Sunoco 2007 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 36 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 2005, 2006 and 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 prod-
ucts, supply disruptions in the Gulf Coast in 2005 attributable to Hurricanes Katrina and
Rita, strong premiums for ethanol-blended gasoline in 2006 and 2007, generally tight in-
dustry 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. Chemical margins were strong
during most of 2005 as chemical prices and product demand reflected improving U.S. and
global economies, but weakened considerably beginning in late 2005 and continued to de-
cline throughout 2006 and 2007 in response to significantly higher feedstock costs and
softening demand.
Sunoco expects that ongoing global product demand growth and limited increases in refin-
ing capacity will provide support for continued profitable refining margins, although at
somewhat lower levels than the prior three years. However, the completion of major capi-
tal projects in 2007 has significantly enhanced the earnings potential of Sunoco’s refining
assets and should reduce the adverse impact of a market decline. Furthermore, the Com-
pany believes chemical margins will improve slightly in 2008. The absolute level of refined
product and chemical margins is difficult to predict as they are influenced by extremely
volatile factors in the global marketplace, including the absolute level of crude oil and
other feedstock prices, the effects of weather conditions on product supply and demand
and the impact of a weakening U.S. economy.
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, safety and environmental performance;
• 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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