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Tesoro Corporation (NYSE:TSO)

Q4 2008 Earnings Call

February 20, 2009 9:00 AM ET

Executives

Scott Phipps - Director, Investor Relations

Bruce A. Smith - Chairman, President and Chief Executive Officer

Everett Lewis - Executive Vice President and Chief Operating Officer

Lynn D. Westfall - Senior Vice President, External Affairs and Chief Economist

Gregory A. Wright - Executive Vice President and Chief Financial Officer

William J. Finnerty - Executive Vice President Strategy and Corporate Development

Analysts

Neil McMahon - Sanford C. Bernstein & Co

Ann Kohler - Caris & Company

Doug Leggate - Howard Weil

Jeff Dietert - Simmons & Company International

Chi Chow - Tristone Capital

Roger Read - Natixis Bleichroeder

Erik Mielke - Merrill Lynch

Jacques Rousseau - Soleil-Back Bay Research

Paul Cheng - Barclays

Mark Gilman - The Benchmark Company

Operator

Good morning, my name is Sarah and I will be your conference operator today. At this time I would like to welcome everyone to the Tesoro Fourth Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Phipps, you may begin your conference.

Scott Phipps

Thank you, Sarah. Good morning everyone and welcome to today's conference call to discuss our fourth quarter 2008 earnings. While management will not be explicitly referencing slides on this call, we filed a slide presentation with the SEC and posted on our website this morning. I encourage you to have these available as we progress through this morning's call.

On the website, you can also obtain a copy of the earnings release we issued this morning for a review of the company's supplemental quarterly data. The earnings release contains additional information in the attached tables on our business. In addition, we have updated the other supplemental financial and operational information on our website that is not included in the release. After reviewing this information, please feel free to contact me with any questions about this matter or otherwise following today's call.

Please refer to the forward-looking statements in the appendix of the earnings slides, which says statements made during this call 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.

Before Bruce's comments I'd like to offer guidance for the first quarter of 2009. For the quarter we estimate throughput to be in the Pacific Northwest region, 110 to 120 barrels a day; in the Mid-Pacific 65 to 75; in the Mid-Continent 95 to 105 and California 250 to 260,000 barrels per day.

Our OpEx guidance for the first quarter; in the Pacific Northwest region is $5 a barrel; in the Mid-Pacific, $2.90 a barrel; in the Mid-Continent region, $3.45 a barrel and California, $7.20 a barrel. Our depreciation for refining is estimated at 85 million. Additional first quarter guidance includes corporate expense of 45 million, interest expense before interest income of 25 million and a marginal tax rate of 39%.

I will now turn the call over to Bruce.

Bruce A. Smith

Many thanks, Scott. Several weeks ago, we pre-announced a range of financial results for the fourth quarter. So when we released earnings last night, both our quarterly and year-end financials certainly weren't a surprise. For that reason since this call is occurring about halfway through the first quarter, what I plan to do is make a few remarks on 2008 and then to reemphasize some of the significant points of our plans for 2009.

But to give a price perspective on the challenges of 2008 I want to back to late 2007. At that time it was becoming clear that product demand in California declined soon after we purchased the Los Angeles refinery and the California retail assets in May of 2007.

After these acquisitions, rapidly rising crude prices pushed product prices to record levels. At the same time the California unemployment was increasing at a rate that was double that of the United States. The demand problem was more acute on the West Coast in the early days but eventually softer demand spread to the rest of United States as the negative impact of housing and credit problems affected the broader business environment.

The early economic events in California negatively impacted operating cash flow in 2007. And since we were in the final stages of completing the $600 million Golden Eagle coker project, our monthly free cash generation turned negative also. So it was obvious that we needed to rethink the 2008 business plan that had been approved by the Board.

In January, we begin making adjustments to position the company to reverse the impact of the negative cash trend. And our early actions overwhelmingly position us to withstand the financial turmoil that occurred later in the year.

Attacking a declining demand problem wasn't new for our management team as most of us had been with the company in the post 9/11 timeframe. So, we understand that we need to act early and decisively in order to protect our balance sheet. We set specific goals to generate cash by slicing inventory and I might add that we did that at a time that we captured some of the highest value for that inventory if we had not acted early. And then we also cut costs in capital. Although, we've always had an analytical focus on the factors that affect cash generation, today as we've mentioned in several of our conferences the entire organization is even more sensitized to cash.

The combination of these actions enabled us to repay over $600 million of revolving borrowings, which ensured that we had full availability under our working capital facility for the issuance of letters of credit. And as we enter 2009 therefore, we have a very strong balance sheet.

I want to highlight a few specific facts about the fourth quarter. One, very noticeable fact was that our margin improved. Even though the Tesoro Index was down by approximately $0.66 a barrel versus the index in the fourth quarter of 2007, our gross margin actually improved by approximately $4 a barrel.

The increase is due to three factors. First, we processed a greater percentage of heavy crude volumes and of course heavy crudes were trading at historically wide differentials.

Second, quarter-to-quarter we made processing adjustments that yielded more valuable distillates. And finally, our wholesale and retail marketing margins were stronger.

So in total, in the fourth quarter, we captured a 150% of the Tesoro Index versus 93% in the quarter in 2007. For the past year, we have talked about initiatives that we're making to improve our performance in Hawaii and California. And so, not surprisingly in the fourth quarter these operations had positive quarter-on-quarter variances.

As recently as two weeks ago, I was asked by an analyst about the profitability of our Hawaiian asset and whether we were considering selling it or as its popular today, alternatively turning into a tunnel operation. The question is very understandable since our contracts for some local products like crude product purchases and in event products get marked to crude values, which can cause our quarterly reported numbers to swing in times of volatile prices.

