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Sunoco (NYSE:SUN)

Q4 2011 Earnings Call

February 02, 2012 5:00 pm ET

Executives

Lynn L. Elsenhans - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of the Board of Sunoco Partners LLC and Chief Executive Officer of Sunoco Partners LLC

Brian P. MacDonald - Chief Financial Officer and Senior Vice President

Clare McGrory -

Analysts

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Chi Chow - Macquarie Research

Mark Gilman - The Benchmark Company, LLC, Research Division

Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Faisel Khan - Citigroup Inc, Research Division

Operator

Welcome to the Sunoco Incorporated's Q4 2011 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Lynn Elsenhans, Chairman and CEO. You may begin.

Lynn L. Elsenhans

Thanks, Craven. Thank you, and good evening. Welcome to Sunoco's quarterly conference call where we will discuss the company's fourth quarter pretax results that we reported today, as well as some strategic and other announcements made today. With me are Brian MacDonald, our Chief Financial Officer; and Clare McGrory, Manager of Investor Relations. I'll start by making a few introductory comments about our results and our strategic review process and then Brian will address business results and our overall financial position and conclude with remarks with some additional detail around the strategic review results.

As part of today's call, I would direct you to our website, www.sunocoinc.com, where we would have posted a number of presentation slides, which may provide a useful reference as we progress through our remarks. I would also refer you to the Safe Harbor statement referenced in Slide 2 on the slide package and is included in this afternoon's earnings release.

So let's begin. As you can see from Slide 3, we reported a pretax loss of $48 million for the fourth quarter. Our results are preliminary and shown on a pretax basis only due to income tax amounts that have yet to be finalized. We expect to report after-tax financial results including accompanying financial information next week. We do not expect material changes to pretax results as reported.

When I look at our financial performance in the fourth quarter, I see a pattern that has become familiar. First, we had very strong performance from Logistics and Retail, the 2 growth areas of our portfolio. Logistics contributed $66 million in pretax income as Sunoco Logistics Partners generated record results for a third straight quarter, largely driven by market opportunities within our Crude Oil segment and growth in our ratable business. The $40 million in pretax income earned in Retail was another solid result, given market conditions during the quarter. Our Retail team did a good job of capturing available margins.

Second, market conditions in Refining and Supply continue to be every challenging and we aggressively are managing the economics of our [indiscernible]. Refining and Supply was negatively impacted by the rapid deterioration in market conditions that occurred in the fourth quarter, which resulted in the loss of $117 million pretax. This marks the 10th quarter out of the last 12 that we have lost money in Refining and Supply. Our Northeast refining business has not had a profitable year since 2008 and has lost over $900 million before tax cumulatively over the last 3 years. This is why we need to exit the refining business, as difficult as this is for our employees and communities.

It is our view that the outlook for motor fuel demand and refining margins in the Northeast remains weak and may continue to get worse. As such, we accelerated the timeline for idling the Marcus Hook refinery to mitigate losses. From an operational perspective, the main processing units at Marcus Hook were idled in mid-December, although the Philadelphia refinery continues to operate. For as long as we own and operate the refinery, safety and reliability will remain key areas of focus.

Regarding the potential sale of one or both of the refineries, I will say that Sunoco has conducted a vigorous and thorough process over the past 5 months with the help of its financial advisor, Credit Suisse. The company initiated contact with more than 150 potential purchasers from around the world, including national oil companies, integrated oil companies, independent refiners, pipeline companies and private equity groups. The potential buyers we have spoken to have considered a range of options, including operating the refineries or only one refinery, operating specific units within the refinery or using the facilities for their storage and logistical capabilities.

At this time, the company has received some degree of interest in its Philadelphia refinery and will continue to pursue a sale of that facility as an operating refinery. If a suitable transaction cannot be concluded, the company intends to idle the main processing units at Philadelphia by July as previously announced. Sunoco has not received a single proposal for the purchase of Marcus Hook as an operating refinery, but is continuing to pursue alternatives for the facility. Sunoco does not believe at this time that Marcus Hook will be purchased and restarted as an operating refinery. Marcus Hook halted crude processing in December and its idling process is expected to be complete within the next few weeks.

Third, delivering value to shareholders continues to be a top priority. We recently completed the separation of SunCoke Energy from Sunoco through a special stock dividend that took place on January 17. This action marks the end of Sunoco's ownership of SunCoke Energy and represents the culmination of nearly 2 years of work on behalf of shareholders to separate these companies.

In addition to reporting earnings this afternoon, the company also disclosed the outcome of the previously announced strategic review. The initiatives are intended to improve future earnings potential, limit future liabilities and provide Sunoco with a well-positioned financial and operational platform, as well as an expense structure that is comparable to companies in the logistics and retail space.

Sunoco's Board and senior management, in consultation with independent financial and legal advisers, considered a wide range of strategic alternatives intended to deliver enhanced shareholder value. The initiative announced today positions Sunoco for growth and success while providing strategic and financial flexibility for the future. Brian will take you through the initiatives later in the call.

The last piece of news I want to cover involves the management changes announced today. Given Sunoco's evolution as a company, its focus on Logistics and Retail and exit from manufacturing, I have decided that now is the right time for me to step aside. After extensive deliberations with the Board, I recommended to them that I was no longer the right person to lead Sunoco as it progressed to the next phase of its future.

