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Western Refining, Inc (NYSE:WNR)

Q3 FY08 Earnings Call

November 6, 2008, 9:00 AM ET

Executives

Mark B. Cox - Sr. VP, Treasurer and Director of IR

Paul L. Foster - President and CEO

Mark J. Smith - EVP of Refining

Jeff A. Stevens - EVP

Analysts

Paul Sankey - Deutsche Bank Securities

Jacques Rousseau - Soleil-Back Bay Research

Jeff Dietert - Simmons & Company International

Chi Chow - Tristone Capital Inc.

Ann Kohler - Caris & Company

Vance Shaw - Credit Suisse

Operator

Good day ladies and gentlemen and welcome to the Quarter Three 2008 Western Refining Inc Earnings Conference Call. My name is Norah and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Mark Cox, Treasurer and Director of Investor Relations. Please proceed sir.

Mark B. Cox - Senior Vice President, Treasurer and Director of Investor Relations

Thank you very much Norah. Good morning everyone. I'd like to thank you for taking in the time to listen in this morning and for your continued interest in Western Refining. My name is Mark Cox and again, I am the company's Treasurer and Director of Inventor Relations.

Today, we will be discussing our third quarter 2008 financial and operating results. The details of these results were published last evening. Joining me for today's call are Paul Foster, our CEO; Gary Dalke, our CFO; Jeff Stevens, our COO; Mark Smith, our Executive Vice President of Refining and other members of our senior management team.

If you need a copy of the earnings release, you may obtain one from the Investor Relations section of our website, at www.wnr.com. I'd like to remind everyone that many of the statements made during the course of this conference call today may include forward-looking statements concerning management's currents expectations. These statements are covered by the Safe Harbor provisions of the Securities and Exchange Act of 1934.

I'll refer you to the forward-looking statement in Risk Factors section of the company's reports that are filed periodically with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on From 10-Q. In addition to reporting financial results and according with generally accepted accounting principles or GAAP, we report certain non-GAAP financials results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release and on our Investor Relations website.

At this time, I'd like to turn the call over to Paul.

Paul L. Foster - President and Chief Executive Officer

Thank you, Mark and thank you all for joining us today. We're pleased with our results in third quarter. Although the hurricanes in the Gulf did have a positive impact on our margins in the quarter, the sustainable changes from the work we've done to improve our operations in our Four Corners and Yorktown refineries contributed significantly to earnings this quarter. More importantly, these operational improvements serve as a foundation for our continued success.

As I will discuss in a moment, we'll continue to execute on our initiatives and take proactive and aggressive steps to ensure that we remain strong and competitive. As noted in our press release, third quarter 2008 net income was a $109.2 million or $1.61 per diluted share. This compares to net income of $46.6 million or $0.69 per diluted share for the same period in 2007.

The improvement in operating income was a result of higher refined product margins. The increase in margins was primarily the result of lower cost crude oil processed at company's refineries during the 2008 quarter. Margins also improved in the quarter as the cost of crude oil declined faster than the prices of finished products.

In the first half of this year, asphalt was a significant drain on our earnings as the price of asphalt lagged the rising cost of crude oil. In the third quarter, the opposite occurred as crude oil prices dropped much faster than asphalt prices. Just to give you an idea of the magnitude, asphalt margins which we define as the average net back sales price, less average cost of crude oil at El Paso, were $50 better in the third quarter than in the second quarter. Based upon our average asphalt production of 6300 barrels per day, margins improved by approximately $29 million in the third quarter of this year compared to the second quarter.

Let's discuss Yorktown and what we did to improve our operations there. In the third quarter, we increased the amount of heavy crude oil we were processing from approximately 66% at the beginning of the quarter to in excess of 95% throughout the entire month of September. This increased processing of lower cost heavy crude oil, reduced Yorktown's feedstock costs by approximately $16.5 million in September alone compared to September of 2007.

We believe this level of monthly savings is sustainable and could increase, as we are currently evaluating other heavy crude oils that could further reduce our crude costs at Yorktown. We also experienced savings in Yorktown as a result of the operation of the low sulfur gasoline unit. We significantly reduced our need for alkylate, which resulted in the savings of approximately $2.5 million per month. We also reduced transportation cost by approximately $2 million per month, because we no longer have to transport high sulfur gasoline to distant markets.

