Welcome to the Sunoco, Inc.'s Q1 2011 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Lynn Elsenhans, Chairman and CEO. You may begin.

Thank you and good evening. Welcome to Sunoco's quarterly conference call where we will discuss the company's first quarter earnings that we reported this afternoon. With me today are Brian MacDonald, our Chief Financial Officer; and Clare McGrory, Manager of Investor Relations. John Pickering, who was recently appointed Senior Vice President of Manufacturing, is in the room with us and on the line is Rick Henderson, who will be Chairman and CEO of SunCoke Energy upon separation. I'll start by making a few introductory comments and then Brian will address business results and comment on our overall financial position. 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, which may provide a useful reference as we progress through our remarks. I would also refer you to the Safe Harbor statement referenced in Slide 2 of the slide package and as included in this afternoon's earnings release. Now let's begin. As you can see from Slides 3 and 4, we reported a net loss of $122 million excluding special items or $1.01 per share. When I look at our performance in the first quarter, I see 3 things. First, operational reliability remains a significant area of focus for us as it negatively impacted results this quarter when processing units at our Northeast refineries came down for extended unplanned maintenance. Overall, our refinery utilization for the quarter was 74%, well below our planned rate. Clearly, this situation is not acceptable and we have taken a number of steps, which I'll discuss shortly to both remedy these issues and ensure there are no further disruptions. Second, the marketplace continued to be challenging, with rising crude prices putting downward pressure on margins in both refining and retail marketing, which was most…

Thanks, Lynn. First, let me comment on quarterly income attributable to Sunoco shareholders and our special items. We reported a pretax loss of $90 million attributable to Sunoco shareholders in Q1, which included $51 million pretax of net favorable special items. The special items were primarily associated with gains from the divestment of the Toledo refinery and related inventory and also the reduction of crude oil and refined product inventories at the Toledo refinery prior to the divestment. Excluding the impact of special items, the effective tax rate on pretax income attributable to Sunoco shareholders for the first quarter of 2011 was 13%. The effective tax rate was determined based upon the expected full year tax rate at the end of the quarter. The lower tax rate relative to prior quarters is largely attributable to the estimated impact of nonconventional coke tax credits and higher coal depletion deductions combined with lower pretax earnings given our Q1 performance. We delivered another strong quarter in our logistics business. In the Coke business, we recognized losses related to our Indiana Harbor operating issues and expected production shortfalls for the year. But at this time, we reaffirm our previously reported 2011 full year guidance for that business. In our Retail business, we were successful in maintaining positive earnings even with the continued challenging market conditions as absolute crude prices continued on their steep rise. Climbing crude prices also negatively impacted our refining and supplier results as did the operational issues at our Northeast refining system previously discussed by Lynn. Regarding Q1 business unit results, I direct you to Slides 4 through 7. First, let's discuss the Retail Logistics and Coke segments, businesses which we continue to believe have the best prospects for growth. Retail Marketing, Logistics and Coke businesses earned $52 million pretax in…

[Operator Instructions] Our first question is from Evan Calio. [Morgan Stanley]

A couple of questions. Your first question, Fred is on SunCoke. What do you assume is a resolution of the heaving issues that are associated with the several ovens underlying the maintenance of your 2011 guidance? I mean, does that assume all the ovens are correct or can you kind of give us an update on that and maybe some color around it so I can understand that better?

Sure. A couple of things. First, the impact, as Brian mentioned in the first quarter, was about $25 million associated at Indiana Harbor. And about half of that, about $13 million, had to do with the cover cost associated with covering. And we made the decision to cover the possible shortfall for the entire year in the first quarter. And then, since the contracts we're locked in, we reported a loss. And then the other $12 million relate to both yield losses as well as a higher oven repair and maintenance cost. So it's a combination of three things. As we look into April and May, what's happened is our yields have begun to improve, our production volumes are improving, we have more ovens in production. So we had a substantial amount of lost production in the first quarter. We feel, as we look into the second quarter, certainly look into April and May, we've seen significantly better levels of production. So we're quite confident that the maintenance work we're doing is actually bringing the ovens back up to where they need to be, first. Second, that our yields are improving accordingly. Our maintenance costs are still higher than we want them to be. But of the three things, two of them, we think we have substantially put behind us. So when we developed the guidance, we developed the guidance assuming we would have some amount of cover. The cover, the cost that we incurred was a little higher than we had originally expected but it was not so far out of the range. And sitting here operationally, we feel like we can operate at or near the minimum for the rest of the year at Indiana Harbor. So a lot of work was done. When we had ovens coming out, we actually kept them down and did the fixes on all parts of the oven. So we actually had a lot of ovens out for a more extended period of time than we would have otherwise had in the past in order to complete as much repair as possible. That's where we are in the Indiana Harbor.

