Good afternoon. My name is Marcus and I will be your conference operator today. At this time, I would like to welcome everyone to the Sunoco second quarter 2007 earnings release conference call. (Operator Instructions) Mr. Delaney, you may begin your conference.

Thank you, Marcus and good afternoon and welcome to Sunoco's quarterly conference call where we will be discussing the company’s second quarter earnings that were reported last evening. With me today are Tom Hofmann, our Senior Vice President and Chief Financial Officer, and Tom Harr, Manager of Investor Relations. As part of this call, I would direct you to our website, www.sunocoinc.com, where we have posted a number of presentation slides. I will be making reference to a number of them today to help highlight and supplement some of the commentary and statistics that were included in our release, so if you haven’t already done so I would suggest that you go there now and be ready to refer to them as I progress through my remarks. To start, for purposes of facilitating a good discussion, I would refer you to the Safe Harbor statement referenced in slide 2 and as included in last night’s earnings release. In the course of our remarks and in the subsequent Q&A, we may be making some forward-looking statements. While we feel that the assumptions underlying these statements are reasonable, our company and our businesses are subject to a variety of risks and uncertainties, which are highlighted there on slide 2. I will also note that here and in our remarks and in our financial and operating statistics, we refer to various external market indicators for our businesses. Let me remind you that these indicators experience significant volatility and are not to be taken as future projections on our behalf. While helpful in considering market changes, the correlation of our actual results with these external benchmarks can and certainly does vary from quarter to quarter due to a variety of factors.

(Operator Instructions) Your first question comes from Neil McMahon with Sanford Bernstein.

Good afternoon. Just a few questions; the first one is really when you look at the shape of the oil curve going forward, we’ve had various comments from some oil companies in terms of what they are doing with their inventory levels. Do you see a change in terms of the way you are going to hold inventory, given the move to backwardation? Maybe you could comment on if you are changing any sort of activity or crude purchases based on what is happening with the flip between WTI and Brent in terms of pricing differentials.

We are always looking at the market structure and our opportunities to build and hold some products, when the Katanga market will allow for that. We are always trying to optimize our crude purchases. But from a materials standpoint, the biggest thing for the third quarter for us is to run these facilities now that we are out of the maintenance mode, at peak operating capability and to use, for instance, in the Northeast system, the flexibility we now have to buy crude not just from West Africa but from some other locations. But nothing in a material way to give to you in a different modeling perspective, if you will.

Okay, maybe just a question related to your new capacity. Could you give us an idea of your entire operations, what would you say your maximum gasoline production capacity is and diesel capacity is? Just roughly, given the new investments?

What I would say is incrementally, let me go incrementally off of, if you will, average realized quarters from before. Incrementally in the Northeast, again depending upon what mode we are running, the expanded catcracker unit, we could be doing 10,000 to 15,000 barrels a day more gasoline and distillate in lieu of residual fuel. And in the MidContinent, incrementally, particularly with respect to the Toledo Crude Debottlenecking project, we should be doing similarly 10,000 to 15,000 barrels a day more of crude input. That would result in largely more jet fuel and maybe a little bit more gasoline with it. So I would look at it more as an incremental improvement over best previously achieved quarters.

Okay, great. Thanks.

Your next question comes from Nicole Decker with Bear Stearns.

Good afternoon, Terry. On your coke segment, maybe you could help us; it looks like some of these activities that you have undertaken are going to meaningfully impact earnings in the upcoming quarters. Could you just give us some guidance as to how earnings might ramp up?

Yes, Nicki and actually, as a matter of fact, we’ve added some disclosure in the 10-Q this quarter that speaks to our expectations for next year, and that’s really when the more significant changes will occur. Not so much in the second half of this year but next year, there are changes that happen to the tax credits related to section 29, but there are also changes that happen to some of our contracts. Brazil will be on for a full year and we are looking for income next year -- instead of the 50 or so we are going to make this year, income next year of the $70 million to $75 million range. As we exit next year, after we complete that second Haverhill project, we would be looking for income in the $90 million to $95 million range, for projects in hand, if you would now, as we go into 2009. But for the second half of this year, I wouldn’t look for much of a change relative to the first half. We will pick up a little bit with more full production from Brazil but the bigger changes are next year.