Furthermore, we have the ability to purchase distressed gasoline blendstocks which can be processed and upgraded into low sulfur gasoline. We expect this to contribute an incremental $3 million per month in Yorktown.

At the Four Corner refineries, we renegotiated several crude oil supply agreements and reduced our crude cost by approximately $5 per barrel for a savings of approximately $10.8 million in the third quarter, which we believe will be sustainable. We have recently begun processing crude oil and gallon from the new supply source and the pricing for this sweet crude is very attractive to western.

At our El Paso refinery, we are currently processing approximately 22,000 barrels per day of sour crude oil compared to the 12,000 barrels per day this time last year. When we complete the low sulfur gasoline project at the El Paso refinery in the second quarter of 2009, we will have the ability to a raise our sour crude oil runs up to 50% or approximately 60,000 barrels per day of crude oil throughput. Assuming a sweet-sour differential of 450 per barrel and a yield loss of $0.75 per barrel, we can improve our margins at El Paso by approximately $4.2 million per month or$51 million per year.

Let me emphasize, we believe we have positioned ourselves to be much more profitable in the future, even in a low-margin refining environment. In total, the initiatives we have implemented in our four refineries could result in the savings of approximately $32 million per month, or $384 million per year. Clearly, this is a dramatic improvement in our business and one we believe can be sustained.

We have also made great strides in the areas of safety and reliability in refining operations. In the past year, we have significantly reduced the occurrence of unplanned outages at legacy giant facilities and our total reportable incident rate is approximately one-half what it was last year. Safety has always been a top priority of ours and we will continue to place great emphasis on further improving our record.

We recently made the decision to accelerate the plant turnaround at our El Paso refinery from January 2009 to the middle of this month. As we look to next year's turnaround schedule, it became apparent to us that a number of refiners are undertaking turnarounds in the first quarter. We believe completing the turnaround now so that we will be fully operational in the first quarter of 2009 when others are out of service, will be more financially beneficial than our original schedule.

As we said in the press release, we are working with our financial advisers to evaluate a number of options to further strengthen the company's balance sheet, including strategic alternatives for specific assets. This process is ongoing and we're very pleased with the progress we're making.

Before I turn to our guidance, let me briefly comment on the fourth quarter. Despite the ongoing economic uncertainty, refining margins remain strong in our four refineries throughout the month of October. In fact, our combined refining gross margins for the month of October exceeded the third quarter level of 1503 per barrel. Our retail and wholesale operations also posted strong financial results for the month.

Looking at the remainder of the quarter, distillate margins look good as a result of steady demand and continued tight supply. And while gasoline demand has declined in last the couple of months, we believe that the significantly lower prices at the pump today should stimulate demand and improve gasoline margins. With regard to our guidance for the fourth quarter of 2008, we expect crude throughput at our four refineries to be approximately 188,900 barrels per day.

We expect total refinery throughput at four refineries to be approximately 215,000 barrels per day. We expect operating costs to be approximately $4 per barrel at El Paso, $8.62 per barrel at the Four Corners refiners and $5.10 per barrel at the Yorktown refinery.

We expect SG&A expenses to be approximately $30 million. We expect interest expense to be about $36 million and depreciation and amortization to be $30 million. We expect our tax rate to be 31%. We believe the capital expenditures for the remainder of 2008 will be approximately $41 million for a total of approximately $197 million for the full year of 2008. A significant portion of this spending will be for the low sulfur gasoline unit in El Paso.

In closing, I'd like to thank our employees throughout the company for their hard work and continued dedication to safety. As our results demonstrate, we've made significant progress in our operations. To help ensure that we maintain the momentum, we also a have a number of additional projects underway in all of our refineries and safe reliable operations along with the environmental stewardship continue to be our top priorities.

I thank you again for listening and will now open up the call for questions. Norah, we're ready for questions.

Question And Answer

Operator

Thank you, [Operator Instructions]. And our first question comes from the line of Paul Sankey of Deutsche Bank. Please proceed.

