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Marathon Petroleum Corporation (NYSE:MPC)

Q4 2012 Earnings Conference Call

January 30, 2013 10:00 AM ET

Executives

Pamela Beall - Vice President, Investor Relations and Government & Public Affairs Vice President, Investor Relations

Gary Heminger - President & CEO

Donald Templin - Senior Vice President and Chief Financial Officer

Michael Palmer - Senior Vice President, Supply, Distribution and Planning

Garry Peiffer - Executive Vice President, Corporate Planning and Investor & Government Relations

Analysts

Chi Chow - Macquarie Capital

Doug Leggate – Bank of America

Edward Westlake - Credit Suisse

Evan Calio - Morgan Stanley & Co. Inc.

Doug Terreson - ISI Group

Blake Hernandez - Howard Weil

Jeff Dietert - Simmons & Company International

Thomas Stinball - Brokerage [ph]

Operator

Welcome to the Marathon Petroleum Corporation Fourth Quarter 2012 Earnings Conference Call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Pam Beall. Ms. Beall, you may begin.

Pamela Beall

Thank you, John. Good morning everybody and welcome to our fourth quarter 2012 earnings webcast and conference call. The synchronized slides that accompany this call can be found on our website. On the call today are Gary Heminger, President and CEO; Garry Peiffer, Executive Vice President of Corporate Planning and Investor & Government Relations; Don Templin, Senior Vice President and Chief Financial Officer; and Mike Palmer, Senior Vice President of Supply, Distribution and Planning.

Now, if you turn to slide two, please read the Safe Harbor statement. It is a reminder that we will be making forward-looking statements during the presentation and during the question-and-answer session today.

Actual results may differ materially from what we expect today and factors that could cause actual results to differ are included here as well as in our filings with the Securities and Exchange Commission.

Now, I will turn the call over to Gary Heminger for some opening remarks.

Gary Heminger

Thanks Pam and good morning. Thank you for joining us. If you please turn to slide three, during our first full calendar year as an independent company, our commitment to safety and operational excellence underpinned our ability to capture value and deliver strong financial results. Our employees and contractors achieved record safety performance across our operations, including the world-class safety record for the DHOUP project.

As a result of MPC’s outstanding operational and financial performance in 2012, our continued strong financial position and positive outlook, we were able to allocate capital to value accretive investments and return significant capital to shareholders.

We returned approximately $1.76 billion to shareholders during the year. This was accomplished through two accelerated share repurchase programs totaling $1.35 billion and a 40% increase in our dividend. Earlier today, we announced the board authorized an additional $2 billion share repurchase, augmenting the $650 million remaining authorization that was announced in the first quarter of 2012. This provides a total outstanding authorization of $2.650 billion through 2014.

The expansion of our share repurchase authorization reflects our intent to continue balancing our use of capital and our recognition of the trust that our investors have placed in us to be good stewards of their capital. In 2012, the U.S. energy industry continued to adapt the growing North American crude oil and natural gas resources and to transportation bottlenecks for those resources. These forces will continue to influence the domestic energy market for years to come, and MPC will invest to remain strategically positioned to create value from these shifts, as they reshape our energy landscape.

While we returned substantial capital to our shareholders, we balance that commitment with critical investments that will enhance MPC’s ability to benefit from changing market conditions. Most significant among these was the very successful initial public offering of MPLX LP, our new midstream master limited partnership, the completion of the $2.2 billion heavy oil upgrade project at our Detroit refinery and the agreement to acquire a world-class refinery in the Western Gulf Coast of Mexico.

First, I will highlight the strategy for MPLX and how it will add value for MPC shareholders. We believe we have created a premier MLP, one that has some very attractive features. MPLX is a fee-based business with stable cash flows and multiple avenues to grow earnings and distributions over an extended period of time.

With multiple avenues to expand, MPLX will be our primary vehicle to grow our midstream business and to participate in the infrastructure investments needed to meet the changing North American energy landscape. MPLX assets are integral to MPC’s integrated logistics and marketing system, providing MPC's refineries access to foreign, Canadian and domestic crude sources and finished products to its wholesale and retail marketing customers. The growing production of crude oil and natural gas liquids and changing supply patterns create opportunities for MPLX to play a vital role in the fast-changing energy landscape. In addition to organic investments, MPC has a significant and growing portfolio of logistics assets that could be acquired by MPLX in the future.

MPC's interest in MPLX, including its ownership of the general partner, will allow MPC shareholders to participate in the value created by growing the fee-based stable cash flow business of MPLX.

Turning to another significant accomplishment for the year, in November, we enhanced our feedstock acquisition economics by completing the Detroit Heavy Oil Upgrade Project known as DHOUP. This project increased our Detroit refinery’s heavy oil processing capacity from 20,000 barrels per calendar day to 100,000 barrels per calendar day, while increasing our total crude oil refining capacity at the facility from 106,000 barrels per day to 120,000 barrels per calendar day.

Our Detroit refinery’s strong financial prospects are validation of the investment decision we made several years ago that now enables MPC to benefit from discounted Canadian heavy crudes. DHOUP also set a new standard for megaproject execution. The $2.2 billion project was completed on schedule and on budget. And just as importantly, it also achieved extraordinary safety records since we started construction of this project in the mid-2008. Early indication of Detroit's operations and financial performance are promising.

