Good afternoon. My name is Heather and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sunoco First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you, Mr. Terry Delaney, Vice President of Investor Relations and Planning. You may begin your conference.

All right. Thank you, Heather, and good afternoon, everyone. Welcome to Sunoco's quarterly conference call where we will be discussing the company's first 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 today's call I would direct you to our website www.sunocoinc.com where we have posted a number of presentation slides, and we 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 23 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 in slide 23. Now turning to our performance for the first quarter, as shown in slide two, Sunoco reported a net loss in the first quarter of $59 million or $0.50 a share as weakness in refining margins, particularly for gasoline, more than offset a very strong quarter for our non-refining businesses. I'll discuss the non-refining business performance in a moment, but first let me address refining and supply. Refining and supply lost $123 million in the quarter. As summarized in slide four, results were most impacted by lower realized margins, particularly for…

[Operator Instructions]. We have a question from the Doug Terreson with Morgan Stanley.

Good afternoon, guys.

Hi, Doug.

Terry, a few minutes ago you are talking about operating cost and how they did increase in relation to the most recent period and also the year-ago quarter, and on this point obviously with maintenance, some of these cost increases may be transitory but others may not be, and so can you provide your expectations for that trend over the intermediate term or for 2008 as well that is, how do you expect operating cost to trend on in coming quarters?

Sure, Doug. My expectation for the second quarter for us would be very much like the first quarter, may be modestly higher as we pick up some additional production barrels. The big variable elements for us are fuel cost, just the absolute cost of natural gas and how much of that we purchase, because anything we purchase runs through our expenses versus what we used for our own internally consume fuel which would... if you would go against our margin. So, depending upon that balance and we've largely been in a period where up until recently perhaps, we've been incented to purchase more natural gas then use our own internally produced fuel. Those expenses will continue to be high and I would expect them to continue at levels like the first quarter. Relative to last year, it really is, it's depreciation, it's fuel cost, it's catalyst cost, it's utilities, things of that nature, price related.

Okay. So, Terry, just to be clear, that the flat comparisons on an absolute basis not on a per barrel basis, is that correct?

That's right.

Okay. Guys, I just wanted to be sure. Thanks a lot.

Thanks.

We have a question from the Neil McMahon with Stanford Bernstein.

Hi, Neil.

Hi, it’s Neil McMahon from Bernstein. Hi, just a sort of philosophical question, I suppose, and apologies if it’s a bit off the wall. To run your refinery flat rate at the minute as we go into driving season, what sort of margin and PAD 1 and on the Gulf Coast would you be looking for through that you're hitting a very high utilization, especially through your reformer units. We're noticing at the minute that hydroskimming margins are extremely low at this time of the year, and obviously you have got extremely low-cross country utilization rates on refineries. I'm just wondering what is the margin you're looking at to trigger yourselves and the industry to produce more gasoline and diesel?

Neil, you're breaking up a little bit, but I think your question was what kind of margins are we looking at to run at full rates?

Yes, exactly, sorry.

Okay. Well, a lot of things will factor into that, including what the last barrels that we put through the crude unit would actually produce. But one of the elements that will be important to that is, as I alluded to, the absolute cost of bringing crude into our refineries, including what we're paying for quality differentials and transportation and the part of the barrel for which we're really... that isn't moving with crude and for which we get really no real increase in margin has made the requirement, or if you will, the margin at which we want to run at full rate pretty darn high, I mean certainly above $9 and $10 a barrel for light products. When you... when we are not at levels like that, we may not be incented to run our units at full capacity.

Okay. So I think, where I'm going to vest that is, when you look at the current gasoline prices across country, it's sort of looks inevitable if demand sort of holds in, even at these reduced rates for the next few months that we're talking north of $4 a gallon cross country and may be higher in the Mid-Continent to actually get the gasoline production that's required based on what you have just said in terms of those margins?

Well, I don't think we’re going to have any problem making the gasoline that's needed for the market. And if that what was your question is, and the primary determinant of the price on the streets going to be largely the crude price. But I would tell you that at these kind of gasoline margin levels, we are not incented to perhaps make that last increment of gasoline and run... and run our crude units at maximum capacity, so we can further fill up our cat cracking units. We'll run them to, if you will, to maximize distillate and feed the gasoline units as needed.