My second question, if I may, is kind of also on SunCoke. Did you mention that? You moved pretty fast in the end there. Did you say you're contracting a new Coke battery in Kentucky?

Brian. We actually filed a permit request in February, I believe, in Kentucky. The plant would be up to 1.1 million tons. Actually, that's what we talked about 200 ovens. It would be multi-customer and we would reserve a portion of the volume for merchant Coke. We're also looking at other sites but we've begun that process already.

What does that mean, begun the process? I mean are you kind of contracted and locked in?

No. We began the permitting process, excuse me. I mean the permitting process is a reasonably long process. And so we felt the best thing for us to do while we're working with customers, while we're developing our engineering work, is kick off the permitting. Because if we didn't, that would be the bottleneck. And by doing it this way, we actually get the permitting process started while we can actually work on project development.

And what's the general kind of gestation or timeline where you'd be ready to kind of break ground or FID, or kind of have... ?

Well, that requires some further work but I guess, as I looked at it, if all goes well in this project, it would be a big project. We would be kicking off significant work, let's say, by 2012. Not really 2011. 2011 is largely permitting. So you would begin doing even more significant work in 2012 and spend for the project would be late '12 and then in '13 and '14, actually. So that's the sort of gestation period you'd see.

So kind of something online by late 2014 if all kind of went according to plan, is that accurate?

Yes, basically. Sometimes things don't go according to plan but that gives you some kind of either late '14, or early '15 that you would have substantial volume.

Our next question is from Paul Cheng. [Barclays Capital]

On the Coke, have we went for a deal in terms of all the different plan, the problem that hitting on Indiana Harbor is really just for them?

Could you repeat the question?

Have we go back and look at all the other trend including the Jewell and everyone, that what are the problem that we face in the Indiana Harbor? It's only for currently in Indiana Harbor and we don't have any problem in any other plants?

Excellent question. The answer is, yes, we have. There are some unusual issues that are relevant to Indiana Harbor. If you look at Indiana Harbor, it's built in 1998. Our oldest plant is Jewell, built in the 70s. We had done over time, some rebuilding work at our Jewell facilities. And so our Jewell facilities are operating at expected volumes. Our newer plants. We don't have the heaving issues that we had in Indiana Harbor. The interesting about Indiana Harbor, the shortfalls we had really didn't have as much to do with the heaving issues as it had to do with just some significant oven repair and maintenance that needed to be. And you can't really separate them perfectly. But the truth this is, it's a fairly old plant and we had some significant work that needed to be done. Our newer plants, we don't have heaving. The foundations themselves are quite solid, Number 1. And Number 2, we don't have anywhere close to the issues at those plants we've had in Indiana Harbor. This is certainly the first time in recent memory that we've been below minimum in any of our plants.

And then in terms of the potential new plant in the Kentucky, based on the customer negotiation that you have right now of the 1.1 million tons, if everything go according to plan, how much of them will be contract? Or how much of them that you are targeting in your current negotiation?

I would say we've kicked off the permitting work. The work with customers really begins now. So it would be really premature to give you a good answer to that question. What we would like to do is preserve a reasonable component of the plant for merchant Coke. So you could read that that would be with some reasonable portions of the volume, but it's too early for me to give you definition around that question.

Okay. Brian, for the first quarter, can you tell us what does Toledo earn and also what is the margin realization from that plant for the two months under your belt?

