Tesoro's CEO Hosts 2012 Analyst and Investor Day Conference (Transcript)

Dec.12.12 | About: Tesoro Corporation (TSO)

Tesoro Corporation (NYSE:TSO)

2012 Analyst and Investor Day

December 12, 2012 8:30 am ET


Louie Rubiola - Director of Investor Relations

Gregory J. Goff - Chief Executive Officer, President and Director

Daniel Robert Romasko - Executive Vice President of Operations

Phillip M. Anderson - President of Tesoro Logistics GP

G. Scott Spendlove - Chief Financial Officer and Senior Vice President

David K. Kirshner - Senior Vice President of Commercial


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

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Jeffrey A. Dietert - Simmons & Company International, Research Division

Evan Calio - Morgan Stanley, Research Division

Douglas Terreson - ISI Group Inc., Research Division

Ann L. Kohler - Imperial Capital, LLC, Research Division

Chi Chow - Macquarie Research

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Richard S. Linhart - Morgan Stanley Wealth Management

Paul Y. Cheng - Barclays Capital, Research Division

Louie Rubiola

Well, good morning, everyone, and welcome to Tesoro's 2012 Analyst and Investor Day Event. For those of you that don't know me, I'm Louie Rubiola and I head our Investor Relations Programs for Tesoro Corporation and Tesoro Logistics. We're glad to see you all today and appreciate you taking the time out of your busy schedules to join us today.

So as we typically do at Tesoro, we'd like to start with a safety message. In an event -- so what we will focus on is how to evacuate this room in the unlikely event of an emergency. So right outside the doors that you came in, about 5 yards, there's a staircase that we can use to go down to the lobby level, which will then take you outside the building. So in the event we have to evacuate, we would ask you to head that way. I hope you wore your comfortable shoes because it's 42 flights of stairs, but it will allow us to get out of the building safely, which is what's important.

I'd like to do a quick follow-up with an overview of the format. So we're going to do a presentation today, which will likely last about an 1.5 hour, We'll follow that up with the Q&A session and then we'll conclude with just some social time to allow you all to interact with management. We'll have some snacks and some drinks and we encourage you to stay afterwards if you can.

Next, I'd like to do a couple of quick housekeeping items. The first is a request to please mute your cell phones and the second is the Safe Harbor reminder. You have to forgive me, I may have to read this one. So we ask you please refer to the forward-looking statements in the slide, which says that statements made during this presentation that refer to management's expectations and/or future predictions are forward-looking statements intended to be covered by the Safe Harbor provisions of the Securities Act as there are many factors which could cause results to differ from our expectations. So with that, I will hand the presentation over to Greg.

Gregory J. Goff

Welcome, everyone. It's a pleasure to be here today and be able to share with you the Tesoro story. We're actually quite excited about what we're able to talk about this morning and like Louie said, we're going to take a little bit of time and talk about what we have going on at Tesoro and then we actually look forward to the questions at the end in getting into discussion because I'm sure, knowing a lot of you, that you're going to have some questions and comments that you want to engage in and we actually look forward to doing that.

What I'd like to do as we get started here is take just one brief minute and introduce our leadership team that we have here today.

So on my left here is Dan Romasko. Dan is our Executive Vice President in charge of operations. So Dan is responsible for refining, marketing and logistics. Next to Dan is Scott Spendlove and Scott is the CFO of Tesoro. Next to Scott is Phil Anderson. Phil is the President of Tesoro Logistics. He became the president back in 2011 and he's really responsible for helping grow Tesoro Logistics.

In front of me is Dave Kirshner. Dave is our Senior Vice President of Commercial. Dave is responsible for the supply and trading on Marine Operations and the way that we run our business as an integrated value chain really optimizing that value chain.

Next to Dave is Chuck Flagg. Chuck is our Senior Vice President of Strategy and Business Development. He's also responsible for M&A work and Chuck's group also they're the ones that kind of originates some of the ideas that we've been executing over the last little bit here, the new projects and that. And then Louie, he introduced himself and then our Investor Relations in the back of the room is Chris Castro who helps with our Investor Relations.

Before we begin our presentation today, what I'd like to do is just maybe put a little bit of context around what we'd like to be able to talk about. Back in the end of 2010, we put forward a strategy of really where we wanted to take the company and during that time, we really looked out over the next, about a 3-year period of time and we really went in and we completed a comprehensive review of all of the Tesoro assets and businesses and we developed a very clear focused plan that we really want to embark on to drive what we believe was quite significant improvement in shareholder value and we realized when we did that, that it was going to be a journey, that it would probably take us about 3 years.

So we set some targets back at the end of 2010 to really deliver by the end of 2013 and that's as we complete 2012, we're going into our last year of what we really set out to do, but so today, I'm going to spend a little bit of time and I'm going to highlight some of these things that we've achieved as part of the strategic plan in 2011 and as we ramp up 2012, but then we're really going to lay out the discussions of what happens in 2013 and beyond.

We have 6 key messages that we'd like to be able to deliver today. First, like I said, I'm going to talk about delivering the strategic initiatives that we set out to do. There were 11 of them. Back in 2010, we believe we've made very significant progress in doing that.

I'm also going to follow that up with just a brief discussion of the market. As we sit here today and we look out into 2013 and maybe the next couple of years, just provide some background on what we see happening in the market during that period of time, which will help you appreciate what we say about our plan.

Then Dan is going to come up and Dan is going to talk primarily about 2 things. Dan is going to talk about our efforts underway to strengthen our position on the West Coast of the United States and he's also going to talk about what we believe is a very strong position in the Mid-Continent, the steps we're taking in the Mid-Continent to strengthen that position and work that we have going on to really look to take some to these advantaged crude oil in the Mid-Continent to our West Coast operations.

And once Dan is done and Phil Anderson is going to come up and Phil is going to spend some time and really demonstrate the value of what Tesoro Logistics has meant to Tesoro, really as a strategic growth vehicle of what we've been trying to do with the company and I think most of you probably saw last night that we announced that we are going to acquire the Chevron Pipe Line system out of Salt Lake City, which fits really well in with our integrated value chain and Phil will talk more about that.

And then Scott's going to come up and pull it all together and Scott is really going to talk about creating value through financial discipline.

And one of the things that we're going to assert today is that when we look at our business in the way that we are valued, we believed that we are undervalued as a company and our stock, and that we're going to demonstrate what we have going on and I'll come back and talk about how we see the future value of Tesoro.

Just briefly, a few comments, high-level comments about the company today. One, since about 2010, we've increased our market retail branded retail business by about 60%. We've grown from about 900 stations to 1,400 stations and we have also significantly increased our wholesale business and that was all really driven to be able to get to a higher degree of integration between our Refining and Marketing business. We believed that it was critical that we had a high degree of Refining and Marketing integration to capture value in a marketing part of the business and more importantly, to drive a higher utilization rate in our refineries. And today, we're at about 80% integration with some more room to go but we feel like we've great progress in that area.

The second thing is that Dan is going to talk a little bit about the exposure we have to advantaged crude oil but our system, we really think we're positioned to have about 65% advantaged crude oil supply into our system and he'll talk a little bit more about that.

And then the third thing that we really want to talk about this because we operate the business as an integrated value chain, how the logistics business fits into everything that we're doing from a refining and marketing standpoint.

Back in 2010, we developed 4 strategic priorities and those priorities, they were really designed to provide clear direction and guidance to the organization and they have really been the North Star of what we've been trying to do for the last couple of years and those strategic priorities that are shown on this slide, they're actually quite simple.

The first one is around operational efficiency and effectiveness and it really has 3 parts to it. One is that it's our drive is to be best-in-class from a personal and process safety standpoint because it ultimately results in higher reliability, so we've been very dedicated to driving that within the company.

The second part of that is that focus to continue to drive overall improvements in the business. Partly by how we invest capital and then through other noncapital type opportunities that we pursue and the third is our desire to have a cost leadership position to really strengthen our cost structure.

The second area is around commercial excellence. It's Dave's responsibility within the company and we're really driving commercial excellence to capture between 10% to 15% of the EBITDA in the company through our focus on commercial excellence.

The third is around financial discipline and we wanted to create and maintain a strong financial position, which today we're in the strongest financial position the company has ever been in.

And finally it was around value driven growth. Initially, we started up with a focus on driving integration, a high degree of integration between refining and marketing so we focus a lot on our marketing position. At the same time, we developed our Logistics business with the IPO of Tesoro Logistics and really growing the logistics position.

And then recently, we introduced a fifth strategic priority around what we call a high performing culture. Back in 2010, we wanted to change the culture of Tesoro to become a very performance-oriented culture and we've recently put a lot of effort into really broadening and strengthening what we do from that standpoint.

So as I get started here talking about the progress of our strategic initiative, there are really 6 key areas that I want to talk about. One is our progress in driving a high performing culture. I want to just share with you a couple of points of why we feel that is so important about what we're doing. Our progress and success in the environmental health and safety performance of the company, improvements that we've driven in operational efficiency and effectiveness, they are foundational to everything that we've been trying to do. The results of our high-return capital program, steps that we have taken or in the process of implementing as far as our asset portfolio optimization and finally, the resulting financial strength that we've created over time.

High-performing culture where we focus on building a strong and healthy company and we have these 5 guiding principles that we put in place back in 2010 that are shown on the chart here and the importance of those guiding principles are there are -- they’re basis for how we work with each other in the company, how we work with suppliers, the communities where we operate but those principles really form the decision that we make when it comes around how we do business and the culture that we create in the company and at the core of all that is a very performance-oriented culture to really focus on doing what we say.

In 2012, we've had another very successful year in our environmental health and safety performance as we really strive to become best-in-class.

In 2012, we reduced both our personal safety and our process safety by about 40% in our efforts to increase our reliability. As you can see on the chart, to be best-in-class from a personal safety standpoint requires you to be at about below a 0.3 total recordable rate as measured by OSHA standards and to be best-in-class from a process safety standpoint, you have to have no process safety incidents. But we are on a quest and we believe it's now within our reach to really have best-in-class performance from an environmental health and safety standpoint.

And as we drive these improvements, in environmental health and safety, not only are we creating a safer work environment but we're really driving a higher level of reliability as measured by operational availability is shown on this chart.

And so our continued investment in asset integrity we've implemented predictive maintenance programs and standardized our -- both our maintenance and inspection systems across our entire refining system, are leading themselves so that we get to a point where we have operational availability of about 98%, which we believe is best-in-class.

And if you take and you combine that operational availability with a high degree of integration between a Refining and Marketing business, it allows us to get to a high utilization rate where we target having a 90% utilization rate.

So in 2012, with a very heavy turnaround year, we'll finish the year with the utilization rate of about 86% to 87% even executing that. So our focus on driving improvements both in our personal process safety and getting to a higher reliability is really paying off.