That’s very helpful. I think at your last strategy presentation, you had given an aspiration for $150 million in earnings in this segment by 2009. Are you still looking to augment with acquisitions or maybe other activities?

Right, Nicki. What we were hoping for is to leave 2009 with a run-rate of about $150 million of earnings from coke. As I said, with the completion of the second Haverhill project at the end of next year, we will have about $95 million booked, if you will. So to get to that $150 million may require us to do a couple more projects where we are 100% owners, similar to the size of the Haverhill project. We continue to work a lot of development prospects and continue to be very optimistic of that potential but I do not have anything new to report on that at this time. Essentially, it is the need to close out a couple more new projects in the coke business.

Thanks, Terry.

Your next question comes from Doug Leggate with Citigroup.

Thank you. A couple of things for me, Terry, please. Can you summarize the high acid on heavy crude runs, or heavier crude runs that you had in the quarter and maybe give some guidance on what you expect over the balance of the year?

On the high acid side, in the first quarter we ran about 50,000 barrels a day in the Northeast, and again in the second quarter, we ran a rate like that. Again, part of that -- that was lower than what we will average in the third quarter. In the third quarter, we should be back up to the 75 to 80 kind of run-rate that we’ve achieved in prior quarters. Again, in conjunction with that Philadelphia catcracker project, there was also that big crude unit that connected with it was also down for turnaround in the first quarter and didn’t come up until into April, so that impacted the amount that we used in the first half of the year. But going forward, we’ll be back to looking for 75 to 80 a day.

What about the heavier grades that you referred to in your prepared comments?

You mean the ones that we kind of ramped up a little bit as we brought on the project?

Yes.

Well, our experience in May and June were that we backed out about 100,000 to 125,000 barrels a day of the lighter sweet crude that we ran and substituted some crudes that we get from either Canada or the Caspian Sea, so again, depending upon the economics and what operating mode we want to be in, we could continue to do that as well.

And that is something we should think about as a run-rate going forward?

It could be. Again, there may be times where we will go back to wanting to run maximum light sweet crudes and have maximum feed to the catcracker to make maximum gasoline, if you will. But that is the kind of potential that we do have and I think on average, we probably will be broadening the portfolio of crudes we run and on average, using more of the slightly higher sulfur sweet crudes.

And just a couple of other quick ones. Any idea of the opportunity cost of the downtime in the second quarter?

I will let you put a number on it. I would say that we were -- obviously we were down for the whole month of June in Tulsa, so that is about 2.3 million barrels during a pretty rich margin period. We were down for about 1.5 million barrels in April in the Northeast as we completed the turnaround work and the expansion work, and we probably lost about 600,000 barrels of production in May and June as we completed the Toledo project. So all in all, about 4.5 million barrels less than optimum production as we completed these projects in the second quarter. You can put the margin potentials on it as you think see fit.

And a final one from me; now that you’ve got these major capital projects behind you, could you just update us on your expectations for capital expenditures over the balance of the year and perhaps dovetail that with some comments on your expectations for share buy-backs?

I’ll speak to the capital and I’ll ask Tom to speak to the buy-back. On the capital, we’ve spent I think about $633 million in the first six months of this year, and in the second-half, we are pretty much still in line with what we laid out at the beginning of the year, which would mean we probably have about another $600 million that we would expect to spend in the second-half of this year. Now, included in that $600 million is $100 million or so of spending towards that Haverhill coke project and about $50 million or so of capital projects associated with Sunoco Logistics, our MLT. So there’s about 450 yet to be spent I refining, marketing and chemicals, if you will. But that is still pretty much in line with what we laid out at the beginning of the year. As to share repurchase, Tom.

Doug, we did buy 100 back in the second quarter and we ended the quarter, as you can see, with a very, very strong balance sheet, so we will continue to look at that program and really, nothing has changed in our strategy of looking at that. To the extent that we find opportunities to build the business, we will spend money to expand, and to the extent that we don’t have those opportunities, we will buy shares back.

That’s great. Thanks, guys.

Your next question comes from Arjun Murti with Goldman Sachs.

