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Western Refining, Inc. (NYSE:WNR)

Q2 2009 Earnings Call

August 6, 2009 9:00 am ET

Executives

Mark B. Cox – Senior Vice President, Treasurer & Director of Investor Relations

Gary R. Dalke – Chief Financial Officer

Paul L. Foster – Chairman & Chief Executive Officer

Jeff A. Stevens – Director, President & Chief Operating Officer

Analysts

Jacques Rousseau – Soleil - Back Bay Research

Jeffrey Dietert – Simmons & Company

Chi Chow – Tristone Capital Inc.

Vance Shaw – Credit Suisse

Paul Sankey – Deutsche Bank

Gary Stromberg – Barclays Capital

Kelly Krenger – Banc of America

Ann Kohler – Caris & Company

Arjun Murti – Goldman Sachs

Maryana Kushnir – Nomuara Asset Management

Adrayll Askew – Hartford Investment Management

Gary Stromberg – Barclays Capital

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2009 Western Refining Incorporated Earnings Conference Call. My name is Shequana and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions).

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

Mark B. Cox

Thank you, Shequana. Good morning everyone. I would like to thank you for taking the time to listen in today. We appreciate your continued interest in Western Refining. As we just said my name is Mark Cox, and I'm the company's Treasurer and Director of Investor Relations.

Joining me for today's call are Paul Foster, our CEO; Gary Dalke, our CFO; Jeff Stevens, our President and COO; Mark Smith, our President, Refining and Marketing as well as other members of our Senior Management team. If you need a copy of the earnings release, you may obtain one from the Investor Relations section of our website at wnr.com.

Today on our call, Gary will provide an overview of our second quarter financial results. And then Paul and Jeff will comment relative to our operations and market conditions and then we'll open up the call for your questions.

Before we proceed, I need to make the following Safe Harbor statement. Today's presentation will contain forward-looking statements and I incorporate and refer you to the forward-looking statements section of our earnings release and most recent filings with the SEC.

We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, we also report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the earnings release and on the Investor Relations section of our website.

I'll now turn the call over to Gary.

Gary R. Dalke

Thank you, Mark. As stated in our press release, we reported a net loss of $7.8 million or $0.11 per diluted share for the second quarter of 2009, excluding a non-cash loss from the impairment of goodwill of approximately $299.6 million. Including the goodwill impairment loss, the company reported a second quarter 2009 net loss of $307.3 million or $4.20 per diluted share. I would like to take a minute to explain the basis for the goodwill impairment. The economic downturn has had a negative impact on our industry's performance. Like others we have experienced a decline in our stock price. As a result our equity market capitalization fell below the net book value of our assets including goodwill.

When we performed our annual goodwill impairment test as dictated by current accounting rules our tests indicated that all of the goodwill was impaired. I believe it's important to point out that this non-cash charge does not impact our financial covenants. In addition to the goodwill impairment charge, our earnings also included a write-off of unamortized loan fees of approximately $9 million and an accelerated depreciation charge of approximately $8.5 million. The write-off of unamortized loan fees resulted from the capital markets transactions and the term debt retirement that we completed in the quarter.

The accelerated depreciation charge was due to the write-off of construction in progress related to two environmental projects at our El Paso and Gallup refineries. Finally, a change in our lower costs for market inventory reserve also increased after tax net income by approximately $20.7 million in the quarter. Our adjusted EBITDA for the second quarter of 2009 was approximately $29.5 million. The definition of adjusted EBITDA is contained in our earnings release, but essentially it represents earnings before interest, taxes, depreciation, amortization, lower cost for market inventory adjustments, maintenance turnaround expense, and other non-cash charges such as goodwill impairment.

For the three months ended June 30, 2009 we generated cash flow from operations of approximately $24 million and year-to-date we have generated cash flow from operations of a $120 million. As of June 30, 2009 we had no cash borrowings outstanding under the company's revolving credit facility and we have not made any cash borrowings under this facility since early in the first quarter of this year. Total capital expenditures for the three months ended June 30, 2009 were $31.1 million, which included capitalized interest of $1.3 million. Capital expenditures in the quarter primarily consisted of spending at El Paso on the completion of low sulfur gasoline hydrotreaters as well as other improvement and regulatory projects at our refineries.

Thank you. I'll now turn the call over to Paul.