Paul Sankey - Deutsche Bank Securities

An interesting version of Deutsch Bank but thank you. Paul you spoke that you are pleased about the progress on strength in the balance sheet. Could you say a little bit more about that? It seems to me a deliberate comment that you've made.

Paul L. Foster - President and Chief Executive Officer

Yes, we're very pleased with the process. The process is ongoing, and we've commented on it for a number of months now. But we're still not in a position to give you any details about that process, about the process itself.

Paul Sankey - Deutsche Bank Securities

The process is essentially remains divestments?

Paul L. Foster - President and Chief Executive Officer

That is, yes absolutely.

Paul Sankey - Deutsche Bank Securities

That interest guidance you gave us at $36 million I guess is reflective of the step up that you had at the end of 3Q in terms of the premium of LIBOR?

Paul L. Foster - President and Chief Executive Officer

Yes it is.

Paul Sankey - Deutsche Bank Securities

So that's kind of a I guess is that... would that be the expectation for, how to put this, about as bad as it gets into 2009, I mean I guess LIBOR was pretty aggressive throughout the period, the past, and is likely to stay that way. I would imagine that your net interest charges wouldn't get a whole lot worse than that into 2009.

Paul L. Foster - President and Chief Executive Officer

I wouldn't expect that to be case.

Paul Sankey - Deutsche Bank Securities

And is there any other tensions on the balance sheet that we know about. I mean you've given us some summary data, can you talk for example about covenants. I mean I guess this quarter has done an awful lot in order to make you very comfortable going forward in terms of covenants. But if there is any other commentary you can give us. These days I seem to be turning into more of a debt analyst than a credit and equity analyst, but I guess that's just the way of the world. But if you could just help us out that would be great and I leave it there? Thanks.

Paul L. Foster - President and Chief Executive Officer

Okay, thank you Paul. First of all we're in a great shape from a covenant standpoint, we don't have any issues that we're concerned about right now. The fourth quarter looks great. As we look ahead we feel very comfortable with where we are. I'll ask Mark to give a little bit more color on the covenants and where we stand now.

Mark J. Smith - Executive Vice President of Refining

Okay, yes when we look at the third quarter and the fourth quarter, the key covenants that we face are the minimal EBITDA covenants. And in this quarter it was $100 million and that's combining second quarter EBITDA and third quarter EBITDA. We have to get those numbers today. We're well in excess of about $270 million. So we have a significant cushion in the third quarter of this year, and looking at the fourth quarter again its $175 million. So I just mentioned we have $270 plus million already and we get to add in the EBITDA that we make in the fourth quarter to that number. And as Paul mentioned, looking at October, October was also a very good month for us. So that number has only increased.

Paul L. Foster - President and Chief Executive Officer

Yes October by itself is over $100 million.

Mark J. Smith - Executive Vice President of Refining

So covenants are in very, very good shape at this point as Paul mentioned.

Paul Sankey - Deutsche Bank Securities

And I guess the following... the implications for '09 are pretty strong as well right?

Mark J. Smith - Executive Vice President of Refining

Yes.

Paul Sankey - Deutsche Bank Securities

Because the covenants are less onerous in '09?

Mark J. Smith - Executive Vice President of Refining

No. The first quarter of '09 we go back to the debt-to-EBITDA covenants and that has to be five times, and I think if you looked at those numbers at the end of the third quarter, the amount of EBITDA that we would need to make in the fourth quarter and the first quarter combined is significantly less than what Paul just mentioned we've made in October. So assuming that these numbers hold at these types of levels, the covenants in the first quarter and going on into '09 we'll be in very good shape as well.

Paul Sankey - Deutsche Bank Securities

Can you remind us if you don't succeed in the disposal program, well firstly could you remind us exactly what nature the requirements is regarding disposals in order to strengthen the balance sheet? And secondly what the implications are if you don't meet those requirements? And then, I really will leave it there. Thanks.

Paul L. Foster - President and Chief Executive Officer

Okay. Thanks again, Paul. We're not required to make any divestitures or to reduce anything. However, if we reduce there our levels where if we reduce the debt to certain levels then our interest rate drops back down.