The third accomplishment I wanted to highlight is the agreement we reached last year to purchase BP’s Texas City refinery near Galveston Bay. As the North American energy industry continues to adapt to a significant crude supply shifts, we see the Western Gulf Coast as a primary destination for the surge in crude supply. This transaction will expand our presence in this increasingly important region. The agreement includes a world scale refinery, along with related midstream assets and branded job or contract assignments. We plan to complete the transaction on February 1st, 2013. The transaction is expected to be funded with cash on hand and be accretive to earnings in the first year of operation. This acquisition will enhance our ability to refine price advantage crude oil and it expands our distribution options for refined products, including greater export opportunities. They will provide immediate scale to enable further expansion of our Marathon brand presence in the southeast. This refinery is one of the largest and most complex in the U.S., and is considered to be one of the most technologically advanced and flexible refineries in the world.

It will be the most complex refinery in our portfolio and it will increase our overall refinery complexity index and significantly increase our participation in the chemicals value chain. In addition to major accomplishments such as DHOUP, the creation of MPLX, initiation, other refinery acquisition, 2012 was a busy year for other improvements for MPC’s operational capabilities.

Our Speedway retail segment increased its store count by about 7% last year, after acquiring 97 convenient stores in Indiana, Ohio and Kentucky. The acquisitions included 87 GasAmerica stores and 10 Road Ranger stores, bringing its total count to now around 1,460 stores. In addition to strengthening its presence in key marketing areas, Speedway also achieved record segment income and EBITDA per store.

At the same time, Speedway grew its merchandise same-store sales for the 15th consecutive quarter and achieved its best ever safety record. Speedway same-store merchandise sales, excluding cigarettes increased 4% compared to the same quarter last year, which achieved a 7.2% same-store increase over the prior year.

And moving on, we strengthened our position as a customer of choice for hydrocarbon liquids productions from the Utica shale by building additional infrastructure at our refinery in Canton, Ohio to received crude oil and condensate deliveries by transports from nearby wells. We entered into a letter of intent to jointly develop infrastructure intended to facilitate transportation of hydrocarbon liquids production from the Utica shale. The project will result and up to 24,000 barrels per day of truck unloading capacity and a terminal capable of loading up to 50,000 barrels per day onto barges on the Ohio River at MPC's current Wellsville, Ohio asphalt terminal.

To increase access to Bakken and Canadian crude, MPC agree to be the anchor shipper on Enbridge's proposed southern access extension with an option to acquire a 25% equity interest in the pipeline.

This line will originate in finding in Illinois, near Chicago and terminate in Patoka, Illinois, a critical crude storage and blending hub and the origination point for crude supply for our four Midwest refineries.

Recently, Marathon pipeline and the owners of Capline have agreed to terms for formalizing a new operating agreement for Marathon pipeline to become the operator of the Capline system effective in September of this year. Capline is a 633-mile 40-inch crude oil pipeline, running from St. James, Louisiana to Patoka, Illinois. It was constructed in the 1967-68 period and has been operated by Shell since that time. Marathon was one of the original owners and today, MPC retains a 32.6% interest.

I have spoken about balance often, and the balance between investing in the business and returning capital to shareholders has been and we expect will continue to be a powerful driver of value. Our share price rose 89% from year-end 2011 to year-end 2012. Combined with dividends, total 2012 shareholder return was approximately 93%.

The value we have provided for our shareholders as a result of our continuous efforts to meet the needs of our customers in the most efficient way as possible, whether it’s sourcing the most price advantage crude slate, identifying the most cost-effective transportation for crude oil and finished products, or determining where our products will be needed most at any given time.

We believe our focus on safe and efficient operations strategically located, refining access to virtually just take some multiple marketing options positions us to make the most of opportunities wherever and whenever they may occur.

If you please turn to slide four, and looking ahead to 2013, we remain committed to operating our assets in a safe and reliable manner, with a continuous improvement in our safety record across all of our operations. Our outlook for U.S. gasoline demand for 2013 is flat and U.S. distillate demand to be up about 3.5%. In addition, we expect export opportunities to remain attractive in 2013. Our distillate exports rose to 151,000 barrels per day during the fourth quarter, compared to 94,000 barrels per day in the same quarter last year.

We remain optimistic about the global competitive position of our U.S. Gulf Coast refineries and the prospects for future exports of gasoline and distillate. Our 2013 capital investment plan totals $1.5 billion, excluding the Galveston Bay refinery purchase price. It allocates capital across all our operating segments to capture value from ships in the energy landscape in North America and to increase our exposure to stable cash flow businesses. Don will go into more detail on specific projects, but I want to highlight a few key points.

We will continue our expansion projects in the pipeline transportation segment, including investments in MPLX operations, and we will pursue additional growth opportunities for this critical logistics operation to support both MPC and third-party business. We will continue to invest in our Speedway segment through a combination of selective acquisitions and organic projects for new stores, rebuilds, remodels and site acquisitions.

This channel of distribution generates stable cash flow from crude and merchandise sales inside the store. Our 2013 plan includes high return projects in our refining and marketing segment that will increase higher value distillate yields, expand our export capacity, allow us to process higher volumes of light hydrocarbons expected to be produced in greater volumes from the Utica Shale, and to continue upgrades at the new Galveston Bay refinery.

And all above, we just completed our first year as an independent company in 2012. We celebrated our 125th anniversary, having been founded in this part of Ohio in 1887. Our long-term success will continue to be built on our ability to adapt the changing marketing conditions and a commitment to value us of health and safety, environmental stewardship and integrity.

We look forward to new opportunities in 2013. As we do, we have recognized the trust our shareholders have placed on us. Our mission continues to be value-creation for our investors, incorporating a balance between internal and external investment and return of capital to shareholders through a strong and growing base dividend over the long term and share repurchases.