Yes. Paul, we are not going to be treating Toledo as a discontinued operation. And so we will not be disclosing specifics about Toledo relative to the Northeast system, although clearly Toledo was profitable.

Okay. Can you tell me then what is the long-term debt of your existing debt on the Sunoco in level?

Approximately $1.3 billion at quarter end, and we had a $177 million bond repayment on April 1.

And can you tell me then what is the Sunoco Logistic working capital?

I'll have to get that to you offline, Paul.

Okay. No problem. Lynn, can you tell us in terms of in March and April, your same-store sales for gasoline, how that looked year-over-year for those store in more than a year?

Yes. I can give you the number for April. In the script, we talked about the first quarter and I just don't have the March break out for March alone. But for April, the OB wide mode gas was down 1.9%, and for April, the OB wide diesel, so open both year, was up 2%.

Okay. So gasoline, down 1.9%. Okay. And you indicate all the unit now in the Northeast refinery are running optimally. In April, I presume that that was pretty challenging. Can you tell us then what is the one way that you were in April? And I presume it's only the last couple of days that you are now back to normal because it looked like even last week that you are still down quite substantially.

We ran about 66% in April. We had markets hook back online the second of April, and Philadelphia is the third week of April.

And then how -- so that by last week, the last week of April that you're pretty much back to normal?

Yes, pretty much back to normal. We were still ramping the refinery units up. And at the present time and for the last week, we have been at maximum economic capacities on all units in order to do the refining.

Okay. And Lynn can you tell us that -- what is the direct and opportunity cause related to the operating upset in the first quarter?

The maintenance expense was roughly $20 million and about $100 million on the operating earnings.

So pretty much that your entire loss is related to this operating upset.

Yes, a little bit of timing too, Paul. I think as I said in the script, we had -- crew timing was negative, about $40 million. The operating downtime cost us a little over $100 million. So that's kind of the way to think about it.

And you indicate that now it seems like that you've already done a number of maintenance. Why -- what give you the confidence that now all the problem has been addressed?

The question, John, is what gives you the confidence that the problems have been addressed.

Well, we did a lot of work and addressed the immediate problems at hand. And in addition to that, we also did some proactive work and addressed some issues that were kind of brewing and could have metastasized into some more significant problems. But it's a very good question, and as a follow-up, what we're doing, as Lynn mentioned, a lot of the issues that we saw in the units were in areas where we had made some significant investments and made some significant changes. So what we're doing, going forward, is we're taking a very detailed look at all areas of the plant where we have made significant changes. We're enlisting the help of some third-party experts to help us with that. We're currently in discussion with some companies that do that in order to proactively address any other areas that may come up as issues in the future.

Okay. Thank you. Just one final question, it's for Lynn. On the Logistics structure having the GP and the LP, I think in the past, you have indicated that's not necessarily the most optimum and that management may address on that. Wondering that if you can update us in terms of what's your thinking, is that still what you think and what kind of time line we may be talking about.

Well, we just continue to look and see if there's opportunities for us to unlock value there, and we don't have anything specific to talk about or any timeline to disclose.

Our next question is from Steve Velgot [ph].

Yes. I wanted to make sure I understood the receivable that related to the Toledo refinery, and then I had a follow-up on that. Was it the $285 million receivable will be partially offset by $175 million of expected taxes through the balance of the year? And then I did have a question about whether or not you still intend to get a dividend payment from SunCoke in conjunction with the IPO and why there hasn't been more discussion about a potential share buyback with all this net cash.