In addition, over this period here, we've also focused on improving our margin capture as this chart shows, over the last 3 years, relative to what the market gives us we've been able to add about $3 of margin capture in our efforts to lower crude supply cost to the refineries and capture higher net backs with the products in the marketplace and that this comes about from a couple of ways: one, our logistics system allows us to position price advantaged crude oil into our system both through the inland refineries and domestically and then secondly, our investment in our capital program, some of the programs we're going to talk about here in a minute, those investments have allowed us to capture feedstock advantage to enhance our margin capture in our system. And then finally, driving that high reliability and the higher utilization rates has allowed us with our focus on cost to manage our cost extremely well to bring our unit cost down so the numbers that you see up here, which are around $4.72 a barrel. Part of it is driven by what we've done to improve the business and the other part is driven by the lower energy cost of the industry experiencing.

One of the things that we're extremely pleased with that’s turned out actually extraordinarily well and exceeded our expectations is our high capital program. We talked last year about our investment in small capital projects and large capital projects and in 2012, we'll spend about $330 million on high-return capital projects and for those $330 million of capital that we'll spend this year, it will generate about $175 million of additional EBITDA for 2012.

And cumulatively, you can see on the chart that, that EBITDA contribution in 2012 will grow to about $300 million and what's attractive about the way we're spending the money is that this EBITDA contribution is sustainable EBITDA that we're being able to develop in running our business and the advantages that we gain by lowering feedstock cost, lower operating cost, improving yield, create that sustainable advantage that I talked about a little bit ago.

Our large capital program. This slide highlights the 5 major large capital projects that we've been working on. 3 of those projects are completed and Dan is going to talk about these projects a little bit more as he gets into his presentation, but 3 of these 5 projects are completed. They were completed on budget and in some cases, ahead of schedule.

You can see that with the $350 million of capital that we committed to these 5 projects on a run-rate basis when we looked at the EBITDA contribution from these 5 projects on a go-forward basis, using our outlook for prices, they contribute an equal amount of EBITDA. So for that $350 million of capital, the EBITDA on an annual basis going forward is about comparable to what we've been doing. You can see the pretty significant returns on most of these projects.

Likewise, we've committed a fair amount of capital to our small capital projects. The projects that are somewhere between $1 million to $3 million. And this chart just highlights 6 of those projects that we're investing in. And in 2012, we'll spend about $135 million in this area to execute these small capital projects and what I'd like to do is maybe just highlight a couple of them just to give you a sense of the impact that they have on the business. One project is that our Martinez refinery in Northern California where we've made some modifications to the unloading facilities to enable us to take Bakken crude oil into the Martinez refinery.

So today, we have the capability to deliver about 5,000 barrels a day mainly because we're bringing in single manifest cars from North Dakota into the Martinez refinery and for a little bit less than $2 million, that 5,000 barrels a day delivers about $3 million of EBITDA so that small little modification has a pretty big impact.

Likewise at our Salt Lake City refinery, as people looked at ways to lower the cost particularly when we bring ethanol into the refinery by making that system more efficient and investing a small amount of money, a little bit less than $1.5 million at the Salt Lake City refinery, we're able to go in and deliver the $1 million of cost savings just by the way we deliver the ethanol into the refinery.

So within the company, what we're trying to do is have a culture where people identify these opportunities that are booked -- that don't require a lot of capital but have very attractive returns on the projects that we can execute and particularly when they have a sustainable impact to us.

Our asset portfolio optimization work, we've made considerable progress in this area. First, we have put a lot of effort into both diversify and strengthen our portfolio. In August of last year, we announced the acquisition of the Carson assets in Southern California, the Refining and Marketing business that we're in the process of going through the FTC on that.

Secondly, last night, we announced through Tesoro Logistics the acquisition of the Chevron's Northwest Product System, taking refined product from the refineries in the Salt Lake City area up into State of Washington.

Third, we're in the final stages of the process to dispose of our business in Hawaii. We expect to make an announcement on Hawaii in January of what will happen there. And just to refresh everyone's memory about what we've talked about in Hawaii, one of the values that we create in Hawaii and a big part of our decision to divest of that business was its significant amount of working capital we tied up in the business, somewhere north of $300 million, that as we complete the process to divest of the Hawaiian business, we'll free up that working capital and that's really the value that's created there.

And the impact on that as that chart shows, on the return on capital employed with Hawaii in our business in 2011 and '12 and without it, it adds about 1% to 2% on a return on capital employed and one of the things that we're trying to do as a company under normal market conditions is get to about a 12% return on capital employed. So this really enhances our return on capital employed.

2012 is a strong year from an EBITDA standpoint, driven partly by margin environment. It's been attractive, but also by the work that we've done to drive the fundamental improvements in the business and how we executed our business this year.

The chart here shows EBITDA of about $2.1 billion using our first 9 months of results, plus consensus estimates for the fourth quarter. Just to put this in perspective, our index, the Tesoro Index, which we use as kind of a proxy for our gross margin for 2012 will be something more than $1 less than it was in 2007 during the Golden age of refining and we'll make about $800 million more of EBITDA based on the steps that we've been taking to improve the business during that period of time.

And as we generated a lot of cash over the last couple of years and one of the strategic priorities I talked about was our focus on financial discipline, we've been able to repay about $625 million of debt, get our total debt to total capitalization down to around 25% where it ended the third quarter and what that's allowed us to be able to do is be in a position to grow the company to capture opportunities like the acquisition of the assets in Carson, California and the Chevron Pipe Line assets.

And maybe just to summarize here very briefly before we get into the rest of the presentation, this is just a basic scorecard that highlights some of the things I talked about here. I'm just going to pick off 2 or 3 of these things. One, since 2010, our OSHA recordable rate is down 48% and that as I mentioned, really helps drive the reliability in our operations that we're striving through to get to that 98% availability. Our utilization rate in our refineries is up 19%. Our cost per barrel down 20% and we've driven our refining and marketing integration. We've increased that by 74%. In addition, our debt to total cap is down 34%. Since 2010, we reinitiated a dividend as everyone is aware in September. We currently pay a $0.60 per year dividend per share. We've extended our debt maturities and finally, the value of Tesoro Logistics is up 90% in less than 20 months since we did our IPO.

So with all of that, that I've tried to summarize very briefly here to put a context around our presentation, we looked at how we are valued today in the marketplace and this is a simple look at the business using the trading 12 month EBITDA and it uses kind of historical multiples for the refining business of between 3x to 5x EBITDA for the marketing business of 5x to 7x EBITDA and then it takes our interest in Tesoro Logistics for both the LP units and the small amount of GP distributions that we've received in the past because of the newness of the company and puts a value on those and you can see on this value that is shows a range of between $40 and $65 a share and we traded on the low end of that range. And it's our view that the market doesn't reflect the value of the improvements that we're driving in the business as we go forward, the acquisition of that Carson assets and then also the growth of Tesoro Logistics. So we think the company is undervalued as we sit here today.

So with that, I'm going to shift gears and just briefly talk about our outlook at the market before Dan comes up and talks about the work going on in the West Coast and Mid-continent part of our business.

So our outlook for the market is for the economy to have modest growth. We view that diesel demand both in the world and in the U.S. will grow at about 2%. We see gasoline demand basically flat in the U.S. over time, continued growth in the shale oil plays, having a lot of value to being able to process those crude oils into the refineries where you can do that. We see the demand for exports of clean products out of United States continuing both in the Gulf Coast and on the West Coast and at about the same levels we've been experiencing and we also see an extremely challenging regulatory environment as we go forward. And I'll talk a little bit more about that regulatory environment in just a minute.

A couple reference points on crude oil differentials here. The first one is the WTI to Brent differential. Our view is that the spread is going to come in over time as additional transportation capacity becomes available to move crude oils out of the Gulf Coast and we'll ultimately get to transportation parity.

Up in North Dakota, the Bakken crude oil using the fuel price for Bakken, not the clear book price for Bakken, we see that coming in versus the peak that it reached in 2012 so we see it trading in, into the teens as we go forward for the Bakken to LLS differential using the fuel price.

The light heavy differential, we actually see the light heavy differentials stay in pretty much in the same range that they've been in for the last couple of years with additional coking capacity coming on in the United States, a little bit less Venezuelan and Mexican heavy crude oil and more light-sweet crude oil. We see that range staying about the same.

Closer home to us we look at the spread between ANS and San Joaquin Valley heavy and we also see that trading somewhere in the $6 to $9 range about where it's been in the last few years so not much changed there.

The crack spreads. When you look at the West Coast crack spreads we see the West Coast crack spreads staying in the same range. Dan is going to share with you some comments about California, how people are looking at the California economy, which shows some pretty good improvement in the California economy. Our view is that crack spreads in California will pretty much stay in the range that they've been in.

Surprisingly, if you look at crack spreads in California over the last 2 or 3 years on an annual basis, they're actually not very volatile. They can be incredibly volatile during short periods of time, but they stayed in a pretty tight range and we expect that to continue in the Mid-Continent because of the changing -- lessening of differentials we see the group crack spreads coming off the peaks that were reached in 2012.

Diesel continued to be the premium product with the demand in diesel growth and efforts to be able to produce more diesel. We see diesel continuing to trade at a premium somewhere on an annual basis of about $3 a barrel over gasoline in the United States.

I mentioned earlier the balances of gasoline and diesel, we see the export activity out of the United States continuing, that's very supportive to refinery utilization rates. I mentioned we see the same level of activity in the West Coast from an export standpoint as we go forward there. And just a little tidbit of information in 2011, the U.S. became a net exporter of light products. And if you look at 2011, the gross value of petroleum exports out of United States became the largest export of anything the United States exports. Last year, the first time that's happened in over 60 years.

The Tesoro Index as we look forward, we see it coming off the level that we experienced in 2012, dropping down to a little bit lower level as this chart shows between 2009 and 2011 our index averaged about $9 a barrel. On a go-forward basis, we see it averaging about $11 a barrel. So not at the same level of 2012, but improved versus the prior years.

And from a regulatory standpoint, I mentioned that we see it to be a very challenging regulatory environment. First, the renewable fuel standard that was enacted back in 2007. To us, it's commercially and technically, it just doesn't work and steps needed to be taken, to either repeal or change it because it's not a workable solution with introducing alternative fuels.

On Tier 3 gasoline, we expect the first draft of regulations maybe by this summer. The Tier 3 gasoline will reduce the sulfur content of gasoline. It has the potential to be very expensive for the industry and the benefits of taking out that sulfur aren't that significant. So that's something that we're very sensitive to. From a new source performance standards from the refinery business, we don't expect anything that will impact emissions from refineries until maybe 2014.

And then finally, on a Federal level, not at the State of California regarding a low carbon fuel standard, we don't expect anything to happen there unless Congress does something with the RFS2 and that somehow with the change in RFS2 it would have an impact from a low carbon fuel standard.

And the bottom line from a regulatory standpoint is that we think it's the process for regulatory overhaul is really long overdue. We need more clarity and more transparency in a regulatory process as we go forward, but the refining business today is probably in the lowest capital requirements that we've been in for over 2 decades. So once we completed the requirements to comply with lower benzene, the capital requirements today are pretty low versus what they've been but the environment from a regulatory standpoint is definitely very, very challenging.

And with that, I'd like to turn it over now to Dan Romasko. And Dan is going to talk about our position, what we're doing to strengthen our position on the West Coast.