Brian MacDonald, currently Senior Vice President and Chief Financial Officer, will become Chief Executive Officer and a Director of Sunoco effective March 1 of this year. Brian has played a key role in Sunoco's transformation and I have full confidence that the company will be in good hands under Brian's leadership. To ensure a seamless transition, I will remain Chairman of Sunoco and Sunoco Logistics until the Sunoco Annual Meeting of Shareholders in May of this year. After that, Brian will become Chairman of both companies.

Mike Hennigan, currently President and Chief Operating Officer of Sunoco Logistics, will become President and Chief Executive Officer of Sunoco Logistics effective May 1, 2012. I hope you will join me in congratulating both Brian and Mike as they assume their new roles and lead both companies into the future.

Now I'll turn the call over to Brian.

Brian P. MacDonald

Thanks, Lynn. I'm going to start by addressing fourth quarter results and then wrap up the call with additional detail on the initiatives that resulted from our strategic review. First, let me comment on quarterly income attributable to Sunoco shareholders and our special items. We reported a pretax loss of $48 million attributable to Sunoco shareholders in the fourth quarter, excluding special items.

Net unfavorable special items of approximately $612 million pretax were primarily associated with provisions to write down refining assets to their estimated fair values in connection with Sunoco's decision to exit the refining business, as well as to record provisions for idling expenses, severance and contract terminations. We also recognized LIFO gains, mostly attributable to the idling of Marcus Hook refinery in December. There will be additional inventory liquidations related to Marcus Hook that continue into 2012.

Regarding Q4 business unit results, I direct you to Slides 5 and 6. Let me start with Logistics and Retail. Logistics and Retail segments businesses, which we continue to believe have the best prospects for growth, and which earned $106 million pretax in aggregate during the quarter. Logistics earned $66 million pretax in the fourth quarter.

The earnings in this business are almost entirely related to Sunoco's ownership in Sunoco Logistics Partners. The main driver for the strong results continues to be the crude oil business as demand for West Texas crude continues to be very high, translating into strong demand for Sunoco Logistics' transportation services, including our proprietary pipelines, the West Texas Gulf and Mid-Valley Pipeline joint ventures, as well as our trucking services.

The recent acquisition of the Texon crude business, along with the existing lease business, delivered excellent results for the quarter and year. The terminal acquisitions executed by Sunoco Logistics in 2011, coupled with the growth in our patented butane blending system, have led to increased cash flows being generated in our terminal segment compared to last year. Sunoco Logistics provided guidance of 7% distribution growth for 2012, up from 6% in 2011, as we are successfully executing on our growth plan. Sunoco Logistics also announced 2012 guidance for organic capital to be approximately $300 million, reflecting a large increase from the previous organic spending levels, demonstrating that the opportunities have never been better in our business.

Retail Marketing earned $40 million pretax in the fourth quarter of 2011. Retail gasoline margins averaged $0.099 per gallon for the quarter and benefited from declining wholesale gasoline prices from mid-October through November. Across the industry, demand was weak in the fourth quarter. On a same-store sales basis, gasoline volumes trended lower by approximately 4.5% versus the same period last year, which is largely consistent with available EIA data.

For the full year 2011, gasoline volumes were lower by approximately 2.8% versus 2010 on a same-store basis. However, even with the challenged demand in the fourth quarter, this is a business that has continued to generate very steady earnings and cash flows for shareholders. For the full year, our Retail segment delivered $169 million in pretax income and $261 million in EBITDA. Average EBITDA for the last 6 years was $277 million.

Now turning to Refining and Supply, where we incurred a loss of $117 million pretax in the fourth quarter. The poor market environment that we saw in September continued into the fourth quarter with Northeast market cracks dropping below $3 per barrel in November and December as gasoline cracks were negative. Further worsening our realized margin were very high actual crude cost versus Dated Brent crude for our Northeast system. These deteriorating market conditions led us to idle our Marcus Hook refinery in mid-December. The refining environment continues to be challenging through January. In particular, related to continued high differentials for light sweet West African crudes.

Now turning to our Coke segment, which earned $9 million pretax in Q4. Our Coke segment results reflects Sunoco's ownership of approximately 81% in SunCoke Energy, effective July 21 when we completed the initial public offering. SunCoke executed a successful startup of the Middletown plant during the fourth quarter. On January 17, 2011, Sunoco completed the spinoff of its remaining interest in SunCoke Energy to Sunoco shareholders. Therefore, Sunoco no longer owns any common stock in SunCoke. This separation of SunCoke from Sunoco is an important milestone in our long-term commitment to deliver value to shareholders. This special stock dividend is another example of this commitment. In Sunoco's first quarter 2012 results, the Coke segment will be reported as discontinued operations, reflecting the spinoff on January 17.

Let me take a few minutes to discuss our financial position at the end of December. As shown on Slide 7, at December 31, we had $2.1 billion of cash on Sunoco's balance sheet, $1.8 billion of which relates to Sunoco parent, excluding cash belonging to Sunoco Logistics and SunCoke. In the fourth quarter, we had a net source in cash of approximately $425 million at Sunoco, excluding Sunoco Logistics and SunCoke. Cash increased in the fourth quarter in large part due to liquidation of refined product inventory related to both expected seasonal movements as well as the idling of our Marcus Hook refinery. Other cash activities during the fourth quarter included approximately $100 million in proceeds received for the sale of the Haverhill chemical plant, which closed in October and the repayment of the $100 million intercompany loan to Sunoco from Sunoco Logistics.