Steve, it's Brian here. Let me punch through your list here. As you'll see on the face of the balance sheet, we have a receivable from the sale of the Toledo refinery of $285 million, and that's related to the product inventory that we sold. That's one component of the sale that was also a sale of the crude, which took place in Q1, and it was $200 million of cash that we received in Q1. Also, on the face of the balance sheet, you'll see a $200 million long-term note from PBF, which is related to the other $200 million from the sale of the refinery. When we referenced the taxes, the taxes are the cash taxes that would be paid throughout the year for all of the ins and outs of the Toledo transaction. So the sale of the physical assets, the sale of the crude, the sale of the products. So it's the total picture in terms of the cash taxes. Your last question related to a dividend from SunCoke. There will be -- as part of the separation of the Coke Company from Sunoco, there will be a dividend to the parent. We haven't disclosed the size of that dividend yet or capital structure. It isn't necessarily normative at this stage in the process. But there will be a dividend from SunCoke to Sunoco. And I think your last question was around a buyback, and at this time, we have cash, which we've been building from the actions we've been taking. Our priorities for that cash are to invest in growth in the Retail business and the Logistics business as well as to have some cash on hand, as you saw from our Q1 performance. So there can still be a reasonable amount of volatility with our refining assets, even the ones that remain. And then the last use of potential cash is a potential delevering of the gross debt of the parent company. And so in the short term, those are our cash priorities. Obviously, there's a healthy amount of cash on the balance sheet. And as we go through these, other actions, potentially more coming, and we'll have to evaluate that as it happens.

Okay. And then just a quick follow-up to get a better sense of what running at 66% type capacity in April may mean in terms of the quarterly Refining results. Is it possible to give an idea of whether April was operated profitably? Or some way of thinking about kind of the current quarter in terms of Refining?

Yes, Steve, we don't give quarterly guidance. Obviously, there's a lot of volatility with crack spreads. I mean, one thing I think is you could take to the bank that if we ran at 66% capacity utilization, we didn't make money in Refining in the month of April. The market's a little better in May. We're only a few days in. And as John Pickering said, we are running well. So we'll have to see how the quarter plays out.

Our next question is from Jeff Dietert. [Simmons & Company] Jeffrey Dietert - Simmons & Company: Could you walk through the process on West Texas Gulf for the expansion? Is there an open season, when is the open season scheduled for, and provide some color there?

We're not really ready to disclose the process on that. Clare has got some comments.

Yes. There is no open season on West Texas Gulf, Jeff. But beyond that, we're working through the process. We're not disclosing any capital or EBITDA guidance on that. Jeffrey Dietert - Simmons & Company: Thank you. That's helpful. Is there an expansion contemplated with Mid-Valley as well, downstream?

There's nothing planned at this time.

Our next question is from Mark Gilman. [The Benchmark Company]

I had two questions. First one on the Coke side. I wonder if you could tell me what provoked, what -- I guess I consider to be a significant change in thinking regarding the marketing side, this shift to at least reserve part for a merchant-oriented operation. Take-or-pay has been indicated, has been fundamental to the business up to this point, and I'm just curious as to why the change.

Right. Go.

Do you want to go, Fritz? Maybe let me address that first, then I'll turn it over to you.

Sure.

Mark, I think a couple of things. I mean, quite frankly, the last couple of Coke batteries we built, we wished we had a little bit of merchant capacity given the potential demand in the market. I think initially, Sunoco took a rightfully conservative position regarding this business and really built a foundation on the business to pick or pay contracts, which provides very rateable and steady earnings. And over the last year and a half or so, as we look at the foundation that we've built, we've been talking about how it would be good to have some level of merchant capacity on top of the very strong foundation that we have. Fritz, I think maybe [indiscernible] that a little bit.

Sure, yes. Brian said it well. I mean, if you look at a company with -- once Middletown comes up with a 5.9 million tons of capacity and all of it, 100% take or pay, you think about adding another 1.1 million tons into that fleet of batteries that could take you to 7 million tons? If we were to reserve -- I mean, this is hypothetical, we don't have a plan for this, but if you were to reserve 200,000 or 300,000 tons of capacity within that new plant, we would have at that point 3% of our- 3% to 4% of our total aggregate capacity available for merchant Coke, which is actually quite modest, number one. Number two, situations like we found in Indiana Harbor, not having any ability to actually backdoor our operations when in fact you have a shortfall, I mean, we've seen it's not an optimum situation to be in and not to do we expect to be in that situation. Most importantly, if we had 100,000 or 150,000 tons of capacity that we could sell into the merchant market when markets are good, such as today or such as what we've seen in the past, the profit opportunity associated with having a small amount of capacity is very attractive. And then finally, it turns out that the capabilities of our ovens is as such that we're quite confident that we could actually have a small amount of merchant capacity in the new plant without jeopardizing the asset. So I guess it has to do with what Brian said with the maturity of the operation, number one; and then number two, the aggregate amount of capacity we have; and then number three, the profit opportunity that would come with having a small amount of capacity available to sell into the market when Coke is in short supply.