Thank you. You commented on the expansion opportunities in coal and coke. Could you just talk about how you are seeing your other non-refining businesses? Can we assume that any additional gains from marketing or chemicals is more likely to be margin related or not? I think you had an overall goal to double your non-refining earnings over the next couple of years, but I guess it kind of seems like coal and coke is on its way to do that and maybe some of these other businesses, it is less clear.

You’ve got coal and coke down. As far as the logistics business, they have grown that pretty significantly, have some pretty good organic growth and part of that would have to be acquisitions as well. Debbie [Fratts] has spoken about that quite a bit to the analyst community. Marketing, I think you are right there. There are opportunities to expand at times to make some acquisitions, but that is going to be more of a margin play. And in chemicals, we’ve run that well. The volumes are decent but that is going to have to be where margins come back strongly. We had said back in December that we are looking at opportunities for chemicals because we’ve not been happy with the returns. So we will continue to pursue that strategically. I don’t have anything else to say about that but if you are looking at that $400 million of earnings that we expect from the other businesses, a significant part would have to come from a return to margins in our chemical businesses.

Thank you. And maybe one follow-up on the stock buy-back, do you have a target debt-to-cap or some other metric of debt that you are comfortable with that you can share with us?

We’ve said historically that we feel that -- now this is on a revolver covenant basis, okay and let’s look at it that way. In that 40% to 45% range, we feel very comfortable. The other thing obviously we have to look at is funds flow to total debt. That’s a key measure for the agencies and we continued to look at that, but the simplest measure and one that is very easy to calculate is debt-to-capital, and in the 40% to 45% range, we feel very good about that.

That’s great. Thank you very much.

Your next question comes from Jeff Dietert with Simmons.

Following up on Doug’s question on feed stocks at Toledo with syncrude trading at a steep premium, as you mentioned, were there any feed stock changes there during the quarter or expected in the third quarter?

Nothing substantial there. I mean, that facility runs well on that diet. It most definitely was expensive relative to WTI but we still ran about 75 a day or so of syncrude there. The ability to replace it is not that simple logistically all the time.

Shifting to your chemical business, it seems that phenol and [cumene] are heavily integrated with your Philadelphia and Eagle Point refineries, and phenol with Haverhill. Is the polypropylene analysis a separate analyst from the phenol and [cumene] analysis, as far as strategic options?

I would not necessarily conclude that, Jeff. I would say although they might be a little bit more standalone, certainly we have a Gulf Coast polypropylene operation that gets supplies separate from Sunoco's refining system and has production separate from that and we have the same in the MidContinent region. I think both have some integration but also are capable of being separated from our refining operations and that is how we measure their profitability. We try to do it on an arm’s length basis. Certainly in the Northeast the refining system benefits to some extent to having a steady outlet for its benzene and propylene, but on the other hand the chemical business benefits from having a secure supply that they don’t have to pay for transportation from the Gulf Coast, so there is some integration there that is beneficial for sure.

Thank you.

Your next question comes from Mark Gillman with Benchmark Company.

Good afternoon. I have a couple of things. On the coke side, what did you do in the quarter regarding the tax credits, in the second quarter, that is? And what is underlying, Tom or Terry, regarding oil price level and its impact on revised tax credit levels in terms of those ’08, ’09 numbers you mentioned?

On the first one, Mark, through the first half of this year we did not have to accrue for, if you will, or crude prices were below the threshold price, so we did not -- we weren’t at a point where we would lose any credits. Given the run-up in crude prices in July and here in August, we probably have some exposure in the second half, depending upon what crude ends up averaging. The benchmark price where we start to lose some of these tax credits is when WTI averages something over $63 a barrel for the year. So we will have to see how it shakes out in the second half. 63 to 78 is the phase-out range, and our total exposure on an annual basis for ’07 is $30 million. So we will see where things shake out the rest of the year. If prices were to stay exactly where they are today until the end of the year, in this upper 70 level, we could potentially lose probably around $10 million of tax credits.

And underlying the forecasts that were mentioned for ’08 and ’09?

The tax credits that would be in there would be not crude price affected. We lose the section 29 credits at the end of this year and then the credits that would continue on are what is know as section 45 and there is no phase-out for those associated with crude price.

Let me shift to another one, if I could; how much WTI or WTS do you actually run in the MidContinent?