Paul L. Foster

Thank you, Gary. The second quarter was challenging for our industry as refining margins were adversely impacted by rising feedstock stocks and contracting crude oil differentials. Earnings at the El Paso refinery were also negatively impacted by a partial shutdown of the refinery for planned maintenance, which decreased our throughput volumes in late May and early June.

Financial results at the Yorktown refinery were adversely impacted by the continuation of narrowing heavy crude oil differentials and lower realized values for petroleum coke. On a positive note our retail operations performed well in this quarter, as gasoline volumes were stable and margins improved, while merchandised sales were up compared to the same period last year. In the second quarter, we made significant changes in our capital structure as we sold $200 million of common equity, $600 million of senior secured notes, and $215 million of convertible senior notes.

The proceeds from these transactions were used to refinance and retire a portion of the company's term loan. We also renegotiated and improved our financial covenants within both the remaining term loan and the revolving credit facility, which gives us additional financial flexibility. As I mentioned on prior conference calls, we have been concentrating on reducing debt and have reduced our debt through our equity offering and working capital management by approximately $340 million in the last 12 months.

In conjunction with the offerings, we met with a number of investors across the country on a four-day road show and we believe the interest we received from investors in our offerings is recognition of the improvements made in our refineries and the benefits they will deliver as we go forward. With this improved capital structure and the operational improvements we've made in our refineries, we believe Western has a strong foundation in place for future growth.

I'll now ask Jeff to give us an update on what we are seeing in the markets.

Jeff A. Stevens

Thanks Paul. The economic slowdown has continued to impact the refining industry. Throughout the U.S. diesel margins continue to be soft as a result of high inventory levels and lower than normal seasonal demand. However, gasoline margins in our Southwest market, which consist of our El Paso and Four Corners refineries, have improved the past few weeks. And we are starting to experience a gradual pick up in demand in both our wholesale and retail business units.

Turning to Yorktown. East Coast refinery margins improved throughout the month of July. However, the refinery continues to be impacted by the light heavy crude oil differentials and the low market value for petroleum coke. Given the current state of the industry, we continue to be focused on optimizing our assets and managing our expenditures.

Paul, I will turn it back over to you.

Paul L. Foster

Thank you, Jeff. Our guidance for the third quarter is as follows. We expect crude oil throughput at our four refineries to be approximately 197,000 barrels per day during the quarter. We expect total refinery throughput at our four refineries to be approximately 218,000 barrels per day.

We expect operating cost to be approximately $3.95 per barrel at El Paso, approximately $8.85 per barrel at the Four Corners refineries and approximately $4.80 per barrel at Yorktown. We expect total SG&A in the third quarter to be approximately $28.5 million, interest expense will be about $32.6 million and depreciation and amortization will be $36.5 million. We expect our tax rate to be 35%. We currently forecast that our 2009 capital expenditures will be approximately a $140 million, of which $70 million was spent through the second quarter.

We recently reduced 2009 capital expenditures by approximately $15 million and we're looking for additional opportunities to further reduce capital expenditures this year as well as in future years. Before we take your questions, I would like to make a couple of closing comments. As Gary mentioned, we generated cash flow from operations of approximately $24 million in the second quarter and year-to-date we generated cash flow from operations of $120 million.

We don't have any cash borrowings outstanding under our revolving credit facility. And we haven't made any cash borrowings since early in the first quarter this year. Our liquidity continues to be good and as Jeff mentioned margins have been improving, which should have a positive impact on our profitability in the third quarter. I would also like to thank our employees throughout the company for their hard work and dedication to safety. We've recently celebrated a milestone in our El Paso refinery as we surpassed 2 million man-hours without a lost time incident.

Thank you again for listening and we will open up the call for questions. Shequana. We are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jacques Rousseau with Back Bay Research.

Jacques Rousseau – Soleil - Back Bay Research

Good morning gentlemen.

Gary R. Dalke

Good morning, Jacques.

Jeff A. Stevens

Good morning, Jacques.

Jacques Rousseau – Soleil - Back Bay Research

Just a question for you, your East Coast refining margins of a little bit over $7 a barrel were obviously down from some other period, but they were better than some of your peers have reported for the same period. Any thoughts on why that would be?

Jeff A. Stevens

Jacques this is Jeff. When you look at the East Coast and you look at our competitors there, we really believe we have a favorable cost structure because of the changes we've made at that facility. We feel like being able to run a 100% of the heavy crude even though that differentials come in. We still think it's probably the most competitive feedstock on the East Coast and so I think that you are probably seeing some of that in those numbers.

