Sunoco 2009 Annual Report Download - page 40

ITEM 7. 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 under Item 8. Those statements in Management’s Discussion and Analysis that are not historical in nature
should be deemed forward-looking statements that are inherently uncertain. See “Forward-Looking Statements”
on page 58 for a discussion of the factors that could cause actual results to differ materially from those
projected.
Overview
Historically, Sunoco’s profitability has primarily been 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. Sunoco’s profitability has been
increasingly impacted by the growth in the level of earnings in its cokemaking operations.
During 2007, refined product margins in Sunoco’s principal refining centers in the Northeast and Midwest
were very strong. Such margins benefited from stringent fuel specifications related to sulfur reductions in
gasoline and diesel products, strong premiums for ethanol-blended gasoline, generally tight industry refined
product inventory levels on a days-supply basis and strong global refined product demand coupled with refinery
maintenance/capital improvement downtime, which led to reductions in spare industry refining capacity.
However, refined product margins declined significantly in the first half of 2008 in response to record high crude
oil prices and softening global demand, strengthened in the second half of 2008 due to supply disruptions in the
Gulf Coast attributable to Hurricanes Gustav and Ike and declining crude oil prices, then declined sharply once
again in 2009 in response to weak demand attributable to the global recession. Chemical margins were weak
during most of the 2007-2009 period in response to significantly higher feedstock costs and softening demand. In
2008 and 2009, cokemaking profitability benefited from increased price realizations from coke production at the
Company’s Jewell operations, which were largely driven by increases in coal prices, and a one-time $41 million
investment tax credit.
The Company believes the profitability of the Refining and Supply and Chemicals businesses will continue
to be challenged in 2010 due to volatility in the global marketplace causing ongoing weakness in product demand
as well as the general oversupply of refined products due to increases in worldwide production capacity. The
absolute level of refined product and chemical margins is difficult to predict as they are influenced by extremely
volatile factors, including the absolute level of crude oil and other feedstock prices, changes in industry
production capacity, the effects of weather conditions on product supply and demand and the status of the global
economy. Furthermore, excess capacity, increasing biofuels mandates and additional environmental regulations
continue to adversely impact the refining industry. These factors may prevent refiners, including Sunoco, from
earning their cost of capital and may lead to industry plant closures in the future. Cokemaking profitability is
expected to continue to be strong as a new plant in Granite City, IL comes on stream, although Coke segment
profitability may be impacted by volatility of coal prices on the Jewell coal and cokemaking operations.
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 striving to:
• Deliver excellence in health, safety and environmental performance;
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