Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sunoco, Inc. (NYSE:SUN)

Q1 2010 Earnings Call Transcript

April 29, 2009 5:30 pm ET

Executives

Lynn Elsenhans – Chairman, CEO and President

Brian MacDonald – SVP and CFO

Clare McGrory – Manager, IR

Analysts

Evan Calio – Morgan Stanley

Edward Westlake – Credit Suisse

Doug Leggate – Bank of America

Chi Chow – Macquarie Capital

Faisel Khan – Citigroup

Jeff Dietert – Simmons & Company

Paul Cheng – Barclays Capital

Mark Gilman – Benchmark

Blake Fernandez – Howard Weil

Ann Kohler – Caris & Company

Operator

My name is Don and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2010 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 turn the call over to Lynn Elsenhans, Chairman and CEO of Sunoco. Please go ahead.

Lynn Elsenhans

Thank you and good evening. Welcome to Sunoco’s quarterly conference call. We will be discussing the company’s first 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’ll start by making 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 will direct you to our Web site, www.sunocoinc.com, where we have posted a number of presentation slides, which may provide a useful reference as we progress through the remarks. I’d also refer you to Safe Harbor statement referenced in slide number two of the slide package and as included in this afternoon’s earnings release.

So let’s begin. As you can see from slides three and four, we reported quarterly net income, excluding special items, of $17 million or $0.14 a share. These results reflect the market environment that remains very challenging, particularly for the refining and chemicals businesses, which are still under significant pressure due to low demand and excess global supply.

That said, during the quarter, we continued to take aggressive actions to address those issues within our control, and we are seeing the benefits of these actions in our results.

Our first quarter refining benchmark margins improved from the prior quarter and we made progress in improving our refining margin captured during a period that was challenged with low utilization due to two planned turnarounds at our Marcus Hook and Toledo refineries. We successfully completed both turnarounds in a safe manner and are focused on running our refineries at optimal utilization rates for the remainder of the year.

Excluding the discontinued polypropylene business, our non-refining businesses earned $78 million in the first quarter versus $49 million for the same quarter in 2009, which is largely due to good execution and a sharp focus on costs. Retail marketing earned $21 million in the first quarter of 2010, logistics earned $17 million with steady contributions from Sunoco Logistics Partners LP and our coke segment earned $37 million.

Our sharp focus on achieving a competitive cost structure continues this year. Cash operating expenses, excluding fuel, utilities and the polypropylene operations that were sold in the first quarter, were more than $50 million lower sequentially in the first quarter of this year versus the fourth quarter of 2009. This expense measurement basis is used internally to track our progress in reducing our controllable expenses and demonstrates our efforts and success in driving our costs to a competitive level.

As we consider the outlook for the remainder of 2010, we continue to expect a challenging market for petroleum and chemical products due to ongoing economic weakness and excess global supply. However, Sunoco is well prepared. The early proactive steps we took during this cycle have made us stronger, leaner and more competitive. We continue to drive toward a sustainably lower cost structure and are focused on running our refineries safely, reliably at optimal capacity utilization, lowering our breakeven cost per barrel and improving margin capture; all of which are designed to increase our cash generation through operations.

Our recent actions to strengthen our balance sheet have enabled us to maintain financial flexibility and position us to take advantage of attractive growth opportunities in our logistics, retail marketing and coke businesses. One such opportunity that we can announce today is a plan that was recently approved by management to expand production at our Jewell coal mining facility. Brian will talk about this in a bit more detail shortly.

We are also pleased to announce that we started construction at our Middletown coke plant in early April. We have already signed an agreement with AK Steel in which they have agreed to purchase over a 20-year period all of the coke and available electrical power from this facility. Completion of the plant and its first coke production is estimated for the second half of 2011.

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 a net loss of $63 million attributable to Sunoco shareholders in Q1 which included $80 million of net unfavorable special items as detailed in our earnings release and on slide five of our Web deck.

We recorded a $44 million after-tax loss related to the divestment of the discontinued polypropylene operations, as well as a $20 million after-tax provision for contract losses in connection with excess barge capacity resulting from the shutdown of Eagle Point refining operations.

We also incurred additional charges totaling $16 million after-tax associated with pension settlement losses and an unfavorable deferred state income tax adjustment attributable to the continuing phenol operations.

Before addressing some specifics regarding operating performance, let me just say that quarterly results, particularly for refining, generally reflect a continuation of market weakness. While crack spreads improved from the fourth quarter, they remained depressed particularly in the Mid-Continent region. We were further challenged in refining during the first quarter due to planned turnaround activity at two of our refineries which significantly reduced utilization during the month of March.

Our non-refining operations, however, continued to make positive contributions generating returns consistent with the fourth quarter, excluding discontinued operations and the $41 million one-time tax credit that we received in Q4.

Additionally, the success of our actions to lower costs is reflected in our results. We have made some progress on margin capture and we continue to pursue initiatives to improve our cost structure and financial positioning for the future.

