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.

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…

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…

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

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.

Thanks a lot, Arjun.

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?

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.

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?

That's correct, Arjun.

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?

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.

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?

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.

The next question is from Doug Leggate.

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.

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.

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

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.

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.

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

So it's $700 million.

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

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.

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.

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.

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?

Yes.

The next question is from Evan Calio.

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?

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.

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?

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.

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?

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.

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...

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.

Next question is from Paul Sankey.

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.

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.

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.

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.

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?"

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

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

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.

The next question is from Chi Chow.

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?

Yes, Chi, we have.

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?

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.

Any view on how it might trend next year?

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

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

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.

Next question is from Mark Gilman.

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?

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.

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.

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

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

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?

No.

Does this affect union employees?

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

And you could just do this unilaterally.

Yes.

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?

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.

And $200 million dollars does that.

I think we said $250 million.

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.

Correct.

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?

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.

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

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.

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?

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?

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.

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.

Next question is from Paul Cheng.

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?

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?

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

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.

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

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

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.

Yes, roughly in line to a little bit better.

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?

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

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?

We're not processing any crude.

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?

Correct.

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?

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.

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

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.

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

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

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?

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.

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

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

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]?

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.

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?

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.

And the next question is from Faisel Khan.

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?

Yes.

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...

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.

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?

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.

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.

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.

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?

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.

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?

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.

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.

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