About 120,000 barrels a day. Most all of Tulsa is WTI or WTI priced, and some in Toledo.

The $15 million net income contribution from the expansion of the catcracker at Philadelphia, are there any incremental operating costs, Terry, associated with running at a higher rate?

There are some incremental higher operating costs but most of it actually is benefited by the fact that it is a net savings, so there is actually a cash credit offset by depreciation. It is included in the $15 million number that we has as the net income number. That includes the associated expenses

And that is net of the incremental depreciation as well?

Yes.

If you were to recomputed that number based on spreads in place today, do you have any idea what it might look like?

Actually, as we looked at how it should help us in July, it would be similar numbers. Again, Mark, we can get this either through some crude savings or for the upgrade of, if you will, replacing the input to the unit as being resid instead of gas oil. So incrementally -- and of course, we are running the unit a little bit harder in July as well, so I don’t think the variability to what the unit can contribute is going to be that great. It certainly will be market-dependent but because of the flexibility it affords us, I think we are going to be successful in pretty much any market in getting a good contribution.

So despite the fact that the resid gasoline spread is, I don’t know, $15 lower as we speak today than in the second quarter, you say that the contribution would not change?

That’s right because we may still get it in the crude differentials between West African crudes and the other kinds of crudes we might run and at the end of the process, not really make more gasoline but make more light cycle oil that we blend off into the distillate pool. I’m just talking directionally and materially. There’s a number of different ways where the unit can contribute to us.

Okay, guys. Thanks very much.

Your next question comes from Paul Cheng with Lehman Brothers.

Hey, guys. Hopefully a short question; Terry, last quarter in the first quarter you have an inventory loss of about $40 million, $45 million pretax. Is there any inventory gain or loss in the second quarter?

Good question, Paul. No, not really of any material nature. If you recall, in the first quarter we had a significant draw-down of product in part associated with the turnaround activities, and then we had a reserve for it at the end of the quarter. During the second quarter here, although year-to-date we are still in a net draw position for refined products, instead of being 4.5 million of reserving barrels, we are down to 1.5 million barrels of reserve. Now, the reserve price for that did increase so we took a little bit of a charge for that but on the other hand, the net change in the inventory mix offset that and I would tell you that our second quarter results are not significantly impacted at all by what we call inventory noise.

Earlier though I think when you talked about retail, you are talking about a 6% year-over-year gain, I think on the sales. Is that an apples-to-apples on those stores over 12 months, or are you just talking about the system as a whole?

Good question too, Paul. It was the second quarter to second quarter, and I guess it wasn’t an apples-to-apples in the context of -- although we are 6% -- for all the sites that we own or lease, the volumes are up 6% year-on-year. But again, part of what happens as part of this retail portfolio management program that you’ve heard us talk about for a number of years is more and more of the sites that we own or lease that are at the bottom of the list, if you will, as far as volumes and earnings, we’ve been moving them out of our ownership into the ownership of other hands, either the dealers or the distributors on them. So there is a different mix of sites in that pool. If we look at just the sites that we own or lease, that were open both years, so that is more of an apples-to-apples, we were up about 2.5% second quarter to second quarter. Does that help?

Absolutely. And in your coke business, the percent in Brazil, just starting up -- what is the earning contribution in the second quarter?

For Brazil, is that what you said, Paul?

Yes.

For the second quarter, it was a little bit less than $1 million. As I said, going forward, it will be about $2 million a quarter until we ultimately conclude whether or not we are going to move our ownership up from 1% or 20% or otherwise structure the deal a little bit differently to give us some kind of comparable value.

And you have indicated that there is not any additional major turnaround you plan for the second half, but let’s say under a not so favorable market condition, if margins continue to slide from here, is there any meaningful turnaround you can push for to be able to conduct over the next two months?

Probably not, Paul. We have really had a very busy maintenance program in the first six months of this year and practically, I don’t -- no, there is nothing we would move up in the next few months.

Okay. In chemical, maybe I see it wrong but it doesn’t look like the cash cost sequentially maybe up about $10 million to $11 million from the second quarter. I think partly it is related to energy. Can you break down between what is the component increase related to energy and what are the other things?

