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Sunoco Quiet on Retail Plans

CEO promises that details will be forthcoming soon in SEC filings; readers expect sale

PHILADELPHIA -- Sunoco executives revealed little about how or if the company's purchase by a midstream energy company known mostly for its pipeline and natural gas assets will affect its retail strategy and the disposition of its retail network.

Energy Transfer Partners LP (ETP) announced its acquisition of Sunoco, including its 4,900 retail locations in 23 states, on Monday (see Related Content below for previous CSP Daily News coverage).

Sunoco president and CEO Brian P. MacDonald said during an earnings call with analysts yesterday that the company will spell out the details shortly in filings with the U.S. Securities & Exchange Commission (SEC).

CSP Daily News readers, meanwhile, appeared confident that the company will sell off the retail assets. In response to a poll that asked, "What do you expect ETP ultimately to do with Sunoco's retail assets?", half (more than 49% of approximately 70 respondents) said that they believe ETP will sell them all off by the end of the year, and about 34% said that it will keep the best sites and sell the rest. Only 9% said that they believe ETP will maintain, manage and grow them as its own, and 3% said they believe it will keep them as is (and 4.5% said "other").

MacDonald, who took over the top job at Sunoco from Lynn Elsenhans only in early March, said "Sunoco has transformed itself over recent years, and ... this deal is an appropriate next step for Sunoco."

For the past few years, Elsenhans touted that transformation, emphasizing that Sunoco's strategy has been to shift its focus from refining to retail and logistics (see Related Content below).

Concerning the "path forward," MacDonald added that "over the recent years, we have taken a number of actions that have completely transformed Sunoco. ... We now have two strong high-return businesses in retail and logistics. We continue to focus on ensuring these businesses are positioned to deliver strong results and to execute on their respective growth opportunities."

Pressed during the Q&A by analysts, he reiterated that "there'll be more detail in the [SEC] proxy. What I can say at this time is that, obviously, in the past year, we thoroughly reviewed our entire business, including conducting the publicly announced comprehensive strategic review. As a result, we have a very clear understanding of the industry landscape and our value. We believe the combination with [ETP] delivers unique synergies and benefits, which is why [ETP] is prepared to pay an attractive premium and why our board has determined that this is the best way to deliver value to our shareholders."

Philadelphia-based Sunoco Inc. reported net income of $248 million for first-quarter 2012 versus a net loss of $101 million for first-quarter 2011. Logistics contributed pretax income of $57 million, while Retail Marketing realized a $6 million pretax loss. Refining & Supply reported a pretax loss of $87 million

"Sunoco's focus on the high-return logistics segment continues to bear fruit as Sunoco Logistics Partners LP had another excellent quarter and contributed $57 million in pretax income to Sunoco," said MacDonald. "Sharply rising crude prices pressured margins in Refining & Supply, as well as Retail Marketing, resulting in losses in both segments."

Commenting on the merger with ETP, MacDonald said, "The combination with ETP is a strategically and financially compelling combination that provides substantial value-creation opportunities. ... In addition, under the merger agreement, Sunoco will continue its plans for exiting its refining business as previously announced, as well as continue its plans for the proposed refinery joint venture being discussed by Sunoco and The Carlyle Group."

Logistics earned $57 million pretax in first-quarter 2012 versus $31 million in first-quarter 2011. The increase in earnings was primarily due to expanded crude oil volumes and margins resulting from market related opportunities in West Texas. Higher crude oil pipeline fees and earnings attributable to acquisitions completed during 2011 also contributed to the improved results.

Retail Marketing had a pretax loss of $6 million in the current quarter versus pretax income of $12 million in first-quarter 2011. The decrease in earnings was primarily attributable to higher expenses largely associated with the increase in company-operated sites and lower retail gasoline margins that were negatively impacted by rising crude oil costs during the quarter.

Refining & Supply had a pretax loss of $87 million in the current quarter versus a $138 million loss in first-quarter 2011. The increase in earnings was largely due to lower expenses attributable to the idling of the Marcus Hook refinery in December 2011 and lower depreciation expense resulting from significant asset writedowns during the second half of 2011. These positive factors were partially offset by lower realized margins and production volumes. Average crude throughputs were down 36% and 27%, respectively, versus the first and fourth quarters of 2011 as a result of the sale of the Toledo refinery in March 2011 and the idling of the Marcus Hook refinery.

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