The interesting fact is that in a rising crude environment, we've built cash in Hawaii, but earnings were negatively impacted. And of course, the inverse is also true.

So, in 2008 we recorded losses in the first half of the year, but somewhat significantly, we made some changes that improved Hawaii's profitability. These changes and the fact that the refinery is oriented to distillate, and therefore to the distillate crack have made Hawaii a more competitive refinery in the Pacific Rim market.

We increased our ability to process some heavier crudes and we upgraded our electrical system to make the refinery more reliable. Over the years, the refinery has had electrical problems that have caused unscheduled downtime. In total Hawaii generated strong cash flow in 2008, even after reported substantial losses in the first half of the year. So, we still see this as a core asset in our system.

In California, our crude flexibility program gave us the ability to capture the value of processing more heavy foreign crudes which recently had historically wide heavy-light differentials. Versus a year ago, fourth quarter heavy crude runs in California were up 2% and in... also in the fourth quarter, we increased our yield of distillate of diesel and jet by 6% versus a year ago, thereby taking advantage of the $12 per barrel uplift over gasoline.

A second go I mentioned crude flexibility; this, for several years, we've talking about crude flexibility and talking about our plans, both capital and operational to improve crude flexibility and to reduce the trap of being dependent on single source crudes. In the past several years we have introduced over 25 new crudes into our system.

If you look it our system today versus a year ago, we have the option to source and process more heavy and cost advantaged crudes. And we believe, the new agreement in Panama will give us the opportunity to introduce other economic crudes into our system.

The crude flexibility program, plus programs to produced incremental volumes of high value distillates and programs to reduce our cost have made us a more profitable company. Today, the entire industry is dealing with softer demand and I believe we have made adjustments that position us to successfully deal with today's challenges.

For the full year 2008 versus 2007, we increased our heavy crude throughput by 5%, shifted 2% more of our gasoline production into distill crude and reduced our inventories as I said earlier by over 5 million barrels.

We lowered our debt-to-capital ratio, greatly reduced our need to borrow under the revolver and improved our free cash flow position. Our culture stresses that value can be created by quickly adapting to change and therefore it emphasis the need to be flexible entrepreneurial and accountable.

The successes I just mentioned are the results of these trades. We delivered three profitable quarters in 2008 as we modified our business plan to deal with the new economic reality but most importantly, we also developed plans to generate earnings growth in 2009 even though we assumed that, we will have a more adverse environment then in 2008. The key element in accomplishing year-over-year growth was to lower our breakeven cost by $2.50 a barrel through initiatives that we believe will improve our ability to capture more of the existing margin.

This plan includes non-capital improvements in crude cost, transportation and distribution cost, yield structure and optimization. We also expect cost reductions as a result of our focus on energy and maintenance processes. Additionally, we will receive the full year benefit from our 2008 income projects, projects, such as the delayed coker at Golden Eagle.

Since announcing our business plan on December, one question that we've been frequently asked is how certain are we going to... how certain are we that we are going to be able to execute this improvement plan. It certainly is not a year that we're going use lightly in this environment, just given the uncertainty that exists, but most of these improvements are structural. We think they have transparency and the potential savings are something that we can do and we are comfortable setting the potential targets that we discussed.

The final change we made was to align our future capital spending plans to better match the lower cash flow expected from a softer market. The result is that we have reduced our capital expenditure program in total and now favor small, quick pay back income projects instead of large multi-year projects. To make this adjustment, we challenged our operations teams to identify projects that have an average cost of 2 to $3 million and meet high return criteria.

In total, we now have over 300 projects which provide us with leverage that we can pull to generate near term additional earnings growth. And the beauty of this change is that we can take projects off the shelf when we feel that we can afford them.

I want to offer one last thought. The challenges in California were unique in the beginning of the down cycle and our exposure to this market made investors nervous. Those problems turned out to be the leading edge of a much larger problem. So, hindsight being 20-20, as we look back today, our stock was relatively oversold compared to others in the industry. We've recovered some of that relative value but I believe that the earnings improvements that we'd outlined for 2009 are not yet reflected in the market.

That comment is not solely based on what has happened in the first few weeks of 2009. Yes our crack spreads have been unseasonably strong, with significant planned and unplanned industry downtime, combined with low purified (ph) gasoline inventories. And yes, we anticipated that these facts could positively impact margins and therefore intentionally deferred some planned first quarter maintenance work to take advantage of any uptick in margins.

In the third quarter call, I said that unplanned supply adjustments would provide unexpected opportunities to build cash. And that's what we've seen so far this year. But quarter end over, we don't know how the impact of the change to summer-grade gasoline's going to affect, nor we do we know how the return of gasoline production once turnarounds will affect margins.

But if history is useful in predicting the future, we believe supply will reflect weaker product demand. To the extent possible we are prepared for the market to make downward adjustments. So, I don't know what you expect in 2009, but we are prepared for the unexpected. We have a solid business plan that's predicated on capturing more of a weaker market. We're excited about the prospects for the year. We're going to certainly take the good news that we've had to date. We plan to take advantage of new supply problems and then we're going to stick with a very conservative business plan in 2009.

And with that Sarah, we're ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Neil McMahon from Sanford Bernstein. Your line is now open.

Neil McMahon - Sanford C. Bernstein & Co

Few questions.

Bruce Smith

Hi, Neil.

Neil McMahon - Sanford C. Bernstein & Co

Hi.

Bruce Smith

Good morning, how are you?