Daniel Robert Romasko

Great. Thanks, Greg and good morning. As Greg said, we're going to switch to regional focus now beginning with the West Coast. I'll be covering the key factors necessary to be successful in that region right after I give a brief review of the product supply demand balance.

We'll also look at Tesoro's relative position and the operational improvements that we're making to further and improve that position. And throughout the region presentation I'll be covering the implication of the Carson transaction.

So starting with the supply demand balance, the market is quite well supplied with net production capacity length of close to 0.5 million barrels a day. Now that's inclusive of ethanol and imports from the other pads. Exports consume about 100,000 barrels of that length leaving overall capacity utilization on the West Coast of around 80%. That's an average for the last 3 years. I think a bit more positive note, through 2012 year-to-date that number is closer to 82% and represents a little bit of a strengthening of the performance relative to the low of the recession.

On even more positive note, if you take a look at Tesoro's reported number numbers, we have utilization rates closer to -- upper 80s percent range. So we're doing fairly well.

So that takes us really to a bit of an emphasis point because the West Coast on average at that utilization rate is about 5% below the rest of the U.S. and it really emphasizes the key success factors and what you need to do to be successful there. And it includes reliable and cost-effective operations, access to cost advantage feedstocks and through efficient logistics system.

Integrated marketing outlets to give you ratable uptake for the product that you produce and then probably more specifically to California, those that can most cost-effectively meet the unique regulatory challenges that the state presents like AB32. In short, economy of scale is critical on that marketplace.

So Greg talked briefly about the economic outlook. This data, these charts that are represented here are from the State of California and they do show some relatively modest economic recovery.

In fact, if you take a look at the data that was published in October, the latest unemployment figures are at 10.1%, which is better than what is represented on this chart. And these charts generally provide some general recovery that could provide demand related market upside relative to the outlook that Greg provided earlier.

So now if we take a look at kind of the refinery asset mix on the West Coast, there's quite a bit of variability and complexity and capacity and those are the 2 key indices for scale within our industry.

Of course, greater capacity generally brings with it lower operating costs, which we all like, and greater complexity has historically given the flexibility for refineries to convert heavier feedstocks, which are typically more deeply priced discounted in the marketplace.

Now our Carson acquisition generates capacity in excess of 350,000 barrels a day and really strong conversion complexity. That combination makes a world scale facility that's profitable, could be profitable for the long-term.

The Martinez facilities looks pretty good actually, both on complexity and on a capacity perspective and we'll discuss a bit further in the slides in this deck some additional improvement opportunities we have for that area.

Anacortes, if you take a look at the surface, it could be viewed as a bit of risk, but we've actually converted the low complexity of Anacortes to an advantage. The low complexity comes with low operating cost. And we're replacing the feedstock of that facility with cost advantage feedstocks like Bakken crude oil through our crude oil rail offloading facility and then of course, our Canadian crudes through the Trans Mountain Pipeline.

So we're capturing the feedstock cost advantages that would typically associate with waterborne heavies at the low operating cost associated with the low complexity facility.

So in fact, our Tesoro has a fairly clear differentiation from the average in the West Coast in the area of cost advantaged feedstocks. Anacortes once you put the Bakken crude oil together with the Canadian crude oil coming in on Trans Mountain Pipeline is going to be close to 80% cost advantaged feedstock.

Our existing California facilities, if you just take a look at them on the surface are closer to mid pack and that highlights one of the most interesting, exciting synergy opportunities related with the Carson acquisition and we'll talk a little bit more about that later in this presentation.

But essentially, we have the capability to significantly shift our feedstock position to a much more positive cost advantage.

Greg talked briefly about where we are on Refining and Marketing integration but we've been making great progress and it nearly tripled our integration over the past several years. Sitting now today at close to 90% integrated and we've done that all on a low capital models. We're not investing a lot of capital in that business to achieve that performance.

The real value of this is it provides high utilization of assets which drops our per barrel operating cost and gives us stability of production in markets whether they're high or they're low.

If we look forward to the Carson integration, the ARCO model furthers that strength of position.

On the improvement side. In our Wilmington facility, we just recently, within the month of November, brought on the new vacuum tower. And this vacuum tower addresses a yield opportunity that we had at that refinery and essentially uplifts about 1 liquid volume percent coke essentially into clean product. And if you take a look at the 2011 to 2012 prices in markets, that value uplift from coke to clean products ranges from $70 to $100 a barrel, so quite excited about that project.

With the capital cost of about $40 million and conservative EBITDA assumptions on an annual basis in the $20 million to $25 million range, I think this is an example of one of the great projects we have in that high-return capital suite.

So cost is obviously a significant success factor also and we're targeting $1 per barrel improvement in our California facilities and that $1 per barrel is on energy price neutralized basis.

And the real focus, and Greg mentioned this a bit earlier, is on reliability. With reliability comes sustainably decreased maintenance costs and increased asset utilization, which has added benefit of spreading those reduced operating cost across more barrels.

And we're well on our way. As a matter fact if you look at this chart, one can argue we're there. If you look at 2012 year-to-date versus 2010, it would appear that we're $1.30 improved. But remember, we're after energy price neutral improvement and if you take out the energy price advantage that we have in 2012, that reduces that $1.30 down to that $0.60 to $0.70 per barrel range, still pretty good and we're very proud of it, but we believe we've got another $0.30 to $0.40 a barrel that we're confident we'll be able to deliver within the next 1 to 2 years.

Carson acquisition. Obviously, our single largest opportunity on the West Coast to enhance our performance is the acquisition of the Carson facilities and that ticks the box on all of our strategic priorities, as well as our key success factors. At a $0.5 billion a year of EBITDA, $0.25 billion annual run rate on the synergies significant reduction in emissions, this is a project, an opportunity acquisition that's great for Tesoro. It's also great for the State of California and it's also great for the California consumers.

In addition to the environmental improvements, the synergy provide a close to $250 million, broken into really 3 areas: the first being the feedstock advantages. Essentially, we get a transportation improvement due to the increased volume coming across our marinas. The transportation advantage associated with bringing in a larger cargo size volumes and then also the removal of the constraints for the crude, allowing us to run more advantaged feedstocks.

In addition, we've got the lower operating costs associated with linking the product distribution to systems together which give us the capability to more cost-effectively take our products to market. So we're quite excited about those synergy opportunities.

California also presents another competitive opportunity for us and that's an area of regulatory requirements. Namely, who can most cost-effectively meet the requirements of AB32. The general impacts of this regulation are higher cost for the consumers, the potential demand destruction and to some extent, some higher costs for refining specifically in the area of stationary source CO2 compliance.

AB32 can be broken into 3 categories and I'm going to walk through in that area. The first is stationary sources. The second is low carbon fuel standard and then, of course, the third is fuels under the cap.

So if I walk through, and I'm going to start under the fuels under cap, which is essentially a carbon fee on tailpipe emissions. It likely has the potential impact of demand destruction because the relative cost of the carbon fee to the end consumer but it's not likely that it will have a direct impact on margin at the refinery level.

And the low carbon fuel standard requires decrease in carbon intensity in the motor fuel pool across the decade and the components to actually achieve that and their cost, if available, will be likely be transferred direct to the end consumer, but quite frankly, the components are not available in sufficient quantities to meet the low carbon fuel standard and we think that that's going to reach a point of infeasibility somewhere in the 2014, 2015 timeframe. And so we believe that California's going to have to address that issue of infeasibility.

That leaves the stationary source for CO2 requirements. The stationary source -- excuse me, CO2 reduction requirements, and that is a competitive issue within the state. Those refineries and businesses that have the capability to most cost-effectively reduce their CO2 emissions do have a competitive advantage. And of course, the combination of our Carson and our Wilmington facilities give us the capability to reduce almost 0.5 million tons a year of CO2 generation.

And to put that in perspective, that's nearly 1/3 of entire refinery of Wilmington currently and we do that while we improve our ability to produce diesel which is the -- what the -- we believe the market will demand.

Now the overall compliance cost of stationary source CO2 are dependent upon the actual CO2 price and those of us that follow the auction process within the state of California recently likely recognize that, that CO2 price sell at around $10 a ton.

And if you use that $10 per ton CO2 price, and you apply it upon what Tesoro's existing facilities are required for reduction in the 2013 and 2014 timeframe, you get a compliance cost somewhere in the less than $2 million per year for 2013 and '14 on average for Tesoro. And so while that's not totally immaterial, it's not a significant impact on the profitability of our business.

If we take a step back and what do we conclude about AB32, we think the notion of decreased CO2 emissions is appropriate and noble, and we're supportive of that. We just believe the means to achieve it are infeasible and not in the best interest of the consumer.

CARB, we believe, is going to have to -- the California Air Resource Board is going to have to address the infeasibility of this issue and they're going to have to do it fairly promptly because the feedstock simply do not exist to meet the low carbon fuel standard.

On the stationary source CO2 front, we feel we've got a bit of an advantage with a great project that makes a great impact on CO2 while still meeting the demands for fuel in the state.

So what about from a funding perspective? We're in a great position to fund this transaction. We expect the cash needs are going to be somewhere in the $500 million to $750 million range as the majority of the transaction funding is going to come from the first tranche of Logistics assets that we're going to sell to TLLP, as well as some revolver and term loan borrowings.

And then we'll repay those interim borrowings through the second tranche of Logistics assets that we sold to TLLP, reduction of inventory which we believe we can achieve shortly after the integration, and then, of course, cash from operations.

If I step back and summarize the West Coast and wrap it up, this Carson acquisition is a performance step changer for us on the West Coast. It gives us the scale to significantly improve our access to price advantage feedstock. It gives us the flexibility to produce the distillate products that we believe the market's going to demand, and obviously, we believe improves our operating reliability, decreases our cost structure and it maintains our strong market position relative to the integration through our retail outlets.

And it gives us a strong capability to improve our capability to meet the unique California regulatory requirements.

And I'm going to switch over to the Mid-Continent. On the Mid-Continent, we clearly have a very strong significant competitive position. So we'll take a look at what that position is. We'll also talk about the improvements plans we have to make that position even stronger. And then we'll spend some time talking about how we're going to extend or hope to extend that feedstock advantage to the West Coast.

Obviously, in the Mid-Continent, we've got a very strong cost advantage feedstock position. Essentially 100% of the crudes that we feed to our refinery are cost advantaged. And Mandan is the Bakken we actually sit on top of that reservoir. In the Salt Lake City, it's the waxy crudes from the Uintah Basin, plus other WTI price-linked crudes in that same region.

As the charts on the left reflect, those crudes are in rapid production growth. So we believe the transportation cost differentials are going to be there for quite a while.

These 2 refineries were built on top of these reservoirs and they're built on top of these reservoirs to produce this crude. So they're uniquely positioned to process the rediscovered crude in that same area. Essentially, what that means is their cost of operations is associated with a very low complexity. They were tuned to run light sweet crudes. So they get a great gross margin associated with the discounted feedstocks, price feedstocks and then they get the turn that, convert it into products with a very low operating cost.

We're also extending that same feedstock advantage as we discussed to Anacortes through our Anacortes Crude Rail Offloading Facility.