Jacques Rousseau – Soleil - Back Bay Research

Is that still the Marlim Crude Oil?

Jeff A. Stevens

That's still, we are bringing in the Marlim along with some others, but it's primarily the Marlim.

Gary R. Dalke

And Jacques this is Gary. The other, we talked about the lower cost for market inventory adjustments with LIFO expense rising in the quarter. We actually had a pickup from lower cost for market inventory adjustment, which impacted Yorktown margins favorably. If you would have excluded the LCM write-up, our margins would have been around $1 a barrel for the quarter.

Jacques Rousseau – Soleil - Back Bay Research

A $1 barrel less or…

Gary R. Dalke

No, a $1 barrel total, but…

Jacques Rousseau – Soleil - Back Bay Research

Okay. That would explain it. Thank you.

Operator

Your next question comes from the line of Jeff Dietert with Simmons & Company. Please proceed.

Jeffrey Dietert – Simmons & Company

Good morning.

Jeff A. Stevens

Good morning, Jeff.

Jeffrey Dietert – Simmons & Company

You guys have been successfully increasing heavy sour utilization at Yorktown and I was wondering what the margins and the or what discounts that we're currently experiencing, are you moderating that later or continuing with mere 100% heavy feedstock?

Jeff A. Stevens

We are continuing near 100% heavy, what we’ve done consistent with we've talked about in the last few quarters is we’re doing a lot more blend stocks and feedstocks from other refiners to supplement our crude runs. But even and as you can imagine we model it virtually daily, but even with the reduction in the light heavy spread it still makes more sense for us to run heavy crude right now.

Jeffrey Dietert – Simmons & Company

Good. Are you starting to see with some of the excess capacity going into cushing starting to see light sweet discounts in the mid-continent widening, shifting you to slight lighter in the mid-continent?

Jeff A. Stevens

Yeah. At the El Paso refinery, we’re currently, we have the ability to run more WTS than we historically have been able to do, but we're still primarily running a sweet slate because obviously that’s the most cost effective crude out there right now Jeff.

Jeffrey Dietert – Simmons & Company

Good. On capital spending you’ve been able to bring that down for 2009. What’s a reasonable ballpark for us to think about for 2010?

Jeff A. Stevens

You know, Jeff. We are right in the middle of kind of finalizing that, obviously we are no different than anybody else. We've asked our people to really look at capital for 2010 and is it really necessary that we have to spend it. So we will probably be able to give more color on that in the next quarter.

Jeffrey Dietert – Simmons & Company

Very good. Thank you.

Jeff A. Stevens

Thank you.

Operator

Your next question comes from the line of Chi Chow with Tristone Capital. Please proceed.

Chi Chow – Tristone Capital Inc.

Hi, good morning. It's Chi Chow, Triston.

Paul L. Foster

Good morning, Chi.

Chi Chow – Tristone Capital Inc.

Hi, Hey Paul, I appreciate your comments on your financial position in the prepared remarks. I was just wondering how comfortable are you on the revised covenants heading into, back into this year and if you take the first part of 2010 and have you run any sort of sensitivities on what sort of average margin you need to, stay at a comfortable level?

Paul L. Foster

Well, in general, as, we went out and did these financial transactions and at the same time, modified our covenants pretty substantially. And we feel I think we feel good about where we are right now and we're very comfortable with both our liquidity and with our covenant positions. We do model it on a regular basis Mark, I don’t know if you have any color you want to add.

Mark B. Cox

No, I would just add into that Chi, I think right now covenant-wise, we are in very good shape as you can appreciate, we look back at this on a rolling full quarter basis and we've had some very strong quarters, of course leading up to this second quarter. As Paul mentioned, I model this quite regularly looking at it and we do of course, look out into the future and we've done some forecasting to see what it does look like and but we think we are well positioned for the rest of this year and we'll just see how the third and the fourth quarter go for us and at that point we'll readdress anything that needs to be readdressed.

Chi Chow – Tristone Capital Inc.

Do you think at some point you need to take out the rest of term loans on your credit agreement?

Paul A. Franko

We are actually, that is an objective that we have and I think we've been pretty public about that and we are continuing to be very focused on that and look for opportunities to do it.

Chi Chow – Tristone Capital Inc.

Okay. Another question on the Longhorn pipeline, do you have any thoughts on the impact of that that pipeline now that it's under new ownership?

Paul A. Franko

Jeff, you want to take that one.