Sources of future expected cash flow include the $182 million note receivable from PBF from the sale of the Toledo refinery, the $125 million pretax potential earnout provision also related to the sale of Toledo and the net proceeds from the exit of the refining business. At this point in time, we have no change in our estimate of net cash to Sunoco related to the exit from refining of approximately $200 million. As explained previously, this net number includes working capital liquidations, contract termination costs, severance costs, tax impacts among other puts and takes. We expect most of these items to flow through our cash flows over the next 12 months.

Our 2012 capital guidance is shown on Slide 8. We expect to spend approximately $150 million in the Retail business, excluding acquisitions. About $80 million is what we call maintenance or stay-in business capital and we expect to put another $70 million to work to grow the business organically. This would include capital investments in new toll road and other recently acquired sites, conversions and other investments targeted to improve income generation in the business.

We also show Logistics capital plans, which are expected to be funded by debt and internal cash flow of Sunoco Logistics. We expect to invest approximately $300 million in organic growth in 2012, which includes the West Texas crude expansion, the butane business, the Nederland Terminal, Mariner West and the Eagle Point terminal. Sunoco Logistics maintenance capital is expected to be approximately $50 million.

Now finally, I want to address the results of our strategic review in a bit more detail. Recall that the objective of the strategic review, as outlined last September, was to determine the best way to deliver value to shareholders of the company after the exit from refining, including how best to utilize the company's strong cash position and maximize the potential for Sunoco's Logistic and Retail business.

As Lynn stated and as outlined on Slide 9, we have decided to pursue a series of initiatives which are designed to deliver immediate value to shareholders, reduce share count, provide strategic flexibility and lower future pension, retiree medical and environmental costs.

I want to walk through each of these initiatives and the reasoning behind them. They are also outlined on Slides 10 through 15. First, we intend to repurchase up to 19.9% of Sunoco's outstanding common stock in open market transactions. This is on the heels of our recent repurchase of 12% of our common stock of April of last year. We believe a share repurchase is the best way to return capital to shareholders. It will improve earnings and cash flow per share, increasing shareholder leverage to the steady earnings and cash flows generated by our Logistics and Retail businesses. We plan to complete the planned repurchase over the next 12 to 18 months. I should note that we are limited to a repurchase program of less than 20% at this time as part of certain tax restrictions related to the recently executed SunCoke tax-free separation.

Second, our management and board have demonstrated their commitment to shareholder return with a decision to increase the annual dividend by 33%, effective immediately. The dividend increase is based upon our expectation of improved earnings from our businesses after the exit from refining and our continued strong balance sheet. We will be paying a quarterly dividend of $0.20 per share effective with the dividend payable on March 9, 2012. Future dividends are of course subject to board declaration.

Third, in order to appropriately size the capital structure for the new business profile, we intend to repurchase some of our outstanding debt. We plan to spend approximately $400 million over the next year reducing our overall gross debt. This includes approximately $100 million of bonds, our PEDFA bonds actually, that were just redeemed in January. As a result of our debt repurchase in 2012, we expect a lower interest expense by approximately $15 million pretax, which improves the earnings power of the company going forward. Additionally, we believe that by having less debt, we will have greater financial flexibility to pursue growth opportunistically.

Our final initiatives are all aimed at improving the financial position and transparency of the company going forward, by putting legacy liabilities behind us. We are a company with over 125 years of history, including many legacy businesses, overwhelmingly manufacturing related. A significant focus on this strategic review was positioning of the new Sunoco to have a cleaner balance sheet and earnings profile going forward, so that it could be competitive with the newer companies that are not burdened with legacy liabilities.

We believe deployment of our cash towards pension, post retirement liability and environmental remediation liabilities will benefit shareholders in this regard. An additional benefit to shareholders is the tax efficiency of these contributions at this time, as we expect to generate significant tax benefits that will be used to offset the large LIFO tax liability generated with our refinery exit.

Our plan is to fund our pension liability by approximately $80 million pretax. This funding significantly reduces potential need for any additional pension contributions for the foreseeable future. As a reminder, we made a very tough decision in 2010 to freeze pension benefits, and at the same time, we contributed about $230 million in a tax-efficient manner to our pension liability, at a time when our plans were underfunded by approximately $300 million.

We also plan to establish a VEBA trust for our postretirement liabilities by contributing approximately $200 million on a pretax basis. Our analysis shows that if this trust is funded with $200 million, it should cover retiree medical expenses through 2020. We also plan to restructure the postretirement medical plan to eliminate Sunoco's liability beyond these $200 million pretax contribution. We believe this provides sufficient line of sight for retirees in terms of their medical coverage and will give them an opportunity to convert to a government-funded plan or arrange for alternative coverage before the end of this period. By pre-funding and restructuring this retiree medical plan, annual pretax earnings will be approximately $20 million better than would otherwise be the case in future years, and annual pretax cash flow will be improved by approximately $30 million per year.

Lastly, our board and management also decided to establish a segregated environmental fund via separate company and captive insurance company to be used for the remediation of legacy environmental liabilities. We plan to contribute approximately $250 million pretax. Environmental remediation is a significant source of potential cash drain in the future that we carefully evaluated in the strategic review.

Known and unknown liabilities exist, largely related to legacy operations which are unrelated to our current and future Logistics and Retail business. Given the strategic shift in our company away from manufacturing and other diverse businesses, we believe it would be appropriate to allocate some of our cash to address obligations related to these liabilities from historic operations. We will do this through insurance policies issued by a captive that would cover known and unknown liabilities that arise in the future related largely to these legacy sites and diverse discontinued operations.