That facility is permitted for 50,000 barrels a day. It's just essentially 40% to 45% of Anacortes' demand for crude, and if you combine that with the Canadian crude that we're bringing in from Trans Mountain, Anacortes' feedstock is close to 80% cost advantaged.

So the unique location that we have along with the conversion configuration that's low cost in nature, coupled with reliable operation, is generating the highest gross margin business among those businesses that are reporting a Mid-Continent position.

And while there's probably and likely some anomalies in the way that we present our data as reported, Tesoro's gross margin is nearly $2 a barrel better than our nearest competitor and close to $8 a barrel above the industry average that report in that region. And that's a pretty significant impact to Tesoro. Obviously, as you can see by this chart our Mid-Continent contribution has grown significantly along with the Pacific Northwest and the West Coast. And it currently contributes close to half of our EBITDA. And we actually expect the underlying reason for this to continue, the underlying reason being the feedstock advantage. We believe the rapid growth of the production in that area is going to keep these barrels transportation cost advantaged.

Additionally, the Salt Lake City has a long-term contract fuel arrangement for the waxy crudes. And that gross margin, as I mentioned earlier, transfers very well into net margin because of the low operating cost. So our improvement on top of that strong position began this year with the Mandan refinery expansion, where we increased 10,000 barrels a day of capacity for a cost of $35 million, generating quite conservatively we feel forward $45 million to $55 million of annual EBITDA.

When I say conservatively, because if you look at 2011 markets and margins, that annual EBITDA would be closer to $100 million per year and you could do the math on 2012, I'm sure, yourself.

Clearly, this was a very inexpensive expansion of that refinery because it essentially expanded the crude unit up to the downstream conversion unit capacity. So now we have an evenly loaded refinery where all of the units are running at their full capability.

The other benefit of that Mandan expansion was that it required additional crude and we're able to put that through our -- through TLLP. So all of the incremental crude that needed to be gathered for fee and delivered to the refinery was done through our TLLP venture.

The second part of the improvement plan for Mandan is Distillate Desulfurization Unit expansion. And that expansion, we believe, is going to cost close to $35 million come on in the second quarter, give or take, of next year and with EBITDA conservatively estimated at $10 million per year. And I say conservatively, again, because we're using distillate to gasoline crack assumptions that are historic in nature and those of us that are watching what's occurring up in North Dakota, I think, are recognizing there's a rapid demand growth for diesel in the region associated with the heavy industries that's supporting the growth of the Bakken fields. So we've likely been fairly conservative on our margin assumptions on the diesel versus gasoline.

The largest project we've announced to date is our Salt Lake City Waxy Crude Conversion Project and that's project at $180 million. Generating $100 million of expected EBITDA per year is obviously exceptionally attractive. That's project essentially doubled the waxy crude that we run at that refinery and it improves the feedstocks costs associated with that. Through long-term contractual agreements with Newfield who's the largest producer of waxy crudes in the Uintah Basin.

The other thing this project does is improve the yields from the same volume of feedstock and increases our capacity from that facility by about 4,000 barrels a day.

As I said earlier, this project at $180 million of capital and $100 million of EBITDA is quite attractive. And we bring on a bit over the -- half of the opportunity or close to half of the opportunity in the second quarter of next year with the remainder coming on towards the end of 2014.

The nature of that feedstock agreement with Newfield is such that it decreases the volatility of the EBITDA stream, which keeps us a little bit more desensitized to market swings than some of our other projects. All of which are good. Another item that we're quite proud of is Tesoro was the first to recognize the regional producer refiner synergy that existed between waxy crude and the local refineries. We're the first one to consummate that through an agreement.

We've already talked a bit about Bakken crude oil source to Anacortes, and that facility actually came on in September. And as Dave likes to say, we believe that facility is going to pay for itself before it was supposed to be completed. It actually has the capacity or permit -- excuse me, up to 50,000 barrels a day. The capital costs for that facility were approximately $60 million and we subsequently sold that to TLLP for $180 million in November of this year.

We're assuming or we're estimating, excuse me, the EBITDA stream from this project to be in the $160 million to $180 million per year range. So obviously a very strong project. It's a great example of understanding a market dynamic, taking prompt and bold action on that and capturing the resulting value. So we're the first unit train capable offloading facility in operation built to process the shale crude rapid growth on the West Coast.

So my last slide is one that talk about commercial excellence. And clearly, what Dave and all of us has been focused on this area is how we capture the strong feedstock advantages that are growing within the country.

Obviously, our Mid-Continent position is extremely strong and our next steps are to extend that advantaged west, because if you look at this graph, obviously, the West Coast is a logical and delivery cost advantaged home for these crudes.

Greg talked about one of our small capital projects and we're actually bringing in manifest our railcars to Martinez and processing up to 5,000 barrels a day of Bakken crude there already, but the real play here is bigger in nature and it's unit train type volume to the California assets. So we started to look at how to do that and if we take a look at the Martinez refinery, that facility really would like Bakken-type shale crudes. It also would like Canadian synthetics or synthetic blends. If we look at Wilmington, it's less desirable shale crudes but it really likes the synthetic blends and the synthetic crudes like SynCrude and SynBit. They would like some of the heavier shale crudes and our assumption for Carson is Carson will like all of the shale crudes as well as the lighter synthetics.

So the question's how do we most cost effectively get those crudes to those facilities and Anacortes-like rail offloading facilities actually look like they might make sense in both Martinez, as well as to serve the LA facilities, but an equally interesting opportunity is to take the crudes -- the shale crudes to their logical and lowest cost destination which is the Pacific Northwest. And if you look at that cost, it provides ample room to put it in marine vessels and bring it down to our already advantaged Logistics assets at our facilities on the West Coast and that stacked cost gets that barrel laid in, about the same as a sole rail opportunity and probably does so with a bit more speed to market.

So we're still in the early parts of this assessment and we expect to have greater clarity on what the best options to take advantage of these opportunities are by the middle of next year.

So that concludes my thoughts. And now, I'd like to turn the floor over to Phil Anderson, our President of Tesoro Logistics.

Phillip M. Anderson

Thanks, Dan. I'm going to talk about Tesoro Logistics Day really from the perspective of Tesoro, not only what we do to enhance Tesoro's business but also to talk about how we think it creates value for Tesoro shareholders and how there's an awful lot of ad value that's going to be created in 2013 and should be recognized in the price of Tesoro's stock.

Really, the key points we'll talk about is how Tesoro's strategy drives TLLP, all the things Greg and Dan have been talking about. Tesoro Logistics really fits in a very well with that.

We look at the performance of TLLP since we IPO-ed last April. We'll talk about our 2 significant growth drivers for 2013: the Chevron acquisition that we announced last night for the Northwest Product System; and secondly, the BP transaction in terms of how that will completely transform our business. We'll roll all that up and we'll take a perspective on how that growth translates into value for Tesoro shareholders through the GP distributions and things like that.

And lastly, we'll look at what to expect beyond 2013 for Tesoro Logistics.

So I'll start with the MLP strategy for Tesoro, which was really very straightforward. If you look at Tesoro's portfolio of refineries, we had significant embedded logistics, including the marketing terminals, the Bakken crude oil gathering system and the marine terminals that are 5 coastal assets.

Additionally, we believe that better access to Logistics assets, especially in the Western U.S., enhances Tesoro's commercial business. The strategy to drive higher throughput and higher market integration increases the call on the Logistics assets and generated significant attractive investment opportunities on the Logistics side.

There's also a desire to increase the third-party utilization of our assets and really increase the cash flows that aren't linked to a crack spread that flow through TLLP to Tesoro.

The MLP vehicle was the obvious choice because it allowed us to do all those things and then really put us in a position with a strategic vehicle to do the BP type transaction.

When we look at how we've done since we've IPO-ed, we've increased distributions over the 6 quarters on a 25% CAGR basis.

Potentially, more important is that accumulatively we've increased distributions 35%. And in 2013, we expect those distributions to hit or to surpass the market $0.51 per quarter per unit which is really the mark where Tesoro captures the highest level of incentive distribution or the high splits. At that point, Tesoro receives over 50% of the incremental distributions through the GP and the combination of the LP unit.

TLLP's growth has really been fueled by the key facets of our business strategy is driven by Tesoro. The organic growth program, which was designed to improve and expand our Bakken business in concert with the expansion of Tesoro's demand for Bakken-type crudes and the expansion of our terminal assets in order to capture Tesoro's growing volume.

Secondly, we expanded our asset portfolio through the additional purchase of 3 logistics assets from Tesoro. The first was the Emerco [ph] marine terminal at Martinez. The second was the Long Beach terminal where Tesoro had just completed a new throughput contract with another area of refiner allowing Tesoro to capture incremental value through the drop. And last, we completed the acquisition, as Dan mentioned, of the Anacortes rail facility just last month. Looking forward with the Chevron and BP transactions, those really set the basis for us to double again the size of TLLP and significantly transform Tesoro's Logistics business.

So we're very excited yesterday, we announced that we had signed a definitive agreement with Chevron to purchase the Northwest Product System. As Greg mentioned, the pipeline has 10 shippers. It originates in Salt Lake City with the 5 refineries, plus products that come in on another regional products pipeline in the area and delivers to terminals in Idaho and Washington. This is an extremely high-quality asset that obviously fits very well with Tesoro's and TLLP's existing asset.

Northwest Product System provides a platform for future organic growth for us and an opportunity to further improve the business with our existing assets on the pipeline.

We expect to generate annual EBITDA of about $33 million that includes about $2.5 million of synergies.

We also believe that the transaction will be immediately accretive not only to the LP, but also to the GP. We expect to purchase -- I'm sorry, we expect to enhance the purchase price of $400 million along with the first tranche of BP assets and a balanced debt and equity combination.

In terms of how this acquisition fits our strategy, we think it perfectly illustrates how we want to drive Tesoro Logistics’ business. For Tesoro, it leverages TLLP to deliver incremental cash flows and further expands Tesoro's value capture through the GP. It also supports how we believe upside value can be created within Tesoro's business by integrating the value chain and delivering new ways to improve the business through the capture of incremental value through our existing assets in the region.

For TLLP, we're obviously adding a very high-quality asset and it perfectly fits our inflation protected fee-based MLP model. The asset will generate significant third-party revenues and puts us into the common carrier product pipeline business in a big way.

Transitioning to BP. We do continue to work very closely with Tesoro on the acquisition of the Carson assets. The combination of the marine terminals, the storage facilities, products pipeline, they all represent a doubling of the throughputs and a significant step change in TLLP's business with roughly $1 billion of combined value in the 2 tranches. Historically, BP operated the product terminals and product pipeline as a proprietary business.

Our intent is to open the system to third parties and drive additional volume and revenue growth in the future, and that's not in any of the numbers we're showing yet.

Besides the scale of the business, we believe this system will make -- will generate future opportunities for us to do organic projects and further grow the business and really set a foundation for additional future growth.

All right. On this slide, when we roll up the outlook and we illustrate how we believe that this creates value for Tesoro shareholders. In terms of EBITDA, our expected EBITDA profile expands fivefold from our original IPO EBITDA last year of $53 million.

Again, that's through the capture of our organic growth program, plus the 3 drop-downs we did in 2012 which we expect to generate a base EBITDA of $140 million in 2013.

