meetings.

Directors’ Deferred Compensation Plan: The Directors’ Deferred Compensation Plan permits independent directors to defer a portion of their compensation. Payments of compensation deferred under this plan are restricted in terms of the earliest and latest dates that payments may begin. Deferred compensation is designated as share units, cash units, or a combination of both. Cash units accrue interest at a rate based upon Sunoco’s cost of borrowing. A share unit is treated as if it were invested in shares of Sunoco common stock, but it does not have voting rights. If share units are chosen, dividend equivalents are credited in the form of additional share units. Share units are settled in cash, based upon the fair market value of Sunoco common stock at the time of payment. The Plan also provides for the annual crediting of restricted share units, which is a portion of the directors’ compensation package. The restricted share units are not payable until death or other termination of Board service.

Directors’ Retainer Stock Plan: The Retainer Stock Plan for outside directors allows for the payment of a certain percentage of the independent directors’ annual retainer in stock. The retainer is granted to each director after the annual meeting. Any shares issued are restricted, prohibiting the transfer or sale of such shares for one year from the date of issue. The holder of the shares receives quarterly dividend equivalents equal to the dividends declared on the Company’s shares. A director may defer receipt of these shares pursuant to the Directors’ Deferred Compensation Plan.

Long-Term Performance Enhancement Plan II: The Long-Term Performance Enhancement Plan II provides that stock option awards under the plan may be made to outside directors of the Company. The options generally have a ten-year term and are generally exercisable two years after the date of grant. The purchase price payable upon exercise of an option will not be less than the fair market value of a share of Sunoco Common Stock on the date the option was granted. The purchase price may be paid in cash or in shares of common stock. Stock options having a value of approximately $19,000 were granted to the Company’s outside directors in 2001 and 2002. In 2003, the Governance Committee recommended, and the full Board approved, the discontinuance of the granting of stock options to the Company’s outside directors as part of the outside directors’ compensation package.

The Directors’ Retainer Stock Plan and the Long-Term Performance Enhancement Plan II, which are equity compensation plans, were approved by the shareholders.

Directors’ Stock Ownership Guidelines: Each outside director is expected to own Sunoco common stock with a market value equal to at least 5 times the total annual retainer. Included in the determination of stock ownership for purposes of these guidelines are all shares beneficially owned and any share units held in the Directors’ Deferred Compensation Plan. New directors are allowed a five-year phase-in period to comply with the guidelines.

Directors’ & Officers’ Indemnification Agreements

Sunoco’s bylaws require that Sunoco indemnify its directors and officers, to the extent permitted by Pennsylvania law, against any costs, expenses (including attorneys’ fees) and other liabilities to which they may become subject by reason of their service to Sunoco. To insure against such liabilities, Sunoco has purchased liability insurance for its directors and officers and has entered into indemnification agreements with its directors and certain key executive officers and other management personnel. This insurance and the indemnification agreements supplement the provisions in Sunoco’s Articles of Incorporation which eliminate the potential monetary liability of directors and officers to Sunoco or its shareholders in certain situations as permitted by law.

Directors’ & Officers’ Ownership of Sunoco Stock

The following table shows how much Sunoco common stock each director nominee, Named Executive Officer¹, and all directors and executive officers as a group, beneficially owned as of December 31, 2003.

Directors’ & Officers’ Stock Ownership



Name	Shares of Common Stock Beneficially Owned²	Share Units and Share Equivalents³	Total	Percent of Class Outstanding⁴




R. J. Darnall**⁵	3,580	4,889	8,469	*


J. G. Drosdick**⁵	771,837	0	771,837	1.02	%


U. F. Fairbairn**⁵	2,861	5,785	8,646	*


T. P. Gerrity^5,6	2,450	10,649	13,099	*


R. B. Greco**⁵	4,040	9,932	13,972	*


T. W. Hofmann**⁵	99,414	0	99,414	*


J. G. Kaiser**⁵	9,425	7,911	17,336	*


R. D. Kennedy**⁵	17,950	5,753	23,703	*


R. H. Lenny**	1,000	5,585	6,585	*


J. H. Maness**⁵	137,451	1,406	138,857	*


N. S. Matthews**⁵	2,580	12,420	15,000	*


R. W. Owens**	45,708	2,773	48,481	*


R. A. Pew^5,6	79,984	4,562	84,546	*


G. J. Ratcliffe**^5,6	2,580	9,602	12,182	*


J. W. Rowe	1,000	1,167	2,167	*


C. K. Valutas**⁵	100,251	0	100,251	*


J. K. Wulff⁷	1,000	0	1,000	*


All directors and executive officers as a group including those named above**^5,6,7	1,661,647	86,840	1,748,487	2.20	%

NOTES TO TABLE:

Represents holdings of less than 1% of Sunoco’s outstanding common stock.

Certain of the directors and executive officers own common units representing limited partnership interests of Sunoco Logistics Partners L.P., a master limited partnership in which Sunoco has a 75.3% interest. The number of such common units beneficially owned by individuals listed in the Directors’ and Officers’ Stock Ownership Table as of December 31, 2003 are as follows: R. J. Darnall (4,000); J. G. Drosdick (30,000); U. F. Fairbairn (2,500); R. B. Greco (1,500); T. W. Hofmann (2,500); J. G. Kaiser (2,500); R. D. Kennedy (5,000); R. H. Lenny (500); J. H. Maness (13,000); N. S. Matthews (25,000); R. W. Owens (10,000); G. J. Ratcliffe (15,000); and C. K. Valutas (4,700). The total number of such common units owned by directors and executive officers as a group (23 persons) is 143,700. The number of common units of Sunoco Logistics Partners L.P. held by each individual is less than 1% of the outstanding common units as of December 31, 2003; the total number of such units held by the group is approximately 1.3% of the common units. These amounts are not included in the table.

