Sunoco 2007 Annual Report Download - page 3

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1
To Our Shareholders
Health, Environment and
Safety continues to be
a top priority at Sunoco
and performance in
2007 was good, but fell
short of our expectations
for continuous
improvement in certain
areas. Refi ning and
Supply set a record for
contractor safety, while
employee safety continues to compare
favorably to industry benchmarks. However,
environmental performance was below our
goals due primarily to operating reliability
issues during major refi nery maintenance and
capital project work in the fi rst half of the year.
Following the completion of the project at the
Philadelphia catalytic cracking unit, reliability
improved and emissions of nitrogen oxide
(NOx) and sulfur dioxide (SOx) were reduced
to less than 10 percent of pre-project levels.
Financially, 2007 was another good year for
Sunoco. Despite signifi cant market volatility,
2007 income before special items* of $833
million refl ected another year of strong
refi ning margins and positive contributions
from our non-refi ning businesses. Earnings
and return on capital employed in 2007, while
less than the past two years, were well above
historical average performance.
Refi ning and Supply earned $772 million,
benefi ting from periods of strong margins,
particularly in the MidContinent region and
during the summer driving season. However,
a sharp rise in crude oil prices in the fourth
quarter, when product demand seasonally
slackened, eroded refi ning profi tability as we
ended the year.
Operationally, refi nery production levels
were limited in the fi rst half of 2007 due to
planned downtime for signifi cant capital
project and maintenance work throughout
our system. We completed two signifi cant
income improvement projects – a $525 million
expansion and modifi cation of the Philadelphia
refi nery’s catalytic cracking unit and a $53
million debottleneck project to expand capacity
of the Toledo refi nery’s crude distillation unit,
which together are expected to contribute
about $1 per share to annual earnings given
historical margin assumptions. We also
completed a major maintenance turnaround
at the Tulsa refi nery. These projects required
a signifi cant amount of focus and attention
to successfully complete in a challenging
construction environment.
Our refi neries operated well in the second half
of the year, and the completed capital projects
provided signifi cant fi nancial and operating
contributions. In the Northeast, we are now
able to upgrade more lower-valued residual
fuel into higher-valued gasoline and distillates
while using a more economic crude slate. In
the MidContinent, the work done at the Toledo
refi nery is enabling additional production of
light products, including record levels of jet
fuel.
Our non-refi ning businesses, in the aggregate,
earned $169 million for the year. While their
collective contribution to earnings was less
than our historical average of about $200
million, the businesses generated meaningful
cash fl ow, despite the added cost of rising
crude oil prices. Our Retail Marketing business
earned $69 million, as gains from retail site
divestments helped offset a weaker retail
gasoline market. In Chemicals, earnings
declined to $26 million due to rising feedstock
prices, which reduced margins for both
polypropylene and phenol. Logistics earned
$45 million while providing $63 million of cash
distributions to Sunoco from Sunoco Logistics
Partners L.P. (NYSE: SXL). Coke earnings of $29
million were limited due to a $20 million phase-
out of certain alternative fuel tax credits, which
occurred due to high crude oil price levels.
During 2007, we continued to grow our
Coke business, with the startup of a new
cokemaking facility in Vitória, Brazil, where
we are the operators and have a $41 million
equity investment. The plant is the largest
––––––––––––––
* Net income for 2007 amounted to $891 million, which includes a net gain from
special items of $58 million.