When you combine that with the EBITDA from the Chevron and BP assets, which up for BP we've estimated using historical volumes and existing market rates in that area, we would expect a total $260 million to $285 million of combined EBITDA. In terms of timing, we expect to complete the BP acquisition within 12 months closing of the initial transaction.

Using typical multiples, TLLP's total enterprise value may well exceed $4 billion with the completion of those transactions with the expanded capture of the cash flows for Tesoro, through its GP position as well as the position it has in the LP, we would expect Tesoro shareholders to have an embedded value of approximately $11 per Tesoro share. Obviously, very significant. We don't believe that that's well recognized yet.

In terms of future growth opportunities beyond BP, there's, obviously, the remaining legacy assets of Tesoro, which include the Avon marine facility at Tesoro Martinez refinery where $100 million is being invested to revitalize that asset, as well as Tesoro's Alaska assets at Kenai, which include a marine facility, a products terminal and the products pipeline that runs into anchorage.

As Dan mentioned, we're working with the company as we look at potential to bring advantaged crudes into Tesoro's refineries. We believe those opportunities may well create new very attractive investment opportunities for TLLP.

In addition to looking at rail options, we're also looking at potential new build pipelines in a couple of areas, including the Uinta Basin in Utah where those crudes presently move by truck into the Salt Lake refining area and the Cook Inlet in Alaska.

These projects would generate substantial growth for TLLP, but most importantly, for Tesoro. It would help Tesoro leverage that advantaged crude price.

We'll also continue to pursue standalone opportunities like the Chevron transaction. These opportunities create future options to expand Tesoro's business in the region, as well as generate significant free cash flow that Tesoro captures through its GP position. There are significant opportunities to grow TLLP well into the future and we believe Tesoro and its shareholders will have substantial financial and strategic benefits from the future success of TLLP.

With that, I'll thank you, and I'm going to turn it over to Scott Spendlove, our CFO.

G. Scott Spendlove

All right. I'm going to walk us through some of the key highlights of our financial discipline strategy and talk about some of the great progress we've made here recently, talk about and give you an update to our capital and turnaround spending outlook, show you some of the strength that we've built into the balance sheet and it puts us in a great position as we've talked about as we go into next year in the Carson acquisition, and then I'm going to show you what we think our cash flow looks like on a go-forward basis and just give you an idea of the kind of strength that we expect and some of the things and we're going to do with that strength.

Our financial priority is relative to discipline and how we manage our balance sheet and put ourselves in a strong position financially are these: Our first priority is to maintain a minimum cash balance in the $600 million to $750 million range; and in the low-margin environment that we've assumed in setting this target, we are able to fill nonetheless cover base things like sustaining and turnaround capital spend annually, our interest expense burden, the pension funding obligations that we have and also guard against and cushion against the impact of lower absolute price environment on our working capital.

The next priority is then to get our leverage down to something under 30% and as of the end of September, we were at 25% debt to cap and a very strong position, again, as we round out the year and move into next year into the Carson acquisition.

We also then target returning excess cash then or investing excess cash into high-return capital projects like the ones we've already talked about and also being just well positioned for the kind of growth that we see and opportunities like the Carson acquisition, and beyond that, be in a position to return excess cash to shareholders.

As we then execute on these priorities successfully and continue to strengthen our financial position, we believe it puts us more in a position to achieve an investment grade credit rating which is a very important thing for us. And we think that post BP or post the Carson acquisition and getting through that period of interim financing that we'll be a strong position to pursue an investment grade credit rating with the rating agencies.

Let me give you an update on our capital spending and the outlook for the next few years on the next couple of slides.

First of all, these slides are before BP or the Carson acquisition or before the Chevron acquisition. We've also separated Tesoro Logistics from Tesoro Corporation as shown separately on these slide. The roughly $70 million a year that you see there really pertains to some of the growth opportunities in the Logistics business that Phil has already referred to. Those dollars are self funding through the MLPs on balance sheet, and so they don't affect free cash flow Tesoro Corporation and that's why separating them and showing it to you separately.

You can see the base level of regulatory and maintenance capital and our plans on a go-forward basis are fairly constant in the $225 million per year range and you can see on top of that the amount of income capital spending that declines over time as we conclude our investments on the project we've already identified, the projects that Greg's already talked about. And again, remember this is before what we expect to spend on the Carson acquisition, which is about $275 million through 2016.

Now while we're showing you decline capital spending for income projects on a go-forward basis, we do expect that we'll continue to look for and pursue high-return capital projects like we've been able to deliver historically. That will be very competitive with other forms of returning cash and driving value for shareholders, and as we develop some of those plans on a go-forward basis, we'll be sure to come back and share those with you.

We're drilling down just a little bit more on our high-return capital projects. As Greg showed you for the period from 2009 through 2012, we will have invested some $500 million on high-return capital projects focused on sustainable improvements, including capturing advantaged crude prices and expanding our throughput, enhancing our yields and reducing our overall operating costs. The sum total of that spend again is $500 million and it's generated about $300 million of return, significant return as we've already talked about.

Going forward then as we conclude our investments in those projects, we're going to spend another $400 million or so, which would take our total spend for the period of 2009 through 2015 to just about $900 million. And you can see on this chart that by 2015, our EBITDA that we expect on a run rate basis for that $900 million of investments is $575 million or a simple payback of less than 2 years. So again, very successful part of our strategy has been finding these projects to invest in and generating significant cash flow and return for investors.

You'll also notice on the chart on the right the big jump in EBITDA from 2012 to 2013. That simply reflects the projects that we completed in 2012, the Anacortes rail project, the Mandan expansion project and the Wilmington Yield Improvement projects, full year of EBITDA from those projects as reflected in the '13 number. And then the EBITDA growth that you see going forward is really reflective of completing the DDU expansion in Mandan and the Salt Lake conversion projects in '13 and '14.

So again, as we fully develop additional high-return capital investment projects, we'll share those with you, but again, rest assured that we will be looking for the kinds of returns that make those projects very competitive with other uses for our funds.

Giving you just an update here then as well on our turnaround spending. You can see obviously the cyclical nature of turnarounds and you can see that we're going through a period of relatively high turnaround spend and turnaround activity. Now you can see that declining in 2014 and '15.

If you take then the typical 5-year turnaround cycle that you can see on this chart, the average that we've spent and expect to spend is in the $200 million range. That added to our baseline of regulatory and sustaining capital, puts the total amount of sustaining capital for us in the $400 million to $450 million range, which just happens to be about what our depreciation is on an annual basis. With the Carson acquisition, we expect to add about $250 million more annually in both turnaround and sustaining capital.

And so as we conclude our turnaround investments next year, turnaround spending, we will be very well positioned from a reliability and operations standpoint to continue to capture and deliver great earnings from strong margins.

So going back then to 2010 and looking at what we've done to improve our balance sheet, there's been quite a lot that we've been able to achieve and it's really founded and based on solid operating reliability and results and capturing good margins, delivering on the earnings improvement initiatives that we've been pursuing, and then of course, the cash that we've been able to generate from the Tesoro Logistics entity. We've generated a significant amount of cash that we've been able to put to good use and strengthen in our financial position.

We reduced debt by over $600 million. And on top of that debt reduction with retained earnings growth that we've seen because of the strong EBITDA that we've been able to deliver, our debt to capital has decreased from about 40% to about 25%. This year, we've done a significant refinancing and extended our debt maturities by about 4 years on average and reduced our overall borrowing cost by a full percentage point. You combine that with the delevering that we've done over the last few years and our total interest expense has dropped by about 1/3 and then don't forget as well at the end of 2010, we changed some of the benefits that we were offering and improved our post retirement benefit obligations, reducing that by about $300 million and keeping those liabilities flat on a go-forward basis as compared to some sharp increases that we were otherwise looking at, having not made those changes.

And then finally, we've built about $1 billion of cash on the balance sheet in that period of time. And again, that positions us very, very well as we go into next year and closing on the Carson acquisition.

So as you look at things on a go-forward basis and based on the consensus estimates that are out there and layering on top of those consensus estimates the EBITDA growth that we see from the Carson acquisition and the Chevron acquisition, we look at free cash flow in the range of about $1 billion a year. Now this is free cash flow after sustaining capital, but before income capital, the very significant free cash flow. And of that $3 billion, we'll probably use about half of that between ultimately the cash that we put into the Carson acquisition once we get through the interim financing period and then another $400 million or so on investment capital, but that still leaves us with about $1.5 billion of free cash flow over the next few years to fund additional investments in high-return projects and continue to strengthen and position the balance sheet for growth and then ultimately of course return excess cash to shareholders to the extent that we have excess proceeds and opportunities to do that.

So as we conclude 2012, we find ourselves in really, as Greg said already, the best position we've been in as a company. It's been a great year for us and the future looks equally promising.

And with that, I'm going to hand it back over to Greg.

Gregory J. Goff

So really to start to wrap up here. In 2013, for us to really continue to successfully initiate or execute our strategic initiative, there's a few things that we really needed to do. First, we really need to continue our drive on fundamental improvements in the business and capture other -- and drive our margin capture.

Second, we need to execute our high-return capital program. And as Scott showed on there, that program in 2013 drives about $225 million of additional EBITDA in 2013. So really building upon this success that we've had with investing the capital.

Third, you saw on the chart that Scott just showed, we're going to spend over $300 million next year on turnaround. So it's a heavy load for the company. We need to successfully execute our turnaround plans next year.

The fourth thing we need to do is we need a successful integration of the Carson refining and marketing assets into our portfolio. There's tremendous synergy value created there. We have a lot of front-end work going on in preparation for Day 1 in the first part of 2013, but that successful integration is a critical driver for us in 2013.

And then finally, the integration of the Chevron assets into our Logistics company is important here in the early part of 2013 because almost -- as we complete that acquisition and integrate that into our Logistics business, we'll be in to integrate the BP assets into our Logistics business. And as Phil mentioned in his talk, we are planning to do about half of that as in the early part of 2013, so the integration activity for the company is pretty significant next year.

Earlier when I talked, I kind of -- I showed a valuation of Tesoro and it was based upon trailing 12 months. And I described how we kind of came about -- we're using that simple methodology. Here, it's taking a forward look now and looking at our EBITDA projections on a consensus basis for 2013, and on top of that, layering on the EBITDA attributable to the Carson transaction and then the growth in the GP distributions as a result of the Chevron, and you can see on the chart up here using consensus estimates, like I said, same type of multiples as we used in the earlier range, we get a value for the company of somewhere between $55 to $95 a share based on those assumptions of looking at the business. And so similar to what we talked about earlier, as you look at the improvements and the changes that we've made in the business over time and the earnings capability of the company and then you talked -- look at the improvements that we're driving next year in the business, a lot of them which we talked about come from our high-return capital program, the $225 million or so from there and then the value from the Carson transaction, as well as the growth in the Logistics business that Phil described, it kind of puts some parameters around, kind of what the value of Tesoro looks like on a go-forward basis in that. So something that really brings together everything that we've been working on to drive that fundamental improvement in value.