Regarding first quarter business unit results, I direct you to slide six. Refining and supply had a $70 million pretax loss or $42 million after-tax in the first quarter of 2010 compared to a pretax loss of $226 million in Q4 or $135 million after tax in Q4. While we are not satisfied with our refining performance in the first quarter, we believe the $156 million pretax improvement sequentially versus the fourth quarter, especially in light of the two turnarounds we had underway in the first quarter, demonstrates that the actions we have taken to improve our refining performance are beginning to yield results.

Market margins improved from the prior quarter, and we made progress on both margin capture and cost reduction initiatives, but the planned returned turnarounds resulted in reduced utilization and prevent us from covering all of our fixed costs. Operationally, crude unit utilization across the system in the first quarter was 79%.

Before we talk in more detail about our first quarter 2010 margin realization, I would like to call your attention to a few changes that we made to our benchmark margins, essentially to make them more reflective of our market. These adjustments include an increase in our crude transportation costs and the addition of a jet component to our Toledo benchmark.

The updated benchmarks are detailed on slide 23. The changes do not affect the comparability of realizations, as historical benchmarks have either been restated in the case of crude transportation costs or not materially different as a result of the change as was the case with the addition of the Toledo jet component.

With respect to our Q1 margin realizations, I refer you to slides seven and eight for more detail on our refining system crude costs and product differentials versus our benchmark. Our results generally reflect improvement in the first quarter versus recent quarters due largely to improved product realizations with offsets in higher crude transportation rate and the impact of LIFO reserves.

Even with the challenges that the turnarounds presented in achieving ratable sales and managing inventory, we did see improvements in capturing more of the benchmark margin as compared to last quarter, in particular, during the early part of the quarter and before the turnaround activity in March.

While most of the factors that affect our realizations versus our benchmarks are typically market related, we continue to aggressively take actions on identified opportunities to improve our margin realizations versus benchmark margins and we are seeing some really positive results.

In general, our benchmarks were up approximately $2 per barrel on average from the fourth quarter 2009 and our realized margins were also higher by about $2 per barrel. Our crude cost for the quarter averaged about $0.90 per barrel above our weighted benchmark due to higher transportation costs and the impact of LIFO reserves.

Our crude inventories fell significantly during the quarter and we reserved for these draws at the higher quarter-end crude prices. By year-end, we are still expecting to have permanent draws of crude oil and refined product inventory related to our Eagle Point closure, but we are conservatively deferring recognition of any profit related to these draws in the event that other business drivers result in inventory builds that might offset these draws.

On the product side, our average differential was approximately $0.67 per barrel lower than our weighted benchmark. The product differentials were challenged in March during the turnarounds due largely to the lower yield gains and the cost of reserving for refined product inventory draws at higher quarter-end pricing.

The turnaround activity also impacted ratability of sales and hence realized margins, particularly in Toledo, where benchmark margins were significantly better in March versus the rest of the quarter. As compared to the fourth quarter, average realizations on benchmark products in the first quarter were still improved even with the lower utilization in March.

We successfully completed our planned cat cracker turnaround in Marcus Hook, which limited production during all of March. Additionally, the Toledo hydro cracker turnaround impacted production for a few weeks in March and was successfully completed in mid April. Now that we have completed the turnarounds, we have the capacity to operate at or above 90% utilization in the Northeast.

Now let’s turn to our non-refining businesses which continue to contribute positive results. Our retail, marketing, logistics and coke businesses earned $75 million after-tax in aggregate during the quarter as detailed on slide nine.

Retail marketing earned $21 million in the first quarter of 2010. Retail gasoline margins remained fairly consistent with the prior quarter, but sales volumes were lower, a decline consistent with DoE statistics and attributable to poor weather conditions in the Northeast.

During the quarter, we also continued to execute on our Retail Portfolio Management program and generated approximately $8 million of proceeds and $3 million of after-tax gains on site sales through the sale of 16 sites primarily to Sunoco branded dealers and distributors. Approximately 80% of the sites divested continue 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 retail business. We anticipate that an additional $50 million of proceeds will be generated through 2011.

Turning to the logistics business, we earned $17 million in Q1. We continue to believe we have very positive growth opportunities for the logistics business.

Now turning to the coke business, coke posted another solid contribution earning $37 million in Q1 consistent with our guidance. We have been in startup mode at our Granite City coke facility through the first quarter of 2010. As we discussed on slide 10, at this time, we continue to work through some challenges within the operations that have caused our ramp up to be slower than planned. We are making the necessary adjustments so that we can run the plant as designed at full charge rates.

At this time, however, we maintain our full-year guidance of SunCoke net income between $125 million to $140 million as we expect some benefit from coal pricing and a lower cost to offset the negative impact of a slower-than-planned ramp up in the Granite City operations.

We also have a few more positive updates related to the SunCoke business that Lynn referenced earlier. We have started construction at our Middletown plant and look forward to our first coke production from that plant occurring in the second half of 2011. Also as Lynn referenced earlier, we would like to announce our plan to expand our coal production at our Jewell mining facility.

