Welcome to Sunoco Inc.'s Q2 2011 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If anyone has 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. Thank you and good evening, and welcome to Sunoco's quarterly conference call, where we will discuss the company's second quarter earnings that were reported this afternoon. With me today are Brian MacDonald, our Chief Financial Officer; John Pickering, Senior Vice President of Manufacturing; and Clare McGrory, Manager of Investor Relations. 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 is included in this afternoon's earnings release. Now, let's begin. As you can see from Slide 3, we reported net income before special items of $49 million or $0.40 per share. When I look at the performance in the second quarter, I see 3 things. First, we had very strong performance from Logistics and Retail, the 2 growth areas of our business. Logistics contributed $54 million in pretax income as Sunoco Logistics Partners generated record quarterly results, driven by market opportunities within our crude oil segment, as well as contributions from acquisitions and organic expansions in the past year. The $69 million in pretax income earned in retail was a near record second quarter performance, and resulted from the decline in wholesale gasoline prices, which expanded margins. Second, the importance of reliability in our manufacturing operations cannot be overstated. In Refining and Supply, our ability to take advantage of margin improvement was limited by low utilization stemming from first quarter operational issues that continued into April. As you may recall from last quarter's…

Thanks, Lynn. First, let me comment on quarterly income attributable to Sunoco shareholders and our special items. We reported pretax income of $71 million attributable to Sunoco shareholders in the second quarter, excluding special items. Net unfavorable special items of $294 million, pretax, were primarily associated with provisions to write down assets at the Frankfurt and Haverhill chemical facilities to their estimated fair values. Regarding Q2 business unit results, I direct you to Slides 4 through 7. First, let's discuss the Retail and Logistics segments, businesses which we continue to believe have the best prospects for growth. These 2 businesses earned $123 million pretax in aggregate during the quarter. Retail Marketing earned $69 million pretax in the second quarter of 2011. Retail gasoline margins benefited from declining wholesale gasoline prices during the quarter, resulting in average margins in the quarter of $0.124 per gallon. Gasoline volumes in the second quarter trended lower by approximately 3% versus the same period last year on a same-store sales basis, which is largely consistent with the EIA data. Distillate volumes also trended lower than the prior year with a loss in volumes of about 1% on a same-store basis. Both gasoline and diesel prices at the pump approached near record highs for this time of the year, which had a detrimental impact to volumes. Total gasoline volumes for our network were up about 3% in the second quarter versus the prior year due to new sites added on the Garden State Parkway in New York State and within our distributor network. Logistics earned $54 million pretax in the second quarter. The earnings in this business are almost entirely related to Sunoco's ownership in Sunoco Logistics Partners, which reported record earnings in the second quarter. The increase versus last year was primarily in the crude…

[Operator Instructions] Our first question comes from Paul Sankey of Deutsche Bank.

Lynn, can you talk a little bit about the options for the Refining segment in terms of the fact that you are losing so much money on this on such a sustained basis in what arguably is quite a strong refining environment for many refiners?

Paul, we've spent a lot of time and money to work out the problems that we have and improve our reliability and viability of these assets. And as we indicated before, we're committed to getting the most value for our shareholders that we can for all of our assets, including refining, and we will continuously add the options for doing so. And right now, we believe that running them is the best option.

Is that because of the -- simply because of the [ph] shutting them down?

It's a combination of factors. I'd say, Paul, one has to do with the outlook and what we think we can generate with that outlook. Another has to do with the contractual agreements that we have in place. And so taking those into consideration, but this is something that we look at, at a continual basis.

The contractual obligations, I guess, have a present value that's a greater cost than the cost of shutting down, allowing for the fact that you're expecting the markets to improve. Is that what you're implying by the first part of the outlook?

What I would say there is, in general for the long term, we do not have a bullish outlook on refining. We have seen some substantial improvement in the market this year relative to last year. We would hope to capture that improvement in the market going forward this year. But in general, I'd say we have not changed our outlook on refining and tend to be relatively bearish for the long term.

Paul, it's Brian. I think what I would add to that is as you know, we've been focused on making sure that refining is free cash flow positive. And the refining team has been working pretty hard on a number of fronts and we made a lot of progress in that regard last year and we were able to essentially be free cash flow positive last year in that business. So as we kind of came into this year, we had a lot of reliability issues, so clearly, we haven't been free cash flow positive through the first part of the year. But as Lynn mentioned, we think we've made some real progress on these reliability issues and what we've seen in May and June is optimistic and we continue to really be focused on getting these assets to at least free cash flow break even so that we continue to have optionality here around them.