Okay. Thank you. My follow-up relates to the refining reliability issue, Lynn. And I guess I'm wondering, could you discuss what management and/or Refining organizational changes you've made in an attempt to prevent these types of issues from occurring in the future?

We've made several changes. John Pickering is now the Senior Vice President of Manufacturing. We also have appointed Jim Keeler, who was the Plant Manager at Eagle Point and then at Toledo, to be the Plant Manager at Philadelphia. And we've made a change at the operations manager level, and we've also brought in some third-party help to help us on both the operational and the technical side.

Our next question is from Chi Chow. [Macquarie]

Great. Thank you. Back on coke, given the issues at Indiana Harbor, what will be the utilization rate in the second quarter at the plant?

The utilization rate in Indiana Harbor in the second quarter will be significantly higher than it was in the first quarter. I don't have that number in my fingertips that I would give to you, but it will be significantly higher in the second quarter than in the first.

And you sort of ballpark, Fritz? 80%? 70%?

Well, we will operate at or near our minimum. So our minimum there is 1.22. So we would operate, I would say, at 95% or so in the second quarter. We're a little bit below the minimum in the month of April, but we're operating at the minimum in May. So we move ourselves up to, like, 95%.

Okay. So are the heaving issues completely resolved, and is that issue completely in the rear view mirror at this point?

Well, I'm not sure a geologist could ever say that heaving is completely resolved. But I also would point out that it's not. As I said in my earlier comments, it wasn't the driver of what we saw in the first quarter and actually in the fourth quarter and the first quarter. That was more about the age of the oven, the significant work that needed to be done, which came upon us and we did it. And so the heaving itself is not what's causing the production shortfall in the short term. It is not a beautiful thing to see, but we've also not seen any substantive or significant additional heaving. You just can't -- I mean, I can't judge geology or geological movements. It's just not relevant in the future, at least not relevant today for the ability of the plant to produce.

Okay. I guess given the shortfall on earnings in the first quarter, can you reconcile how you plan to meet that -- I guess make up that shortfall to still meet the full year guidance? Still not clear on that.

Sure. So if you look at the first quarter EBITDA, if I can just do a little bit of walk here, our EBITDA in the first quarter was $21 million. That included $13 million of cover costs, which will not recur. It also included in that $25 million some cost in yield in Indiana Harbor, which is improving into the second quarter. So in and of itself, a substantial improvement in the second quarter in Indiana Harbor. The second thing that happens in the second quarter and actually typically in the third quarter is yields continue to improve. I must say it's been a very wet first quarter. And it's affected moisture, it's affected yields actually, not just in Indiana Harbor, but affected yields at all of our Coke batteries. And we're seeing some improvement already in May. You would expect certainly by the third quarter things are drier, your yields improve. Third is that we will have relocation cost in the second quarter, which will be to some degree an offset. We included these, we developed our guidance, the estimates that we provided in the S-1 for that were about, I think it was $11 million to $14 million. Those costs will largely be incurred in the second quarter. Of separation, basically, it's a severance cost, move cost and the cost of subletting our space in Knoxville. Those will then recur in the third or the fourth quarter. So you've got Indiana Harbor improvement, number one, which actually you'd begin to see in a substantive way in the second quarter; you have yield improvement across all of the fleet in the second and the third quarter; and you've got the relocation, which will occur in the second quarter, which then doesn't occur in the third and fourth; and finally, when you get to the fourth quarter, you've got both Middletown starting up in the fourth quarter, which is what our expected start up is, number one. Number two, you have coal. We had some roll off of coal. We had some coal contracts that's carried over into the first quarter. Those -- and you get into the second quarter and the third, we get coal at $165 a ton. And then finally, we have our preferred dividend timing, which typically in Brazil was in the fourth quarter. So there is a pretty significant progression through the year.