Yes, that was pretty much where it was going. Just a second question. In terms of the portfolio changing discussion, have you got anywhere in the last few months in terms of looking at the portfolio of refining assets in the overall chemical assets. I'm sort of thinking where you might want to go throughout this year and next year in terms of... is this the right portfolio you want?

Yes, Neil, this is Tom. As far as refining assets, they are... where they are, and we're trying to do some of the things, Terry was talking about. And as far as chemicals, we continue to look at that, they had a good quarter this quarter, they've been generating positive cash flows. So, as we've said, if there are opportunities to put those assets together somebody else will do that, we haven't found those opportunities yet, we continue to look at that and that's where we are with that one. So I think, when you look at our portfolio, I suspect that it’ll get out certainly by the end of the second quarter, third it’s not going to look demonstrably different than it looks today.

Okay. Great. Thanks, guys.

Thank you.

We have a question from Jeff Dietert with Simmons. Jeff Dietert - Simmons & Company International: Good afternoon. Are there steps that you would anticipate taking in an environment similar to what we experience in the first quarter that would reduce the refining loss relative to what you experienced in the first quarter having 2020 vision looking back?

We have done anything differently in the first quarter, is that the question, is this, Jeff? Jeff Dietert - Simmons & Company International: Yes, it's Jeff Dietert with Simmons, I'm sorry.

Okay. Jeff Dietert - Simmons & Company International: It's a big loss for a single quarter, can you reduce runs to a greater degree or there, can you switch crude types, are there things you can do to prevent such a large loss if in the event for industry conditions happened again?

I guess we can always collect volumes further, Jeff, but we ran the units. I think our overall utilization was around 85% for the quarter. We did accelerate some maintenance into the quarter. We are always trying to optimize around the crude slate that we can run. But in this kind of margin environment, I think the next... maybe with high insight that the next biggest most drastic step would be to more drastically shut down whole units or parts of refineries. But generally you don't do that easily or all that quickly. We did slowdown runs and accelerate maintenance, but I don't know if there was much more that we could do. Jeff Dietert - Simmons & Company International: Okay, and just specifically an update on Tulsa, you talked about it being on the market, have you completed that process, is it ongoing, what's the timing associated with that?

Jeff, the process is ongoing. We've been talking to a number of people and we continue to evaluate the options that we have. There are expectations with the... that the decision will be made kind of late second, early third quarter kind of decisions in that time frame, but we continue to evaluate a number of options that we have. So the process is underway. Jeff Dietert - Simmons & Company International: Okay. Very good, and what would you anticipate net financing expense would look like in the second quarter?

Probably more on the $8 million to $10 million range, Jeff. Jeff Dietert - Simmons & Company International: Okay. Thank you, guys.

Sure.

We have a question from Paul Sankey with Deutsche Bank.

Hi, guys. Good afternoon. It was a tough quarter and still is I guess tough in the Atlantic Basin for crude supplies. I wondered if you could talk a little bit more about the impact of the attitude that we saw in Nigeria, the issues that we saw [inaudible] in the North Sea, how you manage that process and what we can expect to see results in Q2 in terms of premiums that you have to pay for light-sweet crude? Thanks.

Yes. Well, some of the things you just referred to, Paul, obviously are more recent and will come into play in our second quarter. And I think, the short answer I would tell you is that, although in the first quarter Nigerian and another West African and pretty much any light-sweet crude premiums were pretty rich and for us resulted in a crude cost as I alluded to earlier of $2.92 a barrel over our marker. I would expect that to be maybe even higher in the second quarter to the tune of about another $1. So, certainly the issues that are going on in Nigeria though I understand the strike has been settled, but the continued premiums there remain and the second quarter will be even more expensive for us in that regard.

Does it get, I mean, [inaudible], does it become a physical supply problem or is it just a premium price problem?

That's pretty much a premium price problem there. There has been obviously some cutback in production over the last couple weeks or so and there has been lingering issues in Nigeria, but it's not like there is a shortage of other alternatives for us to replace those to the extent that any of our shipments were interrupted with other light-sweet crude. But it does play its way into the premiums in addition to the fact that those kind of crudes are in high demand in this kind of environment.

And that I guess is because of the need for those sulfur diesel.

Exactly.

Freight rates, are you going to get any help there, Q2 versus Q1?

Late Q2, yes, early Q2, no. So, a little bit of relief from the first to second quarter, and as we go out to the rest of the year, but it's modest, Paul.

Got you, Terry. And you said your same-store sales are down 1% in, I think, in Q1, I think you said is... we just had marathon thing, actually things have improved a bit since then into Q2. Is that fair?

