Sunoco 2004 Annual Report Download - page 11

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis is management’s analysis of the financial performance of
Sunoco, Inc. and subsidiaries (collectively, “Sunoco” or the “Company”) and of significant trends
that may affect its future performance. It should be read in conjunction with Sunoco’s consolidated
financial statements and related notes. Those statements in Management’s Discussion and Analy-
sis that are not historical in nature should be deemed forward-looking statements that are in-
herently uncertain. See “Forward-Looking Statements” on page 40 for a discussion of the factors
that could cause actual results to differ materially from those projected.
Overview
Sunoco’s profitability is primarily determined by refined product and chemical margins and
the reliability and efficiency of its operations. The volatility of crude oil, refined product
and chemical prices and the overall supply/demand balance for these commodities have
had, and should continue to have, a significant impact on margins and the financial results
of the Company.
During the first nine months of 2002, refined product margins in Sunoco’s principal refin-
ing centers in the Northeast and Midwest were weak due to high industry inventory levels,
rising crude oil prices, a higher level of gasoline imports 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 and 2004 were very strong, benefiting from low industry refined
product inventory levels, colder winter weather in early 2003, stringent fuel specifications
in 2004 related to sulfur reductions in gasoline and MTBE-related product changes, and
strong refined product demand as a result of an improving U.S. and global economy.
Chemical margins for most products were weak during most of 2002 as a result of an over-
supplied 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 product demand. This improvement continued during 2003 and 2004 as
chemical prices continued to rise and product demand strengthened further as a result of
the improving U.S. and global economy.
In 2005, the Company believes refined product margins will be lower than the very high
levels achieved in 2004 but should remain above historical averages, primarily due to
strong global product demand and the more stringent fuel specifications. These factors are
expected to keep the supply/demand balance tight. In addition, the Company believes
chemical margins and volumes will remain strong in 2005 assuming economic strength in
the U.S. and the rest of the world continues to favorably impact global demand. However,
the absolute level of refined product and chemical margins is difficult to predict as they are
influenced by these and other extremely volatile factors in the global marketplace, includ-
ing the effects of weather conditions on product supply and demand.
The Company’s future operating results and capital spending plans will also be impacted by
environmental matters (see “Environmental Matters” below).
Strategic Actions
Sunoco is committed to improving its performance and enhancing its shareholder value
while, at the same time, maintaining its financial strength and flexibility by continuing to:
• Deliver excellence in health and safety and environmental compliance;
• Increase reliability and realize additional operational improvements from existing assets
in each of the Company’s businesses;
• Prudently manage expenses and capital spending;
9