In all, we were pleased with what we were able to accomplish in 2012 and we remain very enthusiastic about our prospects into 2013. Now, I will turn the call over to Don Templin to review the financial results for the fourth quarter and the full year of 2012. Don?

Donald Templin

Thanks, Gary. Slide five provides earnings both on an absolute and per share basis. Our fourth quarter and full-year 2012 financial performance was very strong. MPC had adjusted earnings of nearly $760 million or $2.26 per share during the fourth quarter of 2012. This was compared to a loss of $75 million in the fourth quarter of 2011.

For the full-year of 2012, our adjusted earnings were $3.3 billion, almost $1 billion over the prior year. Adjusted earnings per share was $9.79 for the full year of 2012, compared to $6.72 for 2011. The waterfall chart on slide six shows by segment the change in adjusted earnings from the fourth quarter of 2011 to the fourth quarter of 2012. The primary driver for the change in our adjusted earnings was the increase in refining and marketing segment income, partially offset by additional income tax expense.

The significant improvement in refining the market segment income was primarily the result of higher crack spreads and wider solid crude differentials in the quarter. The increase in income tax expense is a function of higher 2012 earnings. As shown on slide seven, refining and marketing segment income from operations was almost $1.14 billion in the fourth quarter of 2012. This was compared with a loss of $182 million in the fourth quarter of 2011. In explaining the key components of the refining and marketing gross margin, I will refer to the changes in market indicators applied to MPC actual volumes to arrive at the quarter-over-quarter variances. First, the blended LLS 6321 crack spread. It was $2.73 per barrel higher in the fourth quarter of 2012 than the fourth quarter of 2011, resulting in an estimated favorable variable of $371 million.

Both Chicago and Gulf Coast crack spreads were higher in the fourth quarter of this year compared to the fourth quarter of last year. The most significant variance quarter-over-quarter relates to the sweet-sour differential. The sweet-sour differential for the 2012 fourth quarter was $13.41 per barrel, which was $12.44 per barrel higher than the comparable quarter last year and represents an estimated $809 million favorable variance.

The LLS WTI differential was $21.29 for the fourth quarter of 2012, compared with $16.77 for the fourth quarter of 2011. This increase in our differential resulted in an estimated $81 million favorable gross margin variance between the two quarters.

The first three market indicators are calculated by reference to a LLS Prompt price. Rapid changes in crude prices can cause significant differences between the LLS Prompt prices embedded in the market indicators and the actual amount we pay. On average, the delivered LLS crude cost was $1.36 per barrel less than the prompt LLS price during the fourth quarter of 2012, while the average delivered crude cost for the same quarter last year was $6.52 per barrel higher than the prompt price. This $7.88 difference resulted in an estimated $182 million favorable variance.

You may recall there was a dramatic narrowing of the WTI to LLS crude differential at the end of last year, which had a significant impact on our crude oil acquisition costs in the fourth quarter of 2011. Direct operating costs had an unfavorable quarter-over-quarter effect of $90 million. This was primarily due to higher depreciation expense associated with the completion of DHOUP and higher planned turnaround cost in the fourth quarter of 2012, compared with the fourth quarter of 2011. As you know, we completed the turnaround at our Detroit refinery in the 2012 fourth quarter.

The gross margin column captures a number of other factors that need to be considered when reconciling the market-based metrics to the change in our gross margin. They include items such as actual realized prices, refinery yields, other feedstock costs and crude slate variances compared to the values assumed when we calculate the market indicators.

It also includes refinery volumetric gains and purchase for resale activity. As you can see from the waterfall chart, this combination of factors led to an estimated $24 million unfavorable impact in the fourth quarter of 2012 compared to the fourth quarter of 2011.

Slide eight provides a similar earnings walk for the refining and marketing segment on a year-over-year basis. The blended LLS 6321 crack spread in 2012 was double to $3.35 per barrel of crack spread of 2011, resulting in an estimated favorable variance of almost 1.7 billion. The sweet-sour differential accounted for an estimated favorable variance of $870 million, as the differential was $3.36 per barrel higher than the average for 2011.

The WTI to LLS differential was $0.26 per barrel higher in 2012 compared to 2011, which resulted in estimated of $119 million of favorable gross margin variance between the two years. The LLS Prompt versus Delivered price variance was not significant when comparing the annual results. The total prompt versus delivered LLS crude variance accounted for an approximately $49 million positive impact in the full-year comparison.

Market structure had an estimated unfavorable variance of $126 million, that was $0.39 per barrel less of contango in the NYMEX WTI market structure in 2012 compared to 2011. Our direct-to-operating costs were $197 million higher in 2012 compared to 2011, primarily due to higher planned turnaround expenses and higher depreciation expense in 2012.

With respect to other gross margin, a number of factors impacted the change year-over-year. The mix of crudes we actually processed versus the market indicators was the primary contributor of this difference.

On the next few slides, we include earnings walks for each of our other operating segments. Turning to slide nine, Speedway’s income from operations was $77 million in the fourth quarter of 2012 compared to $73 million in the fourth quarter of 2011. Light Product and Merchandise gross margin combined were about $21 million higher in the fourth quarter of 2012, compared with the fourth quarter of 2011.

Life Product margins increased by $8 million as margins averaged $0.1424 per gallon compared to $0.14 in the fourth quarter of 2011. Merchandise margin was $196 million in the fourth quarter of 2012 compared with $183 million in the same period last year. This $13 million increase was primarily due to an increase in the number of stores compared with the same period last year.