I don't know--.

I mean, that sales aren't down at 1% run rate anymore.

I don't have current enough information on that on our own sites, Paul to answer that for you.

Do you think, I mean you said there was anything to do with weather hits, I know it’s kind of more miserable winter than it was a year ago.

The weather impacts are very important in doing those kind of open both year week-to-week kind of analysis, but I don't know... I'm not having looked specifically yet at April.

And finally, just on [inaudible] the minus 1% year-on-year would obviously capture ethanol because we planned it right.

Right. It’s actual retail sales at our service station.

Thanks, Terry.

Okay.

We have a question from Arjun Murti with Goldman Sachs.

Thanks, Terry. With the two new coke plants, is that a straight addition to your CapEx for this year versus look at the annual meeting or there are going to be some offsets elsewhere?

The two plants that we announced, Arjun are additions to what we provided in December, I think in the aggregate, the incremental spending that we'd expect on those to this year is probably in a range of $190 million.

And I guess based on sort of the… pro rate spending over the year, what five or six quarters that takes all of these things.

Yes.

Yes, that's great.

Now, understand that we've done some early spending on the AK Middletown plant, but we won't do the bulk of that spending until we get the necessary permits and that may not be till later this year. So--.

Okay. And then should we still think about your stock buyback program is kind of managing to a debt to cap, obviously refining margins have been a lot lower here, so your cash flow may not be as great. You've got some of these incremental projects, target debt-to-cap, is that how should we think about how much stock you may or may not buy back each quarter?

Yes, Arjun, this is Tom. I think that's fair, and we've always flex that as we had more or less cash flows, we had more opportunities. As we've said many times, we had the opportunity to put that money back into the business and now we do with these coke plants, that's always our first choice.

Yes, that's great. Thank you very much.

Okay.

We have a question from Mark Gilman with Benchmark.

Guys, good afternoon.

Hi, Mark.

Did you make any changes or significance on the crude side in response to conditions in the market?

No, not particularly, Mark as I alluded to earlier, I mean we're... we have to work within a certain range of the light-sweet barrel and we're usually working with West Africans of different type. We have brought in cash being crudes and things of that nature, but nothing significant.

Okay. I guess I'm circling a little bit by the transportation cost, Tom and Terry. I don't have a tanker rate chart right here in front of me. But I guess, I thought we have come off some of those very high peak tanker rates that we saw in the latter part of last year.

We are probably looking at like a prompt spot market kind of rate, Mark, and the reality is when we buy our crudes, we might be six weeks out and what we said at that time are the differentials. I mean, we’re always going to let crude, flat crude prices flat, and crude prices load until loading, but we set the crude differentials when we make the order for the crudes, and that might be five or six weeks out. Within a week or two of doing that, we need to set the loading, we need to set the tanker rates. So our tanker rates are usually four weeks ahead of the spot that you are looking at. So in some respects, our first quarter tanker rates are more reflective of December through February than they are January through March. And December rates were very high.

Tanker rates, if you recall, Mark, spike at the very end of November and into the beginning of December and that impacted January specifically in terms of our realized freight cost.

Well, that's exactly my recollection and thus my question is to, why you might not expect in a second quarter that number to be down a bit?

We do expect it to be down a bit, I'm just saying in a material sense. I don't expect it to be down quite as much as it was up over the last couple of quarters.

Okay. And there are two other effects, I was wondering, Terry, if you could just comment on effects you’re talking about in the context of the year-end results. The delayed pricing of the Nigerian barrels was that an effect in this quarter, also first quarter is typically an inventory draw quarter. And I was wondering whether there is any LIFO inventory type effects that you might have had to put into place that could have adversely hit margins, given rising prices?

On the second part of that, Mark, we really had little inventory change, we had… particularly in the crude inventory, we ended the quarter about where we were at the first. It was very little inventory impact. On your first question, I'll let Tom to answer.

Well, Mark, I think on the first one you're talking about the timing of how we paid for and expensed our crudes that we kind of priced in, like five days into the succeeding quarter, I think that's your question?

That's right, Tom.

Okay, yes. There was very little difference... timing difference in that respect, Mark. And I think the first five days of January versus the first five days of April were within $3 or $4 a barrel. So, you are right, the overall impact of either inventory changes or what I have, in the past alluded to is crude timing, it was really relatively immaterial this quarter. The high crude costs were really most directly related to quality, differentials, and high transportation.