Paul Sankey - Deutsche Bank Securities

Got you.

Paul L. Foster - President and Chief Executive Officer

Mark I don’t know if you have those at your fingertips?

Mark J. Smith - Executive Vice President of Refining

Yes, I mean right now Paul as you look into it a few minutes ago, the rates stepped up to LIBOR plus six. If we divest more than $250 million but less than $500 million, that rate steps down to LIBOR plus 5.5. If we divest between $500 million and $750 million, it goes down to 5 and then if we divest more than $750 million of assets, it goes back to LIBOR plus 4. So there are some step down provisions, but as Paul mentioned there is no requirement to divest in any of assets.

Paul Sankey - Deutsche Bank Securities

Yes, then essentially if you don't, it's just the question of the interest that you got to pay right, given the covenants are comfortable.

Mark J. Smith - Executive Vice President of Refining

That's correct.

Paul Sankey - Deutsche Bank Securities

Yes got you. Okay that it is from me, thanks.

Mark J. Smith - Executive Vice President of Refining

Thank you.

Operator

And our next question comes from line of Jacques Rousseau of Back Bay Research. Please proceed.

Jacques Rousseau - Soleil-Back Bay Research

Great quarter, gentlemen. Just want to see if you could give us any more color on the crude oil being used at Yorktown. I had seen that some of that was Marlim crude oil?

Paul L. Foster - President and Chief Executive Officer

Yes, Jeff you want to speak to that.

Jeff A. Stevens - Executive Vice President

Yes. Our primary crude that we've been purchasing here has been the Marlim and but we continue to look at other crudes. In fact, we brought in some other Venezuelan crude here and have been running some of that over the last couple of months and it's really a process of continuing to look for cheaper crudes out there and having the flexibility to take in stranded cargo when it makes sense. So our flexibility there has changed dramatically with the way we're operating that facility now.

Jacques Rousseau - Soleil-Back Bay Research

How much of it is under contract?

Jeff A. Stevens - Executive Vice President

We don't comment specifically on the contracts but a portion of it is, under a contract currently.

Jacques Rousseau - Soleil-Back Bay Research

Okay and just if you give any sort of color on the upcoming maintenance expense for 4Q '08 and for 2009 that will be great?

Paul L. Foster - President and Chief Executive Officer

Okay, I'll ask Gary to address that. The primary maintenance, other than normal maintenance issues in the fourth quarter, is our turnaround at El Paso and that will be about $25 million.

Jeff A. Stevens - Executive Vice President

Yes $25 million to $27 million in the fourth quarter, that's correct.

Jacques Rousseau - Soleil-Back Bay Research

Okay.

Jeff A. Stevens - Executive Vice President

And then the next turnaround we have scheduled is in fourth quarter of 2009 at our Yorktown facility.

Jacques Rousseau - Soleil-Back Bay Research

Within the fall 2009?

Jeff A. Stevens - Executive Vice President

Yes.

Jacques Rousseau - Soleil-Back Bay Research

But that's also around I think $25 million, Is that right?

Jeff A. Stevens - Executive Vice President

I don't think we have a definitive estimate there yet.

Jacques Rousseau - Soleil-Back Bay Research

Okay. And that will be in the third quarter you said or fourth quarter?

Jeff A. Stevens - Executive Vice President

Yes, we are still working on the date, but likely the third quarter.

Jacques Rousseau - Soleil-Back Bay Research

Okay, thank you very much.

Operator

And our next question comes from the line of Jeff Dietert of Simmons. Please proceed.

Jeff Dietert - Simmons & Company International

Good morning, it's Jeff Dietert with Simmons. I was wondering if you could provide a little bit more color on your Four Corners and El Paso crude procurement. You talked about four corners getting a $5 discount relative to prior, could you provide some color there and talk about what is driving the steeper discount? Is it an increase in production, is it lower refining utilization, are there other factors contributing?

Paul L. Foster - President and Chief Executive Officer

The main thing is that just that we've just taken a hard look at the way we buy crude up there. And I think historically, when we took over that facility, they had been paying a lot more for crude up there than they needed to pay. I been a very delicate process of how we need to lower our hostings to these suppliers. But those refineries are in kind of a unique location and it costs a lot of money for us to bring crude in from other places, but it also cost a lot for them to get it out to other places. As a result, we've been able to work very closely with our suppliers and to get our cost down pretty significantly.