So to summarize what we talked about today, we are really focused on delivering our key strategic initiatives. As I started the conversation today, next year is the third year of our plan to drive this significant and fundamental improvement in the value of the company. We believe we have an organization that's really fired up for the challenge and ready to deliver what we need to do and continue this journey that we've been doing. Dan talked a little bit about our West Coast business. The steps that we've taken and what we have ahead of us to really drive improvement in the West Coast business with some really -- some exciting opportunities, both operationally and then commercially as we find ways to supply cost advantaged crude to those facility to really continue to capitalize on our Mid-Continent position, the project in Salt Lake, the first phase is now just a few months away from coming on is an exciting enhancement to our business in Salt Lake City.

Phil Anderson -- Phil talked a little bit about our Logistics business, and really, a phenomenal growth story. If you look and you think in April of 2011, that business had about 50 -- a little over $50 million of EBITDA and with the things that we have going on by the end of 2013, the potential to have almost 5x the EBITDA in that company and more importantly the value that it contributes to Tesoro. And then Scott really pulled it all together and talked about our discipline on managing the company financially and how we've created a very strong financial position and able to use that as a position of strength as we go forward not only for the transactions but as he showed in our projections using consensus estimates, pretty significant free cash flow as we go forward in the future years in that. So we're very excited and we're very optimistic about everything that we have going on and we feel very comfortable that the track record we've developed of being able to deliver and execute our business is something that we can build on as we go forward.

So with that, I want to thank you for your time today. We appreciate the opportunity to share with you the Tesoro story, and I'd be more than glad to entertain questions and comments, either myself or the others on the leadership team. So we'll just start. Arjun?

Question-and-Answer Session

Gregory J. Goff

Yes, sorry. We do have microphones going on around here, so...

Unknown Executive

So the webcast can hear.

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

It's Arjun Murti with Goldman Sachs. Two kind of broad questions. What are the remaining regulatory hurdles to close Carson and is potentially divesting Wilmington a possibility or is that the deal breaker? And then second question is around the excess cash to investors. Can you just talk about whether you have any strategy to try and regularly grow the dividend, maybe attract dividend growth funds and how you think about dividends versus specials versus stock buybacks?

Gregory J. Goff

Let me answer the first question, Arjun, then I'll ask Scott to respond to your second question on dividends. Regarding the Carson transaction, we always expected this to go into the second stage, which we are in the second stage. We're actually in the latter part of the second stage right now and so we continue to work very cooperatively with the Federal Trade Commission and the attorney general for the State of California, complying with all the -- their information requests, and that process, so far is working well. It takes time. There are scheduled stops along the way that were in there. It's moving pretty much as we expected when we entered this transaction back in August of last year. And right now, it looks good and we continue to believe that in the first part of 2013, that process will be completed. We do not expect to have to do anything with the Wilmington refinery. That is something that we don't think will happen. The real value transaction, I think, as Dan described in his presentation, was the benefits that it provides to the consumers in California, the environmental benefits in that, so the combination of the facilities will be attractive. And we are fully convinced that there will be no need for us to do anything with the Wilmington refinery. And your question on dividend, I'll let Scott respond to you.

G. Scott Spendlove

Our strategy, Arjun, on dividend payments is to be competitive in the yield and the payout that we deliver through the dividend, and as earnings grow and the share price grows, we'll take a look at where we are competitively on dividends and our yield and payout and look to make any adjustments that may be appropriate.

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


G. Scott Spendlove

Yes, with where our shares trade and the multiple that we have on the stock right now, we feel like buying back stock is better use of that kind of cash versus special at this point.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Doug Leggate from BofA. A couple of quick ones, if I may. Slide 39, I don't know if want to refer to, but it’s the Carson synergy overview. Could you just give us a little bit more of a breakdown as to how you get to those numbers? It seems that if I'm reading this right, it looks like the synergies are about 50% of the run rate EBITDA from the refinery, as you see it. So it's a pretty significant -- it's a punchy number. Can you walk us through how you get there and why we should be confident in that number? My follow-up is just on the infrastructure to the West Coast. There's a lot of new pipelines obviously coming on short term that leave a bit of an uncertain environment on how the differentials are going to look. What do you need to see before you make that commitment to do the Marine combination deal that you talked about to move that Bakken crude down to the LA region?

Gregory J. Goff

Yes, let me ask Dan to talk to you about -- well, actually both questions since he's working on both of those. So Dan, why don't you talk about the synergies?

Daniel Robert Romasko

Yes, sure. I obviously didn’t do a great job on my first shot. So let me walk through the synergies. We're fairly confident of the $250 million range. Let me talk about the greater piece of that, which is over half of it, which is the feedstock. And I'm going to break it into the cost and then the value. The cost advantage we have are bringing in larger cargo-type sizes that have distinct cost advantages from a transportation perspective. And if you take a look at VLCC relative to a non-VLC cargo size in today's markets, that is almost $1 to $2 a barrel. Now those rates can change year to year, but that's where it currently sits, and it's a pretty significant value. That applies to Carson. It also applies to Wilmington because they come together. And then we can also utilize that same capability to service Martinez. So that's the cost advantage side of it. Larger volumes coming in on lower-cost transportation and also benefited by the tying the storage facilities together that make all of that work. The other piece of it is running crudes other than the crudes that have been run. And so we don't know for an absolute fact why BP chose to run Alaska North slope as much as they did. But if we look at the crude slates that make most sense in those facilities and specifically, in Carson, excuse me -- it's something other than that the majority of the time, and there's a lot of value that can be captured. So that's the feedstock side of it. The product distribution side is pretty simple. Today, we actually pay third parties to transport on third-party systems our products to market in the LA area, not all of it, but a lot of it. And optimizing, tying our combined facilities together gives us capability to more cost-effectively get those same products to market. And then the last piece, which is a pretty material piece is the actual physically connecting the 2 facilities together and producing a product slate that's more appropriate to the marketplace at a much lower operating cost.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Dan, before you -- I guess, on the feedstock issue, my understanding is that you guys are negotiating world market prices to potentially supply those, as from conversations to likes of Occidental, So how does -- what are you -- the ANS replacement you're talking about, am I misinterpreting that or are you looking at other feedstocks?

Daniel Robert Romasko

We're looking at the full slate of feedstocks into the facility, Alaska North Slope and others. I'm not sure if I caught the full question there.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Yes, this is -- my understanding was that in preparation for this, you were going out to market to negotiate world market prices on a Brent basis.

Gregory J. Goff

That's not true Doug. That's absolutely an incorrect statement. Ed?

Edward Westlake - Crédit Suisse AG, Research Division

It's Ed Westlake at Crédit Suisse. Just a follow-on on the FTC. Have you had any feedback yet in terms of whether they view the combination on a sort of a California basis or your argument, which is to look at the whole of the West Coast?

Gregory J. Goff

No, we have not.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then coming back to dropdowns maybe for TLLP. You mentioned a pipeline project that's obviously EBITDA still within the Tesoro system. Can you give us any kind of idea of the -- sort of EBITDA that is still out there or the EBITDA of the pipeline and what it would contribute?

Phillip M. Anderson

For the 2 pipeline projects I mentioned, the Alaskan -- the Cook Inlet and the Uinta, we don't have good estimates at this point. We know what it costs to move that crude right now, which is quite expensive because it's a relatively inefficient mode using trucks around Uinta and using lightly loaded Jones Act vessels up in Alaska. So there's a lot of room to improve the EBITDA not only through capturing it through a logistics asset, but just flat-out reducing the transportation cost of that crude for Tesoro. So we don't have solid estimates on that yet.

Edward Westlake - Crédit Suisse AG, Research Division

And then a broader question just on large major capital projects. I mean obviously, you're generating a lot of free cash flow. You have line of sight today. But is there some risk that2, 3 years down the road we’re just going to discover some major project, which defers perhaps some of the free cash generation that you see as we sit here today?

Gregory J. Goff

Yes, we've always said that we continue to really scrub all of the assets and identify opportunities. We have things that we're looking at that are being evaluated. But those project have to be at comparable value than what we've delivered. I mean, we showed you where we said $350 million on a run-rate basis and generate $350 million of EBITDA. So we're driven by really using capital effectively when we're redeploying the business. So as we do that, there going to have to be projects of that order of magnitude. Paul?

Paul Sankey - Deutsche Bank AG, Research Division

Paul Sankey of Deutsche Bank. In your $55 to $95 price target, I guess, the big differences would be the FTC and the California market between where you might perceive the value to be and where the market might be wrong. On the FTC, my question was once the FTC decides, is that the end of the matter once and for all because you mentioned the State Attorney General. I was wondering whether there's potential for further comeback, if you like, from the states or politicians or whatever?

Gregory J. Goff

Yes, typically, Paul, the process works such that the State Attorney General and the Federal Trade Commission kind of work hand-in-hand as you go through the process. So we're supplying information to both at the same time in that. So there is a possibility they could do something differently, but we don't expect that to happen.

Paul Sankey - Deutsche Bank AG, Research Division

Alright. On the California market, I know it's typical for it to pretty weak at this time of the year, but it's notable that the Richmond refinery, I think it may be partly running or is basically not running. Is that a concern to you, where you've mentioned the secular decline in California demand? Or are you seeing it very much as just a seasonal effect that we will recover from regardless of the fact that Richmond is not running?

Gregory J. Goff

Yes, I mean, we don't know the extent that Richmond is running other than what you can pick up in the market. We assume that Richmond is producing a fair amount of refined products. So we're not fully negatively impacted of that being down. But the market is, I mean, it's in a seasonal pattern, and I think, like I said earlier, as we look at the fundamentals, the drivers that we've been talking about here, Dan talked about the drivers between the supply and demand balance and what we see happening out there. We see the market on an annual basis kind of staying in that same $14 or so West Coast crack spread. James?

Jeffrey A. Dietert - Simmons & Company International, Research Division

It's Jeff Dietert with Simmons. You guys, with your rail facility, you're undertaking a pretty big change in logistics, and the railroads in general are seeing a massive change in their business with the increase in railed crude. Could you give an update on your facility and how rapidly you're ramping up those volumes? Are there logistical constraints that you're having to work through or is everything operating pretty much as expected? And secondly, if I could, how do you see the regulatory environment proceeding? Who takes the initiatives to make the changes? Dan you talked about needed to occur between now and 2014 when you see some of the infeasibility occurring.

Gregory J. Goff

Yes. Let me ask Dave Kirshner to comment on your first question, Dave, regarding the supply of Bakken crude oil. Dave?

David K. Kirshner

Yes. We are ramping up right now. We're right at 40,000 barrels a day. Just above 40,000 barrels a day going to Anacortes. And you're absolutely right, it's a new business. It's the rail business. I'd like to note that the people that are in the LPG business and the ethanol business are looking at the crude oil business people and say, "Welcome to our world of the railroad business." It's not as grateful. You deal with the weather. And so we're learning about that. And so far, that hasn't had much of an impact, but we also plan for it. From a logistics constraint standpoint, there are some siding constraints that are keeping us from getting up to the 50,000-barrel mark until early next year. We're also investing in tankage to allow for more lack of rateability versus say a pipeline delivery, so both of those investments are going in, the rail siding and the additional tankage investments to allow us to fully maximize the amount we can move to Anacortes.