Was there any product, vital product inventory effects?

No.

Okay. On the new coke contracts, can you talk a little bit about what those contracts look like in terms of escalation provisions and in particular how they treat coal?

Sure. Coal and the new coke contracts and all the other ones we have is a pass-through cost to our customer. So, whether coal costs are $100 a ton or $500 a ton it’s a pass-through to the customer, where we make our money is we agree on an operating cost with our customers that has escalations, we agree on that year-to-year and has escalations. And we get a fixed fee per ton, if you will, that's enough to cover our investment and provide us the kind of ratable return that we want. So coal is a pass-through cost in all of our contracts.

Okay. So that these contracts looked essentially pretty much like the existing ones?

Exactly.

Okay. Just one final one, if I could. Do you or did not restate chemicals or refining gross margins for the asset transfer between the divisions?

No, we did not.

And the split, $4 million to $5 million a quarter you talked about as a net improvement in chemicals, obviously would be a net debt to refining and supply?

That's correct.

Okay. Thanks a lot.

Sure, Mark.

We have a question from Chi Chow with Tristone Capital.

Gentlemen, good afternoon.

Hi, Chi.

Hey, just on the chemicals refining asphalts or the assets swap, what's the history behind of the assets residing in chemicals and what's the basis for making this a swap at this point?

Well, the biggest change it's happened, Chi, is that prior to the end of last year, the propylene splitter was in a joint venture that chemicals was involved in. So we were not the sole owner of that. And the cumene unit is really we invested in it in our refining system more for purposes of providing for a chemical customer. But the end of last year when we... there was assets of always been operated by our refining folks, because they were within the refining gates, at the end of last year we recovered full ownership of the propylene splitter and the joint venture was unwound. We thought it was a good time to redraw, if you will, the lines of the business. And like most other refiners include assets like that as part of their refining operations and refining results. In doing that obviously when the assets went back to refining and marketing, the book value went back there, the expenses went over there and we readjusted the transfer prices particularly in propylene, but they're no longer get refinery grade for propylene, but they are getting polymer grade because the splitter is owned by RNS. At the same time, we've kind of re-looked at the market price. And how the market has changed for benzene and propylene and adjusted the transfer price between our refining and supply in chemicals and the net result of all of that was essentially a benefit. It turns out to chemicals of about $4 million to $5 million a quarter.

So, the cumene units were always operated by the refining?

Yes, and same thing, the JV operated a splitter within the refinery gates.

This is the Epsilon JV. Is that correct?

Yes.

Okay. Okay, thanks. And then just a couple of questions on coke. Hey, Tom, I see on the cash flow statement that there was a distribution to the external investors and the coke making operations. Is it the last such payment to those investors?

Chi, I’m sorry, you broke up a little bit. I think you had a question about our payments on the coke-preferred interest.

That's correct, yes so I see that you've got... it showed up here in the first quarter. Is it the last such payment of that type?

No, it's not. We still have a minority interest in our coke business but the number will be going down as time goes on, because we essentially that... that slipped at the end of '07. It was on one of our plants. So although we still have the minority interest it will be small on a go-forward basis.

Okay. And then on the Middletown plant that you announced, you mentioned that permits you may have been handled later this year, is that correct?

Yes.

And that should we assume about 18 months construction period after that?

Approximately, Chi, yes, they are all right in that range.

Okay. So, mid to late '10, is that what we are looking at for stock--?

We would hope for early '10.

Early '10.

Yes.

Okay. Okay. Thanks a lot.

You have a question from Doug Leggate with Citigroup.

Thanks. Hi, guys.

Hi, Doug.

Couple of things. It kind of goes back to the... I think it was Mark Gilman's question about crude slate, all the focus has been on Nigeria and the Atlantic Basin, but what about Syncrude on the situation in the Midwest? What are you seeing there right now in terms of those premiums? Are they getting any easier as the weather warms up a little bit or are you seeking any alternatives to keep those plants?

All right. Real time, Doug, the premiums have come down some but they were very high in April. And I think I would have to say there as well in the second quarter that our overall crude differential versus our benchmark might be a little bit higher than the first quarter. For us our alternatives for the most part into Toledo is a little bit more of either domestic crude coming up from the south or foreign crude, but generally speaking we are going to run a die at anywhere from 60,000 to 75,000, 80,000 barrels a day of Syncrude. So there's been some relief of late and we would expect that to continue down, if there is. Production up there is picking up again, but April was high.