Part of it is energy, Paul. I don’t have all the specific numbers. Part of it is they get their allocation of, as I alluded to, anything that is stock price related. Compensation, that was higher in the second quarter than the first because our share price was up $7. Performance related compensation accruals were up on the basis of a very strong second quarter, and more fuel usage and utility price. They were the main components. The other thing is your number may be off a little bit because our actual tax rate may have changed from quarter to quarter. I don’t think our actual expenses were up $10 million, but you can circle back with Tom more specifically on that.

Okay. Tom, if you don’t mind, give me a call or send me an e-mail with the breakdown?

Sure.

Also, this is probably for Tom; Tom, what is the sustainable maintenance capital requirement on a 12-month basis for your system, if you can break down between refining, retail marketing and chemical.

Paul, what we’ve historically looked at there is it is pretty close to depreciation rates. If you look at everything in total, and depreciation is running in the 450, 500 a year range, that is probably not a bad -- that is system wide, including everything that we do -- that is probably not a bad run-rate from a requirement for maintenance.

So it is about in the $450 million to $500 million?

Yes.

Okay, and then --

And obviously there’s some timing in there for the turnarounds, but that’s a pretty decent rate.

Okay. Final question -- Tom, or maybe this is for Terry, if I look at the traditional 6321 market indicator in the Northeast and I think that when we take into consideration the premium portal, the reforming gasoline, those that the premium has been coming down compared to the second quarter level, maybe that’s off by say $0.50 to $1 per barrel. But on the other hand, I was wondering more as it accrues and they give you about $0.50 benefit, so net net, if we are still looking at the 6321 crack spread, is that a reasonable proxy in terms of the second to third quarter, that what kind of margin realization changes that we should be looking at? Or are there any other things that we should take into consideration?

I think that is reasonable. Crude premiums continue to be quite high, but as you alluded to, Paul, we do have some other flexibility. More and more, as I alluded to in the comments, Paul, I think we are going to wean ourselves off of that -- I’ll call it the old 6321 benchmark and get to more of the value-added 6321 that we put in -- I don’t know what, slide 21 here in these conference call slides. And when we do that, I think the product realization discussion that we have to have will be minimal, because this does a better job of capturing that and we will focus the differences more on what is happening in the crude market. But your overall conclusion is fair.

Okay, how about in the MidContinent system?

Same thing there. I’d say there’s a lot of moving parts but for now, the best guidance I could give you is as that benchmark moves, so will our realized margins move, second to third quarter.

Very good. Thank you.

Your next question comes from Robert [Puon] with Golden City Financial.

Based on today’s pricing on the crude oil and the [inaudible], the next quarter, if you [inaudible] on WTI, the profit margin is only about $12 or maybe $14 the most. Is it -- what is the break-even part --

We can’t hear you.

Your question is really breaking up. We can’t hear you.

Okay. I have to hang up the other phone. Then it might be a little bit better. Just one second.

Marcus, we can move on to the next one --

It’s okay now. Based on today’s market trading on the crude oil, if the crude oil doesn’t come down, does it mean not much money to make on the next quarter, on this coming quarter?

I am not going to get into projecting what the quarter will end up being. Crude prices are high and margins, as we talked about in the Northeast, are certainly lower than they were in the second quarter but there is clearly still profit opportunity in the MidContinent. Our retail business is doing well and there’s a lot of time and a lot of season and a lot of potential weather and other changes that could happen as the quarter rolls out. We won’t be making any projections here today.

Okay. Thanks.

Your next question is a follow-up from Mark Gillman with Benchmark.

Give us an update on what you are thinking regarding hydro cracker conversion projects at this point?

Still progressing with the engineering and the timetable for that, both in Toledo and in Philly. We will have more to say on that, Mark, probably late this year when we probably do another update, as we’ve done in others. Again, those projects are really late ’08 at the earliest, early ’09 kind of projects. But they are both still looking attractive to us but there is some work yet to be done on them.

Thanks, Terry.

Your next question comes from Richard Voliva with Deutsche Bank.

Good afternoon. Just a quick question on diesel and heating oil inventories. There is obviously a lot of noise in the [dealer stats] right now with all the switches between non-road and everything. Can you give us a little bit of a flavor for what you are seeing in terms of heating oil inventory or distillate inventories as we head into the fall hear, particularly I guess in pad one?