Jeff A. Stevens - Executive Vice President

Jeff I'll on comment on that too. This is not unique just to the Four Corners. If you look at Rockies and you look at what's happened with Canadian crude coming down into those markets, the other black wax-type crudes, sweet crudes have been under a lot of pressure in those markets. The discounts have widened throughout that region. So it's really been a change there and in El Paso, we are looking at significantly running more sour crude once we get the low sulfur gasoline unit up which we expect hopefully by the end or the first part of the third quarter of '09. And we believe that there'll be continued pressure on the sour crudes and the dist will stay widen.

Jeff A. Stevens - Executive Vice President

Second quarter just...

Paul L. Foster - President and Chief Executive Officer

Yes, the end of the second quarter of '09.

Jeff Dietert - Simmons & Company International

Yes it looks like WTS trading $5 below, much wider discount than what was experienced in 3Q already. Secondly, with the strong quarter and the significant EBITDA you generated this quarter you've really bought some time just focus and execute on your strategic initiatives. Could you talk about the level of interest in Yorktown and where you are in that process, how long you expect it to take?

Paul L. Foster - President and Chief Executive Officer

Again, we're not going into the details of that. What I can tell you, we're very pleased with the process. The process is going on as I think we predicted and planned it. And we if we don't those announe something sooner then we will report to you again in your next quarter call.

Jeff Dietert - Simmons & Company International

Thanks Paul.

Paul L. Foster - President and Chief Executive Officer

Okay, thank you Jeff.

Operator

And our next question comes from the line of Chi Chow of Tristone Capital. Please proceed.

Chi Chow - Tristone Capital Inc.

Hi, good morning.

Paul L. Foster - President and Chief Executive Officer

Good morning.

Chi Chow - Tristone Capital Inc.

Paul, coul you comment a little bit more on the supply-demand dynamics in the Four Corners region. It is really a pretty nice realized margin you guys got there the second quarter?

Paul L. Foster - President and Chief Executive Officer

Yes, I suggesting you want to, I don't know...

Jeff A. Stevens - Executive Vice President

Yes historically Chi that has been a market that's realized a premium because of its location. But throughout that whole Four Corners area we're still seeing good demand. That area is driven a lot by gas processing and other industries out there that remain strong even in this economic climate. And it's been a very good market for us and continues to be even today relative to where prices are.

Paul L. Foster - President and Chief Executive Officer

One thing, I will say as well, we are not planning to run quite as many barrels through the winter, up there this year as we did last year. I think we learned something, that that market, it's a great market, it's very unique but in the winter time their demand does go down some. And I think we have planned accordingly and I think that's going to pay off for this year.

Chi Chow - Tristone Capital Inc.

What sort of ultilization rate are you running on the New Mexico crude line?

Paul L. Foster - President and Chief Executive Officer

On the Mexico crude line we are not shipping any thing right now. We made a decision this summer when crude was whatever it was, it was a high price, and realizing that we will come into the winner time and we weren’t going to run as much crude up there and we actually pressed all the crude into that line up to the Four Corners and ran it. And so right now that line is not running anything and we're continuing to evaluate that on a periodic basis and try to figure out what we're going to do with that long term.

Jeff A. Stevens - Executive Vice President

But Chi, let me comment that we have replaced that crude with some other crudes that we found that we're bringing in and that crude we are bringing in at a significantly less cost than what it was when we purchased the barrels and pushed them through that line. So we're not running quite as much but we're running more than what is locally being produced.

Chi Chow - Tristone Capital Inc.

Are you bringing in the incremental barrels by truck then?

Jeff A. Stevens - Executive Vice President

By truck and rail.

Chi Chow - Tristone Capital Inc.

Okay. And then, secondly do you have a '09 CapEx estimate?

Mark J. Smith - Executive Vice President of Refining

We're still in the process of developing and finalizing our 2009 CapEx budget. But I can tell you right now we're targeting in the range of $165 million give or take a little. That's not final but it's kind of our preliminary take on it right now.