We plan to increase our production of our high quality mid-vol coal at our Jewell mining facility by approximately 0.5 million tons per year. We believe that our plan provides the company with an opportunity for income growth. We would initiate the project in the current quarter starting with the training of new miners. Under this plan, we expect to see increased production of coal starting in January of 2011 ramping up to our target production rate for their coal facility of 1.75 million annualized tons by the end of 2012.

The required capital for the project is projected to be approximately $25 million with the majority of capital spend occurring in 2011 and 2012. Using conservative estimates of coal prices relative to the current market, we anticipate a slightly negative impact to income in 2010 and 2011 from the expansion project due to the cost of training new miners with positive impact to income starting in 2012. If the coal markets continue to improve, we may see benefit from the increased production earlier, and conversely we may see less benefit from coal sales if the coal market declines.

Lastly, we have recently initiated a study to update our measure of coal reserves at our Jewell mining facility.

Turning to our chemicals business, closeout our discussion of non-refining results, as announced earlier this month, we successfully closed upon the sale of our polypropylene business on March 31 for approximately $350 million in net proceeds, which were received in early April. As a result – the results of our polypropylene business are shown as discontinued operations in the first quarter. These results reflect some improvements in margins and lower cost as compared to the fourth quarter and also benefit from LIFO inventory profits due to inventory draws.

Finally, let me take a few minutes to discuss our financial position at the end of March. In conjunction with that, I direct you to slides 11 and 12. From a fund flow perspective, our first quarter net cash flow before debt activity was a positive $449 million, largely driven by the receipt of a tax refund of approximately $394 million related to net loss carry backs.

Additionally in February, Sunoco Logistics issued $500 million of senior notes to fund the previously announced incentive distribution exchange transaction with Sunoco as well as to okay outstanding borrowings under the Sunoco Logistics revolving credit facility.

From a balance sheet perspective, our overall net debt position was $1.6 billion, down about $500 million from the fourth quarter. Of the $1.6 billion net debt position, approximately $1.1 billion of net debt was attributable to Sunoco Logistics, leaving approximately $500 million of net debt attributable to Sunoco at the parent level which does not reflect the impact of the cash from the polypropylene sale.

We end the quarter with a consolidated net debt to capital ratio of 34%; however, at the Sunoco level, excluding Sunoco Logistics, we ended the quarter with a consolidated net debt to total capital of 16%.

From a liquidity perspective, at March 31, we had $812 million of cash and approximately $1.9 billion of available committed borrowing capacity which includes approximately $440 million available to Sunoco Logistics. As I mentioned earlier, the cash balance at quarter-end does not includes the $350 million of proceeds from the sale of the chemicals polypropylene business as those cash proceeds were received in early April.

And a final balance sheet note. At March 31, the current replacement cost of all inventories valued at LIFO exceeds their carrying value by $2.8 billion.

As we look forward to the remainder of 2010, we will continue to take appropriate actions that will assist us in maintaining our financial flexibility. To build a better Sunoco for the future and to deliver value to shareholders we remain focused on the fundamentals, running our refineries safely and reliably at optimal capacity utilization, lowering our breakeven cost per barrel and improving margin capture. This focus will help us to achieve our aspiration of becoming the preferred provider of transportation fuels in our markets.

With that I’ll ask the Operator to open up the lines for any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Evan Calio with Morgan Stanley.

Evan Calio – Morgan Stanley

Hi, good evening guys, and thanks for taking my call.

Brian MacDonald

Hi.

Evan Calio – Morgan Stanley

A question on coke and on the Jewell mine expansion. Does the expanded production scale-in over some period of time? Or do you expect that to be kind of a chunky late-2012 event? And then a follow-on – as you consider your non-core asset disposal program, is the mine within this category? And are you able to sell that coal mine under the existing contract with the Jewell plant? Or is there some renegotiation that would be involved with that? And then I have a second question, if I can.

Brian MacDonald

Evan, I’ll start with the second question first. At this time, we don't intend to sell the coal mine and we think it's a good asset. We are going to put some capital into it and expand the coal that we take out of the ground there. So at this time, that's our plan with regard to the coal mine.

With regard to the timing of the coal, it will start to come out in stages starting in 2011. One of the things that we are going to be very focused on is hiring miners in advance of that, getting the right training and making sure that we have a ramp up that works pretty well. And it will be complete with 0.5 million tons of additional capacity by the end of 2012.

Evan Calio – Morgan Stanley

Okay, that's helpful. My second question is, the great improvement in SG&A from 4Q to 1Q – $19 million lower or $21 million over kind of an average period. Is this an impact on – from your cost-cutting with a lower run rate going forward? And can you give us any kind of color there? What's in that cut?

Brian MacDonald

Yes, I think, one of the measures that Lynn mentioned in her remarks and a measure that we’re using internally for our own performance measure as well as for our executive compensation structure is basically measuring cash expenses excluding fuel and utilities, so really getting at the cash expenses of the company. And as Lynn mentioned in her remarks, those are down $50 million in Q1 versus Q4. That’s the primary measure that we have. And I think everyone knows, we are pretty focused on cost and cost reductions.