Gregory J. Goff

Dan, would you like to talk about AB32?

Daniel Robert Romasko

Yes, and I think the question was specific to how we're going to address the infeasibility? Is that right, Jeff?

Jeffrey A. Dietert - Simmons & Company International, Research Division


Daniel Robert Romasko

So currently, I think most of us are aware that the LCF -- the Low Carbon Fuel Standard has been declared unconstitutional. And right now, CARB actually has approval to continue to implement it while it goes through the appeal process. So the question is how are we going to address this as a joint industry-state? And I think the simple answer is we need to get together. CARB, I believe, is aware of the issue that they're facing. The blend stocks simply don't exist, and we're starting to see some issues that we believe will start to occur to towards the end of 2013, 2014 timeframe. CARB is probably, we believe, aware of those issues and we're going to have to get together as an industry and state to figure out a solution. The rest of the pieces of AB32 can proceed, and as I said the stationary source impact on CO2 is relatively minor for us?

Evan Calio - Morgan Stanley, Research Division

Evan Calio of Morgan Stanley. Two questions. The first is a follow-up on the potential additional crude feedstock advantage to the West Coast, kind of multipart. Number one, what do you see as the longest lead time item potential for the buildout of rail in Southern California? Is it in the ordering side or the permitting side? Secondly, are those apples-to-apples numbers including -- assuming that you own transloading capacity? And then thirdly, how do you think about the yield impact, particularly running maybe a Syncrude versus what you're currently running, so I know that in Anacortes it gives you a several dollar -- a several dollar benefit running Bakken versus what you would have otherwise been the crude [indiscernible] ?

Gregory J. Goff

Yes, that probably haven't tied in. But we didn't answer your second question, Doug. Also we'll try to -- Dan, if you want to respond to those.

Daniel Robert Romasko

Okay. So I'm going to see if I got those right. There's a timing question on it, is that correct?

Evan Calio - Morgan Stanley, Research Division

That's right. Just ...

Daniel Robert Romasko

A yield question. And was there a third one?

Evan Calio - Morgan Stanley, Research Division

Yes, the third one was related to -- I lost my own thought here -- if they’re fully loaded? Sorry. Because all those numbers -- it doesn't look like they're including transloading.

Daniel Robert Romasko

So from a timing perspective, permitting in the State of California can take anywhere depending on the intensity of the project anywhere from 2 to 3 years. So that's how long that can take. If the marine solution, which is Pacific Northwest and then marine down is something that's closer to the 1 to 2-year range, so it's much prompter. Of course, in the interim, we're dealing with manf [ph]. What we can manage this through manifest railcars, which is not permitting issue. Yield perspective, it's too early to tell. We've done preliminary analysis, and it looks quite favorable. So I think we're too early to call on that. And regarding the cost, they're all on the same basis, and the loading in inter-marine and full marine cost would have to be additive to that rail cost from the Pacific Northwest.

Gregory J. Goff

Just one point of clarity on that cost chart. On the Gulf Coast, that does have an additional adder for the arbitrage value between which is being charged in the market today between Bakken and taking it to the Gulf Coast. So to be completely clear, Evan, the others are all on a comparable basis except for that adder that applies to some shipments to the Gulf Coast.

Evan Calio - Morgan Stanley, Research Division

Great. And just one second question, if I may. It relates to your buildup in target price. I think the sector is undervalued, and it largely relates to the valuation of the MLP assets. So in that line, would you consider marking the GP value, which is a value that's often overlooked in refining, if that wasn't being recognized in your share price?

Gregory J. Goff

Today, we would do that today. We like the way that we operate the business and continue to do that, so I mean, we would look at that down the road but that is something that we would intend to do.

Douglas Terreson - ISI Group Inc., Research Division

Doug Terreson, ISI. Greg, today's fundamental outlook suggests that U.S. demand growth maybe below that of supply. But at the same time, Slide 26 kind of indicated that there may not be a significant increase in exports in '13 through '15. And so while Tesoro is going to benefit from the acquisition capital program in '13. My question is whether there's a specific reason why we don't have exports rising next year. Or put it another way, how do you reconcile these fundamental factors in your outlook through the next couple of years?

Gregory J. Goff

Let me try and understand the question clearly, Doug. Our view on exports are to stay pretty much constant with where they are today because as we see the markets where they go, we don't see a big shift there from economic activity in that. And so as we project out the export activity in both the Gulf Coast and West Coast, we see it pretty constant. That was one thing --I didn't know if I answered your questions.

Douglas Terreson - ISI Group Inc., Research Division

Yes. So the question is if you have supply growth over demand growth but no increase in exports, how does that reconcile? Do they reconcile through lower gross margins? Was that part of the reason that the index went -- declined next year? Do you understand now?

Gregory J. Goff

Yes, the index -- our index declined primarily as attributable to our assumptions on crude differentials. We have a lot of robust estimate of crude differentials next year.

Douglas Terreson - ISI Group Inc., Research Division

Okay. So exports may increase?

Gregory J. Goff

Yes. Ann?

Ann L. Kohler - Imperial Capital, LLC, Research Division

Great. Ann Kohler, Imperial Capital. My question is a follow-up to Evan's, basically regarding your ability to increase flows out of Anacortes. Currently, you're looking to move that up to the 50,000-barrel a day level of Bakken crude. What would be the ability and the timing to move that up? Are there natural increments in which you would be able to do that? And the cost associated with that?

Gregory J. Goff

Ann, to your question I mean, we will get to 50,000 barrels a day at Bakken into Anacortes in the first part of next year.

Ann L. Kohler - Imperial Capital, LLC, Research Division

Right, if you're looking to potential move additional crude from that area down to the California refineries, you certainly need to increase the capacity of that facility. What is the ability to increase that facility? What do you have to do? Are there permitting issues? Is there a natural increase, one level, a second level? And what would be timing for all of that?

Gregory J. Goff

The opportunity that Dan mentioned, as far taking Bakken into the Pacific Northwest and then transloading onto ships does not involve our Anacortes refinery. It's another opportunity.

Ann L. Kohler - Imperial Capital, LLC, Research Division

So there would be another opportunity beyond the Anacortes rails facility that you have?

Gregory J. Goff

Right. Yes it is.

Ann L. Kohler - Imperial Capital, LLC, Research Division

And in terms of the timing on that, though, would that be -- and you see -- you certainly indicated that in California you're looking for permitting a 2 to 3-year opportunity. So just 1 or 2 years of added additional facility in the Anacortes area?

Gregory J. Goff

The opportunity that we're looking at is considerably less up in the Pacific Northwest. It's under evaluation right now, so. Chi?

Chi Chow - Macquarie Research

Yes. Chi Chow from Macquarie Capital. So all the talk about railing the crude to California, what is your capacity to be able to process light sweet crudes through your West Coast refineries? Is there an upper limit before you run into the processing limitations?

Gregory J. Goff

Let me and Dan try to cover that. Let him go back and reinstate between -- because he also laid the case out for Carson, but go ahead, Dan.

Daniel Robert Romasko

Yes. So in Martinez our early analysis indicates that we probably want to diet of somewhere between 30,000 to 50,000 barrels a day. The actual hardware to get to that is still under review. Heavier crudes like Canadians could be brought in without as much of an impact. Wilmington really doesn't have a strong desire to take on the lighter shale crude simply because it's built for complexity of the heavier feedstock. So it's going to prefer either the most heavy shale crudes or Canadian feedstocks.

Chi Chow - Macquarie Research

Okay. And then you talked most about railing Bakken. And does it make sense to rail Permian in -- Permian basin crudes into California and are there limitations there?

Daniel Robert Romasko

It's a possibility, and it would require the same rail offloading capability. The key, we believe, is the offloading capability at the site either through a marine solution or through a rail solution.

Chi Chow - Macquarie Research

Right. And then just 2 questions on Salt Lake. So Phil, you mentioned this pipeline project. Are you talking about a heated pipeline to get the wax crude in?

Phillip M. Anderson


Chi Chow - Macquarie Research

Okay. And then you're talking the Newfield contract stabilizing the EBITDA at the facility. Can you talk a little bit more about that? What's the situation?

Phillip M. Anderson

Yes. I'll do it -- sorry, at a very simple level. That contractual agreement has price advantages that minimize that are contractual in nature and minimize the volatility relative to let's say Bakken. So as we know Bakken crude can actually price above or below WTI. The arrangement with Newfield gives us a fixed pricing relative to WTI. So it takes that piece of the equation out.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Rogers Read, Wells Fargo. Kind of 2 unrelated questions. But first, I'm getting back to the Low Carbon Fuel Standard. What would be the process? And I know you talked earlier and it's said many times that it will be a bigger issue for the consumers getting costs passed along. But if infeasibility is not addressed fairly quickly, however the best way to put it would be for 2014 and '15, what are the risk to Tesoro on a cost side, on the ability to move product, et cetera?

Phillip M. Anderson

So ultimate -- I'll try to address it in a high level because there isn't a formal process to resolve this, quite frankly. The real issue is the feedstocks simply don't exist so we can't go to that end of state. I don't view it as a cost issue. It would be a cost issue if the feedstock existed to blend with carbon intensity required by CARB and it was simply a matter of us paying an incremental amount to get it. Fundamentally, we don't know, nobody knows in the industry, and CARB likely understands they simply don't exist. So before that period of time, there are allowances within CARB's own regulations where they can reset that curve. That will likely be the most probable outcome.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

And no cost to mine those allowances at this point?

Gregory J. Goff

Mine the what?

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Mine the allowances. Sometimes like somebody is saying you have to pay for rent and stuff like that?

Gregory J. Goff

And those markets are not developed yet well enough for us to make a call. The only market that we really gone to recently that gives evidence of how carbon is going to price is relative to the cap and trade and those are priced at $10 a ton in the last and only auction.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And then the other question. In the Bakken area, we've heard talk about small refineries starting up to produce diesel, obviously, pursuing an attractive market there. What do you think is that process? Is that something that you're watching at all or does it seem that these small units would be so inefficient? Probably on a per barrel basis it's not a huge risk?

Gregory J. Goff

Yes, I mean, the economics are probably questionable on those projects. But we're doing things to increase, that there is growth in diesel demand in the area that Dan mentioned. But with our capability, I think we'll be able to produce another 5,000 barrels a day of diesel by next year to meet demand from the oilfield operations in that. So those ideas will just have to be evaluated and see if they make any sense. But the market can pretty much supply the demand up in the area without any problem.

Richard S. Linhart - Morgan Stanley Wealth Management

Richard Linhart at Morgan Stanley. There's a recent MLP IPO, Northern Tier, that has a Minnesota refinery about 10% or 20% larger than Mandan, and they've been running at about a $250 million EBITDA per quarter run rate for the past few quarters. Is Mandan operating at a similar level?

Gregory J. Goff

Yes, I mean I don't know what Northern Tier runs at that type of EBITDA rate. I think that they are comparable in size, the 2 facilities. And in the chart up here that Dan showed you when he talked about our Mid-Con position, he did have -- did you have 2012 refining margin on there?

