The following discussion should be read in conjunction with the consolidated financial statements of Sunoco Logistics Partners L.P. Among other things, those consolidated financial statements include more detailed information regarding the basis of presentation for the following information.

Overview

We are a Delaware limited partnership which is principally engaged in the transport, terminalling and storage of crude oil and refined products. In addition to logistics services, we also own acquisition and marketing assets which are used to facilitate the purchase and sale of crude oil and refined products. Our portfolio of geographically diverse assets earns revenues in 29 states located throughout the United States. Revenues are generated by charging tariffs for transporting refined products, crude oil and other hydrocarbons through our pipelines as well as by charging fees for terminalling services for refined products, crude oil and other hydrocarbons at our facilities. Revenues are also generated by acquiring and marketing crude oil and refined products. Generally, crude oil and refined products purchases are entered into in contemplation of or simultaneously with corresponding sale transactions involving physical deliveries, which enables us to secure a profit on the transaction at the time of purchase.

Strategic Actions

Our primary business strategies are to generate stable cash flows, increase pipeline and terminal throughput, utilize our crude oil gathering assets to maximize value for producers and, pursue strategic and accretive acquisitions that complement our existing asset base and improve operating efficiencies. We also utilize our pipeline systems to take advantage of market dislocations. We believe these strategies will result in continuing increases in distributions to our unitholders. As part of our strategy, we have undertaken several initiatives including the acquisitions and growth capital programs described below.

Acquisitions

During the three years ended December 31, 2011, we completed eleven acquisitions for a total of $796 million.

2011 Acquisitions

• Controlling Financial Interest in Inland Corporation-In May 2011, we acquired an 83.8 percent equity interest in Inland Corporation ("Inland"), which is the owner of 350 miles of active refined products pipelines in Ohio. The pipeline connects three refineries in Ohio to terminals and major markets in Ohio. We acquired its equity interest through a purchase of a 27.0 percent equity interest from Shell Oil Company ("Shell") and a 56.8 percent equity interest from Sunoco. The pipeline was included in the Refined Products Pipeline segment from the date of acquisition;

• East Boston Terminal-In August 2011, we acquired a refined products terminal, located in East Boston, Massachusetts, from affiliates of ConocoPhillips. The terminal is the sole service provider to Logan International Airport under a long-term contract to supply jet fuel. Total active storage capacity for the terminal is approximately 1 million barrels. The terminal was included in the Terminal Facilities segment from the date of acquisition;

• Eagle Point Tank Farm-In July 2011, we acquired the Eagle Point tank farm from Sunoco. The tank farm is located in Westville, New Jersey and consists of approximately 5 million barrels of active storage for clean products and dark oils. The tank farm was included in the Terminal Facilities segment from the date of acquisition; and,

2010 Acquisitions

• Bay City Terminal-In October 2010, we acquired a terminal facility located in Bay City, Texas from Gulfstream Terminals & Marketing LLC. The terminal is capable of handling both crude oil and refined products volumes. Total active terminal storage capacity of this facility is less than half of a million barrels. The terminal was included within in the Terminal Facilities from the date of acquisition;

• Big Sandy Terminal-In October 2010, we acquired a refined products terminal and pipeline segment located in Big Sandy, Texas from an affiliate of Chevron Corporation. The terminal and pipeline segment were not operational since being acquired. In February 2012, we completed a sale of the Big Sandy terminal to Delek US Holdings, Inc.