So we – there will be some timing as we go through the year. There is seasonality on some items. So expenses weren’t necessarily – they may go up and down at times a little bit. But fundamentally, we are focused on cost reduction.

Evan Calio – Morgan Stanley

That's great. Thank you.

Operator

Your next question comes from the line of Edward Westlake with Credit Suisse.

Edward Westlake – Credit Suisse

Hi, good afternoon. It's been an interesting day all around. Just a question around the working capital move in the first quarter. You've got $400 million, if I'm reading this correctly, of capital – of working capital contribution to the cash statement. How do you see that changing as we go through the year? What's behind that move?

Brian MacDonald

We had inventory draws in Q1 and we had some turnarounds. We had some inventory reduction that we wanted to do related to the Eagle Point closure. I would say that between now and the end of the year inventories may come down a little bit. But most of what we wanted to get done for the year we did in Q1. In Q2 and Q3, they may go up a little bit because of some seasonal trends.

But I think there is a little bit more to go by year end. But most of what we wanted to accomplish, we account for that in Q1.

Edward Westlake – Credit Suisse

Great. And then perhaps a follow up – I mean, the management of SXL – well, you've just become the management of SXL with the changes. I mean, is there any change in strategy there? Or what's going on in terms of the change that you've made there?

Lynn Elsenhans

No change in strategy. We are still very committed to growing SXL. What we are trying to do, though, is ensure that as we get back growth that we don’t increase our overhead costs. And we think that there are some opportunities to streamline business processes that are to the benefit of both Sunoco, Inc. and SXL reducing some overheads overall in both companies.

Edward Westlake – Credit Suisse

Right.

Lynn Elsenhans

But the strategy for SXL remains very focused on growth and Sunoco, Inc. believes that there are opportunities between the two companies. But we also are in Sunoco, Inc. very supportive of growth opportunities in SXL that do not depend on Sunoco, Inc.

Edward Westlake – Credit Suisse

Right. Okay, thank you.

Operator

(Operator instructions) We have a question from the line of Doug Leggate with Bank of America.

Doug Leggate – Bank of America

Thanks. Good afternoon everybody. A couple of questions, I guess, on the cash move in the quarter. Brian, there were a bunch of things that you were looking for this quarter. I'm just trying to figure out which ones we got, which ones we're still waiting on. I know there's a bit of a laundry list, but if we talk about the proceeds related to the change in the IDR; the sale of the SXL proceeds; the tax rebate – did you get the tax rebate? You know, things like that. Can you just kind of walk us through what the changes were that we saw in the quarter?

Brian MacDonald

Yes. So, basically in Q1 and in the financial statement, the full impact of the sale of the limited partner units of Sunoco Logistics that we sold, the settlement of the IDR reset, the pension contribution to the Sunoco pension, as well as our tax refund which was $394 million and which we received at the end of March. What is not excluded, the only item which is not excluded is the $350 million for the sale of the polypropylene business which was received on April 1. So that cash is not reflected in the balance sheet as of March 31.

Doug Leggate – Bank of America

So the share sale of Sunoco parent shares for the pension, did that just transfer directly into the pension? So we didn't actually see it go through the cash flow statement?

Brian MacDonald

That is correct.

Doug Leggate – Bank of America

Okay. What was your remaining outstanding pension liability that you still have to fund?

Brian MacDonald

When we put the shares, we put $90 million approximately of share into the fund and $140 million of cash for a total contribution of $230 million. When we did that we basically said that we did not expect any legal minimum contributions to need to be made until 2012. The equity markets as you know have continued to do fairly well since we’ve done that. So the status of the pension fund is looking better although I don’t have a specific update at the time here.

Doug Leggate – Bank of America

Okay. Just a couple of other quick ones, if I may. On your CapEx, it looked like the run rate CapEx for the quarter, particularly on coke, was a little bit light. Can you just talk to that and what we should expect as we move through the balance of the year?

Brian MacDonald

I think our guidance remains for capital. Coke is a little light because they’re just starting up the Middletown project. So that will ramp up as we go through the year. Overall, we are sticking with our capital expenditure guidance. We are trying to figure out ways to take cost and spend that money more effectively and we see a little bit of opportunity there, but nothing at this time to change the guidance that we put out for the year.

Doug Leggate – Bank of America

Great. And the final one for me is, I don't know if you're going to answer this one this time around, but I'll have a go. On the signing, now that we've got Eagle Point out of the system, run rate, DD&A, and, if you can, maybe some idea of run rate, operating costs, given that utilization is likely to pick up again here. And that's it for me. Thank you.

Brian MacDonald

I think basically our guidance on the refining is that we want to get the cost structure down to where we can have cash flow break even when margins are around the $5 range. I think we are starting to see some progress of the actions we’ve taken. Our pretax loss improved over $150 million from Q4 to Q1. We are clearly not satisfied that we lost $70 million in refining in Q1, but we had two major turnarounds underway and we had an improvement in results of $150 million versus Q4. So clearly, we are starting to see some benefit from the actions that we took last year. But we’ve got a lot more to do.