We will structure it in such a way where we can contribute our cash today to fund these known and unknown liabilities in a tax-efficient manner and take off the table future drains on cash related to these matters so that investors can buy Sunoco's stock without the noise of these diverse legacy liabilities.

These legacy sites that are subject to environmental remediation obligations that this fund would be used for include legacy terminals and other legacy logistics assets, currently and formerly owned or operated refineries, chemical plants, mining operations and associated off-site disposal facilities. Remediation liabilities associated with our existing retail operations will continue to be managed as they currently are. As a result of this structure, we expect annual cash outlays to decline by $10 million to $15 million versus historic run rates. We currently plan to complete this funding by the end of 2012 and will provide updated details as necessary as we work through it.

In summary, as detailed on Slide 16, we plan to deploy cash in the range of $340 million to $390 million after tax towards legacy liabilities, and $400 million towards gross debt reductions, which together are designed to improve financial and strategic flexibility to deliver sustainable value to shareholders. Additionally, we plan to return capital to shareholders in the form of a share repurchase of up to 20% of our outstanding common stock, as well as through an increased dividend. If you are to assume a full 19.9% share repurchase was completed at an average price of $38, reflecting recent share price, that would be approximately an additional $800 million used to return capital to shareholders in addition to the 33% increase in the ongoing dividend.

Using this illustration of the share repurchase, we would utilize cash of approximately $1.5 billion to $1.6 billion after-tax from the strategic initiatives we announced today. We believe that after our exit from refining, all of these initiatives allow the company to be well positioned to generate value for shareholders through our high-return Logistics and Retail business. The company will be financially stronger without the burden of significant legacy liabilities and will be more flexible.

Sunoco will also continue to be in a position to support the growth of Sunoco Logistics and to grow in Retail through organic capital invested in our existing portfolio as well as opportunistic acquisitions. Shareholders will be more levered to our strong businesses with a higher dividend and higher earnings and cash flow per share.

With that, I'll ask the moderator to open up the line for any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Arjun Murti.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

First of all, best wishes, Lynn, to you in your future endeavors. You did far more in restructuring and repositioning of this company than we ever expected and I definitely wanted to wish you the best. I realize many of these were very tough decisions, so good luck to you.

Lynn L. Elsenhans

Thanks a lot, Arjun.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

My question, Brian, you were getting to it at the end there with the remediation points. If you don't sell the refineries and you decide to shut them down, what are you obligated to do? Do you have to dismantle them? Reclaim the land, I realize there's some amount of logistics assets associated with them that would continue, but how involved is, I guess, "cleaning up the site" if you don't sell the refineries?

Lynn L. Elsenhans

Well, first of all, Arjun, what you do and the timing of when you do it is in fact somewhat dependent on how the sites get used. But regardless of what we do and when we do it, it's all funded in the $250 million that we're talking about with this captive insurance as well. And essentially, we have remediation plans that get approved by the agencies. And again, it depends on how the sites are utilized.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Got it. And I think the point you were trying to make there clearly was, it will not be part of the going concern, Sunoco general partner Logistics and Retail company?

Brian P. MacDonald

That's correct, Arjun.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

That's great. The related part to that is, you mentioned there are a long list of national oil companies, integrated oils, et cetera. I presume in the list could be included petrochemical companies, there's obviously a lot of natural gas in the Marcellus, other types of export facilities, maybe even LNG. Are those in that list of potential suitors? Or is it really someone might or might not consider this as a refining site primarily?

Brian P. MacDonald

Arjun, our primary focus to-date has been to try and sell the refineries as operating refineries. That's clearly in the best interests of our employees and our communities. And we've been working very hard to do that. And so as part of that process led by Credit Suisse, we've contacted over 150 people to try to generate interest in buying one or both refineries as operating refineries. As Lynn mentioned in her remarks, unfortunately, we did not receive a single offer for Marcus Hook as an operating refinery, I think reflecting obviously very difficult refining economics. We do have interest, limited interest, in the Philadelphia refinery as an operating refinery, and we continue to pursue that option. And we'll see if we can conclude a sale that would continue to have Philadelphia refinery operating. But our anticipation is that Marcus Hook will not be sold as an operating refinery, unfortunately. And so we will continue to pursue other alternative uses for the site, many of which you mentioned as potential options as Marcellus develops or other potential uses for the site.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

And just lastly, very quickly, will the going concern company -- and maybe this is for you, Brian, as the future CEO, definitively retain the retail gasoline business? Or that's something to be determined in the future?

Brian P. MacDonald

Well, Arjun, we've gone through this pretty comprehensive strategic review with the financial advisors and external counsel, and we've looked at a lot of options to deliver value to shareholders. And at this time, we believe the best way to deliver value is to keep the 2 businesses together. We obviously have a track record here of delivering value to shareholders, so we'll continue to monitor the strategy. But for the foreseeable future, our plan is to run the 2 businesses together.

Operator

The next question is from Doug Leggate.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Again, I'll echo Arjun's comments, and congratulations, Brian. If I may try, just a couple of housekeeping points, maybe one strategic question to kick off. Arjun asked a question about retail but you also have the general partnership, Brian, in the Sunoco Logistics business. I'm just wondering in terms of having that value recognized by the market, a little more tangible perhaps, what are your thoughts there? And then I do have a couple housekeeping questions, please.