On a same-store basis, gasoline sales volumes decreased 0.2% and merchandise sales increased 0.2% in the fourth quarter of 2012 compared with the 2011 fourth quarter. The lower same-store gasoline sales volumes primarily reflect the impact of the higher absolute price of gasoline. Speedway's average retail gasoline price was $3.32 per gallon during the fourth quarter of '12 compared with $3.20 per gallon for the comparable quarter last year. In January 2013 we've seen an increase in demand with an approximately 2% increase in same-store gasoline sales volumes at Speedway.

Speedway's income from operations for all of 2012 was $310 million compared with $271 million for 2011. Light product margins increased by $15 million as margins averaged $13.18 per gallon in 2012 slightly higher than the 2011 average. On a same-store basis, gasoline sales volumes decreased 0.8% in 2012 compared to 2011. The decrease in same-store gasoline sales reflects lower gasoline demand in our market area. Merchandise margins were $795 million in 2012 compared to $719 million in 2011 or an increase of $76 million. The increase in light product and merchandise margins were partially offset by increased expenses of $52 million primarily due to an increase in the number of stores operated in 2012 as compared to 2011.

Slide 10 shows fourth quarter and full year changes in our Pipeline Transportation segment income from operations was $72 million in the fourth quarter of 2012 compared with $38 million in the fourth quarter of 2011. This increase was primarily attributable to an increase in transportation tariffs and earnings from pipeline affiliates offset by slightly higher mechanical integrity costs. Some of the increase in the transportation tariffs were related to the formation of the MPLX, 2012 income from operations was $216 million compared with $199 million in 2011. This improvement is primarily attributable to an increase in transportation tariffs partially offset by higher mechanical integrity costs and a reduction in pipeline affiliate income in 2012.

The chart on Slide 11 provides an analysis of cash flows for the fourth quarter of 2012. At December 31, 2012 our cash balance was nearly $4.9 billion. Operating cash flow before changes in working capital was just over $1.1 billion. The working capital benefit of $919 million noted on the slide primarily relates to the impact of lower refined product prices on our ending receivables and a reduction in our inventory levels at year-end. Capital expenditures and investments during the quarter were $403 million including amounts related to the completion of our Detroit heavy oil upgrade project also shown on this slide is the $500 million of cash used in connection with our second accelerated share repurchase program and the cash we received related to the initial public offering of MPLX.

Slide 12, shows that at the end of the fourth quarter, we had nearly $4.9 billion of cash and approximately $3.4 billion of debt. With EBITDA of over $6.3 billion during the last 12 months. We continue to be in a very manageable debt position with leverage of 0.5 times EBITDA and a debt to total capital ratio of 22%. This strong liquidity position will enable us to fund the Galveston Bay refinery in cash with sufficient remaining balances to support our core liquidity position and continue to focus on capital return.

Turning to Slide 13, during the last 12 months we generated almost $4.5 billion in cash from operations and nearly $3 billion of free cash flow. Consistent with our commitment to return capital to shareholders we distributed 60% of our free cash flow in the form of dividends and share repurchases during this past year. We are committed to being a leader in our peer group in terms of total shareholder return going forward. As Gary mentioned earlier, our strong liquidity position has supported the board’s authorization of the repurchase of an additional $2 billion of common stock for a total outstanding authorization of $2.65 billion through 2014. We will periodically update you on the progress of the share repurchase program. Regarding the $500 million accelerated share repurchase program we initiated in November. We expect the program to complete tomorrow. The total shares to be received will be based on the average share price over the three-month period of the program based on share prices to date we expect to receive approximately 930,000 shares in addition to the 7.4 million shares received at the inception of the program. This will bring the total shares acquired under the program to approximately 8.3 million shares or about 2.4% of the shares outstanding when the program began.

Slide 14 provides outlook information on key operating metrics for MPC for the first quarter of 2013. This information assumes the February 1 closing date for the Galveston Bay acquisition. For comparative purposes those same metrics for the first quarter 2012 are also shown.

Slide 15 provides a breakdown by segment of our actual 2012 capital expenditures and investments along with our approved capital budget for 2013.

Slide 16 indicates the significant capital projects that we’ll be working on in 2013 and beyond. Total capital spending in 2013 associated with planned upgrading of the Galveston Bay refinery and related assets is expected to be approximately $400 million. We will continue infrastructure investments and complete several programs that are underway at this time. In addition, we've identified synergies that we should begin to capture during our first year of operation. Executing on our commitment to expand our assured sales, we have allocated $255 million for organic and acquisition opportunities within our Speedway segment in 2013. At our Garyville refinery, we are continuing our projects to optimize diesel and gasoline yield through modifications to the older crude unit, hydrocracker and the distillate hydro-treaters. Total capital spending is estimated at $225 million with the hydrocracker revamp to be completed in 2014 and completion of the final phase of the program in 2015. We intend to be a first mover in the Utica Shale play and will position MPC to be the customer of choice for the crude oil and condensate. Total spending is estimated at approximately $300 million through 2014 to accomplish to these objectives. New barges will be purchased to allow Utica production to be transported to Catlettsburg from the Wellsville facility. We plan to invest in condensate splitters at Canton and Catlettsburg to allow the refineries to process up to 60,000 barrels per day of condensate from the Utica field.

In 2013 we should complete our Wellsville truck-to-barge crude system project and begin a condensate gathering line project that will connect production via pipeline to both our Wellsville terminal and the Canton refinery. The Patoka to Catlettsburg crude oil pipeline upgrade project is within MPLX and has been prefunded with a $160 million of proceeds received from the initial public offering. This major upgrade project is expected to increase capacity and reliability and will be completed in September of 2014. The Robinson uni-cracker project is a planned revamp of our distiller hydrocracker to improve margins by processing more feedstock at a lower conversion and shifting approximately 10,000 barrels per day of other products to diesel production.