Chi Chow - Tristone Capital Inc.

Okay great. And then one final question could you comment on exports of products into Mexico and what that trends looking like for you guys?

Jeff A. Stevens - Executive Vice President

Chi that continuous to be a very strong market for us. The data that we've gotten from PEMEX down there is that in '08 they expect 4% to 5% growth and they expect the same in '09 and that demand continues to grow and become very strong, both on gasoline and diesel.

Chi Chow - Tristone Capital Inc.

Your are sending both products there.

Jeff A. Stevens - Executive Vice President

Yes

Chi Chow - Tristone Capital Inc.

Great, thanks a lot.

Paul L. Foster - President and Chief Executive Officer

Thank you.

Operator

And your next question comes from line of Ann Kohler of Caris & Company. Please proceed.

Ann Kohler - Caris & Company

Hi, good morning. Just a clarification. You said that at this point you're preliminarily looking for a capital budget next year of $165 million?

Mark J. Smith - Executive Vice President of Refining

$165 million is correct, yes.

Ann Kohler - Caris & Company

And do you have in that at this point what the regulatory portion of that is?

Mark J. Smith - Executive Vice President of Refining

A significant part of it is regulatory. I don't have the final amounts. We're still in the process of nailing that down but I can tell you a significant portion is regulatory.

Ann Kohler - Caris & Company

Great, that's great. And then could you also just explain sort of the trend of margins during the month of October across your three regions?

Jeff A. Stevens - Executive Vice President

Well the trend, the margins were strong throughout the month, they actually even through the end of the month they were strong. They're actually starting to trail off pretty significantly now as we head into mid-November. As we mentioned, we're going into a turnaround in El Paso here in the next week or so, or second half of November and we think it's probably going to be a pretty good time to be in turnaround and when we come out of that turnaround, we think the market will probably be pretty robust, largely because several of our competitors are going to be in turnaround in the first quarter.

Ann Kohler - Caris & Company

Okay. And then just circling back to the Four Corners region, basically the utilization there has been I guess below capacity once you brought on that crude line and is that just a function of running it less hard, given the supply-demand dynamics in that market?

Mark J. Smith - Executive Vice President of Refining

That is correct, there is a finite market up there that we feel we want to maximize and that's what we're achieving right now.

Ann Kohler - Caris & Company

Okay, great. Thank you so much.

Paul L. Foster - President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. And your next question comes from the line of Vance Shaw of Credit Suisse. Please proceed.

Vance Shaw - Credit Suisse

Hi guys, good morning. Great quarter.

Paul L. Foster - President and Chief Executive Officer

Thank you. Good morning.

Vance Shaw - Credit Suisse

Question for you. Perhaps the most interesting thing you said was this $384 million per year improvements that you guys have put into place. I was just wondering if you could just real quickly go down the list and give us an idea of the impact of what you've done and just if you can tell us if for each of those items which ones have already had an impact or which ones are sort of going to be making an impact in the future?

Paul L. Foster - President and Chief Executive Officer

Okay. I'll kind of start with the end of your question because that's easier. The one that's in the future really is the El Paso one. When we get to gasoline desulphurization in place, we'll be in a position to ramp up our sour crude runs in El Paso. That one is $51 million per year, is what that one amounts to.

The Four Corners improvements. We reduced our crude purchase thrice up there. That is we believe, let’s see we have got that in here, $10 million a quarter. That's about $43 million to $44 million a year and that's already in place. And then in Yorktown, the $36 million a year from purchasing distressed blend stocks for gasoline. That's already in place. I’m kind of going back through this, pardon me, the reduced feedstock cost in Yorktown from buying different crude than we used to buy. We believe that that's a permanent change and that's already in place, that one $16 million a month whatever that is per year.

Mark J. Smith - Executive Vice President of Refining

$190 million

Paul L. Foster - President and Chief Executive Officer

$190 million. So of all these, that's definitely the biggest change we have made. And that's largely result, not just of buying crude better and differently but as we mentioned, we're running 95% heavy crude there which is a dramatic improvement. A year ago we were running way less than 50% heavy crude and the economics really didn't work that well and that was one of the objectives we had when we made the acquisition last year and we announced that we're going to make some strategic changes to these assets. And so that, of all the changes we've made, that's the most significant.