Brian P. MacDonald

Sure. Well, I think we very much like our position in the Logistics business. We think it's got great growth prospects in front of it. We obviously have a big stake both in LP units as well as our GP position and our IDR position. And we'll be working hard with folks like yourself to help get that value recognized in the market.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

So it's not -- it's a core part of the business for the time being.

Brian P. MacDonald

Yes. As I said to Arjun, we've looked at a lot of options to deliver value to shareholders as part of our strategic review. And at this time and for the foreseeable future, we think the best scenario is to run the 2 businesses together.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

My housekeeping points is, a couple quick ones, if I may. Can you tell us what the Sunoco pure net debt was in the quarter? And can you maybe just give us an idea what you see is the appropriate capital structure for the new business as we go forward? Then I've got one final one, please.

Clare McGrory

Sure, Doug. This is Clare. If you see our net debt actually at the end of the year, is on our conference call slide.

Brian P. MacDonald

So it's $700 million.

Clare McGrory

And you'll see it's about $700 million of net cash at 12/31 for Sunoco parent.

Brian P. MacDonald

So Doug, Sun parent today has approximately $1.1 billion of debt. We've already taken $100 million of that out in January. And we'll take another $300 million over the next 12 months. So that will take us down to about $700 million of gross debt at the Sunoco parent level. And we think that's a pretty comfortable level.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

And I guess the final one then is as you've reported pretax, can you just explain maybe in a little bit of detail as to why you didn't give us the after-tax numbers? I'm just curious as to what the blockage was there in terms of giving out numbers to us.

Brian P. MacDonald

Yes. I mean, as you probably noticed in the release and some of the announcements we made today, we have a lot of things going on here and we just needed a little bit more time to work through the book tax impacts of the various things that are in our results. And so we felt we had a lot of important news to get to the market in terms of the strategic review. We feel very comfortable about the pretax operating results, and so we decided to give you all this news. And next week, we'll give you the after-tax numbers.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Just one more point of clarification. You mentioned, when you were going through the net debt numbers, that you had the $100 million note from SXL paid in the fourth quarter. Is that the one due in 2013?

Brian P. MacDonald

Yes.

Operator

The next question is from Evan Calio.

Evan Calio - Morgan Stanley, Research Division

A few detailed questions here, maybe just one broader strategic question. As you shift from an integrated to an independent retail business, do you expect to pursue more of a growth strategy or cash harvest? How should we think about that business on a forward basis?

Brian P. MacDonald

Yes, Evan, we have been growing that business with some smaller acquisitions, which we think have been -- which have been accretive for us. And we'll continue to look to grow that business through some tuck-in acquisitions as well as organically.

Evan Calio - Morgan Stanley, Research Division

And a different question on the cash. Going forward, still $700 million in cash would appear to be current run rate cash gain in the quarter. How do you think about the use of any clearly refinery proceeds? Would that be more growth capital or potential dividend as buybacks are limited by the spinoff?

Brian P. MacDonald

It's a very good question, Evan. And under certain circumstances, if events were to change in the future, there may be an opportunity to revisit the buyback levels. At this time, we don't have any plans to go above the 19.9%, but under certain circumstances, there could be a revisiting of that. And what I would say is we have announced a lot of things today, and we want to get through these, we want to get through a successful exit from refining. And then we'll take a look again at where we are and what are the opportunities.

Evan Calio - Morgan Stanley, Research Division

Sorry if I missed it. When is the Safe Harbor on the buyback? And is it 2 years from the IPO or from the spinoff date?

Brian P. MacDonald

There's no real definitive time period on the Safe Harbor. And the key is that we obviously don't have a plan to buy more than 19.9% of the stock back at this time.

Evan Calio - Morgan Stanley, Research Division

Maybe lastly if I could squeeze one in. Just on the -- are the contributions on environmental and medical, are they direct offsets on the LIFO inventory gains? I mean, is there a scenario where that's a full tax yield based on your...

Brian P. MacDonald

No. We have very large -- fortunately or unfortunately, we have very large LIFO tax gains, and these will be very efficient in reducing some of our LIFO tax gains. But we still believe we'll have some tax gains even after these items. And why we felt it was important to, for a variety of reasons strategic, but also in terms of tax planning, that we get these done in 2012.

Operator

Next question is from Paul Sankey.

Paul Sankey - Deutsche Bank AG, Research Division

The question I had was, I guess, somewhat obscure, but the decision to make the insurance company captive, could you talk a little bit about that? And I guess the overall reason for this question is I'm wondering whether or not there would be major obstacles to somebody acquiring Sunoco. I assume that the biggest previous unknown liability was the environmental issue. And I guess within that, I'm just thinking about how much range there was of uncertainty on the environmental liability and how well this captive insurance company would mitigate that.

Brian P. MacDonald

Paul, it really wouldn't be appropriate for me to speculate on what someone might be concerned about or not concerned about in terms of a potential acquisition. What I would say is that we felt, as we reposition the company away from these legacy businesses, that we felt it was very important for investors, as well as the community that these sites are in, that we fund this liability and effectively take it off the table from the future company.

Paul Sankey - Deutsche Bank AG, Research Division

Yes. And the decision to do it captively, is that just because of the annual premium would be so large that it's better to sort of hold it within yourself? I'm just wondering, because if you have a large environmental liability, I guess -- and I'm not sure why captive is the way forward, that's all.