Estimated total capital spending for the project is $75 million and it should be complete in 2015. With respect to our gasoline and distill export project to Garyville we are progressing well and plan to have the final phase of the project complete ahead of schedule in late 2013. This $40 million capital project along with some minor optimization work has already allowed us to increase our diesel export capacity by 50,000 barrels per day while the addition of a tank will expand our ability to export gasoline as well. The Catlettsburg vacuum cut-point project is a revamp that will recover additional volumes of gas oil from the refinery's residual oil production to be processed in the Cat cracker, thus increasing the production of higher valued gasoline and diesel. This project is expected to be completed in 2014.

Now I’ll turn the call back to Pam Beall.

Pamela Beall

Thanks Don. Many of you have asked about the assets in MPC's refining and marketing segment that could potentially be acquired by MPLX in the future. You will find in our 10-K which will be filed next month additional disclosure about those assets that we believe will be useful to investors. Now, as we open up the call for questions we ask that you limit yourself to one question plus a follow-up and then of course you may re-prompt for additional questions as time permits. So, John with that we would like to open the call to questions.

Question-and-Answer Session

Operator

Thank you, we will now begin the question and answer session. (Operator Instructions) And our first question comes from Chi Chow from Macquarie Capital, please go ahead.

Chi Chow - Macquarie Capital

Alright. Thanks and good morning. Gary, you mentioned in your remarks the news on Capline and I am wondering with Marathon becoming operator does that change your thoughts at all on a possible reversal of line or are you still happy with the crude supply optionality from the Gulf Coast longer term?

Gary Heminger

Thanks Chi and good morning to you. The operatorship -- this has been under discussion for some time and so I would find that separate from whether or not there is an opportunity to reverse the line. We continue to study those opportunities. As we’ve said before there were three owners and it takes all of us to agree on which direction that pipeline might flow. So, we will continue to analyze this going forward and determine if there's any change in that direction.

Chi Chow - Macquarie Capital

So, the ownership structure doesn’t change at all?

Gary Heminger

No, it does not.

Chi Chow - Macquarie Capital

Okay, and does the upcoming decision on the Keystone XL line influence your thoughts or I guess, all three owners thoughts?

Gary Heminger

Well it’s going to be very interesting if Keystone XL gets approved or if its delayed, that is, I think it’s going to take longer to get that decision made than we had initially thought. But certainly if something would to happen in that pipeline doesn’t get built to the Western Gulf, then that would put I think a different view maybe for some of the owners on Capline, but all remains to be seen.

Chi Chow - Macquarie Capital

Okay, Thanks Gary. And then a second question on DHOUP. Can you talk about how the unit is operating so far? You’re in January and I think you have put out a $350 million EBITDA accretion number out there on 2011 pricing. What are your thoughts on handicapping upside or downside on that increase at this point?

Gary Heminger

Right, the numbers that you have quoted are correct that we put out numbers to both the 2006 to 2010 timeframe and 2011. The number you have quoted is correct and Chi we are very pleased, I really congratulate and complement our refining team that built this project and had it up and running. It’s running very well. It's been able to meet its stated capacity very early on and so we are in the process now of testing to see, it’s too early yet Chi. If I take you back to how we brought Garyville up, we are in some very early stages, so I don’t have any of the test data yet on if it can outrun its design capacity, so it’s too early. But its running very well, and it came up relatively seamless.

Chi Chow - Macquarie Capital

Great, what type of barrels are you displacing with the increased runs of the heavy Canadian?

Gary Heminger

Let me ask Mike Palmer to answer that.

Michael Palmer

Oh yes Chi, obviously, we talked before about the ability of bringing in an incremental 80,000 barrels a day of heavy Canadian and we've been ramping that up. But basically we've been bringing in the heavy Canadian, which we've been very successful at acquiring and moving, and just backing out a really what is a variety of other lighter in some sweet crudes.

Chi Chow - Macquarie Capital

Okay, great, thanks Mike, appreciate it.

Operator

Our next question comes from Doug Leggate from Bank of America, please go ahead.

Doug Leggate – Bank of America

Well, thanks, good morning everybody. I've got a couple as well, hopefully I won't take too long. You guys mentioned that you're getting ready to basically or you'd be able to process increasing amounts of condensate opened from the Utica, have you already got line up sight as to where the supplies are coming from and have you been in negotiations with suppliers already, because obviously volumes are still somewhat fairly sparse, as we understand it?

Michael Palmer

Yes Doug, this is Mike Palmer. You know, you’re right. Certainly, the Utica production both the crude oil and condensate has come on more slowly than what the producers originally estimated, but it's very interesting. Just to give you some rough numbers. There have been something on the order of 500 drilling permits that have been issued. There have been about 200 wells that have been drilled and only about 50 wells were actually producing. So, there is lot of wells that have been already drilled that are just waiting to be hooked up to gas processing and takeaway capacity. And we’d certainly expect that that's going to begin to happen around mid-year this year and continue through 2013, ‘14, and beyond. So we remain very optimistic about the volumes of condensate and some crew that we'll have coming out of the Utica for our operation.

Doug Leggate - Bank of America

Great, thanks. Two quick follow-ups if I may. Gary, the accelerated or rather the step-up in the buyback program, could you give us some idea as to how you're thinking about prioritizing that between competitive dividend growth and buybacks. And perhaps what the likely pace you would anticipate given the cash in your balance sheet of executing that buyback program, and have got one final input?