Doug Leggate – Bank of America

So can you speak to the DD&A perhaps run rate going forward and with just the three refineries?

Brian MacDonald

No. I think it’s consistent with the guidance that we’ve given before is that for this year our refining CapEx is roughly $300 million. We're continuing to try to figure out ways to make that more cost effective. But that’s kind of our guidance still.

Doug Leggate – Bank of America

All right. Thanks a lot.

Brian MacDonald

Thank you.

Operator

Your next question comes from the line of Chi Chow with Macquarie Capital.

Chi Chow – Macquarie Capital

Good afternoon. Lynn, you mentioned the $50 million in cost reduction 1Q versus 4Q, do you have a breakout of that by business segment?

Lynn Elsenhans

No. I think the majority of that, Chi, you're going to see in refining and supply – the larger piece of that. Big piece is, of course, related to the Eagle Point closure. But you will see I think improvements across the board.

Chi Chow – Macquarie Capital

Okay. Good. And then in refining, can you discuss some specific actions you’ve taken that have resulted in a better margin capture rate on the product side that you show in the first quarter?

Lynn Elsenhans

One of the things that we have done is tried to simplify the crude slate a bit, still very much looking at what are the most optimal crudes to run on the overall basis but taking perhaps a smaller basket than we had before. And this allows us I think to plan better, get better reliability, and that’s one of the areas.

Another area you may recall is that we have split the product supply piece and crude supply piece, and the product supply people now are working in a very coordinated fashion such that we have one face to the marketplace when we sell our product and we don’t find ourselves inadvertently competing against ourselves to place the product. I think that has allowed us to optimize some margin capture.

We’ve also done some analytical work around the pricing terminal and trying to really optimize where we put the volume in the terminal when we have discretionary volume. So those are some of the kinds of things that we’ve been doing.

Chi Chow – Macquarie Capital

Great. That's helpful. On the crude slate side, can you talk about any particular basket improved that you've eliminated? You mentioned simplifying it. Is there crude from a particular region you're not taking from anymore?

Lynn Elsenhans

We don’t know there is a particular region. I think one of the things, obviously the economics in the model are driving us towards not running as much of the heavier – within the basket that we run, so the heavier part of our basket, that’s economic driven more than anything.

Chi Chow – Macquarie Capital

Okay. And then one final question on the Jewell expansion. The 500,000 tons of increased coal production, is that targeted at third-party sales? Or is it more for internal supply to your coke plants?

Brian MacDonald

I think, Chi, I don’t think we really haven’t locked that down yet. I mean, we just actually made this decision a couple of days ago. So we’ve got a little while to figure out the best way to monetize that coal.

Chi Chow – Macquarie Capital

Okay. Great. Thanks for your comments.

Brian MacDonald

Thank you.

Operator

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

Faisel Khan – Citigroup

Good evening.

Brian MacDonald

Hi, Faisel.

Faisel Khan – Citigroup

How are you doing?

Brian MacDonald

Great.

Faisel Khan – Citigroup

Right. I was wondering if you could help me out with – on the margin capture rates a little bit. It's obviously going up in the first quarter. But how much of that do you guys think was market-related versus actions that you guys took?

Brian MacDonald

I think that’s bit of a top line. I think we had better results in January and February than we had in March. So I think we are making progress from our own actions, some of which Lynn mentioned. I think the fact that the market was up obviously helped us a little bit too. But March was pretty tough with the turnarounds we had underway.

Faisel Khan – Citigroup

Okay, great.

Lynn Elsenhans

I think to be fair that some of the strength in sort of the non-core products that are high-margin products that we got from the marketplace.

Faisel Khan – Citigroup

Got you. And then on the coke side of the business, I think in your annual report, you talked about opportunities both to expand your business in the US and you also said abroad. I'm wondering if you could elaborate a little bit on what kind of opportunities you guys might have abroad this year?

Brian MacDonald

We’re still in the early business development stages and steelmakers just came out of a pretty painful period. So we are starting to have conversations in select places around the world outside of the US about opportunities. And there's really nothing specific to talk about. But we see some good opportunities there and we see some good interest from steelmakers and we are in early discussions.

Faisel Khan – Citigroup

Got you. And then on the coal production potential expansion, I guess, right now, what's your – what are your current production costs and, I guess, going forward as you expand the mine, are you envisioning kind of lower production costs, because you have more scale? Or would you have kind of similar production costs?

Brian MacDonald

Well we are not going to disclose our production costs since we have to sell this coal too. But we think the cost will be a little bit higher than what we current bring out. But not necessarily in a material way, and in some of the places where we may take out the coal, the royalties may be a little bit higher given the tick up in prices. So we had this project on the drawing board for a little while and we just waited until we were comfortable with coal prices and the outlook that we felt that it could be a good economic project.

Faisel Khan – Citigroup

Okay, got you. And then I guess, with all the asset sales that you guys have going on and the tax refund, it seems like you guys are going to build a decent cash balance going into the end of the year. I guess, what do you guys envision – how do you guys envision spending that cash? Is that more to protect your balance sheet? Or is that to make kind of a strategic position to do something towards the end of the year?