Vance Shaw - Credit Suisse

Yes that's really spectacular. Is there any, you guys have any update on the situation with the Scandinavian oil company that had been providing you guys with bad crude before or crude that was hurting you, is there any update in that legal situation?

Paul L. Foster - President and Chief Executive Officer

No, that process is ongoing and because it's an ongoing legal matter we're not in a position to comment.

Vance Shaw - Credit Suisse

No I understand. The final comment is; I mean you guys have done an absolutely fabulous job turning these assets around. Are you guys going to start getting out and talking more to investors, both from the equity and perhaps the debt side, and tell thm your story. I think it’s pretty spectacular story?

Paul L. Foster - President and Chief Executive Officer

I think we are and I appreciate that compliment by the way. I think you last six or eight months we've been busy and we kind of had to survive the whole covenant question and get ourselves in a better position. And I think we've done that. We have got a lot better level of comfort now. And so yes, I think we will get out. I think we have a great story to tell and we're looking forward to doing that so.

Vance Shaw - Credit Suisse

Now apart from the fact that a lot of your composers will be in turnaround in the first quarter of next year. I mean are you guys are seeing any light at the end of the tunnel in terms of consumer demand. You guys are closer to what's going in the real economy than we are. I mean what are you guys seeing? And you are in different parts of the country too. So you may be seeing something different on the East Coast and the West Coast, you guys have any general comments on what's going on out there?

Paul L. Foster - President and Chief Executive Officer

Yes I'll ask Jeff to....

Jeff A. Stevens - Executive Vice President

Yes what we're seeing, we are in obviously two different markets. We are in the Southwest and I think I've already commented on what we're seeing from Mexico and their demand. In our bigger markets, our biggest market out here is obviously Phoenix. The data that we've seen published is 2% to 3% off of gas and maybe 1% up on distillate. Those markets, Phoenix and Tucson and Albuquerque, are three of the primary markets. I think what we've seen particularly in our retail change is a stop and decline and a kind of a flattening out. Prices have started coming down and I think everybody's anticipation is that we will see more demand in the Virginia market and the markets that Yorktown serves. We've seen real strong demand there and continue to see strong demand. So I think in the markets that we're in, we're not seeing what the rest of the country has been experiencing.

Vance Shaw - Credit Suisse

I don't know if you guys have mentioned it, but how much you are sending down to Mexico, is the significant portion of what you guys are making or is it sort of incremental?

Jeff A. Stevens - Executive Vice President

It's very significant. It’s in excess of 15% of our El Paso production. And they continue to be one of our largest and best customers and we see nothing but increases ahead of us in that market.

Vance Shaw - Credit Suisse

Got you. Thanks very much guys and congratulations.

Jeff A. Stevens - Executive Vice President

Thank you.

Operator

And your next question is a follow up question of the Ann Kohler of Caris & Company, please proceed.

Ann Kohler - Caris & Company

Yes gentlemen. Could you just give us a little bit of color around tax rate? It seems to be a little bit higher in the first half of the year and has dropped down in the second half, what's caused that and how should we look at that going forward?

Jeff A. Stevens - Executive Vice President

Yes, I'll handle that. What's kind of driving it down lower is as our profitability increases, we're able to utilize the manufacturers' credit to a greater extent and also the low sulfur diesel fuel credits that we have until going into next year. So really it's improved profitability and the impact of the credits on that.

Ann Kohler - Caris & Company

Great, thank you.

Paul L. Foster - President and Chief Executive Officer

Thank you,

Operator

I'd now like to turn the presentation over to Mr. Foster for closing remarks.

Paul L. Foster - President and Chief Executive Officer

Thank you, Norah. Again I want to thank you all for listening in. We look forward to getting through the fourth quarter and getting our turnaround done in El Paso and we will visit with you in the first quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation on this call. This now concludes the presentation. You may now disconnect. Have a great day.

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Source: Western Refining Inc. Q3 2008 Earnings Call Transcript
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