Gary Heminger

Sure Doug. Let me ask Don to take that one.

Donald Templin

Yes Doug, this Don. With respect to returning capital to shareholders, we've indicated to you on a number of occasions, our bias is to having a strong base dividend, and then to the extent that we have incremental cash like we have currently to use other mechanisms to return the capital to shareholders. So, we've favored share repurchases historically, and we will continue I believe to favor share repurchases going forward. With respect to our base dividend, we view that as a long-term commitment to our shareholders, and we believe that successful companies grow their share, their dividend overtime on a sustained basis and we'd be committed to doing that. But to the extent that we have excess cash and we would look to use tools like a share repurchase program. I think we've historically used accelerated share repurchases, at least for last two times that doesn't necessarily mean that that's how we would plan to do it going forward.

Doug Leggate - Bank of America

Great, thank you. I apologize to squeezing the third one in, but just very quickly on the micro Gary. If I could just ask for your perspective on the outlook for Canadian heavy differentials, I know that you guys are essentially a fairly significant buyer of that, and I'll leave it there, thank you.

Gary Heminger

Yes Doug, there are going to be many changes in the Canadian heavy market this year. Now, of course it depends on what happens with the Excel pipeline, but that won't be completed even if they were approved first half of this year, probably won't be completed into the 15th timeframe or so, somewhere in that arena. But we just brought Detroit up, DHOUP in November, and there is another very large project up in Whiting that will come up, we understand later this year. So we really would expect to have strong differentials through the front half of this year, and then we'll see what happens when those other project comes up. But at the same time you're going to see one or two more fields come on stream. And I still think it's going to come down to the pipelines and the pipeline capacity, and where and what regions that heavy crude can move. And then of course that will be tempered by any turnarounds and not any downtime in any of the Canadian upgraders or Canadian production operations.

Doug Leggate - Bank of America

Got it, thanks for the answers Gary, I appreciate that.

Gary Heminger

Thanks Doug.

Operator

Our next question comes from Ed Westlake from Credit Suisse, please go ahead.

Edward Westlake - Credit Suisse

Hey, good morning Gary and everyone and congrats on the results. Just trying to focus in on Texas City, obviously we'll actually see the EBITDA soon enough. But, could you give us any updates on say OpEx per barrel, or the logistics EBITDA within Texas City, or the potential capture rate that you think relative to Gulf Coast margins given that you've got lot of aromatics and propylene production in Texas City?

Gary Heminger

Right, let me ask. Thanks for the comments there Ed, and let me ask Don to cover this.

Donald Templin

Yes. Ed, with respect to I would say the operating expenses or manufacturing costs, we have embedded those manufacturing costs in the outlook information that we have included in our slides. So that includes two months’ worth of Galveston Bay or the Texas City refinery in those amounts. So, you can see kind of those numbers as reflected or compared to 2012. With respect to the EBITDA, we don’t give specific EBITDA per plant or by refinery, but at the time that we did announce the acquisition last year we used two different price decks and the incremental EBITDA associated with the refinery using those two price decks was between $700 million and $1.2 billion.

Ed Westlake - Credit Suisse Securities

Great.

Donald Templin

Ed, the other thing with your question on aromatics, we are just going to take over on Friday. We just received the LP, late in the process here and because the former owner that was their property and we need to make sure the same got to the finish line, as I said, it will on this Friday. So, we just got that LP. We will be refining that and really get into the details of that starting next week. So, we really can’t breakout the aromatics yet. But all of that value is embedded in the numbers, the 700 or 1.2, that John just gave you. Those numbers were based on a 12-month and of course, this is going to be an 11-month period.

Ed Westlake - Credit Suisse Securities

Yes. The other question is around gasoline versus diesel. Oversea gasoline prices have been depressed partly because of American demand and partly because refineries in the US are running as hard as they can whereas diesel obviously has been a little bit more profitable. When you think about uses of the free cash flow that you have. What sort of thoughts do you have around making some larger investments to improve the diesel yield at the refinery system?

Donald Templin

Well, Ed, we have made and I think we were a little bit ahead of the curve going back to when built Garyville. We built Garyville to be a balanced refinery about 50% gasoline and 50% diesel. Then when we did DHOUP the same thing to get more diesel output and to be able to lessen the amount of reset in the marketplace and then further investments we made at Garyville to even expand the hydrocracker to make more diesel and with the help of other process units and then lastly to be able to export that diesel out of the marketplace in an efficient manner. So we have made a lot of investments in what I call low hanging fruit early on and probably ahead of some.

Ed Westlake - Credit Suisse Securities

But no plans to do a major sort of hydrocracker build?

Donald Templin

Not at this time, Ed.

Ed Westlake - Credit Suisse Securities

Okay, thanks very much.

Operator

Our next question comes from Evan Calio from Morgan Stanley, please go ahead.

Evan Calio - Morgan Stanley & Co. Inc.

Hi, good morning, guys.

Gary Heminger

Good morning, Evan.

Evan Calio - Morgan Stanley & Co. Inc.

Question on your 2013 CapEx. I guess first can you quantify how much of the $1.6 billion is midstream including dock capacity, I am trying to understand the better the organic growth or kind of more of the conventional growth in MLP assets within the portfolio? I have a second question.

Donald Templin

Evan, this is Don. We have not typically broken that out. I mean, you can see what we have included for pipeline transportation but a big piece of that number relates to the Patoka, the Catlettsburg upgrade expansion project. We have not separately detailed the other projects.