The Chief Executive Officer and the next four most highly compensated executive officers during the last fiscal year.

This column includes shares of Sunoco common stock held by directors and officers or by certain members of their families (for which the directors and officers have sole or shared voting or investment power), shares of Sunoco common stock they hold in SunCAP and Sunoco’s Shareholder Access & Reinvestment Plan or “SHARP”, and shares of Sunoco common stock that directors and officers had the right to acquire within 60 days of December 31, 2003.

Includes share unit balances held under the Directors’ Deferred Compensation Plan and the Deferred Compensation Plan for executives, and share equivalent balances held by executives under Sunoco’s Savings Restoration Plan (see footnote 3 on page 43). Although ultimately paid in cash, the value of share units and share equivalents mirrors the value of Sunoco common stock. Thus, the amounts ultimately realized by the directors and executives will reflect all changes in the market value of Sunoco common stock from the date of deferral and/or accrual until the date of payout. The share units and share equivalents do not have voting rights, but are credited with dividend equivalents in the form of additional share units or share equivalents.

⁴

Based on the number of shares of common stock outstanding at December 31, 2003.

⁵

The amounts of shares of common stock beneficially owned include shares of Sunoco common stock which the following persons have the right to acquire as a result of the exercise of stock options within 60 days after December 31, 2003 under certain Sunoco, Inc. plans:



Name				Shares




R. J. Darnall				1,580


J. G. Drosdick				645,000


U. F. Fairbairn				1,580


T. P. Gerrity				1,580


R. B. Greco				1,580


T. W. Hofmann				74,800


J. G. Kaiser				1,580


R. D. Kennedy				1,580


J. H. Maness				103,800


N. S. Matthews				1,580


R. A. Pew				1,580


G. J. Ratcliffe				1,580


C. K. Valutas				80,900


All directors and executive officers as a group (including those named above)				1,217,160

NOTES TO TABLE: (CONTINUED)

⁶

The individuals and group named in the table have sole voting power and investment power with respect to shares of Sunoco common stock beneficially owned, except that voting and investment power is shared as follows:



Name				Shares




T. P. Gerrity				870


R. A. Pew				16,050


G.J. Ratcliffe				1,000


All directors and executive officers as a group (including those named above)				18,977

⁷

J. K. Wulff was elected a director of Sunoco effective March 8, 2004. The amount in the table represents the number of shares of Sunoco common stock which were acquired by Mr. Wulff after December 31, 2003 and before March 8, 2004.

Equity Compensation Plan Information

The following table provides information as of December 31, 2003 with respect to Sunoco common stock that may be issued upon the exercise of options, warrants and rights under Sunoco’s existing equity compensation plans, including the Long-Term Performance Enhancement Plan II, Long-Term Performance Enhancement Plan, Executive Long-Term Stock Investment Plan, Retainer Stock Plan for Outside Directors, and Employee Option Plan.


Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted–average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders:
Stock options	3,200,040¹	$	34.53
Common stock units	92,834²		—³
				2,581,759⁴
Equity compensation plans not approved by shareholders	23,890⁵	$	28.00	0

Total	3,316,764	$	34.49	2,581,759

Consists of stock options granted under the following shareholder-approved plans: Long-Term Performance Enhancement Plan II and the following expired shareholder-approved plans: Executive Long-Term Stock Incentive Plan and the Long-Term Performance Enhancement Plan. No additional awards may be granted under the expired plans.

Consists of common stock units awarded under the Long-Term Performance Enhancement Plan and the Long-Term Performance Enhancement Plan II that are payable in stock. In addition, there are 402,600 common stock units that are payable in cash under these plans. No additional awards may be granted under the Long-Term Performance Enhancement Plan.

Common stock units do not have an exercise price. Payout is based on meeting certain targeted performance criteria or length of employment.

⁴

Consists of 2,385,580 shares available for issuance under the Long-Term Performance Enhancement Plan II and 196,179 shares under the Retainer Stock Plan for Outside Directors.

⁵

Consists of stock options granted in 1994 to employees (other than executives) under the Employee Option Plan.

The following is a description of the material features of the Company’s only existing equity compensation plan that was not approved by shareholders.

Employee Option Plan: The Sunoco Board of Directors approved the adoption of the Employee Option Plan which provided for the award of stock options to all employees (other than executives) of the Company and certain subsidiaries. The awards, which have a ten-year term and are exercisable two years from the date of grant, permit optionees to purchase Sunoco common stock at the fair market value on the date of grant. Two million shares of Sunoco common stock were authorized for issuance under the plan. In 1993 and 1994, stock option awards totaling 1,721,385 and 241,895, respectively, were made to eligible employees. As of December 31, 2003, 23,890 options remain outstanding and unexercised. No additional awards can be made under this plan.

PROPOSALS ON WHICH YOU MAY VOTE

Item 1. Election of Directors

There are 13 nominees for election this year. Detailed information on each nominee is provided on pages 29 to 33. All directors are elected annually, and serve a one-year term until the next Annual Meeting. All of the director nominees have consented to serve if elected. However, if any of the nominees should be unable or unwilling to stand for election at the time of the Annual Meeting, the Board may reduce the number of directors to be elected at the Annual Meeting, or designate a substitute. If a substitute is designated, proxy votes in favor of the original director candidate will be counted for the substituted candidate. At this time, the Board of Directors knows no reason why any of the nominees may not be able to serve as a director if elected.

Your Board unanimously recommends a vote FOR each of these directors.