Brian P. MacDonald

Well, there's a lot of technical reasons in terms of the structuring. Some part of it is getting a certain level of tax-deductibility for the structure, part of it is creating the surety that comes with the captive insurance company, which is a regulated entity under insurance rules. The liabilities will be funded based upon an actuarially -- actuarial basis from third parties. And so this entity and this approach will have a lot of substance to it as well as a substantial amount of cash to make all the parties involved from Sunoco's shareholders, creditors, our communities where these sites are in, that people will have a good sense of surety around the ability to take care of these liabilities.

Paul Sankey - Deutsche Bank AG, Research Division

We'll have a comparison on Wall Street for valuation purposes. Where do you think you're taking Sunoco now in terms of what we should consider you to be from a comparative point of view? Are there other companies that we can look at and say, "This is the valuation of Sunoco?"

Brian P. MacDonald

Well, Paul, usually I don't like to tell people how to do their job. And since that's your job...

Paul Sankey - Deutsche Bank AG, Research Division

I've got an idea about it, Brian, just seeing what you thought.

Brian P. MacDonald

Since you don't mind occasionally telling us what you think we should do in our jobs, I think we're increasingly looking like a C-Corp MLP. We obviously have a great MLP with lots of good growth prospects and we have a great retail business with steady cash flow. Our MLP now has -- our share of MLP's earnings are now greater than our Retail business, and the MLP will continue to grow. And so I think we're increasingly looking like a C-Corp MLP, which as you know is an emerging class of companies playing in the infrastructure place. And that's the way we kind of increasingly view ourselves versus other peers.

Operator

The next question is from Chi Chow.

Chi Chow - Macquarie Research

At the Philly refinery, you've got disclosure that states the cumene supply agreement with the Frankford phenol plant can be terminated with 6 months prior notice. Has the company given Honeywell that notice at this time?

Brian P. MacDonald

Yes, Chi, we have.

Chi Chow - Macquarie Research

And secondly, can you give us some guidance on how G&A expenses may trend going forward with all the strategic changes at the company?

Brian P. MacDonald

Yes. I think in 2012, costs are sticky in this category. So 2012 will look reasonably similar to 2011. We have some things to do in terms of implementing systems and processes for the new company as we exit manufacturing to allow us to get some of the costs down going forward. But for 2012, I would broadly think that it looks a lot like 2011.

Chi Chow - Macquarie Research

Any view on how it might trend next year?

Brian P. MacDonald

I'd like to defer that till the end of this year, Chi.

Chi Chow - Macquarie Research

One more for me. Brian, do you have any timing on the remaining $300 million of debt redemptions you laid out?

Brian P. MacDonald

Well, we need to work through that, and we will do it within the next year for sure. But we'll also be opportunistic as well.

Operator

Next question is from Mark Gilman.

Mark Gilman - The Benchmark Company, LLC, Research Division

It's a little difficult, I guess, for me to do math at this hour of the day. But in thinking through the equity impacts of the whole series of initiatives, it looks to me as if the balance sheet gets real close to a 0 equity position. Can you comment on that?

Brian P. MacDonald

Yes. I think, Mark, you're forgetting about all the LIFO gains that are coming, because LIFO is on the books at such a low value.

Lynn L. Elsenhans

Basically the balance sheet today reflects the impairments of refining, which will be largely offset by the LIFO gains, which will be recognized as we liquidate the inventory.

Mark Gilman - The Benchmark Company, LLC, Research Division

Yes, but the tax on those LIFO gains is, by your own admission, substantial, is it not?

Brian P. MacDonald

Yes. But the LIFO gains are also substantial, Mark, to the tune of $2.7 billion before tax.

Mark Gilman - The Benchmark Company, LLC, Research Division

Let me talk about the postretirement benefit situation. Is there a union approval at all that's required in order for you to implement this?

Lynn L. Elsenhans

No.

Mark Gilman - The Benchmark Company, LLC, Research Division

Does this affect union employees?

Brian P. MacDonald

This would affect retired employees of our unions, as well as those union members who are currently eligible for retiree benefits.

Mark Gilman - The Benchmark Company, LLC, Research Division

And you could just do this unilaterally.

Brian P. MacDonald

Yes.

Mark Gilman - The Benchmark Company, LLC, Research Division

That seems a little strange. Let me shift to the environmental. I am by no means an insurance expert and probably relatively ignorant with respect to that space. But I guess I don't understand how even with the creation of a captive insurance company you can put a ceiling on what have to be considered highly uncertain future liabilities. How does that work?

Brian P. MacDonald

Well, we will establish an insurance company and we will have actuarial valuations of the liabilities, both known and unknown. And we will fund that, and that entity will provide the insurance for both known and unknown liabilities.

Mark Gilman - The Benchmark Company, LLC, Research Division

And $200 million dollars does that.

Brian P. MacDonald

I think we said $250 million.

Mark Gilman - The Benchmark Company, LLC, Research Division

Okay, $250 million, where the potential claimants, if you will, would have no recourse to Sunoco should just liabilities be in excess of what that captive insurance company could fund.

Brian P. MacDonald

Correct.

Mark Gilman - The Benchmark Company, LLC, Research Division

Okay. Last one for me, operational. There's been some press and trade stories regarding the fact that you've moved some Bakken crude to the Philadelphia refining complex. Can you comment on the validity of that? To what extent it has occurred? And whether it's something that you could do more of going forward or a potential purchaser could do more of?

Lynn L. Elsenhans

I can say that, yes, we have moved small amounts of Bakken crude into Philadelphia. And it's a limited opportunity. But it's possible that, that could increase over time with the addition of additional Logistics.