• Butane Blending Business-In July 2010, we acquired a butane blending business from Texon L.P. The acquisition included patented technology for blending of butane into gasoline, contracts with customers currently utilizing the patented technology, butane inventories and other related assets. The acquisition was included within the Terminal Facilities as of the date of acquisition;

• Controlling Financial Interest in Mid-Valley Pipeline Company and West Texas Gulf Pipe Line Company-In July and August 2010, we acquired additional ownership interests in Mid-Valley Pipeline Company ("Mid-Valley") and West Texas Gulf Pipe Line Company ("West Texas Gulf"), increasing our ownership interest from 55.3 percent to 91.0 percent and from 43.8 percent to 60.3 percent, respectively. Mid-Valley owns an approximately 1,000-mile common carrier pipeline, which originates in Longview, Texas and terminates in Samaria, Michigan. The pipeline provides crude oil to a number of refineries, primarily in the midwest United States. West Texas Gulf owns and operates an approximately 600-mile common carrier crude oil pipeline system which originates from the West Texas oil fields at Colorado City and our Nederland Terminal, and extends to Longview, Texas, where deliveries are made to several pipelines, including Mid-Valley. As we now have a controlling financial interest in both entities, each is reflected as a consolidated subsidiary as of the respective acquisition dates, and are included in the Crude Oil Pipelines; and

• Additional Equity Interest in West Shore Pipe Line Company-In July 2010, we acquired an additional ownership interest in West Shore Pipe Line Company ("West Shore"), increasing our ownership interest from 12.3 percent to 17.1 percent. West Shore owns and operates an approximately 650-mile common carrier refined products pipeline that originates in Chicago, Illinois and services delivery points from Chicago to Wisconsin. This investment is accounted for as an equity method investment, with the equity income recorded in the Refined Products Pipelines.

2009 Acquisitions

• Romulus Terminal Acquisition-In September 2009, we acquired a refined products terminal located in Romulus, Michigan from R.K.A. Petroleum LLC. The terminal has storage capacity of less than a half of a million barrels and services the Detroit metropolitan area and has been integrated into our Terminal Facilities from the date of acquisition; and

• Excel Pipeline LLC Acquisition-In September 2009, we acquired Excel Pipeline LLC ("Excel") the owner of an approximately 50-mile crude oil pipeline in Oklahoma, from affiliates of Gary-Williams Energy Corporation ("Gary-Williams"). The system originates in Duncan, Oklahoma and terminates in Wynnewood, Oklahoma and has been operated by us since 2007. The pipeline has been included in our Crude Oil Pipelines from the date of acquisition.

Growth Capital Program

In 2011, we completed $171 million of organic growth capital projects to improve operational efficiencies, reduce costs, expand existing facilities and construct new assets to increase storage, throughput volume or the scope of services we are able to provide. In 2011, these included projects to expand upon our butane blending services, increase tankage at the Nederland facility, increase connectivity of the crude oil pipeline assets in Texas and increase our crude oil trucking fleet to meet the demand for transportation services in the southwest United States.

During 2012, we expect to spend approximately $300 million on expansion capital expenditures related to organic growth, excluding major acquisitions. This includes spending to capture more value from existing assets such as the Eagle Point terminal, the Nederland Terminal and our patented butane blending technology, as well as Project Mariner West and the West Texas crude expansion. A summary of our previously announced growth projects is as follows:

Mariner West

In 2011, we announced a joint pipeline project with MarkWest Energy to deliver ethane produced in the Marcellus Shale Basin in Western Pennsylvania to the Sarnia, Ontario petrochemical market ("Project Mariner West"). This project would transport ethane from Western Pennsylvania to markets in Sarnia utilizing existing pipelines, which will be modified for ethane service. We received binding commitments in an open season to enable Project Mariner West to proceed with an initial capacity to transport approximately 50,000 barrels per day and the ability to expand to support higher volumes. The project is underway and we expect operations to commence by July 2013.

West Texas Crude

In 2011, we announced plans to expand takeaway capacity out of the Permian Basin in West Texas as there is a market need for incremental crude transportation to various refining centers in Texas, the mid-continent and the United States Gulf Coast ("West Texas Crude Expansion"). The West Texas Crude Expansion is expected to add a minimum 100,000 barrels per day of capacity and will utilize existing pipelines. The project is expected to be completed by the first quarter 2013. In February 2012, we commenced an Open Season for these pipelines, which will serve to prioritize service for shippers making long-term volume commitments.