Evan Calio - Morgan Stanley & Co. Inc.

Right. But the fact is listed number two would mean it’s a pretty big priority item you are spending here? I guess my second question is -- I mean maybe you are just saying you want to answer that but in terms of the Galveston Bay or the Texas City CapEx, I mean, can you mention how much is regulatory maintenance versus growth, just trying to understand how much invested capital could drive incremental returns on a flat crack basis rather than aggregate amount of what’s being invested?

Gary Heminger

I think $400 million is our expectation of the spend that we would have related to Galveston Bay this year, Evan. I would say substantially of all that relates to either regulatory or projects that were ongoing. Our view around expansion opportunities actually occurs in subsequent years.

Evan Calio - Morgan Stanley & Co. Inc.

Okay. Maybe finally a question is, obviously, it’s very topical around midstream and downstream this quarter but do you see any role for rail in your system or do you really think you are kind of best served by pipe given your location? I would leave with that. Thanks.

Michael Palmer

Evan, this is Mike Palmer. We have looked at rail over and over again. If you look at our system, again, with our plants in the Midwest and the plants in the Gulf Coast, we just don’t think that our investing in rail makes a lot of sense. We think that we can accomplish much lower transportation costs through pipeline. We understand why others do it, but what we have looked at it and just can’t make sense of it.

Evan Calio - Morgan Stanley & Co. Inc.

Okay. It makes sense. Appreciate you guys.

Operator

Our next question comes from Doug Terreson from ISI, please go ahead.

Doug Terreson - ISI Group

Good morning, everybody and congratulations on your great results.

Gary Heminger

Thanks, Doug.

Doug Terreson - ISI Group

Gary, industry exports or net exports seem to have slowed during the past year although I think you pointed out that you didn’t have any problems because yours was -- increased further with the expansion in Garyville. My question involves any insights that you may have into the slowdown in the industry exports, meaning, are there supply or demand side features that are present here and what you consider your major advantage is in this area? Also how the new refinery will affect your export capabilities in coming years? Meaning, will you have to make investments or is it readymade for exports. So if you could just comment on couple of those items I would appreciate it?

Gary Heminger

Sure, Doug. Our numbers on exports appear to be about flat for distillate and I can talk about distillate because that’s the commodity that we export the most. So about flat to last year. One of the things that I think give us a good position in the market is the quality of the distillate that we are making out of Garyville as a high cetane rate which is sought after in the marketplace. So I think that is, say, it gives us a strong position. You will notice that we substantially increased quarter-over-quarter last year, the numbers were 151 this year to 94 last year. So we substantially increased that and continue to have a strong demand for our distillate.

As we take on Galveston Bay and the way -- part of the synergies and the way that we are going to operate there, the day we move some of our products, I would say we kind of crisscrossed with Galveston Bay because Galveston Bay is a very large supplier into the Florida market as same as Garyville is and then we also both plants were exporters into the Latin America, South America market and some to Europe. So, we will be able to pick up some synergy and be able to optimize how we move those products to marketplace and I think take advantage of some good transportation savings both in distance and in the volume or the metric tons that you are going to ship in one batch. So, that’s what we are looking at upfront, Doug.

Doug Terreson - ISI Group

Okay. I had a couple of other questions about inventory. I think you guys mentioned that there was an inventory gain in the quarter, so I want to find out the magnitude? And then Gary, you are (inaudible) for the industry in Washington, so I wanted to see if we could get some updated insights from you on, potential changes in industry tax policy and specifically, while it doesn’t sound like there is going to be some type of mandate whereby the refiners migrate from LIFO to FIFO, just want to see what your views might be in that area and also the level of your current LIFO reserves, so there is three question there.

Gary Heminger

Right. Donald, go over the inventory first.

Donald Templin

Yes. So, with respect to inventory I think the comment I made was in the fourth quarter as part of our cash flow or working capital items our inventories at year-end were slightly below or were lower than our inventories at the end of the third quarter. On a year-on-year basis our inventories are just slightly up, maybe $200 million I want to say roughly. So, that’s the inventory.

Doug Terreson - ISI Group

And industry tax policy Gary, your view?

Gary Heminger

Right. A couple of things, industry tax policy of course the industry would certainly embrace staying with LIFO and that’s the direction that we are working hard and trying to explain in Washington. I would say the biggest item in Washington that we are dealing with short-term will be the renewable fuel standard. It’s unworkable in its current approach. You see that there was a decision that came out this week that said that a decision was made that EPA oversteps some boundaries within the biodiesel side of the business. I would say Renewable Fuel Standard because as we come to hit the blend wall and the requirements that are there for blending and the lack of cellulosic and the lack of some other advanced cellulosic type of materials it really puts us in an unworkable solution, or unworkable position, I should say. The next discussion point is going to be around E15 and we don’t think that works either and it’s going to be something that we continue to work very hard inside the beltway. From a tax position, we certainly embrace staying with LIFO. I will let Don discuss.

Donald Templin

Yes. I think you had asked about LIFO but I don’t have the reserve number with me right now. If you are asking about the replacement cost, I mean, fair value exceeds our carrying cost by somewhere around $5.4 billion at the end of the year.

Doug Terreson - ISI Group

Okay, great guys. Thanks a lot.

Gary Heminger

See you, Doug.

Operator

Our next question comes from Blake Hernandez from Howard Weil, please go ahead.

Blake Hernandez - Howard Weil

Hi, guys, good morning. I had a question for you on Texas City, understanding you are about to close but just kind of the history of the facility, it’s obviously been run somewhat inefficiently I am just curious if you have had a chance to get in there and assess some cost cutting and efficiency opportunities yet?