Daniel Robert Romasko

Just none in -- we had our Mid-Con combined.

Gregory J. Goff

Combined, right, which was about the 2 were $1 billion. I think what he said was Salt Lake City and Mandan are $1 billion. So I don't know how they do $1 billion of EBITDA in Northern Tier, to be quite honest with you.

Richard S. Linhart - Morgan Stanley Wealth Management

80,000 barrels a day, that's what they've been reporting.

Gregory J. Goff

Yes. Well.

Richard S. Linhart - Morgan Stanley Wealth Management

Okay. Second question. Could you run through on the Carson acquisition and on the synergy capital, the breakdown of the price that Tesoro will pay and that TLLP will pay?

Gregory J. Goff

Do you want, Dan? Or Scott?

G. Scott Spendlove

Well, the $2.4 billion purchase price that we expect will be funded in part by what we expect will be about $1 billion worth of logistics assets that we will sell to the MLP. The synergies that you see here and the capital you see on this slide relative to the Carson acquisition don't really address anything pertaining to the logistics entity, if I understand your question. The remainder of the purchase price will be cash and once we get through the inter-financing period and in the working capital reductions, what we expect once we close.

Richard S. Linhart - Morgan Stanley Wealth Management

So none of the synergies will be going into TLLP they’ll all be at Tesoro?

G. Scott Spendlove

There will be synergies driven by the logistics assets that will accrue to the benefit of Tesoro that will come because we own and operate those logistics assets and those synergy -- that synergy value will most likely accrue or accrue up to the Tesoro Corp. level.

Paul Y. Cheng - Barclays Capital, Research Division

Paul Cheng, Barclays. Two quick questions. You've been wanting the Bakken crude oil in [indiscernible] for 3 months now. Can you give us some idea that comparing to your expectations on -- in terms of the yield improvement, is that right in line, better, worse or what type of supplies that you may have seen? Also in the chart, Page 30 -- 51, you say its $9.75 per barrel for the total cost. Maybe I'm wrong, but I thought in the past you were talking about $8.50. So what's the difference between the 2 numbers?

Gregory J. Goff

Yes, I'll quickly answer your second question and let Dan answer the first one. When we did the drop-down to Tesoro Logistics of the MLP, we put the market rate into that number. So that's the market rate that Tesoro paid for the Tesoro Logistics when we sold the asset for $180 million. Before, all we had in was just the incremental operating cost to do that. So kind of the comparable on the market basis that's what Tesoro pays today to get to that $8.50 to $9.75. And Dan can answer your second question on the yield value.

Daniel Robert Romasko

Yes, and the short answer is it's too early to tell. We don't have any clear and compelling indications that it's better or worse at this point. It will probably take 6 months or so before we get all the outtakes together and get a good sense on whether we're within $1 or not. It's close.

Paul Y. Cheng - Barclays Capital, Research Division


Daniel Robert Romasko

Could you ask that one more time?

Paul Y. Cheng - Barclays Capital, Research Division

In terms of how to run it, have you faced any challenge or difficulties beyond what you initially thought?

Daniel Robert Romasko

No, we haven't. Dave talked about the non-rateability of supply, which does present challenge to us, but the yield structure coming through the plant is pretty much as we expected it.

Unknown Attendee

Greg, a follow-up on the FTC issues. I think the latest concerns, which have been expressed are relating more to the branded supply versus unbranded supply and not more so much about the refinery in itself. So I'm just wondering if you're aware of that issue and what do you have to say to that?

Gregory J. Goff

Well, from an FTC standpoint, I think there's nothing that we're aware of to have anything to do with branded and unbranded supply. As we know back -- a short time ago when we have some supply -- operating problems, one of our competitors had an operating problem that hit at the same time as Chevron was having their problem, there were issues around supplying customers with what companies choose to do between their contractual commitments and their non-contractual commitments. But that really doesn't -- it's not involved in our FTC process. That's a different issue.

Unknown Attendee

I think the issue is related to the branded stations which are going to be as acquired part of the transaction. And I think the comments that have been made by several associations related to that, that if you have more branded supplies from your refineries going into the branded stores, there would be less left for unbranded supply, and I think that's what people are talking about.

Gregory J. Goff

Yes, our intent all along, we've been very, very clear that it is our intent to continue to run the ARCO model, just as it has been run, in the future, so from the transaction itself because it's fully integrated. The Carson refinery is fully integrated in with their marketing business in Southern California, Nevada and Arizona. That's not going to change.

Unknown Attendee

If I may ask a follow-up here, and I think it's probably for Dan. Dan, if you have looked or just looking at the West Coast system, if you consider whether first of all on Martinez itself, your Bakken versus Canadian sweet synthetic, is that interchangeable? And if you look at the logistics, getting it on Trans Mountain and barging down from there versus rail to Washington and then just barging out from there, how does those 2 to compare?

Daniel Robert Romasko

Sure, I'll talk about the crude question first and then we'll cover the logistics. They're both interchangeable and additive. So the crude slate will fill up the units to their larger conversion limits. So the more Bakken we put in, the faster we fill up the top end of the crude unit, and the light in processing equipment. And the Canadians, especially, the synthetic bits and the heavier Canadians don't do that, so you can add them together. So that may be the best answer I can give on that, because it probably exhausts the analysis we've done today. Regarding the logistics, yes, we can come down off of Trans Mountain via marine if that's needed, but we also like to put in our Trans Mountain Pipeline capability into Anacortes. Now what we can't do is utilize facilities that have been modified in Anacortes properly to ship up volumes of crude oil from Bakken, and the reason for that is [indiscernible] Act. So our solutions that we're contemplating that include both rail and include marine would be through ports other than our Anacortes facility.

Gregory J. Goff


Edward Westlake - Crédit Suisse AG, Research Division

Yes, just 2 follow ups. Just one very simple one. EBITDA in 2012 would have been depressed by the fact you had a very heavy turnaround schedule across the firm. And you're doing that again next year. Can you give us an idea if you've done any assessment of what EBITDA you lost? That's the first question. And then second question is a follow-up to Paul on the multiples. Obviously, California has always attracted a relatively low multiple in people's minds. Where might we be wrong as you've operated it out there for 2 years now?

Gregory J. Goff

Yes. Dan, you want to talk about the turnaround?

Daniel Robert Romasko

Yes, well, we haven't done a specific analysis on what the turnaround implications to EBITDA or where versus our prior year. But we look at what our plan is for the year and we execute to it. So that’s may be the simplest answer I can give. What we do look is whether we've delivered the improvement that expected for the year. And I think Greg did a fairly good job of running through that when he looked at the high cap or the high-return capital projects, which we believe added $175 million to the EBITDA. It's really difficult to compare year-on-year and rationalize out both market and turnaround impact, and the closest probably we could do for that is to go back all the way to 2007, which would have been the last time we had an index that looked like the index this year. And it was, if I recall correctly, don't hold me to this, I think it was a $15 index and $1.3 billion EBITDA stream. And you contrast that with 2012, which has normally $14 index and north of $2 billion in EBITDA. So I think if you stack those together, $1 less in index generating $800 million plus more EBITDA is pretty good improvement trend year-on-year is tough do.

Gregory J. Goff

I'm not sure I have a good answer to your second question around the multiples on California-specific assets. That's how we use kind of that broad range of 3 to 5. But to go back in and look at the value on the California assets, I don't -- we don't have a way to do that, that I'm aware of. Do you have anything to add, Scott. I can't help you out in your question there, sorry. Doug?

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

A couple of quick follow-ups. I've got to take advantage of Phil being here. It's a little bit outside of a real house I guess, the audience here, anyway. The Congressional budget office recently published a report on the pass-through vehicles and the impact potentially on tax leakage. Could you just give us a view as to how you see -- whether you see any risk to a change in the MLP structure? And a quick one, Greg, for you, if I may. Clarification on the working capital eased from Hawaii. I was under impression it was more like $500 million, you said $300 million. Just clarify that.

Phillip M. Anderson

On the prospect of MLP taxation, we do keep a close eye on that through the NAPTP, our association, as well as Tesoro's own legislative efforts. MLPs, if you add them all up, they don't -- if you did tax them, it does not generate a significant amount of revenue. I think the pass-through vehicles, they're primarily looking at would be hedge funds and things like that. In order to get to MLP, you've got to get hedge funds, and you end up picking up significant number of mom and pops. So we hear probably an equal or potentially more discussion of the potential expansion of the MLP section of the code to allow green type investments. So we do not, at this point, feel like there's significant risk out there to the structure.

Gregory J. Goff

To your second question, Doug, I think there are 2 points to clarify. One, what we typically said is we have about anywhere between 4 million to 5 million barrels of crude to support that Hawaiian operations, so about $100 a barrel so you get to $500 million. But to be clear, the net working capital position, we take all the net working capital within that range of $300 million to $400 million depending on prices. That's the distinction. Chi?

Chi Chow - Macquarie Research

Just a couple of follow-ups. Scott, could give us an update on share repurchase activity here in the fourth quarter?

G. Scott Spendlove

We have been buying back shares, and we're -- as we said earlier, it's an opportunistic program, and we're on pace to be able to continue buying back shares through next year.

Chi Chow - Macquarie Research

Any amount that you can?

G. Scott Spendlove


Chi Chow - Macquarie Research

Okay. And I just want to check on your CapEx budget here. So it looks like 2012, $535 million; 2013, $455 million, lower than what you previously disclosed. Are we comparing apples to apples there versus your prior guidance?

Gregory J. Goff

Let me finish. Let me just respond to your question, Chi. What we've done from a capital budget standpoint, 2013 budget is firm, how it is. And when we looked at the capital projects going out from '14 and on, because we know that the -- we'll be looking at the capital requirements for the Carson business and our discussion today that there's tremendous amount of opportunities there, we chose not to budget a lot of capital for '14 or '15 or that until we really get time to look at the opportunities in Carson and see how we want to allocate capital into that business. It kind gets back to Ed's question. Are there big things out there? There probably aren’t big things, but there'll be some amount of capital that we will allocate to drive in other improvements at the Carson facility and that's why it's maybe not completely comparable.

Chi Chow - Macquarie Research

So the prior guidance included Carson?

Gregory J. Goff

It did not, no. We just scaled back to be prepared for Carson, so when we get into '14 and '15.

Chi Chow - Macquarie Research

Okay, so neither one includes Carson?

Gregory J. Goff

No, they do not.

Chi Chow - Macquarie Research

Oka. But it did. The 2013 budget looks like it fell from $545 million for 2013 down to $455 million, is that? And what's causing the decline, I guess, is the other question.

Gregory J. Goff

I think maybe what you doing is we broke down logistics, or you're looking at the prior year. In the past, we -- as Scott talked about, we wanted show logistics kind of separately so you could see how we're allocating capital to refining and marketing business and the logistics since it self-funds.

Chi Chow - Macquarie Research

Got it. So the prior guidance includes [indiscernible] this year you break it out?

Gregory J. Goff

That's right. Any other questions? Well, thank you, once again. We really -- we appreciate the opportunity today. We appreciate the questions and you taking the time to come here today. Thank you very much.

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