Mark Gilman - The Benchmark Company, LLC, Research Division

Give me a rough idea what the cost -- what the laid-in cost of doing that is, Lynn.

Lynn L. Elsenhans

I think you're going to have to ask Clare that off-line. But as you know, Mark, we don't really go into a lot of specifics on operating costs.

Operator

The next question is from Brad Olsen.

Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I just have a couple questions. Following up on Brian's comment about your new peer group, the dividend looking forward, pro forma you guys are looking at probably a lower payout ratio than some of your C-Corp MLP holding company comparables. And do you guys have any thoughts on whether or not that's a good kind of target payout ratio going forward? Or whether that's something you'll revisit following the idling or sale of the Philadelphia unit?

Brian P. MacDonald

Brad, it's Brian here. What I would say is, we still have some restructuring activity to get through this year. And I think you've raised a very good point. We made a 33% increase in the dividend today. But we'll continue to evaluate that as we move out of manufacturing and reposition the company.

Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And on a similar note, Brian, you also mentioned that going forward, Sun investors are more levered to the new Retail and Logistics asset footprint. And so going forward, would you expect that the dividend would follow a growth rate kind of commensurate with the growth rate at those underlying businesses? Or is it something where the MLP and the C-Corp will kind of follow their own policies as dictated by the Board of Directors?

Brian P. MacDonald

Brad, I think it's a great question and one that we've been thinking about. But we've had a lot of things going on and one that we haven't put enough thought to, to really be able to answer now. But I think it's a very fair question and it is on our mind.

Brad Olsen - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And just one more question, this on -- you mentioned the tax-efficient deployments of cash, the various prefunding of your obligations. Now is that -- will the tax-efficient deployments of those amounts, will that affect your tax rate going forward on the cash flows you have from the Retail and the MLP business? And if you wouldn't mind maybe reconciling the $200 million net proceeds of the refinery shutdowns and kind of helping us understand kind of what that $200 million looks like now pro forma for those tax-efficient deployments.

Brian P. MacDonald

Yes. Brad, first of all, going forward, once we get into 2013 and really have put a lot of this restructuring behind us, our tax rates should return to a sort of a normalized 40% rate. So kind of going forward, I think that's a reasonable tax rate for the new Sunoco. In terms of the $200 million that we anticipate to get from the refinery, that is net -- the way I would think about that is that's net of a lot of things, including severance costs and contract terminations and other expenses, as well as the working capital. So I would think about that as a discrete item, and then I would look at the after-tax cost of the initiatives, the funding of the environmental trust, the retiree healthcare and the pension as we've outlined them in the deck. And the important point is that we have enough tax capacity to ensure that we get cash tax optimization for these items because of our LIFO tax gains.

Operator

Next question is from Paul Cheng.

Paul Y. Cheng - Barclays Capital, Research Division

Several quick questions -- I have to apologize, I actually joined late, so you may already covered it, so if that's the case, please let me know. On Retail, Brian, can you share some insight on your own Retail net worth, what kind of yields for the year, now same-store sales number that you can see? I mean, the DOE number seems to have dropped a lot but looked like none of our company have been seeing that kind of similar drop, wondering there what you guys have seen?

Lynn L. Elsenhans

For January, the low gas [ph] sales were down about 0.3%. And if you just take a little bit of a broader view, we roughly are in line with the EIA numbers. I don't know, Clare, do you have anything to add?

Clare McGrory

Yes. I think we saw improvement year-over-year on January. 4Q is pretty tough, but as Lynn stated...

Paul Y. Cheng - Barclays Capital, Research Division

Because the DOE number actually dropped significantly more based on their weekly reports. But you guys are seeing just only 0.3% drop year-over-year.

Clare McGrory

For January. I don't think the EIA numbers are generally pretty -- are very reliable at this point for January.

Paul Y. Cheng - Barclays Capital, Research Division

No, they are not. That's why that we're trying to -- but the gap is very big.

Lynn L. Elsenhans

Right. So for the January number, I wouldn't rely on it. But more broadly for the quarter, the fourth quarter, I think we would say we were relatively in line.

Clare McGrory

Yes, roughly in line to a little bit better.

Paul Y. Cheng - Barclays Capital, Research Division

And Lynn, do you believe your retail network has been gaining market share or that your 0.3% drop year-over-year in January is a reasonable representation of your market?

Lynn L. Elsenhans

Well, in the markets that we are participating in, I think we're doing well and probably gaining a better share.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And second question. Marcus Hook, you said you idled in December. Is the whole facility now totally shut down and is not being run or process any crude?

Lynn L. Elsenhans

We're not processing any crude.

Paul Y. Cheng - Barclays Capital, Research Division

And is it still the plan, that by July 1, despite that the current very strong margin, you still plan, say, Philly by January 1, that you're going to stop running?

Lynn L. Elsenhans

Correct.

Paul Y. Cheng - Barclays Capital, Research Division

And on a going forward basis, Brian, how much is the cash you really need on hand for the retail operation to run on a smooth and efficient way?

Brian P. MacDonald

Paul, we're not prepared to address that today. I think we'll be working on that, and what we think that is as we exit manufacturing. It's certainly substantially less than the cash that we carry today and certainly less than the cash that one needs if you're in the refining business. But we're not going to put a number on that today; that's something that we'll roll out as we complete our exit from manufacturing.

Paul Y. Cheng - Barclays Capital, Research Division

Brian, can you tell us what is the working capital or the inventory value of your retail business?