I guess what you're saying to me is that the problem is not so much the margin or you don't have an expectation for the margin environment to improve but you can improve the operations and if you do that, you'll be free cash flow, let's say neutral, and then cover your contractual obligations?

Correct.

I got you. And is there anything -- do the contractual obligations pertain to both refineries?

Yes.

So essentially, you're going to have to keep running them and we just have to hope that the operations can be improved to the point that you said way back actually, you said you would get to free cash flow neutral?

Yes, I would say, Paul. I mean, I wouldn't want to say that we have to keep running them. I think I would say that we think that's the best thing to do to keep running them. And we work on this every day and we think about this every day and the refining team is working hard every day to improve the results. And so, it's clearly probably been an issue for us and still is and we continue to work through it.

Just finally for me, is there anything more you can give us on the contractual obligations, either the length of them, the scale of them, the way they're split between the 2 refineries?

There are a number of different things that use them. As you would imagine with industrial aspects of this nature, there are some petrochemical contracts, one with a polypropylene business that we sold last year and one with Honeywell for the cumene plant that we just recently sold to Honeywell. And then there's some other ones as well and there's some detail on those in our disclosures that I would refer you to.

Our next question comes from Evan Calio of Morgan Stanley.

A few questions. To start off, for Brian on the cash position, are the phenol plant proceeds in cash or is that asset held for sale?

We have closed on the sale of the Frankfurt facility to Honeywell and we received $87 million in cash proceeds from that. We are working on options for Haverhill and what we did at the end of the quarter is impair the assets down to what we thought was their fair market value.

Evan, those cash proceeds came in July. They're not in cash on the balance sheet.

Okay, so they weren't in this quarter then?

No.

Okay. And so, then the PBF receivables, short-term 90 day, that's in the cash today, right? I think you mentioned that.

Yes.

And the next quarter you'll receive, it will be a pro forma or you'll actually receive the cash in conjunction with the SunCoke offering of your $575 million, plus $190 million less deal-related expenses. That's correct, right?

Yes. A little bit more than $190 million because the greenshoe was exercised.

Okay. Can you remind me of the tender on the Toledo earn out and when that's termed and paid?

The Toledo earn out is a multi-year earn out that's capped at a combined amount of $125 million. It's based upon the profitability of the plant in Toledo. And so early next year, we'll determine or PBF will determine if there's a profit, an earn out payment for this year and what the size of it will be.

So that payment is in the first half of 2012, if there's an earn out?

Early 2012. Probably, sometime in the first quarter.

Okay. And maybe lastly, just on general cash strategy question for Lynn, now that you've successfully completed the SunCoke IPO, any update on intent to redeploy your cash position or appropriate cash levels for SunCoke -- sorry, for Sunoco?

Evan, we have nothing new to disclose today on that. We continue to say that given the volatility in the refining business, we would expect to hold some significant cash level maybe beyond what was done in the past, past being sort of during the golden age. And we're looking to clean up some of the legacy liabilities in the company and use some of the cash to fund those liabilities. And we're looking to grow, if it makes sense in the strategy and if it's profitable, the 2 growth businesses, Retail and Logistics.

And do you guys still intend to hold an analyst meeting in September?

We're working on dates and calendars and venues, Evan, for meeting sometime in the fall. Given kind of where we are now, it's unlikely it would be in September, but we're working on some options for the fall.

Our next question comes from Paul Cheng of Barclays Capital.

Lynn, I think that you've been always saying that other option is on the table and you guys are looking at what is the optimum organizational structure for the Sunoco Inc. should be. [Indiscernible] let's assume a year from now that SunCoke being totally spinoff and that you also sold Chemicals. So you have Retail, you have Refining and you have Logistics. Now that with the IPO done, have you guys been able to spend some time and think it through whether that the best structure to keep all 3 under the same roof, or that you could see a better value offer sort of to break up [ph] the company or that this something that you guys are just contemplating and that is going to take some time before you can come to a conclusion and recommend to the board? So if that's the case, then any kind of timeline you can share in terms of when you think you may have a more clear view of what you think is the best option?

Paul, we continue to look at this and it is going to take some time and we're not yet ready to disclose a timeline on that.

Okay. So you can't even say this is going to -- is that 6 months or whatever. So you're going to just looking at that at this point?

What I would say, Paul, I think demonstrated by the actions we've taken, I think we're open to what creates value here. We've been pretty busy on a few things. So we've just sort of checked off the Coke IPO and we're working on Chemical dispositions. And so I would just say that as we work through the strategy and we have more to say, we'll say it at the right time.

Brian, do you have an estimate of what is the lost opportunity cost in April related to the operating upset?