Neil McMahon - Sanford C. Bernstein & Co

Not too bad, thank you. In terms of the price you're getting for your crude in Mandan and the one in Utah, are you getting differentiated prices in those locations because the processors are struggling at export volumes, is that still coming through? And I have got two follow-up questions as well.

Everett Lewis

The answer on... this is Everett Lewis. The answer on the crude prices in Mandan and Salt Lake occasions are, we're still getting differentiated prices in those locations, we certainly got them in the fourth quarter. I think as things shift around in the crude market in the first quarter we're seeing less of that, but we're still getting a benefit.

Bruce Smith

I think it's fair to say that differentials are always better with higher prices the narrower they get, the narrower the differentials get.

Neil McMahon - Sanford C. Bernstein & Co

And the second one relating to the fourth quarter is looking at Hawaii, the delay in the retail pricing in Hawaii versus the drop you saw in, say California through the fourth quarter. How much does that help your profits from that Mid-Pacific region?

Everett Lewis

I think that... there are some differences in timing on the retail prices amongst the different regions, but I don't...the bigger effect you see in Hawaii is the effect of the crude versus some of our product sales contracts, and that's much more relevant than the impact on the retail which is a considerably smaller number. We saw...

Neil McMahon - Sanford C. Bernstein & Co

Okay.

Everett Lewis

Some of the fuel oil on a pre-price basis and when crude price are going down that shows an advantage in earnings as Bruce pointed out in his remarks.

Bruce Smith

It can be oil stations, it's really not the gasoline and the products link there. So even when you get good strong retail prices it's less significant there.

Neil McMahon - Sanford C. Bernstein & Co

Okay. And just two final ones from me. Looking at the volumes from Jamnagar are you seeing any hit in the West Coast at the minute in terms of... or you're expecting them to come later on in the year waiting for the summer gasoline season?

Bruce Smith

Our view would so far the answer to... factually is no. We haven't seen anything. Our view is that probably not going to be... and all the consultants that we talked to and the study that we've done, we probably spend the better part of the year and a half, understandably trying to see how we think to flows of that product are going to really impact the global markets, not just our market.

Because we're talking about things that as globally those shifts occur obviously there is a trickle effect no matter what. And so to the extent that we go back to one solid view, consistently that the world and I think particularly now with the economic time to win (ph), that everybody is going to rational. And so, that our view is probably that we finally will not operate it at the type of capacity that it might once have operated at.

But, when you look at where the product flows are going to go we don't see that coming to the West Coast. That's not to say that again in the global markets it might not impact the West Coast, but the work that we've done and with some consultants just as recently is over the last several weeks we're talking to them, we just don't think the products are going to come to the West Coast.

Neil McMahon - Sanford C. Bernstein & Co

Again, a very final one maybe a quick one. In terms of the new administration, lots of talk about CO2 legislation and California fishing creek (ph), a variety of different nodules which could ultimately lead to refiners having to feel the brunt of some CO2 legislation. And anything you can give us any guidance on there or are we at a very, very early stage?

Bruce Smith

Lynn, you want to lend in.

Lynn Westfall

Yeah, Neil it's Lynn. Certainly we're starting to see the initial talk about that. You've got sides lining up now, you've got some people looking at carbon trade which is what President Obama was in favor of during his election campaign. But then last week, the Secretary of the Energy mentioned that carbon tax has the mechanism. So, what we're seeing right now, the early phase of the discussion and feeling, which way they want to go; between carbon tax and carbon trade and we really don't expect anything of substance to come out, probably till maybe later this year.

Obliviously, they are concentrated on the economic front first. So, we're watching it, but as you say right now, it's just in the talking stage.

Neil McMahon - Sanford C. Bernstein & Co

Great. Thank you very much.

Unidentified Analyst

You're welcome.

Operator

Your next question comes from the line of Ann Kohler form Caris & Co. Your line is now open.

Bruce Smith

Hi, Ann.

Ann Kohler - Caris & Company

Good morning. I just had a question; you kind of alluded to, with the strong margin environment that positively impacted your cash. Could you talk little bit sort of what's the cash position versus the end of the quarter?

Bruce Smith

Greg, you want to talk about cash.

Gregory Wright

Sure. Hi, Ann, it's Greg.

Ann Kohler - Caris & Company

Hi.

Gregory Wright

This time a month ago, in January, we borrowed about $92 million on settlement day, purchasing the prior month's crude. We don't know today we will buy that crude again, it looks like we will be very close to either a small borrowing or a small cash position. In other words, we built close to that $90 million plus cash here in the last month. So, it looks real good. Again, it looks like it will be unborrowed LCs were down, availability is growing as the borrowing base grows. So, I'm very happy with where we are right now.

Ann Kohler - Caris & Company

Great. Thank you.

Gregory Wright

Thank you.

Bruce Smith

You're welcome.

Operator

Your next question comes from the line of Doug Leggate from Howard Weil. Your line is now open.

Bruce Smith

Hi, Doug.

Doug Leggate - Howard Weil

Hi, guys. How are you?

Bruce Smith

Good and you?

Doug Leggate - Howard Weil

Not too bad. Thanks. I'm sorry, I've got a few as well if I could wrap a little more very quickly.

Bruce Smith

Sure.

Doug Leggate - Howard Weil

On the... you've obviously made quite a big deal about the crude flexibility, and that's clearly played in pretty well. How sustainable do you think some of these discounts are in terms of what ICE brought to the table? I'm thinking specifically about, whether you had benefited from, for example, the difficulties that big guys (ph) has been having done in California. And also just some of the distress cargos, perhaps coming out of China?