Okay. My other question is on the coke business. Clearly, a fair amount of momentum, I think you talked about a number of possible... I think you said previously that two to five ongoing potential negotiations, a couple of those seem to have come to fruition, can you kind of update us as to where you now see any additional fund potential where perhaps as much as far as you can talk about where things stand in terms of those negotiations, and of course where that leads to in terms of your thoughts on restructuring the coke business in terms of ownership done the way in the office too early. But, Tom, if I recollect at the strategy presentation, you did say that you expect to get a conclusion sort of the structure of that business in 2008, and obviously where it tends moving on.

As far as the new projects, we feel very good about the two that we have announced and I'll just remind everybody, we will be completing what we call Haverhill II later this year. So, that will be coming on stream in the second half of '08. So, and as far as, others Doug, we would continue to take the position that we're very positive on the opportunities that are in front of us, but until we have one, we're not going to be saying anything, it's taken us a while to get where we are, but we certainly are positive on future opportunities, and as far as the structuring you are right. We feel real good in... as we said when you look at them making $25 million in the first quarter, we have provided guidance earlier that… they being the 80, 85 range this quarter, 100 or 90 or so at the end of the year, $150 million EBITDA. So, having these two new plants coming into the portfolio, certainly it’ll be helpful to us, but we have not made any decisions yet on a future structure. So right now the default obviously is that they stay within Sunoco and generate a lot of nice steady solid earnings and cash flow for us.

Are you still committing to get this result in 2008 or so?

We are, Doug. I mean we continue to look at it, I'm not sure that... that could be the answer. And... but there will always be opportunities, these are… this is the unique cash flow pattern that we have with this business and we see what's happening in refining, we like that balance, but we'll continue to look at it.

All right. Thank you.

[Operator Instructions]. We have a question from Paul Cheng with Lehman Brothers.

Hey, guys.

Paul, how are you?

Very good, thank you. Quick... sort of quick one, what's your value-added 6321 crack for the month of April and the current number?

The 6321 value added for the month of April was approximately $10.50 a barrel and more recently it is how much, Tom?

Yesterday point in time it was like $9.85.

Okay, Tom, do you have any kind of number that you can share about your retail margin so far in the quarter comparing to the first quarter?

I'll add to that one, Paul, and I'd say not specifically, but it's several cents of gallon weaker than the first quarter, and in April was not at profitable levels.

So, [inaudible]:

Or lower.

Lower. Right. Okay, and is there any reason for the coke business that if you do, did in the first quarter $25 million, why for the full year that we should not be over $100 million?

Well, there were... there was a couple of million dollars in the first quarter, Paul that related to prior year tax adjustment, and there was probably a million or two related to higher realizations on some... we also produce some coal that is a pass-through cost on one of our contracts, we got higher prices for that in part related to something that happened in higher spot prices that affected the Haverhill cost. So, without getting into all those details, I said there might be $3 million or $4 million in that result that may not be repeatable. Having said that, in the second half of the year, we will start picking up some income from the Haverhill II plant when that completes. So I would probably look for the full year now income more like a 100, but not our current run rate may not be quite 25.

Okay. Okay, I see, okay, very good. Thank you.

You have a follow-up from Mark Gilman with Benchmark.

Guys, prove what you indicated before in response to a prior question. Should we assume that the preferential return embedded in your net finance cost will be zero going forward?

Close, certainly yes.

That was yes, Terry?

Yes.

Okay. One other one if I could. I guess I was really struck by the reported retail gasoline margin in the first quarter, it almost looked frankly as if something was wrong somewhere. Did you guys change your pricing strategy at all? I say that, I guess in conjunction with the comments on volumes, because it almost looks specifically in the jobber channel anyway that you were trying to shed volume?

No, Mark. No, we did not change our pricing strategy and I would say that this... it's always something that's very hard for you or anyone in the model from the outside, I mean, we made money in the first quarter when wholesale gasoline prices came down. From a distributor standpoint, we're at a very, very high levels of prices, I think in some of the areas that they operate, they may be feeling the volume change a little bit, I'm sorry the pricing impact a little bit more than we have. But we don't really change how we go to market in any significant way quarter-to-quarter.

Okay. Thanks, Terry.

[Operator Instructions]. And there are no further questions.

Okay. If there is no further questions, I appreciate your attendance and I'll be here to answer any other questions you have. Thank you.

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