Brian MacDonald

Well, I think we’ve already built a pretty sizable cash balance already, and I think first and foremost we are thinking about protecting the balance sheet and the capital program. And last year was a pretty painful year for the company and for the balance sheet. So I think, first and foremost, it’s to protect the balance sheet until we are comfortable that we are through the refining down cycle. We are interested in growing parts of our business, the retail business, the logistics business. We’ve got a big project in coke to build and fund this year. So we see opportunities to put the capital to work. If we can find the right acquisitions or opportunities, we will put the capital to work at the same time protecting the balance sheet and making sure we get through the downturn.

Faisel Khan – Citigroup

Great. Then last question, the $0.14 per share income that you guys reported, that includes the discontinued operations in your chemicals business, is that right?

Brian MacDonald

That is correct.

Faisel Khan – Citigroup

Great. Thank you very much for the time. I appreciate it.

Brian MacDonald

Thanks, Faisel.

Operator

Your next question comes from the line of Jeff Dietert with Simmons & Company.

Jeff Dietert – Simmons & Company

Good afternoon. Mid-coal or mid-vol coal prices have improved meaningfully since you set prices last year. Some of the recent transactions would suggest maybe $250 per ton for met coal in Virginia. Could you talk about what kind of incremental earnings would be generated in 2011 relative to 2010, if that $250 per ton price were to hold for your Jewell mine and the associated Jewell coking facility?

Brian MacDonald

Jeff, I think it’s a little early for us to talk about that. I think we are working through exactly when, what rate the coal would come out of the mine in ’11 and we haven’t given guidance for ’11. So I think it is a little early for us to really get into that.

Jeff Dietert – Simmons & Company

I'm really just trying to get a sensitivity so that I can look at pricing and spot pricing and adjust as we go through time. So it's not really as much guidance as it is a way to compare 2010 to the current market in however it may evolve, and what influence that might have on your coke profitability.

Clare McGrory

Jeff, this is Clare. The sensitivity that we’ve generally given on coal prices is for every $25 per ton change in the price would affect our EBITDA about $40 million and our net income $20 million to $25 million. That’s probably all we could give you there and you can try to gage where the stock prices were when we contracted as best you can.

Jeff Dietert – Simmons & Company

Okay. And now you – on a separate issue, you talked about perhaps monetizing $50 million in the retail on the divestiture side. Are there other assets that you're considering for divestiture at this time?

Brian MacDonald

No. I think we are always look at our portfolio and thinking about our portfolio. But other than the retail assets that we've been explicit about, there's nothing more to really add today.

Jeff Dietert – Simmons & Company

Okay. And on the corporate expenses, $23 million for the first quarter; a little bit higher than what I'd expected. Could you talk about what influenced that and give us some expectations for what a quarterly run rate would look like going forward?

Lynn Elsenhans

I would say the quarterly run rate should trend lower than that. We had a few unusual items hit through Q1, but we can talk about it in detail later, nothing really notable to talk about.

Jeff Dietert – Simmons & Company

Okay. Thanks for your comments.

Brian MacDonald

Thanks, Jeff.

Lynn Elsenhans

Thanks, Jeff.

Operator

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

Paul Cheng – Barclays Capital

Hi, guys. How are you doing?

Lynn Elsenhans

Great, Paul. Good, how do you do?

Paul Cheng – Barclays Capital

Very good. Several quick questions. Brian, do you have the balance sheet items for SXL for the working capital and long-term debt?

Brian MacDonald

We don’t –

Paul Cheng – Barclays Capital

Or it's not available yet?

Brian MacDonald

Yes, we don’t disclose the working capital, Paul. But that is in the Web deck. And it is $1.1 billion for Sunoco Logistics.

Lynn Elsenhans

And we gave the – Paul, the working capital changes as well in the Web deck between SXL and Sunoco on slide 11.

Paul Cheng – Barclays Capital

Okay. When the SXL going to file the 10-Q?

Brian MacDonald

May 5, I believe. May 5 or 6.

Paul Cheng – Barclays Capital

And if possible that it will be great [ph], seems that now that you're also the CFO over there, that when you guys report the SXL, you also disclose the working capital, that would be helpful.

Lynn Elsenhans

We'll take that under advice, Paul.

Paul Cheng – Barclays Capital

Yes, that would be helpful. Just a request. Brian, you mentioned that the pension contribution, the $100 million or $90 million on the stock is already in. Is the $140 million of the cash contribution is already reflected in the partnership also as of the end of the –?

Brian MacDonald

Yes it is Paul. That took – that occurred in Q1.

Paul Cheng – Barclays Capital

And how does that work? I mean you – because in the partnership or in the cash flow, we then see there's an item saying that there is an issuing of the stock because it directly goes to the pension. On the cash component, is your current cash rate, 800 some-odd million, is that including that $140 million or it's not including that?

Brian MacDonald

Does not include the $140 million that is in the pension fund.