Bruce Smith

Yeah. I'll let Everett provide his thinking. The question about sustainability, I make is a good one. I think that we have something that's sustainable. The question is the levels of it. I mean, I think that one of the real emphasis that we've had, when you look at the decision, the first and foremost economic driver in this business is crude. And if you can crude at better values, you're going to have higher profitability.

I mean, one of the real issues today is, what's the price? I mean, is that is WTI even a good marker. But, at the end of day, it's the difference between what have you bought it for, and whatever the value of the light products are. And, what we saw very early on, in this corporation, while we were so linked to ANS, and we just didn't have options. Our refineries weren't used to processing anything else. And, the safest and easiest think to do is to process the same crudes over-and-over.

So, for years now, we've been talking about how do we give ourselves, without investing huge amounts of money, how do we give ourselves that flexibility to better balance against what's out in the marketplace. Last year alone, I said 25 crudes. Last year, we increased crudes by 14, I think was what the number was. So, we've really made an operational effort to try to understand how we can blend, how we can use the crudes that are on the market. We use brand new crudes that have just come on to the market. We've been early users.

And we think that again, our operation and our style of doing that gives us an advantage. And there's no question that if you look at supply points in a long crude world, if you've got places to go to buy and with shipping rates being good that you ought to be able to continue to see good values in crude markets. The worst crudes you buy are the ones that are on land, that are linked to the same refinery. That doesn't tend to be the case in the Williston Basin, because there were not... there's not the ability to move that out.

So, I think that the sustainability here we feel good about, specifically the Big West. I don't think we've seen much change there. And I don't think we've ...

Doug Leggate - Howard Weil

Now that's specifically about big West, but it goes to your point about the markets are dynamic and they change. So the advantages we see one day may not be the same as the advantages the next day. We were seeing a big advantage for imported crude and for California during the quarter. Today we recovered an advantage towards these California crudes. And saying Big West is one factor among many will affect that?

Bruce Smith

They were only processing, I think if they in... I think they are approximately 30,000 barrels a day. So I don't think that the dynamics in that markets swung much around what we have with Big West. I do think that as I said earlier Doug, that again you don't know what's... I can't tell you that our Panamanian agreements going to making a big difference. But we think that does give us a unique opportunity to continue to see advantaged crudes coming.

And so we stress it because we've done a lot to change our supplemental and going to back to your question, we think it's sustainable the question is to degrees. And I can't measure that, but we feel over good about what we are today versus where we were several years ago.

Doug Leggate - Howard Weil

I guess as a follow-up to that, Bruce because obviously this is probably one of the bigger issues that you guys focused on over the last couple of years, putting that flexibility in place. Typically, the first quarter is a tough one for you guys.

Bruce Smith

Right.

Doug Leggate - Howard Weil

And I think you have given some color that things seem to going a little better. I just wonder if you elaborate a little more as to whether or not that benefit has continued into Q1, I am meaning crude discounts, and particularly as it relates to Neil's question about Mandan, are you able to look in those discounts, would you consider hedging it, would you consider trying to protect those in someway. Can you give me just a little more color as to how you see Q1 playing out, that will be great.

Bruce Smith

I think that the discounts that we've seeing traditionally in Q1 are down from what we saw in Q4. There pre-crude field specific, they are difficult to lock in. We've looked at locking some entries, some contractual arrangements, but I think as production outlook's changed, people are less interested in doing that.

So, it's not something we are actively pursuing, but again as we said that the situation is dynamic. We are continuing to get some discounts there, but as those reduce others come up. We try new crudes, we get discount there. We've being bringing some stuff around from the Brazilian side as that production comes on. And some other new crudes from elsewhere in the world.

So, we continuing to see favorable crude balances but they won't all be the same quarter-to-quarter.

Let me make a point a little bit way Doug, as I think it is important. We have seen factors change from the fourth quarter to first quarter and I think that the problem with the business is that it's awfully difficult today to develop and that's true for, I said this in a conference recently.

One of the most difficult jobs that everybody has today and each of you, and I mean this in sincere ways trying to predict what's going to happen because the trends are so out of whack with what's been true in history here. I mean, we had trouble predicting, just as we talked about cash a second ago.

We look at cash and we saw much stronger cash position on settlement day two days ago. But it's just timing differences. It's people that are managing their cash and it's also difficult to not determine what we're going to pay but determine what the receipts are going to be on any given day, because people are managing their cash differently than they have in the past.

As I look at the business one of the most difficult things is to try to predict and that's why I said really being prepared for the unexpected.

We've seen, if you look at the first quarter and you're exactly right, if you look at the first quarter of any given year. What I have told the market forever, we loose money in January, we breakeven in February and its all about March because that's traditionally what happens.

What we seen is this, is something that's a little different we took advantage of it by deferring some maintenance. But it's not because all because of what we did relative to crudes or the heavy-light differences were much narrower. But we found a way in the middle of all that to do very well and I have the word the first quarter is going to end up because we're now over 45 days from finishing and you think were you halfway there and normally the last half of March is a strong month; I'm not sure that's going to be true. We may have seen the whole inverse, we may have seen, this very, very strong January. And may see a weaker March?

Doug Leggate - Howard Weil

I assume that you were in the black in January, then I guess is the bottom-line?

Bruce Smith

I would tell you that we made more in January than current consensus for the quarter.

Doug Leggate - Howard Weil

So that you need to be here. Thanks a lot, Bruce.

Operator

Your next question comes from the line of Jeff Dietert of Simmons. Your line is now open.

Jeff Dietert - Simmons & Company International

Good morning.

Bruce Smith

Good morning, Jeff.

Jeff Dietert - Simmons & Company International

I had a question on crude feedstock as well as specific to California. Could you talk about what the domestic crude, international crude split is for 4Q and what primary international crude you were using in the fourth quarter and how that might change in the first quarter?

Everett Lewis

Let me answer that indirectly I guess. Number one, I don't think we want to share exactly what crudes we are running at which refinery, as that, I mean you are holding too much information for the public. But, I can tell we have the ability to bring in almost 50% of imported crude in Los Angeles. Since we've been improving that facility from its prior capabilities and we used a lot of that in fourth quarter. I think the intent to do that is down a little bit in the first quarter, that will probably shift that balance around a bit.

Bruce Smith

It's Bruce, say 100% of the crude in Hawaii came in and it was imported.

Everett Lewis

That's for sure.

Jeff Dietert - Simmons & Company International

Can you quantify how significantly the heavy seller discounts have changed currently versus 4Q, for your Canadian or excuse me, your Californian imports?

Bruce Smith

No, obviously the heavy lights spread have come in and the South Americans I think have been particularly affected by the Chinese pull in some of their new refineries. And that's what has changed the balance around. So we're looking more at the domestic heavy sellers and for the heavy crude than we are, the South Americans. But at the same time there is a bunch of new ones that come on and we're accessing. So we're pulling some crude from some of the Australian fields, from some of the South American fields and on the other side South America as well.

So we're continuing looking for the most advantaged ones, but there is no depth, the heavy lights spread that come in.

Jeff Dietert - Simmons & Company International

That's helpful. Thank you, I appreciate your comments.

Bruce Smith

Welcome, Jeff.

Operator

Your next question comes from the line of Chi Chow from Tristone Capital. Your line is now open.

Chi Chow - Tristone Capital

Hi, good morning.

Bruce Smith

Good morning, how are you?

Chi Chow - Tristone Capital

Yeah, thanks. I have a follow on I think to Ann's question earlier. In the release you mentioned that you're experiencing a reversal of 4Q, the 4Q working capital impact. Can you elaborate on that because it seems like crude prices are generally flat here so far in the first quarter?

Gregory Wright

I'll take the second, first. Chi, this is Greg. Yeah, the prices we've seen have been all over the place. So I don't know that there is a strong movement in the working capital area. What we have seen there is some very good margins on the West Coast that began in mid-December and carried through January and started to taper off somewhat in February and mid-February.

So I think a lot of our cash build would has been due to that margin improvement, maybe a little bit to working capital, I really have to work at that.

Chi Chow - Tristone Capital

Greg, can you give us any details on the capacity you've got on your revolver right now and what's the current availability?

Gregory Wright

I can. Are you into that post or pre certification.

Well, this is... I will mention the certification?

Chi Chow - Tristone Capital

Okay.

Gregory Wright

The revolver borrowing base last when we submitted is... at the end of year, I think this is... was 620 million. After posting LCs we have about 250 of that available to us. We, the way our revolver works obviously on a rising price environment, the borrowing base will come up and we will see that here in the first quarter.

The other thing that's going to happen, that will help us as Bruce mentioned is that we have a fixed charge coverage test which doesn't matter if we have at least 15% availability which we always have had. The one thing however if we're below a one to one ratio on that and still have the availability, not to have that test work it does increase the amount reserved by the banks.

Once I file my 10-K here in the next or week or two showing that we passed that one to one test, I'll claw back over $100 million of availability as the standard reserve returns to $50 million

Chi Chow - Tristone Capital

Okay, that's great. Thanks for those comments. I have one other question on more operationally in nature. It seems like in California, we now have gasoline cracks higher than diesel. Do you have the flexibility to swing your production back toward more gas?

Bruce Smith

Yes, and we haven't done anything to switch to diesel, that's irreversible. We haven't made any physical changes in the plants that will prevent us from going back and forth at will between the diesel and the gasoline. We, and I'm sure everyone else are looking at swinging more into the gasoline line right now, with the prices that were there.

Chi Chow - Tristone Capital

Right. And, can you make any comments on what do you expect your margin capture to be 1Q relative to the fourth quarter?

Bruce Smith

Yeah. I think ... I mean, I think that overall, if looking at where we are. And again, even with the strength as I've talked about it in January, our margin capture is going to be, is going probably be down. But, again, either, it's just still early in the quarter. I just take to do more predicting about the quarter. I don't mind talking about sort of what's happened to-date. But, I mean, there is a lot of change going on right down in the marketplace.

In the Pacific Northwest, we're seeing, we're going to see more turnarounds that our facilities come back up. But another one's going down. So, there are so many changes going on in the marketplace as we see great changes. It's just very tough for us to predict what's going to happen in the next 45 days. And so, I think it's fair to say, our expectations would be down.

Chi Chow - Tristone Capital

Okay. Thanks, Bruce. I appreciate it.

Bruce Smith

You're welcome, Chi.

Operator

Your next question comes from the line of Roger Read with Natixis Bleichroeder. Your line is now open.

Bruce Smith

Good morning, Roger.

Roger Read - Natixis Bleichroeder

Hi, guys. Good morning. Ethanol; what do you... how do you see the ethanol impacting the market, and, given that one of your competitors was at least sniffing around it the other day, any interest on your own side?

Bruce Smith

Is that sniffing alcohol?

Roger Read - Natixis Bleichroeder

Ethanol or alcohol, you can tell the difference, right?

Bruce Smith

Do you want to...

William Finnerty

Well, I guess... this is Bill Finnerty, guys, as you look at Ethanol and you all know that for 2009, we're looking at 11.1 billion requirement coming from the NAG Act (ph) Security Act. We think that there are going to be some issues for the industry as we move forward as far as having as the blend wall (ph) on this. But, the drop in demand on gasoline and the volume that you're talking about, they are hovering around the 10% level and above.

So, I think ethanol is going to be something that we're going to watch very closely. As you know, a number of the ethanol producers are having problems, production is going down, and it's something that we will probably factor as far as pricing structures go moving into the future.

Bruce Smith

I think, Roger, your question was more directed since ... I mean, I didn't ... the Verizon notice by Barrow (ph). But, right now we don't have any plans to do anything similar to what Barrow has done. I mean, I think that, when we look at our base business right now; as I mentioned earlier, we've got these 300 projects, that we'd like to pull the lever on, where we think we have really solid returns.

We think that's the best use of capital once... we're sort of into that stage, where I think it's fair to characterize, we view our self as our own bank. We don't want to go into the revolver, we want to have that available for letters of credit. And so, we think we need to be able to fund projects with the cash that we have. And, so, we're at the point where we're starting to think about, the first series of those projects, the first tranche I would say of those projects. But we think that's a lot better way for us to deliver value to shareholders over the near-term than anything else. And so, we're... don't be surprised when we start to talk about some of those projects and our ability to bring something in value into 2010 from those types of investments.

Roger Read - Natixis Bleichroeder

Okay. That's helpful. Thank you.

Bruce Smith

Okay. You're welcome.

Operator

Your next question comes from the line of Erik Mielke from the Bank of America. Your line is now open.

Erik Mielke - Merrill Lynch

Hi. Good morning. It's Erik Mielke here from Merrill Lynch. Quick question for you on the Panama you talked on the utility front. Are you currently running in your Atlantic Basin crudes in the... in your Pacific Rim refineries?

Bruce Smith

Are we currently running...?

Erik Mielke - Merrill Lynch

Do you have historically run Atlantic Basin crudes?

Bruce Smith

I understand, I was just try to think with the crudes,

Everett Lewis

Depends on your cash definition of Atlantic Basin. We aren't running anything currently from sort of West Africa and that side of the Atlantic Basin. If you look at the other side of the Atlantic basin we are running crudes from that side.

Erik Mielke - Merrill Lynch

Okay. I guess what I'm trying to get at is, is there a cost advance that you are trying to build into by having this pipeline solution. Is that what you are trying to do with the agreement?

Everett Lewis

Yes, and that has a lot to do with it. I mean if we can reduce those transportation costs to get it to the West coast, we can shift some of the pricing dynamic on those, on those crudes from that direction in our favor.

Erik Mielke - Merrill Lynch

And, I mean are you able to quantify that, because the volumes are not insignificant, given your size.

Gregory Wright

We have a quantified it to date, we've done. We obviously have done that internally, sort of going to cap it in two stages, I mean I think Bill Finnerty was... has been working on that dossier beside me. It's sort of the first phase when the pipeline gets reversed, which but we won't have as much tankage which will limit us a little bit. And so it's sort of late this year, I guess it's a third quarter, we are still plan, at that point and time we think that the pipeline will be reversed in August.

We will be able to participate in throughput through the pipeline and our tankage as part of the agreement will be available early in the first quarter of 2010. And as we do this is part of what Bruce was and Everett was talking about earlier. It's not only taking our business model to capture differentials in the market place but improving our infrastructure in order to facilitate that and PTP product is going to be an important step in doing that, not only in the discounts that we will see coming forward on a freight basis but also with the tankage we will have on both sides; the ability to plan to meet our specifics specifications at the facilities.

Bruce Smith

It does go back to, to being able to have right type of savings relative to shipping. It also goes to being able to do things that are a little bit more opportunistic in a shorter period of time. So the range of what the benefit could be is, is to address your question is somewhat wide right now. I think we'll need to see how our experience goes. We have planned in the numbers for this year a very small amount of benefit in that $2.50 number that I've mentioned where we were lowering our breakeven but it's very small, it's certainly more oriented to next year. And I think it will be a bit of learning process but we would expect to see more benefit in 2010.

Erik Mielke - Merrill Lynch

That's great, makes me a lot of sense. Two follow-up questions on Panama, first of all would you consider a long-term supply agreement. And secondly what does it do to your working capital requirements, having to run these additional facilities?

Bruce Smith

I mean the answer we will consider long-term, yes.

Gregory Wright

Definitely I think as Dan indicated before our forward position is trying to pick up preferred supplies long-term. And this is a conduit by which we can accomplish that objective.

Bruce Smith

I mean I think that's a... I mean we haven't said before. But I mean it's I think it somewhat intuitive that obviously one of the benefits would be that if we can find the right type of supply, where it would link to the West coast, Erik we can develop a nice win-win scenario. And so...

Erik Mielke - Merrill Lynch

Absolutely, and that's great and then the working capital?

Gregory Wright

I think it's, Erik, it's about the contractual arrangements that we have make, I mean we have contracts where we have called those deliberately, we have contracts, FOB so as far as the negotiation yes we will follow it.

Bruce Smith

And then quarterly our working capital goes up under an agreement that would be more of supply agreement, actually the usage of letters of credit could actually go down. So, again I think we are going to have to see what we think we can make out of it and I hate to sound like we are waffling, that's really not the case. We are looking at a number of different things and how we might do that now that this is firmly in place we been working on, actually been working on this since we started on the Panamanian transaction a little more year ago, probably October a year ago.

So, we'll see. We are I think probably a year away from being able to give you more definite answers about what we see there. But it's possible something could be announced before that.

Erik Mielke - Merrill Lynch

That's great. That's all from me. Thanks.

Bruce Smith

You're welcome, Erik.

Operator

Your last question comes from the line of Jack Rousseau from Back Bay Research. Your line is now open.

Jacques Rousseau - Soleil-Back Bay Research

Good morning. Just a couple of things, please. I just wanted to see if you could qualify the hedging gain in the quarter and give any details on what hedges you may have in the current year. And then also maybe a few comments on... in the quarters, as I know that you had a tough fourth quarter, I just want to see your outlook there also? Thanks.

Gregory Wright

We can give you a little color on the hedges in the fourth quarter, because they're probably a little bit bigger number than you are expecting. And, there are several elements of it. We have a change in the pattern on what we were doing on the crude, and the crude is not a big part of it.

We do every year build butane inventories for the winter and summer gasoline burning seasons. So, we build butane all year and we're using it during this winter. So, we pulled that butane inventory by about 80% of what was stored through the quarter. And that accounted for about a third of the hedging number.

The other thing we do is, when we're selling some products on the West Coast, we use what we call it an exchange for physical. So we can link it up with the NYMEX and at a premium for the West Coast. And as we do those sales and we exchange the physical for the NYMEX contract, the change in value of that between the time we do the deal and time we actually deliver the physical shows up on our hedge line. But, it's really just part of the pricing transaction that we do on products in the West Coast. So, this averaged another third.

So, the last think is really what you are seeing on the stock crude hedging, which is pretty much inline with what we typically do. And what I'd expect to see going forward.

Jacques Rousseau - Soleil-Back Bay Research

What was the total hedge number in the quarter?

Bruce Smith

About 85 million I think.

Jacques Rousseau - Soleil-Back Bay Research

85 million. Thank you.

Operator

Your next question comes from the line of Paul Cheng from Barclays Capital. Your line is now open.

Paul Cheng - Barclays

Hey, guys. Good morning.

Bruce Smith

Good morning, Paul.

Paul Cheng - Barclays

A number of quick questions hopefully. Greg, do you have the long-term debt? How was the total debt at year-end working capital and also your market value of the inventory in excess of the book value?

Gregory Wright

The long-term debt, Paul was about a little over 1.6 billion.

Paul Cheng - Barclays

So, nearly all of them is long-term debt on the total debt?

Gregory Wright

We don't have any maturities right now (ph) now. So, there is I think some capital leases may show up in part of this. It's going to be all long-term for quite a while.

Paul Cheng - Barclays

Okay. Then ...

Gregory Wright

Go ahead.

Paul Cheng - Barclays

Working capital?

Gregory Wright

Working capital, I will have to... yeah, working capital was about 200 million.

Paul Cheng - Barclays

200 million.

Gregory Wright

In the year.

Paul Cheng - Barclays

Yeah. And market value of your inventory in excess of the book value?

Gregory Wright

About 400 million.

Paul Cheng - Barclays

400 million. Thank you. And, Bruce if we look at your retail store you have I think 2 or 300 stores in California. How is that same-store sales, you all said it looked like... I mean, are you seeing stabilization there or you're still pretty brisk (ph)?

Bruce Smith

Everett.

Everett Lewis

I think the same store sales numbers are down obviously in California. And we've been pretty, pretty aggressive with our retail program. So, I think they are down a bit more than the total demand drop in California.

Paul Cheng - Barclays

All right. Everett, how much they are down in your store in California? So far, I think I'm more interested in January, that what have you seen?

Everett Lewis

You have January?

Bruce Smith

I don't have the January numbers yet. The fourth quarter numbers were sort of in the range of 8 to 10.

Paul Cheng - Barclays

I see. Okay. And, Everett, in terms of the hedging, is there any rule of thumb we can use based on how the future oil price and the future market value, if the oil price moves at certain... is there any rule of thumb that we can use? How would that impact on your hedging gain or loss may look like?

Everett Lewis

I don't think so, because we do it on a pretty much a cargo-by-cargo and situational basis. We hedge if we're above the target. The butane thing is the once a year kind of thing, it's not a quarter-by-quarter thing. So, it's... to give you a rule of thumb we are covered in general.

Paul Cheng - Barclays

Okay. So, with that we... so we really don't know the activity at the quarter-end in terms of what is the hedging gain on lose maybe?

Bruce Smith

Right.

Everett Lewis

I think that's right.

Bruce Smith

Right. That's right.

Paul Cheng - Barclays

I see, okay. And, on the turnaround, can you give us maybe a brief update for the remaining of the year then, what is the major turnaround, I mean you are done with Anacorte and any other major turnaround coming up soon?

Everett Lewis

We have a full refinery turnaround in Alaska, coming up this year and we have a couple of hydro crackers in California we're going to do sort of second, third quarter. I think that's about it.

Paul Cheng - Barclays

So, the hydro cracker, is it both for the Golden Eagle and for Williston.

Everett Lewis

Yes, there's one that's coming up pretty soon. And then there is one that's out in fall.

Paul Cheng - Barclays

Okay. In Alaska typically you do... if I recall you were saying May, is this still the time.

Everett Lewis

I think we are looking at April, May for the Kenai turnaround.

Paul Cheng - Barclays

Okay. And, how many things on that one, 50?

Bruce Smith

What you say, 15 or 50?

Paul Cheng - Barclays

50 days.

Bruce Smith

It's not 50 days, that's less than a month.

Paul Cheng - Barclays

Less than a month

Bruce Smith

It's about 28 or 30 days is sort of what my recollection is, it's about.

Paul Cheng - Barclays

And if I recall correctly is that that one you're actually going to shut down the whole thing and you are not going to add production right, during that time?

Everett Lewis

That's right. We shut the whole refinery down.