It's a pretty big number, Paul. I mean, April was our worst month, at least for those people who've been around here for a while. April was our worst month in the history of refining. We were profitable in May and June. But we were -- we had a loss overall obviously in the quarter. So April was a pretty abysmal month.

It think in the first quarter call that you indicate, first quarter, the operating upset opportunity cost as we paid [ph] is around in the $130 million, $140 million. Are we talking about a similar type of number in April or is it a lower number?

It's probably a lower number because we're talking one month but it was a significant number. It's fair to say we would have been profitable in April if we have been operating well.

And there are a lot -- even though we operated well in May and June, I mean we had a lot of lingering effects through the second quarter. Our crude slate was off because we had an overabundance of heavier crudes. So our slate was very geared towards lighter crudes. We had the merge costs, our inventory was still out of order. We had a lot of impact to the supply chain that lingered through the whole quarter. So even though we were profitable in May and June, we would have been more profitable if we didn't have the lingering impacts of all the operational issues that we had from January through April.

Brian, those lingering effects or impacts, that's pretty much over by the end of the quarter or that spilled into July?

No, pretty much the impact from that series of events is pretty much behind us at the end of the quarter. So we should see a clean quarter in Q3, absent anything else arising from. . .

And in your early comment, you're talking about a 5-day lag effect benefit and also inventory benefit. Can you quantify for us then how big are those?

Yes. I'd say that both the timing and the inventory benefits were probably about $2 a barrel together.

$2 per barrel?

Yes. A little better than $2 a barrel.

Okay. And when I'm looking at your result and your realization, it looked your refining cash operating costs were down nicely from the first quarter, but it's still high comparing to the 2010 level. It looks like you're still about $4 per barrel. I presume -- I mean, that in the third quarter, we will see them lower. What kind of sustainable level we could expect? And the last question that I have is that in retail similarly, it looks like your cash operating cost is a bit high. It looked like sequentially, it's up about $24 million and year-over-year up $22 million. Can you say and try to elaborate for us what's causing that increase?

On the Refining side first, Paul, I'll tell you that as you know, we don't disclose our operating costs. You are correct to expect that they will be sequentially lower in 3Q since we did reduce utilization in 2Q. For the Retail side, we did see some higher cost related to credit card fees with the retail gasoline prices reaching almost record high. And if you're looking at the year-over-year, there was also higher expenses because there were some one-time benefits in 2Q 2010.

How much is the credit card fee increase?

That's probably $3 million to $4 million.

Our next question comes from Mark Gilman of The Benchmark Company.

A couple things. Brian, are the full tax consequences of the PBF sale hardware and inventory now behind you or is there anything residual on the tax line associated with the transaction that's going to show up in the second half?

Not on the P&L. The cash taxes, we reflect as we go through the year, just like we would as individuals, our estimated taxes for the year that we pay to cash accordingly through the year. So there could be some cash tax implications as we go through the back end of the year. But that's all part of our estimated cash taxes. But from the P&L side, everything will be reflected.

Can you give me a rough idea of how much that cash tax obligation in the second half is?

No. I can't, Mark, because it really plays into what's the profitability in Q3 and Q4 and how the...

No, I'm just talking about the transaction, Brian.

Pardon me?

I'm just talking about the transaction, which I wouldn't think has anything to do with profitability going forward. Just the sale transaction.

Well, what I'm telling you is that your cash taxes are a function of a transaction plus the overall profitability of the company and those 2 blend together. So depending on the profitability and the deductions that the company has, may completely offset any cash taxes required on the transaction. And that's why I can't give you a specific answer.

I see, okay. Can you indicate what your LIFO inventory reserve was as of June 30?

$3 billion, Mark.

This one may be difficult, but it sure as heck would be helpful. As you look at the logistics profit item in the second quarter, how much of that [ph] earning level would you attribute to the WTI dislocation?

We didn't disclose that because we don't have that as a segment that we disclose to the marketplace.

It's not a segment, Lynn. It's a market factor.

But what you're basically asking for is to segment out the crude earnings and we don't segment out those earnings.

I'd say Mark, as SXL talks about their earnings, they talk about some of the factors that affect their market earnings and they talk about that there was higher demand for their services, given the opportunities, obviously with the Mid-Continent crude. So they talk about conceptually market-related earnings and ratable earnings. So that WTI piece falls into a piece of that and year-to-date, they said their market-related earnings have been about 25% of their total, talking SXL but, yes, so there's been more market-related earnings this year than is typical.

And currently, we're showing no further questions.

Thank you, everyone. We'll end the call here and we'll be available for any questions, and thanks everyone for joining. I know it's been a tough day for everyone and a tough couple of days. Hopefully, it gets a little better from here, and thanks again.

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect your lines at this time.