Although heating oil inventories look low year-on-year and versus normal, and they probably really are to some extent, I think it is a little early to get too excited about that. It doesn’t take a whole lot to replenish those. And given the changes in off-road data, I’m not sure how much is really heating oil and how much isn’t, so I don’t have much more to add to that, Rich, other than although heating oil looks a little low right now, it is not getting us terribly excited that you can count on a great winter season yet. On that one too there is a lot left to be written, if you will.

That’s fair. The with the new Philly, the catcracker there, you have a lot of flexibility is what you are basically saying between flipping back and forth between diesel and heating oil and what not, right?

Yes.

Okay. Perfect.

Yes, and the future hydro cracker project in Philadelphia can be a very much big addition to that, because that can really help us convert a lot of heating oil to on-road diesel. So if we do that project and get that on in ’09, that might give us the capability of doing another 45 or 50 a day of such.

Great. Thanks.

Your next question comes from Paul Sankey with Deutsche Bank.

Yes, it’s another Deutsche Bank one for you. I have a question there from Rich.

You’re not together, I gather?

No, I was a bit worried that we might be breaking up like the previous questioner as well, so I asked Rich to get on there. On the market firstly, is there going to be any impact from natural gas and the very big disconnect between natural gas and oil that we’ve seen this quarter, do you think, or is that not an issue at all?

In our reported results, Paul?

Yes, I was just wondering if what we are seeing, this very big disconnect between nat gas is going to be a material issue for you guys or whether it is really not one to think about.

Not that material. We end up obviously buying a little bit more natural gas and using a little bit of our own fuel gas, a little bit more, sell some more of that, as gas is cheap relative to that. But from an overall profit perspective, it is not a big item.

I guess one that is important and people have been asking a little bit about it but not quite parsing it directly is the fact that margins have collapsed, I guess basically because product prices have fallen but crude prices have risen. What is going on there? What is your perspective on why we would have this issue? Do you think it is related to the way the curves are shaped? Any observations you’ve got would be interesting. Thanks.

You might or might not think they’d be that interesting, Paul. I’ll let you be the judge. A lot of what happens is, in my opinion, seasonal. We are in the second half now. The driving season inventories are on the rebuilding mode. Refineries are coming back to operation, so some of it I think, particularly on the product margin side, should be expected. I think as we’ve seen, particularly over the last several years, when the financial money is coming into the market, it kind of amplifies the physical fundamentals and when that financial money tends to leave the market, it tends to amplify the downward correction, if you will. On the crude side, I don’t know that I really have anything to add to the discussions on that as to why that might be going up at the same time. I just don’t have anything to add there, Paul.

But you seem to be hinting that you think that it is financial money that is coming in, it is financial flows that are coming in to drive up the price, rather than a real physical need.

I think they play a part. Again, everybody has their own opinion. Sometimes that -- we tend to talk internally here that they more amplify some physical fundamental but they can also lead sometimes too. But they definitely play a part.

And, further to Neil McMahon’s original question, you seem to be answering that you tend to play Katanga with products but not with crude. Is that a fair statement or did I just misunderstand the way you answered?

No, that’s a fair statement, Paul.

Interesting. Okay, final one for me; you had some quite significant management change in the quarter. Is there anything that you would take the opportunity to add on the way that the management structures or at least personnel has changed?

Sure, Paul. You are alluding to Joel’s change in role from the EVP head of refining and supply to being a strategic advisor. No, it is exactly as we’ve talked about. Vince Kelly and Mike Hennigan have been Senior Vice Presidents in charge of refinery operations and commercial for the past year-and-a-half, and have worked for Joel and with the company for a number, for the last six or seven years. So I think it was a normal transition and a personal choice of Joel’s. Joel is still around as an advisor and Vince and Mike have worked with him and continue to do so to this day.

Okay, great. I’ll leave it there. Thank you very much.

(Operator Instructions) At this time, Mr. Delaney, you have no further questions.

All right. Thank you, Marcus and again, I appreciate everybody’s participation, and either myself or Tom Harr will be available for further questions. Thank you.

This concludes today’s conference. You may now disconnect.