Clare McGrory

The inventory value at December 31 is not that different from 9/30. It's a little over $3 billion in total. And on the working capital, we'll update you when we release our balance sheet next week and finalize the tax amount.

Paul Y. Cheng - Barclays Capital, Research Division

Like kind of, is that the total Sunoco? I'm just asking on the Retail business, excluding Refinery.

Clare McGrory

The Retail business, I don't have that breakout.

Paul Y. Cheng - Barclays Capital, Research Division

So I'm trying to understand now on a going-forward basis that once you are out from the refining, I mean how much is really the working capital requirement that for the retail business?

Clare McGrory

What we had talked about before was, and it's something we are continually evaluating, but it's going to be about 5 million to 6 million barrels and realize that we have -- we'll have inventory somewhat downstream as well as inventory depending on how we're purchasing it as in route that we take title to, when it loads into a pipeline or what have you.

Paul Y. Cheng - Barclays Capital, Research Division

And how many station now, that is actually owned and operated by you now?

Clare McGrory

We have company operated sites still about just short of 400 sites.

Paul Y. Cheng - Barclays Capital, Research Division

And that on a going-forward basis, beyond that, what is the game plan? Do you want to grow the company up more aggressively? Or that your growth will be primarily on the [indiscernible]?

Brian P. MacDonald

Paul, one of the things I like about our business, I mean we have a good business in all 3 channels of trade and we earn good returns in all 3 channels. And we often move sites between the 3 channels to optimize. So I would say that we continue to want to grow in all 3 channels in ways that make sense in terms of returns and delivering value.

Paul Y. Cheng - Barclays Capital, Research Division

Is there one more important or more as a focus to, once you have a bigger growth than the other? Or that really doesn't have a target?

Brian P. MacDonald

No. I wouldn't say one is more important than the other. I think it's finding the right clothes for the right season and then that's the way we approach this, is how can we be successful and grow in all of those 3 channels.

Operator

And the next question is from Faisel Khan.

Faisel Khan - Citigroup Inc, Research Division

Just want to make sure that I understand something. When you decide to shut down the refineries or if you decide to shut down Philadelphia, is there still an opportunity to turn these assets into terminals?

Lynn L. Elsenhans

Yes.

Faisel Khan - Citigroup Inc, Research Division

When does that decision get made? I guess at Marcus Hook, you've already decided to shut it down. So is there an opportunity to convert that to a terminal now and...

Lynn L. Elsenhans

That's a possibility. But there are other potential options for the site and we continue to evaluate all the options for its alternative use.

Faisel Khan - Citigroup Inc, Research Division

And then on the $200 million working capital number, or the number you think you'll get recovery on once you've shut down the refineries, is that inclusive of the environmental fund of $250 million? Or is that exclusive of that $250 million?

Brian P. MacDonald

They're really 2 separate items. The environmental funding includes all of our legacy sites, including the Philadelphia and Marcus Hook refinery, it includes refineries that have been sold to others that are no longer operating, it includes legacy logistics locations, it includes Sunoco's participation in Superfund sites, it includes legacy retail sites that Sunoco no longer owns or operates. So there's a lot of different pieces in that environmental trust, former mining sites that Sunoco was involved in. And it's well beyond just the Marcus Hook and Philadelphia refining sites.

Faisel Khan - Citigroup Inc, Research Division

And then in the retirement of debt that you guys talked about in your prepared remarks, I think you said you reduced interest expense by about $15 million. I would have thought that number would be a little bit higher given your cost of debt, but it seems to be a little bit low.

Clare McGrory

Faisel, about $130 million of that is -- consists of the PEDFA bonds and lease on our equipment at the refinery, both of which, about $130 million have very low interest rates.

Faisel Khan - Citigroup Inc, Research Division

Okay, that makes sense. And just so I understand, with all these sort of initiatives taking place, I mean it seems like corporate expense could be cut down fairly significantly going into the future. And I think you said you still want to wait a little bit longer before you figure out what that number is. But when do think we'll know how much corporate expense can be cut out of the entire company on a go-forward basis?

Brian P. MacDonald

I think mid-to-late this year, we should be able to give you a little more clarity on that, Faisel. I don't want us to get ahead of ourselves. But I think mid-to-late this year after we exit manufacturing and get these items in place, we'll be able to give a better view.

Faisel Khan - Citigroup Inc, Research Division

Okay. And then what have your conversations been like with the rating agencies? I would assume now that you're exiting manufacturing and that's very clear, that there should be some sort of acknowledgment that this is a less risky business?

Brian P. MacDonald

I certainly will not speak for the rating agencies. We have informed them of all of these actions, some of which are shareholder friendly and some of which are creditor friendly. And we're certainly trying to do this in a way that's balanced and fair to both shareholders, creditors, current employees and former employees. And I think the rating agencies will have something to say at the appropriate time. But we're comfortable -- we're very comfortable with the capital structure of the new Sunoco and the derisking of the new Sunoco with taking all these legacy liabilities off the table, reducing debt, and putting these employee liabilities behind us.

Lynn L. Elsenhans

Okay. Well, thank you very much for joining us this evening. As I indicated at the start of the call, we will be reporting on our after-tax financial results, including accompanying financial information next week. Brian and Clare will be available for follow-up tonight or tomorrow. In addition, they will be in attendance at the Credit Suisse Energy Conference in Colorado on Monday and Tuesday. I also want to say that I have enjoyed working with all of you during my time at Sunoco and Sunoco Logistics and thank you for the well wishes. I also wish you every success. Thank you.

Operator

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

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