Paul Cheng – Barclays Capital

Okay. But the stock that you don't see it in the cash flow because you directly transfer, so it don't show yet?

Brian MacDonald

Correct.

Paul Cheng – Barclays Capital

Okay. On the – with the Northeast refining, if we do not have any major turnaround on final [ph] mean that – two questions – one, what would be the sustainable level that you think you can run at now in terms of the product available for sales? And comparing to the first quarter level then, what is your target unit cash costs in terms – you don't need to give me an actual number, but in terms of are we looking at down to be – down $0.30 per barrel comparing to the first quarter in the second quarter? Or it's going to be down $0.50? What kind of improvement that we should be expecting?

Lynn Elsenhans

Well, Paul, if I answer your first question, I'll answer it from the standpoint of capability. What we actually run, we will run to meet the marketplace. Capability in the Northeast, we would expect 505 on a system basis, something on the order of some 90% to 95% utilization. That’s the capability. And then in terms of your question on –

Paul Cheng – Barclays Capital

Lynn, that is just on the crude unit; you also have feedstock, right? So what is the total product available from the (inaudible)? It's got to be higher than the 505, I presume?

Lynn Elsenhans

I don’t think so. Not in the Northeast.

Paul Cheng – Barclays Capital

Really? You're running about 10% to 15% higher than your crude capacity, normally.

Clare McGrory

I don’t believe so.

Lynn Elsenhans

Yes, not in the Northeast.

Clare McGrory

Maybe you're looking at total throughputs for that? Not crude?

Brian MacDonald

Why don’t we handle that one offline?

Paul Cheng – Barclays Capital

Okay.

Brian MacDonald

Go through the detail.

Paul Cheng – Barclays Capital

And, Lynn, the second part of the question that on the second quarter, that what kind of improvement that you may be talking on the unit cash operating costs for your total refining system, comparing to the first quarter level?

Lynn Elsenhans

Well, one of the issues of doing it on a per barrel basis is that the number of barrels run is a huge impact on what that is. And kind of probably would overwhelm the other, unless Brian has some other comment on that.

Brian MacDonald

No, I think you’ll have to come back for next quarter’s call for that discussion.

Paul Cheng – Barclays Capital

A final one, Brian, the 2010 CapEx, I assume you guys have no change still at 837?

Brian MacDonald

That’s right, Paul. We’re going to hold with our guidance for now. We are continuing to work that and see where there is some opportunities to bring it down. But at this time, we don’t have anything specific to say to be able to bring it down.

Paul Cheng – Barclays Capital

Okay. Thank you.

Brian MacDonald

Thanks, Paul.

Operator

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

Mark Gilman – Benchmark

Folks, good evening.

Lynn Elsenhans

Hi, Mark.

Mark Gilman – Benchmark

A couple of things on the coke side. Was there a Brazil coke dividend in the period?

Brian MacDonald

No.

Mark Gilman – Benchmark

Okay. I think in discussion of the segment, Brian, you referred to the new contract with AK. Could you discuss any differences in terms or contract structure with, let's say, the average of the base contracts currently in place?

Brian MacDonald

Mark, we really can’t talk about specific-customer contract. Sorry.

Mark Gilman – Benchmark

Well, should we expect any change in contribution as a result of this contract versus others?

Brian MacDonald

Well, we’ve given our guidance for 2010. We are holding to our guidance.

Mark Gilman – Benchmark

Okay. What was the impact of the LIFO reserve in the quarter, please?

Lynn Elsenhans

On a per barrel basis, Mark?

Mark Gilman – Benchmark

Anyway you want, Lynn.

Lynn Elsenhans

As it relates to realized margin, I would say, it was probably between $0.40 and $0.50 a barrel.

Mark Gilman – Benchmark

Okay. Would you break that down between the crude component and the product, if you could?

Lynn Elsenhans

Actually, no. I was speaking largely of the crude there and there was another significant impact on the product.

Mark Gilman – Benchmark

What kind of number on that?

Lynn Elsenhans

Probably similar on a per barrel basis for –

Mark Gilman – Benchmark

So all in, $0.80 to $1.00?

Lynn Elsenhans

Yes, as it relates to the realized margin. Yes.

Mark Gilman – Benchmark

And that's coming through results?

Lynn Elsenhans

Yes.

Mark Gilman – Benchmark

Okay. I'm truly impressed with the performance on the refining side. I guess, though, I feel like I'm missing something. Because in a period where you had extensive converge in unit turns in probably the wrong month in the quarter for them to occur, $1.00 – $0.80 to $1.00 a barrel LIFO hit, low utilization rates, it seems there has to be something else going on to hold your unit costs down to the level that I roughly calculate, and not to produce an adverse margin effect, and you had the 5-day crude pricing lag, which had to hurt you additionally in the period. What am I missing?

Lynn Elsenhans

I don’t know that you're missing anything.

Clare McGrory

I'd say, Mark, though, one thing I'll tell you there is that on your last point (inaudible) timing it was kind of offset by some benefits we had just ratability during the quarter. Usually we’re very ratable the way we purchase crudes; it just happened to be some benefit. So it wasn't as big as that you would like.

