Sunoco 2006 Annual Report Download - page 9

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 38 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.
Throughout most of 2004, 2005 and 2006, refined product margins in Sunoco’s principal
refining centers in the Northeast and Midwest were very strong. Such margins benefited
from stringent fuel specifications beginning in 2004 related to sulfur reductions in gasoline
and diesel products, supply disruptions in the Gulf Coast in 2005 attributable to Hurri-
canes Katrina and Rita, strong premiums for ethanol-blended gasoline in 2006, strong re-
fined product demand as a result of improving U.S. and global economies which led to
reductions in spare industry refining capacity and generally tight industry refined product
inventory levels on a days-supply basis. Chemical margins improved during the 2004-2005
period as chemical prices increased and product demand strengthened as a result of
improving U.S. and global economies, but weakened considerably during late 2005 and
most of 2006 in response to significantly higher feedstock costs and softening demand.
Despite considerable weakening in refined product margins in the fourth quarter of 2006
and the early part of 2007, the Company believes the outlook for refined product margins
is favorable for 2007, primarily due to strong global product demand and continued tight
refining supply. However, the Company expects these margins to be lower than the mar-
gins in the 2005-2006 period. In addition, despite increases in worldwide capacity, the
Company believes chemical margins and volumes in 2007 will improve, 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 dif-
ficult to predict as they are influenced by these and other extremely volatile factors in the
global marketplace, including 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 of Company assets
in each of its businesses;
• Prudently manage expenses;
• Efficiently manage capital spending with an increasing emphasis on income improve-
ment projects;
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