Gary Heminger

Yes, Blake. First and most important to us is to bring this on a very safe manner, safety to the employees, safety to the community and the environment and that’s really where we are focused. We have set up a complete separate team to be able to bring this on and turn this over so that they are not distracted with their job back at one of their other refineries they are there to look after this plant. We have named the new management team and we have confidence in their abilities. We are not going to focus on cost cutting early on. We really need to, as Don outlined a little bit ago, that the capital that is on our plate this year is mainly to this and the next couple of years is to complete the regulatory or consent decree capital if you want to call it then that is required in this plant. Then we will focus on what is the best way in our opinion to operate. Mike Palmer’s group is going to focus on the best way to optimize the feedstocks and then how we sell it into the marketplace. I want to be very clear, we are not going to step out and try to reduce operating cost immediately until we totally get this under control and a safe turnover the operation.

Blake Hernandez - Howard Weil

Understood. Thanks, Gary. And then the second question was -- one of your peers yesterday talked about I guess the opportunity to where they have pushed out all the foreign barrels that we are using along the Gulf Coast and replaced it with domestic barrels. I am just curious, do you have a similar opportunity with Garyville and of course Texas City coming online. I don’t know if you have a mix offhand of what foreign crude you run, is there a chance to replace those?

Michael Palmer

Yes, Blake. This is Mike Palmer. We certainly believe that here in 2013 that there really won’t be any material volume of foreign cargo sweet crude left in the Gulf. We always look to optimize our crude slates and where we can bring in a domestic barrel that’s priced better and provides higher profitability than a foreign barrel, we do that. So, there is not a lot of foreign sweet crude that we bring into the Gulf anymore. There may be some at Galveston Bay and once we get the LP and we are looking at that refinery closely will determine what the best crude slate is there. The other thing I would say is, while they won’t be any real material light sweet cargo crude coming into the Gulf, there will always be opportunities that various refiners will look at to bring special crudes in that provide value to that refinery. So, it’s not as if this crude is going to go completely away.

Blake Hernandez - Howard Weil

Got it. Perfect, thank you.

Operator

Our next question comes from Jeff Dietert from Simmons, please go ahead.

Jeff Dietert - Simmons & Company International

Good morning. I know we are late in the hour. My question is regarding barging activity on the Mississippi River. I think historically you have moved something like 50,000 barrels a day and by barged down to Garyville. Are you being impacted by the low water levels and what are the constraints to moving more (inaudible) crude down to Garyville?

Garry Peiffer

Yes, this is Garry Peiffer. Regarding the Mississippi River, at moment it’s pretty much operating as normal. We are operating at Wood River dock with 9 foot drafts, so that’s pretty much what we normally operate at. So the good news is we had some pretty good precipitation here lately. So from a operation standpoint, other than the incident that occurred down in the southern part of the river here over the weekend that they expect to have up and running in the next couple of days, the river levels are not impeding our flow on the or activity on the Mississippi.

Jeff Dietert - Simmons & Company International

Is the 50,000 barrel a day movement the right ballpark and what’s the constraining factor to keep these from moving more?

Michael Palmer

Yes, this is Mike Palmer. Let me answer that. As you well know, the reason for these very wide differentials that we are seeing on the heavy Canadian now is due to pipeline constraints and that’s for everybody. What we will do as we go forward is we will have to look at the logistics space, the pipeline space that we have and how we best utilize that space within the system. So, whether or not the heavy barrels that we can get into say the Patoka area, whether those move on to Garyville by barge or whether we move those by pipe down to Galveston Bay or whether we move those to the Midwest system will be part of the optimization process that we will do each and every month. But there are pipeline constraints.

Jeff Dietert - Simmons & Company International

Thanks, Mike. Thanks, Garry.

Pamela Beall

John, we will take one last question and then we will call it a wrap.

Operator

(Operator Instructions) We have a question from Thomas Stinball from Brokerage [ph], please go ahead.

Thomas Stinball - Brokerage [ph]

Hi, good morning guys and congratulations on a great year. My question to you is on how you are acting as a blender and producer of gasoline in response to the moves higher and RINs over the last few weeks. You alluded to sort of the structural question on the blend wall, but we have incurred RIN economics and shortage of ethanol after last year’s crop year, how are you planning to comply with the renewable mandates for ‘12 and ’13?

Gary Heminger

We don’t see that we will have any problem meeting the renewable mandate. Please understand the way that RINs work is you can carry some RINs forward and then we buy RINs on the third party market as well and of course there was a bit of issue a couple of years ago with the validity of some RINs but that has pretty much been all straightened out and we feel confident that it is not going to give us any problem in meeting that window.

Thomas Stinball - Brokerage [ph]

Would you prefer if you could get term ethanol supply agreement or buying RINS from the third party market as a means to fulfill that obligation?

Gary Heminger

We don’t have any problem, we have term ethanol agreements already. So that’s not a problem to us.

Thomas Stinball - Brokerage [ph]

Alright, thank you.

Gary Heminger

Alright. Pam let me state that, I mentioned something in my speech that I thought afterward, for the folks at Speedway I said 15 straight quarters, it’s really 15 straight years that they have increased their merchandise sales and my compliments to them.

Pamela Beall

Okay. Well thank you Gary. Thanks everyone for joining us today. If you have any follow-up questions I will be in the office this afternoon if you want to give us a call. Thank you. Bye, bye.

Operator

Thank you. Ladies and gentlemen this concludes today’s conference. Thank you for participating. You may now disconnect.

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