Mariner East

We also continue to develop a joint pipeline and marine project to deliver natural gas liquids produced in the Marcellus Shale Basin to a storage facility on the East Coast ("Project Mariner East"). This project would transport natural gas liquids, utilizing modified existing pipelines, from Western Pennsylvania to the East Coast where the natural gas liquids could be loaded on waterborne vessels for third-party transport to United States ports or export to international markets. We are currently in the engineering phase of Project Mariner East.

Conservative Capital Structure

Our goal is to maintain substantial liquidity and a conservative capital structure. Sunoco Logistics Partners Operations L.P. (the "Operating Partnership") and Sunoco Partners Marketing and Terminals L.P., our wholly-owned subsidiaries, have a five-year $350 million unsecured credit facility (the "$350 million Credit Facility") and a $200 million 364 day unsecured credit facility (the "$200 million Credit Facility"), respectively. We will maintain our conservative capital structure by combining debt and equity issuances to finance our future growth.

Cash Distribution Increases

As a result of our continued growth, our general partner increased our cash distributions to limited partners in all quarters in the three years ended December 31, 2011. For the quarter ended December 31, 2011, the distribution increased to $0.42 per common unit, ($1.68 annualized). The distribution for the fourth quarter of 2011 was paid on February 14, 2012.

In January 2010, we repurchased, and our general partner transferred and assigned to us for cancellation, the incentive distribution rights ("IDRs") held by the general partner under the Second Amended and Restated Agreement of Limited Partnership, as amended, as consideration for (i) our issuance to the general partner of new IDRs issued under the Third Amended and Restated Agreement of Limited Partnership and (ii) our issuance to the general partner of a promissory note in the amount of $201 million, which was repaid in full during the first quarter of 2010. The new IDRs provide for target distribution levels and distribution "splits" between the general partner and the holders of our limited partnership units equal to those applicable to the cancelled IDRs, except that (i) the general partner's distribution split for distributions above the current second target distribution of $0.1917 per limited partnership unit per quarter (or $0.7668 per limited partnership unit on an annualized basis) and up to the third target distribution increased to 37% from 25% (these percentages include the general partner's 2% interest); and (ii) the third target distribution increased from $0.2333 to $0.5275 per limited partnership unit per quarter (or from $0.9332 to $2.1100 per limited partnership unit on an annualized basis). See Note 12 to the consolidated financial statements included in Item 8. "Financial Statements and Supplementary Data" for more information on these changes.

Results of Operations

The following table presents our consolidated operating results for the three years ended December 31, 2011:

                                                                Year Ended December 31,
                                                            2011          2010          2009
                                                                     (in millions)
Statements of Income
Sales and other operating revenue:
Affiliates                                                $    432       $ 1,117       $   706
Unaffiliated customers                                      10,473         6,691         4,696
Other income                                                    13            30            28

Total revenues                                              10,918         7,838         5,430

Cost of products sold and operating expenses                10,264         7,398         5,023
Depreciation and amortization expense                           86            64            48
Impairment charge and related matters(1)                        42             3            -
Selling, general and administrative expenses                    90            72            64

Total costs and expenses                                    10,482         7,537         5,135

Operating income                                               436           301           295
Net interest expense                                            89            73            45
Gain on investments in affiliates                               -            128            -

Income before provision for income taxes                  $    347       $   356       $   250
Provision for income taxes                                      25             8            -

Net Income                                                $    322       $   348       $   250
Net Income attributable to noncontrolling interests              9             2            -

Net Income attributable to Sunoco Logistics Partners
L.P.                                                      $    313       $   346       $   250

Net Income attributable to Sunoco Logistics Partners
L.P. per Limited Partner unit:
Basic                                                     $   2.56       $  3.13       $  2.17

Diluted                                                   $   2.54       $  3.11       $  2.16

(1) In September 2011, Sunoco announced its intention to exit its refining business in the northeast and initiated a process to sell its refineries located in Philadelphia and Marcus Hook, Pennsylvania. If arrangements for sale cannot be made, Sunoco intends to permanently idle the facilities by July 2012. We assessed the impact

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with United States generally accepted accounting principles ("GAAP"), management uses additional measures that are known as "non-GAAP financial measures" in it evaluation of past performance and prospects for the future. The primary measures used by management are earnings before interest, taxes, depreciation and amortization expenses and other non-cash items ("Adjusted EBITDA") and distributable cash flow ("DCF").

Our management believes Adjusted EBITDA and distributable cash flow information enhances an investor's understanding of a business's ability to generate cash for payment of distributions and other purposes. In addition, EBITDA calculations are also defined and used as a measure in determining our compliance with certain revolving credit facility covenants. However, there may be contractual, legal, economic or other reasons which may prevent us from satisfying principal and interest obligations with respect to indebtedness and may require us to allocate funds for other purposes. Adjusted EBITDA and distributable cash flow do not represent and should not be considered alternatives to net income or cash flows from operating activities as determined under GAAP and may not be comparable to other similarly titled measures of other businesses.

The following table reconciles the difference between net income and net cash provided by operating activities, as determined under GAAP, and Adjusted EBITDA and distributable cash flow:

                                                                    Year Ended December 31,
                                                               2011            2010         2009
                                                                         (in millions)
Net Income attributable to Sunoco Logistics Partners L.P.     $   313         $  346        $ 250
Interest cost, net                                                 89             73           45
Depreciation and amortization expense                              86             64           48
Impairment charge                                                  31              3           -
Provision for income taxes                                         25              8           -
Gain on investments in affiliates                                  -            (128 )         -

Adjusted EBITDA(1)                                            $   544         $  366        $ 343
Interest cost, net                                                (89 )          (73 )        (45 )
Maintenance capital expenditures                                  (42 )          (37 )        (32 )
Sunoco reimbursements                                              -              -            -
Provision for income taxes                                        (25 )           (8 )         -

Distributable cash flow                                       $   388         $  248        $ 266

                                                               Year Ended December 31,
                                                          2011            2010         2009
                                                                    (in millions)
Net cash provided by operating activities                $   430         $  341        $ 176
Interest cost, net                                            89             73           45
Amortization expense and bond discount                        (2 )           (2 )         (2 )
Deferred income tax expense                                    2             -            -
Restricted unit incentive plan expense                        (6 )           (5 )         (5 )
Regulatory charges excluded from impairment                  (11 )           -            -
Net change in working capital pertaining to
operating activities                                          35            (55 )        121
Provision for income taxes                                    25              8           -
Net Income attributable to noncontrolling interests           (9 )           (2 )         -
Other                                                         (9 )            8            8

Adjusted EBITDA(1)                                       $   544         $  366        $ 343

(1) Amounts exclude earnings attributable to noncontrolling interests and include an $11 million charge for regulatory obligations recognized in the fourth quarter 2011 in connection with our assessment of the impact on certain of our crude oil terminal assets affected by Sunoco's decision to exit its refining business in the northeast. The total charge recognized for the impact was $42 million, which included a $31 million non-cash impairment for asset write-downs at the Fort Mifflin Terminal Complex.

Analysis of Consolidated Operating Results

Net income attributable to the partnership interests was $313, $346 and $250 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Net income attributable to partnership interests for 2011 decreased $33 million compared to the prior year period due primarily to the absence of a $128 million non-cash gain on our acquisition of additional interests in Mid-Valley and West Texas Gulf. The gain resulted from an adjustment to record our previous ownership interest at fair value in accordance with acquisition accounting rules. Also contributing to the decrease was a $42 million charge in 2011 for certain crude oil terminal assets which would be negatively impacted if Sunoco's Philadelphia refinery is permanently idled. Excluding the gain and the charge, net income increased $137 million compared to 2010. Higher income from our operations was partially offset by higher interest expense related to debt offerings in 2011 and 2010. Proceeds from these offerings were used to fund growth initiatives and finance the IDR repurchase and exchange transaction.

The $96 million increase in net income attributable to partnership interests from 2009 to 2010 was primarily the result of a $128 million non-cash gain on our acquisition of additional interests in Mid-Valley and West Texas Gulf. Excluding the gain, net income decreased $32 million compared to 2009, due to an increase in interest expense, related to debt issuances which were used to finance the IDR repurchase and exchange transaction and fund growth initiatives. Higher interest expense was partially offset by increased operating income associated primarily with improved Terminal Facilities volumes and contributions from acquisitions and organic projects.

Analysis of Operating Segments

We manage our operations through four operating segments: Refined Products Pipelines, Terminal Facilities, Crude Oil Pipelines and Crude Oil Acquisition and Marketing. Prior to 2011, our crude oil pipeline and crude oil acquisition and marketing operations were reported as a single Crude Oil Pipeline segment. For purposes of comparability, all prior year segment disclosures have been recast to conform to the current year presentation. Such recasts have no impact on previously reported consolidated net income.

Refined Products Pipelines

Our Refined Products Pipelines segment consists of refined products pipelines, including a two-thirds undivided interest in the Harbor pipeline and joint venture interests in four refined products pipelines in selected areas of the United States. The Refined Products Pipeline System earns revenues by transporting refined products from refineries in the northeast, midwest and southwest United States to markets in 6 states and Canada. Rates for shipments on these pipelines are regulated by the Federal Energy Commission ("FERC") and the Pennsylvania Public Utility Commission ("PA PUC").

The following table presents the operating results and key operating measures for our Refined Products Pipelines for the three years ended December 31, 2011:

                                                         Year Ended December 31,
                                                      2011           2010       2009
                                                        (in millions, except for
                                                             barrel amounts)
     Sales and other operating revenue
     Affiliates                                     $      64       $   76     $   79
     Unaffiliated customers                                65           44         49
     Intersegment revenue                                   1           -          -

     Total sales and other operating revenue        $     130       $  120     $  128

     Depreciation and amortization expense          $      17       $   15     $   13
     Operating Income                               $      33       $   44     $   45
     Pipeline throughput (thousands of bpd)(1)(2)         522          468        577
     Pipeline revenue per barrel (cents)(2)              68.3         70.0       60.7

(1) In May 2011, we acquired a controlling financial interest in Inland and we accounted for the entity as a consolidated subsidiary from the date of acquisition. Average volumes for the year ended December 31, 2011 of 88 thousand bpd has been included in the consolidated total. From the date of acquisition, this pipeline had actual throughput of 140 thousand bpd for the year ended December 31, 2011.

(2) Excludes amounts attributable to equity ownership interests in corporate joint ventures which are not consolidated.

Operating income for the Refined Products Pipelines decreased $11 million to $33 million for the year ended December 31, 2011. The decrease in operating income was partially offset by contributions from the acquisition of a controlling financial interest in the Inland pipeline system in the second quarter 2011 ($8 million). Excluding results from this acquisition, operating income decreased compared to 2010 due primarily to lower volumes on our refined products pipelines in the northeast and southwest United States ($9 million). Volumes were negatively impacted during 2011 by unplanned maintenance activity at Sunoco's refineries during the first half of 2011. Further contributing to lower results in 2011 were the following:

• decreased equity income from our joint venture pipelines ($2 million);

• absence of one- time billing from 2010 ($2 million);

• higher operating expenses ($3 million) driven largely by increased employee and maintenance costs, partially offset by decreased utility costs related to the volume reductions; and

• higher selling, general and administrative expenses ($3 million), primarily associated with incentive compensation.

Operating income for the Refined Products Pipelines decreased $1 million to $44 . . .