But all told, outside of the turnarounds we had significantly improved margin capture and there were several aspects of that that was the way we operate it in our conversion units and yield gains it was – and Lynn talked about earlier in terms of actual realizations on our benchmark products. Some help on our chemicals, products out of the refinery. And there is also a lift we got from after the Eagle Point closure in terms of our production mix.

Mark Gilman – Benchmark

Okay. You had conversion unit turnarounds, and yet your yields, your product yields on a manufacturing – from a manufacturing standpoint, essentially improved.

Clare McGrory

Right. I would say outside of the turnaround, we were running much better.

Brian MacDonald

And Mark, while we did see – I mean we had a very good January and February and then a very tough March. So, as you said, losing $70 million before tax is certainly not great, but it is a pretty significant improvement from Q4 and Q3.

Mark Gilman – Benchmark

Okay, I'll take the rest offline. Thanks a lot, folks.

Brian MacDonald

Thank you.

Lynn Elsenhans

Thanks, Mark.

Operator

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

Blake Fernandez – Howard Weil

Good evening. Thanks for taking my question. Brian, I think you just answered one of my questions on the coke guidance. I think I heard you saying that the Jewell expansion was going to result in some negative earnings impact in 2010. Am I to assume that that's just fairly negligible and guidance remains as is?

Brian MacDonald

Guidance remains as is and we have a little bit of cost this year. But we’ll figure out how to offset it somewhere else.

Blake Fernandez – Howard Weil

Okay, great. The other question is on the retail side of things. I think the commentary in the release is that you're looking to take advantage of growth opportunities. Can you just remind me if that – the growth on the retail side, would that be in the form of major larger packages or acquisitions? Or is that really on the re-imaging front or kind of enhancing the asset base that you currently have?

Lynn Elsenhans

It is a little bit on enhancing the asset base we have. But we are also looking at opportunities. Several of our competitors are putting some of their units out of sales, some of those packages are large; some of them are less large. And so we also are opened to profitable acquisition in the retail space.

Blake Fernandez – Howard Weil

Okay, great. Thanks, Lynn. And then the last one for you on the acquisition front – obviously, one of your competitors has a couple of facilities on the East Coast that I guess one of them was just taken down, but one is still available. Is that something that you guys are even entertaining whatsoever? Or are refining acquisitions just not even on the table at this point?

Lynn Elsenhans

Not looking at refining acquisitions.

Blake Fernandez – Howard Weil

Okay. Thanks a lot. Appreciate it.

Brian MacDonald

Thanks, Blake.

Operator

Your next question comes from the line of Ann Kohler with Caris.

Ann Kohler – Caris & Company

Good afternoon. Just a couple of questions. On the $50 million reduction in costs quarter-over-quarter, I would assume that given the bulk of that was from Eagle Point that that is pretty much sustainable?

Brian MacDonald

Yes, I think Ann that probably should be sustainable. There's some seasonality things as we go through the year – that go through the year that might offset some of that. But that’s – our goal is to sustain and continue to push on cost pretty hard.

Ann Kohler – Caris & Company

And do you have a comparable number 1Q over 1Q?

Brian MacDonald

It is a little bit better than that. I don’t have it exactly in front of me. But it is a little bit better than the $50 million.

Ann Kohler – Caris & Company

Okay, and then I know over the past year you've talked about one of the objectives that you have is looking at – potentially looking for a strategic partner for the refining side of the business, potentially with maybe a crude producer. Is that something – I would assume – is that something that you're at this point engaged in? Or is that something that is still a little bit more for the future?

Lynn Elsenhans

Well, given where light/heavy cracks or light/heavy differentials are, it's just not something that’s likely to happen in the near term. I mean the idea is still there and I think eventually it will become an attractive project. But that's really on hold at this point.

Ann Kohler – Caris & Company

Okay, great. Thank you so much.

Lynn Elsenhans

Thank you.

Operator

And we do have time for one more question. We do have a follow-up question from the line of Paul Cheng with Barclays Capital.

Paul Cheng – Barclays Capital

Thanks. Brian, a quick one. Quarter-to-date, when you look at your realization comparing to your benchmark on the refining margins, whether in the crude slate as well as the product, they fluctuate dramatically different than what we have seen in the first quarter so far?

Brian MacDonald

You know, Paul, I am not really prepared to answer that as it’s not even a full month of operations; so, let alone anywhere near a quarter. So I'm not – I really don’t answer that. Sorry.

Paul Cheng – Barclays Capital

Okay. Thanks.

Brian MacDonald

Thank you.

Operator

This does conclude the Q&A. Do you have any closing remarks?

Lynn Elsenhans

Well, I just would like to thank everyone for joining us on the call this evening. Brian and Clare will be available for additional follow-ups that you might have either tonight or tomorrow morning. And I hope that everybody has a good evening. Thank you.

Operator

Thank you for participating in today’s conference call. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sunoco, Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts