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Executives

Lynn Elsenhans – Chairman, CEO and President

Brian MacDonald – SVP and CFO

Clare McGrory – Manager, IR

Analysts

Jeff Dietert – Simmons & Company

Mark Gilman – The Benchmark Company

Evan Calio – Morgan Stanley

Arjun Murti – Goldman Sachs

Paul Cheng – Barclays Capital

Paul Sankey – Deutsche Bank

Blake Fernandez – Howard Weil

Faisel Khan – Citigroup

Sunoco, Inc. (SUN) Q4 2009 Earnings Call Transcript February 4, 2009 5:30 PM ET

Operator

Good afternoon. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2009 earnings 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) I would now like to turn the call over to Lynn Elsenhans, Chairman and CEO of Sunoco. Ma’am, you may begin.

Lynn Elsenhans

Thank you, Rachel. Thank you and good evening, everyone. Welcome to Sunoco’s quarterly conference call. We will be discussing the company’s fourth quarter earnings that we reported this afternoon. With me today are Brian MacDonald, our Chief Financial Officer, and Clare McGrory, our Manager of Investor Relations. I will start by taking on 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 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 go through the remarks. For purposes of facilitating a good discussion, I also refer you to the Safe Harbor statement as referenced in slide number two of the slide package and as included in this afternoon’s earnings release and Form 10-Q filing.

So let’s begin. As shown on slide four and five, we reported a quarterly net loss, excluding special items, of $31 million or $0.27 a share. For the year, Sunoco reported a loss, excluding special items, of $37 million or $0.32 a share. The challenging market environment had continued to impact our volumes and our margins in both the petroleum and the chemical businesses. The fourth quarter refining benchmark margins worsened from the previous quarter and the rising crude oil prices during the quarter also negatively impacted our margins. However, in this difficult environment, the company continued to take aggressive actions to address those issues within our control.

Our non-refining businesses earned $127 million in the fourth quarter, as we managed to produce strong earnings as a result of good execution and a sharp focus on cost. Retail marketing earned $21 million as rising feedstock prices put pressure on retail gasoline margins, but Logistics earned $22 million with steady contributions from Sunoco Logistics Partners LP and our Coke segment earned $78 million, including a one-time tax credit of $41 million.

During 2009, we successfully executed our business improvement initiative and we exceeded the target of $300 million in cost savings on an annualized basis by this end of the year. Excluding Tulsa, our SG&A in operating expenses in 2009 were roughly $560 million below 2008. And approximately half of this improvement is attributable to our cost reduction initiative and the other half is from lower volumes and energy costs.

These savings were partially offset by approximately $80 million in increased pension-related expenses. In 2010, we expect to see a full year’s benefit of the lower cost structure from both the business improvement initiative and the closure of the Eagle Point refinery. We will also benefit from the pension and healthcare plan modifications announced in November.

As we consider the outlook for 2010, we continue to expect a challenging market for petroleum and chemical products due to ongoing economic weakness and excess global supply. However, the company has responded to the market environment with several strategic actions to improve our competitive cost position, optimize our portfolio, and our operating performance.

Earlier this week, we announced that we have permanently shut down our previously idle Eagle Point refinery and that we’ve signed an agreement to sell our polypropylene business, which comprises of significant portion of our Chemicals business, for approximately $350 million in cash, a good value for our shareholders.

Earlier in 2009, we sold our Tulsa refinery and the Retail Home Heating Oil business. These portfolio changes addressed areas of the business that were not meeting our cost of capital and enabled the company to redeploy capital to the growth of our Logistics and Coke businesses while we continue to invest in our strong retail brand.

The company has also taken several recent actions to strengthen balance sheet and liquidity, which Brian MacDonald will discuss in more detail shortly. All of these initiatives, along with our continued focus on cost reduction, serve to strengthen the balance sheet and will enable us to maintain our financial flexibility and grow our non-refining businesses as we manage through the refining down-cycle.

So now let me turn the call over to Brian.

Brian MacDonald

Thanks, Lynn. First let me comment on quarterly net income attributable to Sunoco shareholders and our special items. We reported net income of $26 million attributable to SUN shareholders in Q4, which included $57 million of net favorable special items, as detailed in our earnings release and on slide six.

We incurred a $19 million provision for costs associated with MTBE litigation as well as additional charges associated with the business improvement initiative and the Eagle Point shutdown. These charges were offset by a $21 million favorable adjustment to the gain related to the divestment of the discontinued Tulsa operations as well as a $55 million gain from the liquidation of LIFO inventories in connection with the shutdown of the Eagle Point refinery.

Before addressing some specifics regarding our operating performance, our quarterly results, particularly for refining, generally reflect the continuation of market weakness as crack spreads deteriorated further from the third quarter, especially in the mid-continent region. Our non-refining operations, however, continued to make positive contributions and we continue to aggressively take actions to improve our cost structure as well as our financial position for the future.

Regarding Q4 business unit results, I direct you to slide seven. Starting with refining and supply, we had a loss there of $135 million in Q4, as gasoline margins deteriorated significantly from the prior quarter and the mid-continent margins in particular were very weak. Operationally, crude unit utilization across the system in Q4 was 84%.

With respect to Q4 margin realizations, I refer you to slide eight and nine for more detail on the refining system crude costs and product differentials versus our benchmark. Our margin realizations were challenged in Q4 by lower overall benchmark margins as well as rising crude cost and volatility in prices. While most of the factors that affect our realizations versus our benchmarks are market related, we are taking actions on identified opportunities to improve our margin realizations versus benchmark.

These actions include the reorganization of our commercial group. We will place all resources serving external market in one organization. In general, our benchmarks were down approximately $1 from the prior quarter and our realized margins moved lower with the benchmarks. Our crude cost for the quarter averaged about $1.61 above our weighted benchmark due to the impact of rising crude prices on our Northeast crude prices as well as higher transportation costs. On the product side, our average differential was $1.02 lower than the weighted benchmark, as product pricing, particularly for non-benchmark products, continued to be weak in this difficult market environment.

As compared to the third quarter, margins were held by improved yield at both the Northeast Complex and the Toledo refinery, as they recovered from maintenance work during the third quarter. The utilization rates in Q4 reflect the idling of Eagle Point refinery in early November. For the November and December period, Eagle Point volume transitioned to increase utilization at Marcus Hook in Philadelphia, which involved working through intermediate inventories and securing the appropriate mix of crude purchases for these facilities.

The Northeast Complex did experience some operational issues near year-end, which continued into January. However, we have recovered and are currently operating at approximately 90% utilization in the Northeast and expect to continue at or above these rates until the start of our planned FCC turnaround in Marcus Hook, which begins in late February. We also are planning our Toledo HCC [ph] turnaround slated for our mid-March start. Both turnarounds are expected to occur over approximately 35 to 40 days.

Now turning to our non-refining businesses, which earned an aggregate $127 million during the quarter, as detailed on slide ten. Retail marketing earned $21 million in Q4. Sales volumes were lower as compared to the prior quarter, a normal seasonal decline. And retail gasoline margins declined as wholesale prices rose steadily with crude prices during October and again in late December.

During the quarter we also continued to execute on our retail portfolio management program and generated approximately $44 million of proceeds and $6 million of after-tax gains on site sales through the sale of 62 sites primarily to Sunoco branded dealers and distributors.

In 2009, we divested a total of 157 sites and generated $120 million in proceeds. Approximately 80% of these sites divested continued to be in the Sunoco dealer or distribution portfolio. We will continue to use this program to enhance our overall return on capital employed in the business. We anticipate that an additional $60 million of proceeds will be generated through 2011.

Turning now to Chemicals, where we earned $6 million in Q4 with slight improvements related to phenol margins and lower expenses. The results continued to reflect weakness in both the polymers and phenol business, and we continue to manage volumes and margins in this difficult environment.

Logistics earned $22 million as Sunoco Logistics posted another solid quarter. The business continues to produce steady income growth from its growing asset base. Coke posted another solid quarter earning $78 million in Q4, which included a one-time tax credit of $41 million associated with our Granite City, Illinois facility. Excluding the tax credit, the business reflected a slight increase as Granite City operations started up in the fourth quarter. Granite City continues to ramp up production with full production expected to be reached in the first quarter.

Looking ahead to 2010, we expect Coke earnings to be between $125 million and $140 million, as shown on slide 11. As compared to 2009, EBITDA is expected to be about flat. The increase related to a full year of operations from Granite City is expected to be partially offset by lower revenues for Jewell Coke facility due to lower expected coal prices. We also expect to incur more cost as we increase resources dedicated to business development for international expansion and some technology enhancements.

In 2010 and going forward, the Coke business is expected to be near breakeven on a cash flow basis with the capital program we plan for this year and with no major working capital changes. We believe that this will allow us to fund its own capital requirements, which we think speaks to the strength of the business model.

Finally, let me take a few minutes to discuss our financial position at the end of the year. In conjunction with that, I direct you to slides 12 and 13. Our fourth quarter net cash flow before debt activity was a positive $338 million, driven by the liquidation of inventories related to both Tulsa and Eagle Point refinery.

From a balance sheet perspective, our overall net debt position was approximately $2.1 billion, down about $340 million from the third quarter. Of the $2.1 billion of debt, approximately $900 million was attributable to Sunoco Logistics, leaving $1.2 billion attributable to Sunoco at the parent level. We ended the quarter with a net debt-to-capital ratio of 41%. From a liquidity position, at the end of the year, we had $377 million of cash and approximately $1.4 billion of available, committed borrowing capacity, which includes approximately $200 million available to Sunoco Logistics.

Turning to slide 14, which details historic and 2010 capital spending, we were successful at managing expenditures in 2009 by reducing spending where possible in refining and chemicals while making capital available for opportunities in Sunoco Logistics. Our full-year 2009 spend was approximately $950 million, which included about $400 million in growth capital spend in Logistics and Coke. The mix of spending changed during the year as compared to our initial guidance, with the reduction of approximately $150 million in refining and coke being partially offset by higher spending at Sunoco Logistics associated with growth opportunities.

In 2010, we have about $840 million allocated for capital spending, which includes growth capital of $280 million for the construction of the Middletown coke plant and the committed logistics opportunities. Any capital requirements for Sunoco Logistics will be funded within Sunoco Logistics Partner, using its own balance sheet and access to capital. We will to continue to focus on capital discipline in 2010 as we did in 2009.

Turning to slide 15, as we look into 2010, we will continue to take appropriate actions that will assist us in maintaining our financial flexibility. We believe this proactive approach will improve performance in both the short-term and long-term and deliver increased value to shareholders. Together these actions have allowed the company to exit 2009 with a much more competitive cost structure across all of our businesses and reduced future capital calls.

Today’s earnings release also provides a recap of several actions to strengthen our balance sheet and liquidity. To start with, the company has modified the Incentive Distribution Rights, often referred to as IDRs, that entitle Sunoco to receive cash in excess of its general partner interest from Sunoco Logistics.

This transaction will provide Sunoco with approximately $200 million of cash in exchange for a portion of future cash flows from the IDRs while also improving the cost of capital of Sunoco Logistics and enhancing its long-term growth potential. This transition demonstrates the value of Sunoco’s general partner interest as we continue to recover substantial general partner distributions and we will be able to grow back into the cover level of high distributions in the future.

Secondly, Sunoco strengthened its liquidity position through the sale of 2.2 million of its Limited Partner units in Sunoco Logistics Partners for net cash proceeds of approximately $140 million, excluding the underwriter option to exercise the green shoe. This transaction demonstrates the underlying value of Sunoco’s position in Sunoco Logistics. With this sale, we will now hold a 33% interest in the partnership, including our general partnership interest.

The company plans to bolster the funded status of its pension plan with a contribution of approximately $200 million, about evenly split between cash and Sunoco common stock. The pension contributions will generate a positive cash tax benefit in the first half of 2010, and the contribution will have minimal dilutive impact to Sunoco shareholders.

Furthermore, the pension contributions are expected to eliminate the need for any legally required minimum pension contributions until 2012. The combination of these large discretionary contributions and the previously announced modifications to the company’s defined benefit pension plans and postretirement medical benefit plans significantly bolsters the funded status of these plans and reduces future funding needs for these obligations over the coming years.

All of these initiatives, along with our continued focus on cost reduction, serve to strengthen the balance sheet and will enable us to maintain our financial flexibility and grow our non-refining businesses as we manage through this refining down cycle. I’ll also advice that Sunoco’s Board of Directors today declared a cash dividend for the first quarter of $0.15 per share, and we believe that Sunoco’s current dividend level is sustainable under current conditions.

We will continue to take prudent and appropriate actions that will enable Sunoco to face the future from a position of strength. With our significant refining presence in the Northeast and Midwest, a more efficient cost structure, a strong branded retail network, significant ownership and overall control of the Logistics operation, a strong Coke business, and a much stronger balance sheet, we will be well positioned to capitalize on the eventual market recovery and take advantage of opportunities for growth.

With that, we will open up the line for questions. We’ll ask that you limit your questions to two questions each so that everyone has a chance to get their questions answered. And I know it’s been a long day in the market, so we’ll all get off the call at a reasonable time. So with that, operator, we will open up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jeff Dietert with Simmons.

Jeff Dietert – Simmons & Company

Good evening.

Brian MacDonald

Hi, Jeff.

Jeff Dietert – Simmons & Company

If my notes are correct, your previous Coke guidance was $215 million of net income for 2010. Hopefully I didn’t miss an iteration there. But could you talk about the pieces that contributed to the lower guidance?

Brian MacDonald

Yes. I think, Jeff, the Middletown plant started off. It’s gotten pushed back. We have some coal price changes from the way the coal blends work for our Jewell operation. So those are the primary reasons. We also have a little bit more I would call an investment in terms of business development capabilities for us to go after business outside of the United States. And we also have some investments that we are going to make in technology as we kind of look to the next phase of growth for the business.

Jeff Dietert – Simmons & Company

Okay. Could you split the difference between the major components? What was the coal price impact on the lower guidance and what’s the impact of higher expenses or higher spending on the reduced guidance?

Brian MacDonald

No. I think, Jeff, what I would say is that, broadly speaking, we have – we have Granite City coming up to operation this year. And that’s clearly a plus for the business. And now I would say the coal price impact is sort of an offset to that. And so I think you can kind of walk from the income this year less the tax credit to the guidance that we are giving. And kind of – those are really the two big items with some additional investment around the business development activities and technology.

Jeff Dietert – Simmons & Company

Is there some kind of metric we can use for coal price to factor in the influence in changes of coal prices on EBITDA and net income?

Clare McGrory

Yes. I mean, we’ve generally given guidance – this is Clare, Jeff. We’ve generally given guidance that every $25 change in our contracted coal price results in a $25 million to $30 million impact on net income. Now keep in mind, we contract our coal prices. So you are not going to necessarily be able to track that exactly with the spot market. So that’s our guidance on the Jewell contract.

Jeff Dietert – Simmons & Company

Thank you.

Operator

Your next question comes from the line of Mark Gilman with Benchmark Company.

Mark Gilman – The Benchmark Company

Good afternoon or good evening, Lynn and Brian and Clare.

Clare McGrory

Hi, Mark.

Mark Gilman – The Benchmark Company

Couple things. What was magic about selling 2.2 million units of the limited partnership interest in SXL? And if understand that the issue is you want to retain control and leave that discussion for another time through the GP, why not a bigger number?

Brian MacDonald

I think, Mark, we kind of put it in the context of a number of other things that we were doing, which are in the release, as well as some of the tax planning that we were also doing in the combination of all these things, as well as what we thought would be a good market size transition leaving flexibility for Sunoco Logistics to go to the market in the future if they have attractive acquisition opportunities. So I think it was really a balance of a series of things.

Mark Gilman – The Benchmark Company

Okay. One other one if I could. The second half, the refining system had cash losses. Can you give us a better idea and maybe focus on the fourth quarter where the loss is being focused? Is Toledo losing money on a cash basis, is the Northeast system losing money on a cash basis, both?

Brian MacDonald

Yes. I would say, Mark, in particular in the fourth quarter, I mean, Toledo was very weak. I mean, the margins were just terrible, unprecedented, as you know, for Toledo. Our expense basis in Toledo is higher than it is in the Northeast. And so we had a disproportionate impact in – of Toledo in Q4 versus Q3. So that’s a big part of what’s going on in Q4.

Mark Gilman – The Benchmark Company

Okay. Let me just sneak one more in. Why would you stock for the pension contribution?

Brian MacDonald

Yes, that’s – you know, there is a number of things there. First of all, there is an immediate cash tax benefit of putting in the stock. So if you think about it – if you put stock in at – I'll use $27, which was the calc I did before today’s market, you basically get a 35% tax deduction for that on a cash basis. So in essence, you are selling stock at $36 or a 35% premium. Secondarily, we wanted to fund the pension plan. Even though we are funding it in this year, it actually goes on last year’s tax return. And as you probably know, there is a one-time election to do tax carry-backs to five years. So we get to carry back the loss of this deduction on the pension for five years.

I think the third reason would be that if you think about it, this is an unfunded liability of the company. So we think there is good value in our stock. And so by putting the stock in the pension plan, the value that we think can be generated with the stock effectively accretes to the current shareholders as opposed to selling stock on a secondary basis. So when we kind of looked at all of this and the tax part of this, improving some of our credit metrics as well as the ability to effectively issue stock at a 35% premium, we thought it was a good way – it was a good way to improve the pension funding and the balance sheet, generate some positive cash, and allow the value that we think we can create in our stock to accrete to the current shareholders.

Mark Gilman – The Benchmark Company

Okay. Thanks. Brian.

Brian MacDonald

Thanks, Mark.

Operator

Your next question comes from the line of Evan Calio with Morgan Stanley.

Evan Calio – Morgan Stanley

Hey, good evening and thanks for taking my call.

Brian MacDonald

Hi, Evan.

Evan Calio – Morgan Stanley

Just a question on the use of cash with the growing cash in the balance sheet with more cash on the come year. I mean, do you see there is really a cash buffer until refining margins improve and thereafter similar to your pension contribution, consider stock buybacks, (inaudible) no acquisitions here?

Brian MacDonald

Yes. I would say, Evan, a couple things. I mean, first, we’ve got a lot of cash coming, but we haven’t received it yet. So the chemical sales need to close. Secondarily, we don’t have the cash from the IDR reset yet. That won’t happen until there is a debt issuance from Sunoco Logistics. That cash needs to come first for sure. I think, as you said, a lot of this cash, we will use it as a buffer to ride through the refining down-cycle here. We had at year-end about $300 million of commercial paper outstanding short-term debt. So this will allow us to kind of wind down some of the short-term debt. But fundamentally, we wanted to put cash on the balance sheet, to kind of ride through the cycles, strengthen the balance sheet, and give us financial flexibility. There could be some interesting acquisitions for us to do out there in the growth parts of the business.

We don’t have anything specific to talk about, but we wouldn’t want to say that we are not going to do any acquisitions, but we would be doing them in our growth – in the growth areas of our business and not necessarily in refining. And then I think once we get through the – once we get through the refining down-cycle, then we will be thinking about our cash a little more broadly. I think the other piece of this, as you probably saw, our Board approved our Q1 dividend today. And we had to cut our dividend or we chose to cut our dividend back in October. But I think with the actions we’ve taken today and when we took our dividend cutback in October, we did it with a mind of having a dividend that we thought could be sustainable through the down-cycle. And we continue to believe that, especially after the actions that we’ve taken and announced over the last few days.

Evan Calio – Morgan Stanley

My second question – thank you. My second question, on the chemical sale, was (inaudible) in the phenol assets pretty much buyer-driven? And if so, is that an asset you might look to sell at a later date if and when phenol margins improve? And then a little tag on just kind of what tax rate that we should use in that $190 million pretax loss in cash?

Brian MacDonald

I think we ran – on the chemical sale process, I mean, we ran a pretty extensive process. It took 13 months, as you know. We look to sell the whole business. We had interest in – we had some interest in the whole business, we had more interest in the polypropylene business, and a little bit of interest in the phenol business on its own. As we look at what we thought was the best option for us, it was to sell the polypropylene business in the way we did. We didn’t think the value that we could receive for phenol was appropriate for us to sell the business.

And so at this time, we are – we’ve taken the phenol business off of the market, and we are going to operate it. We will do some things around the edges to take some costs out and run it better, now that we have a clear view of it being in our portfolio. But that’s really how we ended up with selling the polypropylene business as the best option. Now, turning to your question on the tax rate, on the sale of the chemical business, it is a stock sale and so it has some – it has some tax losses associated with it. From a book perspective, I would – I'm not sure exactly what to tell you at this point in time until we work through it. But more importantly, from a cash – from a cash tax perspective, there is some benefit to it and we will realize that over time.

Evan Calio – Morgan Stanley

Great. Thanks, guys.

Brian MacDonald

Thank you.

Operator

Your next question comes from the line of Arjun Murti with Goldman Sachs.

Arjun Murti – Goldman Sachs

Questions related to cash flow. Beyond the Eagle Point inventories, can we expect any more additional inventory cash flow to come in, be the sale of chemicals or from refining in the first quarter or first half of this year?

Brian MacDonald

I think, Arjun, on the inventory side, there is some additional inventory to come out of the system related to Eagle Point. It won’t necessarily come out in Q1 or come out through the rest of the year and more towards the end of the year. In Q1, we have two turnarounds getting started. So we may see some pressure on inventory going up, as we may see both [ph] on some inventory for the turnarounds. But I think fundamentally, as you look through the year, we should see some inventory improvement absent some other reason. But our current plan is to get the rest of the Eagle Point inventory out over the year.

Arjun Murti – Goldman Sachs

And your chemicals proceeds, did that contemplate inventory sales as well or is that an additional amount that you can get it?

Brian MacDonald

There is – as part of the chemical sale, as part of the $350 million, there is a piece of that, which is normal working capital that’s in the business and there will be a traditional working capital adjustment at the time of the close related to that.

Arjun Murti – Goldman Sachs

That’s great. And then just a final one. In light of the changes you made to your pension and healthcare plans and then in light of the $200 million contribution, can you comment on where you are from an under-funded status post the $200 million of contribution?

Brian MacDonald

At year-end, our largest pension plan was unfunded by approximately $320 million. So absent other changes in the plan with the $200 million contribution, that would leave us in our largest plan about $120 million under-funded. Our funded status is sort of in the mid – or will be in sort of the mid-90s range. And so we feel very good about – very good about getting that liability frozen from the changes we made in terms of freezing additional service in the plan. And now the actions that we’ve taken to fund, we feel pretty good about that as a future – what future capital calls may come from the pension in the future.

Arjun Murti – Goldman Sachs

And anything on the healthcare side?

Brian MacDonald

Yes. We froze our eligibility for healthcare as well. I think – I mean, between that pension and the healthcare, the respective freezes lost about $95 million of the – both of those liabilities together, roughly half of each of them. So the – the healthcare liability, the cash piece of that is roughly $35 million a year. That’s the kind of cash piece. On a present value basis, the liability is roughly $300 million. And what you will see there is the cash piece won’t really grow – won't shrink very much over the next few years. But if you go out maybe three, four years, it starts to really have asymptotic decline or more exponential decline because people are kind of rolling up, new people are coming on. So the cash dynamics around the healthcare plan – or the retiree healthcare plan really start to pay off kind of going out three, four years.

Arjun Murti – Goldman Sachs

That’s very helpful. Thank you very much.

Brian MacDonald

Thanks, Arjun.

Lynn Elsenhans

Thanks, Arjun.

Operator

Your next question comes from the line of Paul Cheng with Barclays Capital.

Paul Cheng – Barclays Capital

Hey, guys.

Lynn Elsenhans

Hi, Paul.

Paul Cheng – Barclays Capital

Two questions. One, on the Coke, Brian, can you maybe tell us about what is the estimated coal price that you use for 2010 estimate comparing to 2009? And also to Lynn, if you will be help us in the Logistics on a pro forma basis after assuming a sales of 2.2 million units? And also the GP incentive-wide change, what is the fourth quarter earnings would be on a pro forma basis? And second question would be a number – a balance sheet item. Wondering if you have your inventory market value in excess of the book value and also that if I try to deconsolidate the Sunoco Logistics from your balance sheet, what is the working capital and long-term debt? Thank you.

Brian MacDonald

Paul, that was about five questions. You broke the two-time rule.

Paul Cheng – Barclays Capital

Well, I guess five parts of the two questions.

Brian MacDonald

Okay. So on the call – Paul, we really can’t give you a coal – an average coal price or coal price year-over-year. Basically what happened is a lot of the coal that we use in – the coal we use in Jewell is basically priced up – a market-weighted price. And it has a lag effect to it. So as we went through ’09, if you will, we were the beneficiaries of relatively high coal prices in ’08. As we sort of exit ’09 and come into ’10, there is a lag effect that we are incurring. And so the guidance that we give is pretty consistent with that. And as you saw this year, the guidance that we gave had a fairly small range of variability around it even though we had a lot of volatility in coal prices through the year. In terms of your question on Sunoco Logistics, we will still continue to hold 33% of the LP units after we sold the 2.2 million units, including the GP. And then on the –

Paul Cheng – Barclays Capital

No, I mean – Brian, what I mean is that if I look at your fourth quarter earnings for the Logistics, and that’s – as we thought you report [ph] 22 million. I’m saying that if it is on a pro forma basis, assume all this activity have been full [ph] in the fourth quarter, what that 222 million is going to be? Is that 18 million, 17 million, what’s that number?

Brian MacDonald

I’ll have to do the math for you, Paul. Let me try to answer it maybe a little bit different way. In terms of the GP distributions that we expect based upon current distributions, we are effectively giving up about 15 million approximately of GP distributions in 2010 because of the IDR reset. And then we will continue to receive the LP distributions for the new number of units that we received.

Clare McGrory

And then you can probably do the math on the LP percentage.

Brian MacDonald

Yes.

Paul Cheng – Barclays Capital

And you say 15 million, right?

Brian MacDonald

15 million over the year, yes.

Paul Cheng – Barclays Capital

Right. Does that go fully into – 100% into bottom line or –?

Brian MacDonald

Yes.

Paul Cheng – Barclays Capital

Okay.

Brian MacDonald

And then working capital over market value –

Clare McGrory

The value there, Paul, is 2.7 million.

Paul Cheng – Barclays Capital

Okay. Thank you, Clare.

Clare McGrory

The market value versus the book.

Brian MacDonald

And then the net debt – the net debt, Paul –

Paul Cheng – Barclays Capital

No, no. The working capital for the Sunoco Logistics and also the long-term debt.

Brian MacDonald

Okay. I can give you the debt. The net debt is $900 million roughly for Sunoco Logistics and $1.2 billion for SUN net debt

Paul Cheng – Barclays Capital

Right. Do you have – what is the long-term component?

Brian MacDonald

Not in front of me, but we’ll get back – we can get it for you.

Paul Cheng – Barclays Capital

Do you have the working capital on? Is that something that we can get about the Sunoco Logistics?

Clare McGrory

We can get that for you.

Brian MacDonald

Yes, we can get it. We don’t have it right in front of us.

Paul Cheng – Barclays Capital

Okay. Thank you.

Brian MacDonald

Thanks, Paul.

Operator

Your next question comes from the line of Paul Sankey with Deutsche Bank.

Paul Sankey – Deutsche Bank

Hi, good evening, everyone.

Brian MacDonald

Hi, Paul.

Paul Sankey – Deutsche Bank

Lynn, when you announced the Eagle Point shutdown, I think you made statements as to the potential of the company to maintain its profitability regardless of the environment. Just given the time that’s past and what we’ve seen since then, I wanted – is that where you are at now? Do you believe that you can resist all environments? And could we infer from that that your disposal and shutdown program is more or less complete?

Lynn Elsenhans

Two different questions there. One of the things that happened in the fourth quarter is margins were down. So when we made the statement, it was at the kind of margins that we saw at the time. And when we took the actions at Eagle Point, we were trying to increase the utilization and essentially make the same amount of barrels at the two locations instead of three, eliminating the cost of the third location. And that all of that we thought in the margins at the time would put us in a position that was essentially breakeven. And we are making progress toward basically making those goals. So getting the utilization and stripping the cost out. So I’d say we are on track to meet that, but the – it's really dependent on just how the environment shakes out.

Paul Sankey – Deutsche Bank

But the environment’s better sense was when you made the announcements, right?

Lynn Elsenhans

It is right now today.

Paul Sankey – Deutsche Bank

But you’re just not convinced it’s going to stay that way or won’t get worse [ph] again?

Lynn Elsenhans

I think what we have decided is we need to be prudent to say what actions should we be taking and – or taken in order to withstand a downturn. Will it get worse? I won’t speculate on that. I think the market dynamic is such that if you see the actions that people in the industry got if things get worse is more likely to be more rationalization. And that rationalization would tend to – the marketplace would work and the margins would tend to come back up.

Paul Sankey – Deutsche Bank

Sure. But if we look back at the statement, it’s actually – as far as you are concerned, you’ve delivered to the best of your knowledge, if we had the same margins that we had back then, you would now be – you would now be profitable versus previously you weren’t.

Brian MacDonald

I think, Paul, what we said was where margins were at the time, which were kind of around $5 when we announced Eagle Point that we wanted to drive our cost structure to be around cash breakeven at those kinds of $4.50 to $5 margins that existed around the time. Clearly margins got worst in Q4 and better here in January. We are still executing – Eagle Point is down. The people are gone. Eagle Point – the Eagle Point costs are substantially out of our system. The second piece of this is moving the volume over to our two assets here in Philadelphia and running those assets and capturing all of that volume and getting all the operational efficiencies of getting that higher volume and throughput. I mean, quite frankly, we are still working on that, and as I said in my opening remarks, we had some operating issues in late December and going into January. So I think everything that we said we would get when we closed Eagle Point, we are still committing to get. And but we are still working through actually capturing it.

Paul Sankey – Deutsche Bank

Yes, I understand that. So – that's fine. I get it. Just to get into the weeds a little bit on SXL, the Incentive Distribution Rights that you’ve given up, is that some sort of cap on the GP split or could you just clarify what that is in terms of the structure of the general partner’s payout?

Lynn Elsenhans

Basically the general partner has Incentive Distribution Rights that basically pay out even though it’s – the equity is, say, 2%, we get the disproportionate amount of the cash flows. And then the cash, we found ourselves in a position that as the distributions grow, we were getting 50% of them. And so – so that creates some business issues for Sunoco Logistics around their cost of capital and the cost of issuing new equity and growing. And so it’s quite common with general partnerships in MLPs that when you get into what are known as the high splits or up into the 50% incremental distribution level as we were, there would be a restructuring of the distribution rights.

And so really what we did, Paul, is we took down – we basically took down our distribution rights. We got paid – we will get paid a very nice piece of cash for that. But we did not give up our rights for those distributions to grow back up. So over time, as Sunoco Logistics grow and we think it continues to grow and there is lots of good opportunities there, our distributions will grow back up into the 50% level and we could do a transaction like this again or a different flavor of this type of transaction. So I think it’s really two-fold. One, to help Sunoco Logistics with their cost of capital and their access to the market. And then secondarily, I think it really demonstrates the underlying value of Sunoco’s ownership in the GP.

Paul Sankey – Deutsche Bank

Yes. And you answered the question, which was – I didn’t know whether you were actually just capped out now at a given level or whether you were going to re-grow again in the future.

Brian MacDonald

We have not capped out and we will grow back in the high split [ph] over time.

Paul Sankey – Deutsche Bank

And haven’t been asked yet, so the traditional demand question is my last one. Just what do you think through your very big retail network in terms of any kind of growth, any kind of product mix? Thanks.

Lynn Elsenhans

I’d say we’ve seen a slight improvement in volumes, but – I’d call it slight.

Paul Sankey – Deutsche Bank

Okay. Thanks a lot.

Operator

Your next question comes from the line of Blake Fernandez with Howard Weil.

Blake Fernandez – Howard Weil

Good evening, everyone. Brian, I think this question maybe for you, but it’s regarding CapEx. I think the number of $840 million, of which $280 million looks like growth. And I’m trying to confirm, if the $560 million would be considered kind of a base or a maintenance capital number going forward, and if so, is there any flexibility with that number?

Brian MacDonald

I think there is some flexibility with that number. I think that’s our plan now. It will change a little bit on the chemical side, assuming we close the sale. And then around the edges, we’ll continue to focus on capital and how we can cut cost and defer. But that’s basically the forecast for now.

Blake Fernandez – Howard Weil

Okay. And then I noticed in the refining CapEx, there was about $30 million of income improvement. Can you tell us what that comprises?

Lynn Elsenhans

That is – Blake, that’s the – our biofuels acquisition that we acquired in 2009 that we are expected to finish up to have running by midyear.

Blake Fernandez – Howard Weil

Okay, great. Okay. (inaudible) for me. Thanks.

Lynn Elsenhans

Thanks, Blake.

Operator

Your next question will come from the line of Faisel Khan with Citigroup.

Faisel Khan – Citigroup

Good evening. It’s Faisel.

Clare McGrory

Hey, Faisel.

Faisel Khan – Citigroup

How are you doing? Thanks. On the realization that you guys reported in the quarter, it seems like your capture rates went down. And I think you noted that your Toledo operation was much weaker in the quarter compared to the third quarter. So I’m just trying to figure out – in the Northeast, you actually – your capture rates actually improved sequentially quarter-over-quarter or were they roughly the same or how did that transpire?

Lynn Elsenhans

Faisel, they actually improved from a rate perspective when margins were terrible, as you saw. But I mean, in the Northeast side, we had better operations in the fourth quarter. So we were able to recognize and see better yield gains. And we also saw some net improvement. But net-net, they were still – we are certainly not happy with them. We would like to see a little bit margin improvement – benchmark margin improvement that will enable us to start to see some of the results from the actions we are taking on the controllable side.

Brian MacDonald

And Faisel, what I would add to that, I mean, I think we – as we said in our last call, we think there is margin capture opportunities here. And as part of our bonus plan for 2010, we actually have margin capture improvements as part of our bonus plan. So this is a pretty important item for us.

Faisel Khan – Citigroup

Okay. And then just curious, sequentially quarter-over-quarter what kind of improvements did you guys see in your kind of cost-cutting effort on the refining side?

Lynn Elsenhans

Sequentially quarter-over-quarter the improvements were significant. Probably quarter-over-quarter it was $100 million or so for the company. So a big portion of that is on the refining side.

Faisel Khan – Citigroup

Okay. Got you. And then just one last question, on the pricing differential that you guys realized versus benchmarks, the $1.61 per barrel, how much of that was timing versus transportation?

Lynn Elsenhans

About $0.50 a barrel in the timing which you could do the math there at quarterly there [ph].

Faisel Khan – Citigroup

Yes, that makes sense. And the rest with transportation?

Lynn Elsenhans

For the most part, yes.

Faisel Khan – Citigroup

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Paul Cheng with Barclays Capital.

Paul Cheng – Barclays Capital

Hey, guys. Lynn, in the past, I think from time to time people asked the question whether you guys have any interest to spin – part of the spin-off (inaudible) into an MLP, any update of your thinking here.

Lynn Elsenhans

No change from my standard answer, Paul, but it’s –

Paul Cheng – Barclays Capital

Yes, nothing changed there. Okay. Second, I think in your press release you said that your pension contribution is going to have an earning benefit. Brian, how much is that in 2010? Also that in the fourth quarter for your Coke business, is there any income contribution from the Granite City?

Brian MacDonald

Yes, there is. There is contribution from Granite City. And then –

Paul Cheng – Barclays Capital

Can you quantify it, Brian?

Brian MacDonald

No. No, it’s all baked into the overall guidance. And then on the pension side between the freezes in the plan and the funding that we have, we expect about, excluding settlements and curtailments, a reduction in expense of approximately $50 million to $60 million.

Paul Cheng – Barclays Capital

And that’s after tax. So that will be about $30 million to $40 million, right?

Brian MacDonald

Right, right.

Paul Cheng – Barclays Capital

And you said all going to hit in the corporate or how from a reporting standpoint is it going to show up?

Brian MacDonald

No, it will be – it will be allocated out.

Paul Cheng – Barclays Capital

So it’s going to be by segment that everyone would get a piece of the benefit?

Brian MacDonald

Yes.

Paul Cheng – Barclays Capital

Okay. Thank you.

Brian MacDonald

Thank you.

Operator

And your last question is a follow-up from Mark Gilman with The Benchmark Company.

Mark Gilman – The Benchmark Company

Yes, thanks. What have you got in the 2010 Coke earnings guidance for Brazilian dividends, Brian?

Brian MacDonald

I don’t have a – I don’t have a number in front of me, Mark.

Clare McGrory

That shouldn’t change from our previous guidance that we’ve given.

Mark Gilman – The Benchmark Company

I’m not sure I know what that is, Clare. I mean, you had two $6 million dividends. One in the second, one in the fourth. What should we assume, ratable, not-ratable? I don’t know what to do with it.

Brian MacDonald

I’m going to [ph] ignore it and just use our overall guidance.

Mark Gilman – The Benchmark Company

Touché, point taken. One other clarification. It’s my understanding, and maybe I’m just wrong, that what you show for Logistics earnings in your income statement, given the consolidation of SXL, doesn’t reflect anything in terms of general partner distributions. It reflects your interest in SXL, limited partnership plus general. Is that wrong?

Lynn Elsenhans

I think that’s correct.

Clare McGrory

I mean, it’s general, Mark, it should be reflective of the cash that we receive. So I guess it depends on how you look at it.

Mark Gilman – The Benchmark Company

In terms of your consolidated earnings, Clare, I don’t think. Does it?

Clare McGrory

No. The distribution piece shows up on your cash flow statement, but on the earnings statement, it’s just your proportional piece.

Mark Gilman – The Benchmark Company

Exactly. So if you went from – I guess where were you on the interest in SXL 43% priority to the sale?

Clare McGrory

33.

Mark Gilman – The Benchmark Company

Okay. So if you go 43 to 33, all right, a reduction of – I don’t know, it’s late in the day – near 25%. All things being equal, your earnings that you show on the income – in you segment earnings statement for Logistics go down by 25%. Is that right?

Clare McGrory

Mark, we’ll calculate it for you and make sure we’re right on this.

Mark Gilman – The Benchmark Company

Yes. My abacus isn’t working at this hour, sorry.

Clare McGrory

No, no, no, no. But I just want to make sure that we got the accounting right.

Mark Gilman – The Benchmark Company

Okay. Thanks, guys.

Clare McGrory

Sure.

Operator

There are no more questions at this time.

Brian MacDonald

Okay. Well, thanks to everyone for joining. And Clare and I will be around for any questions for a little bit and tomorrow as well. Have a good evening.

Operator

And that concludes today’s conference call. You may now disconnect.

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Source: Sunoco, Inc. Q4 2009 Earnings Call Transcript
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