Great. That's very helpful. Thanks, Fritz. And then in Brazil, I believe you mentioned last time that there was some weather-related issues. Has that been resolved?

It has actually. It was a significant storm which hit the port, knocked out the valley coal unloaders, actually put them into the ocean. And it affected all the steelmakers that were located and supported by the Victoria port. Since then valley did a good job getting those coal unloaders up. And by the time we got to March and April, we were operating much closer to capacity and frankly the entire steel industry, including Arcelor, our customer there, is moving their production levels up to more normal levels of capacity.

Great. Thanks. And one final question. Lynn, I guess given all of the problems with the Refining lately, is the possibility of shutting one or both refineries down and converting out to a terminal in the cards at all?

Well, we spent a significant amount of money and time working on the issues to improve our reliability and to improve the viability of these assets. And we're committed to getting the most value for our shareholders from all the assets, including the refining assets, and we continuously look at the options around them. And right now, we believe that continuing to run them is the best option. And as long as we own them, we're committed to running them safely and reliably at a competitive cost structure.

Our next question is from Evan Calio. [Morgan Stanley]

Guys, just a set of follow-up on a couple of questions, if I may. Just to confirm on the SunCoke separation, two potential components for cash to Sun equity earning upstream debt, just to confirm that both of those proceeds are tax-free, will be structured to be tax-free.

Yes. Sure. There'll be two sources of proceeds, Evan. One will be the proceeds from the initial IPO, which will be tax-free and then the second source of proceeds, which will be an upstream dividend, which will also be tax-free.

Okay. And any thoughts or I know it wasn't -- you talked about the separation before. And post-filing, we concluded the subsidiary IPO with 80% spend to follow. I mean, can you share the rationale for that where -- when Sun is already somewhat overcapitalized?

I think one of the big drivers and advice that we've gotten as we looked at the options is that given the uniqueness of the Coke business that it would be good to establish a value through an IPO with a natural set of investors before final distribution to get the maximum value for the Sunoco shareholders.

That's great. Any guidance on the timing of the separation or kind of approximate targets here?

We're working hard, and it's as soon as possible. We filed an S-1, as you know. We got some questions back. We'll work from the SEC and some comments. We're working through those, and we're going to refile an amended S-1 as soon as possible. We're in the process of moving to Chicago. We basically got the management team fully in place, and we are motoring as quickly as we can.

Okay. Great. And then just one last follow-up on the balance sheet to summarize. I know your goal is to invest in growth and in post-spin -- and talking about your excess cash here, and post spin-off, that would appear to be Marketing and Logistics. As we think about Retail Marketing, can you give me an estimate of an approximate dollar investment to run a match system? And have your views changed at all that that is the goal or something broader than that would be the goal?

Well, I think in terms of the Retail business, Evan, I mean, we're looking at growing in all the channels whether that's dealer, company ops, distributors and doing what's most economically sensible. So we're looking to grow in all segments there. We've made a couple of small acquisitions, as you know. And we just continue to pursue acquisitions there.

Sure. But would your goal be to grow beyond what your -- what kind of organic supply would be, potentially?

In terms of fuel supply? We'd be open to that absolutely.

Because you confirm the goal would not be -- to not invest in refining chemicals or some new business?

Well, I think we have good opportunities to grow in Retail and Logistics, and we're working hard on that. And it's highly unlikely that we would invest in Refining or Chemicals.

Our next question is from Jeff Dietert. [Simmons & Company] Jeffrey Dietert - Simmons & Company: One follow-up on Chemicals. Were you forced to buy feed stocks, buy cumene on the open market to meet sales requirements? Or were you able to reduce throughput unencumbered?

Jeff, we did have to go out and buy some feedstock, and we also at a point during the quarter to declare force majeure because of our inability to supply.

We have no further questions at this time.

Okay. Well, thank you for joining our call this evening. Brian and Clare will be available for additional follow-ups that you might have tonight or tomorrow morning. And have a good evening. Thanks.

This now concludes today's conference. You may disconnect at this time.