Paul Cheng - Barclays

And two final questions. One, on the FX gain the 20 million. What's the nature of that FX gain?

William Finnerty

That's the strengthening of the US dollar against the Canadian dollar, most of which occurred in October.

Paul Cheng - Barclays

But you don't have a Canadian operation, is it because of why do you have that?

William Finnerty

No we deal by Canadian crude on our recovering offers. And pay for in Canadian dollar.

Paul Cheng - Barclays

Okay that's why you have a FX, okay. And then finally, maybe this is for Lynn, Lynn, California, I think previously that Ethanol (ph) office they are talking about the 10% Ethanol branding standard by the beginning of 2010, is that final now, or is it still a bit up in the air?

Lynn Westfall

No. As far as we know that rule is on the books, it's final and will be effective December 31, 2009.

Paul Cheng - Barclays

Because I think at one point all you guys were talking about that may get pushed also, is that going to get pushed out or you think that this is final?

Lynn Westfall

No, we are pretty sure that is final. There is an alternate mechanism to comply with offsets, if you don't want to go to the full 10%, but because of the distribution system in California, it's pretty certain that everyone is going to up to 10%.

Paul Cheng - Barclays

So how much is going to cost you guys to comply with that?

Bruce Smith

Capital, income?

Paul Cheng - Barclays

Capital.

Lynn Westfall

Right now, the capital plans are a million dollars.

Paul Cheng - Barclays

Oh, so it's just very small.

Lynn Westfall

Yes.

Paul Cheng - Barclays

Is that unique to you guys or that the industry wide, that is pretty small.

Lynn Westfall

I can't... I'll tell you what the rest of the industry is.

Bruce Smith

I don't think that we can answer the industry question?

Paul Cheng - Barclays

Nice, okay, very good; thank you.

Bruce Smith

Okay.

Operator

Our last question will be from Mark Gilman from Benchmark Company. Your line is now open.

Mark Gilman - The Benchmark Company

Good morning. I have question about economic curtailments and was frankly hoping in answering that maybe Everett you might be able to shed some light on the Pacific Northwest in the fourth quarter which looks like on an adjusted basis it had a negative margin, which kind of raises the question of why you're running your refinery at all? What kind of economic curtailment's built into the first quarter guidance?

Everett Lewis

Like in terms of the run-rate?

Mark Gilman - The Benchmark Company

Yes, Everett.

Everett Lewis

You can see the run-rate, we're in, we are at little under 70 I think in the first quarter which is well below our product capacity, our full capacity up there and that is for largely economic reasons, although we had a turnaround built in the first quarter as well to work on the crude tower, primarily a little bit on the FCC. I'd say if we haven't gone and put refinery turnaround, we probably would have been running it making money in there.

Gregory Wright

Yes, we would have been running. We wouldn't have been running full out.

Everett Lewis

Right.

Gregory Wright

We are like there, we were elsewhere in our the system remounting and sort of local demand

Bruce Smith

We had some problems there in the crude line terminus (ph).

Gregory Wright

Yeah, I mean going back to the fourth quarter. Where you could see the actual margins there were couple to things going on. One is as we're talking about the foreign exchange, we bring in a lot of Canadian crude there. So we were pre-pricing that by a month plus, maybe a month and a half. So you were seeing some serious affect on the income there and the margins there from the pricing and timing, while the crude prices were coming down, that you need the take out if you want to get to a flat price level. And that would bring back us to much better looking reserve margins.

The other thing that happens is we were looking at and we talked about margin in the fourth quarter like it's one number. But it started high in October, dropped down very low in late October, November, through the early part of December, and then it came up in December. And we did have an operating problem there at the end of December, in that quarter, that took on an unplanned basis offline, right when the margins were the highest they've been. So, there are a lot of thinks going on in the Northwest that make it, I think a little difficult to figure out...

Bruce Smith

It's not a very clean number. I think as the fair markets between, it's a little bit like to why it has difficulty making money, given the nature of the crude deliveries, when we got a rising crude market. The same thing is true in inverse for the Northwest. And then with the couple of operating problems we had, which took us down just at the wrong time... the fourth quarter was not a very clean number.

So, I think you have to look at it, it's not being extraordinary, but it's not very representative of what the refinery could have done in that quarter.

Mark Gilman - The Benchmark Company

Okay, thanks. I just had one follow-up on working capital, Bruce or Greg. I guess, at this point, it looks to me as if you probably built working capital by something in the neighborhood of 150 million bucks in the fourth quarter. But, that seems to contradict some of the language in the release, which I guess confuses me a little bit, where you talk about the contraction of receivables versus payables, which frankly would seem to sagest a working capital reduction. Can you help me understand that?

Gregory Wright

Well, with the price is falling as hard as they did, we have a big hit (ph) on working capital to the tune of I think over $300 million. And it's again, it's around the timing of paying for crude, and you're paying for a higher price of crude and trying to match that to the lower price of product. So your receivable, payable differential in a falling market, you can see that we've burnt in a lot of cash in the fourth quarter and that's directly attributable to that dollar.

Mark Gilman - The Benchmark Company

Okay. Thanks, Greg.

Gregory Wright

Welcome.

Bruce Smith

So, are there anymore questions?

Operator

There are no more questions at this time.

Bruce Smith

All right. Well, listen again as always, I want to thank everybody for participating. I appreciate you being so patient with us in our later call this time. We'll be back more on normal schedule next quarter. We look forward to talking to you and of course, if anytime you've got a question; if you'll give Scott a telephone call, we'd be glad to get back to you. And again, thanks very much for participating today.

Operator

This concludes today's conference call. You may now disconnect.

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