Jeff A. Stevens

Sure. Chi, this will be the third different owner/operator in the past five years and as we've said before what we've tried to do is position El Paso to be the most competitive refinery in this market and we really believe because of the location of our asset and the things we’ve done to make it more profitable that whether there is a Gulf Coast pipeline coming in or whether it's out of refining competitors in our market that we compete. We feel very good about our position, we'll see what kind of success that the past two operators, I don’t think you’ve had much success, but we feel that we are in a good position to compete against it and the other refineries in this market.

Paul L. Foster

Well the other thing I'll point out too is that Magellan is operated alone from the Gulf Coast into El Paso for the last six or seven years and so there has been Gulf Coast product coming in here very consistently and in fact we’ve been the primary shipper. And so I really don't see that changing a great deal.

Chi Chow – Tristone Capital Inc.

How much volume have you brought in on Longhorn?

Jeff A. Stevens

If we bring our outlook that we bring from the Gulf Coast, well not a Longhorn, we never ship the Longhorn, but on Magellan. And we also supplement gasoline and diesel needs here just in an effort to keep our supply balanced.

Chi Chow – Tristone Capital Inc.

Okay. Maybe it’s three strikes and they are out this time of ownership?

Paul L. Foster

We are not saying that I mean as we've competed alongside those gas for, alongside of that asset for many years and I think we will continue and, we just don't see it as a big change in the market.

Chi Chow – Tristone Capital Inc.

All right. Thanks, Paul I appreciate it.

Operator

Your next question comes from the line Vance Shaw with Credit Suisse. Please proceed.

Vance Shaw – Credit Suisse

Yes. Good morning, guys. Firstly, what is your availability on your revolver, I know you have no cash borrowings, but I assume you have some LCs?

Jeff A. Stevens

Right, Mark.

Mark B. Cox

As we do and this will be a course in the Q, I think when it gets filed tomorrow, but on the revolver we had gross availability, a little bit in excess of $500 million, net availability was about $230 million and then we had including cash, total availability of about $300 million at the end of the quarter, today, just to give you an idea of where we are today, its gotten better actually, so there are net availabilities improved slight bit cash positions better today we are in excess of $100 million cash approaching $150 million cash. So total availability cash-in and revolver are pushing about $350 million today.

Vance Shaw – Credit Suisse

Gotcha thanks. Also just following up on the Longhorn is that just a finished products pipeline or does that carry crude as well or how does that that work?

Mark B. Cox

No, it's just finished products. Today all they’ve shipped is gasoline and diesel and we’ve not talked to them so we don't know what their plans are in the future, but definitely not – not crude oil.

Vance Shaw – Credit Suisse

Got you. I might have missed part of the call earlier on your comments on sort of what Q3 looks like, but if you could just comment briefly by region, because you guys really touch a lot of different, parts of the country both East Coast and West Coast. What the summer drive season has looked like for you guys?

Jeff A. Stevens

Yeah, Vance this is Jeff. In this Southwest, we’ve really seen a pickup both on margin on gasoline and demand. As you know, we benefit from the L.A. market, which impacts the Phoenix market, which where quite a bit of our product goes into and I would tell you gas margins have progressively gotten better in July and continue to be good in August. We see that in the Southwest too in both our El Paso and Albuquerque and our Four Corners markets. Diesel has remained lower than it's been and I would tell you diesel demand is still soft in the Southwest. On the East Coast kind of the same story with the refinery shutdowns and planned and unplanned gasoline demand is still strong on the East Coast and fairly robust margins, where the diesel is kind of in that $8 to $9, $10 range on the East Coast and demand remains kind of flat is what we are seeing. On the retail side as we reported, our retail units are in the Southwest, we saw kind of slight uptick in demand, we saw pretty good margins particularly as we got into June. We've continued to see that in July we've actually, July-over-July of last year had an increase of gasoline demand in our retail and our margins remain fairly strong.

Vance Shaw – Credit Suisse

Great, thanks. And just one final question if I can any thoughts on the industry consolidation, you guys have any feelings or thoughts on assets that might come off or are you guys looking at anything?

Paul L. Foster

No, I think it’s the same as always. We got our eyes open, we believe that there are going to be opportunities as a result of this tough environment that we’re in. And I think it probably makes sense for there to be some more consolidation in the industry, but as far as anything specific now there is nothing that I can talk about.

Vance Shaw – Credit Suisse

Yeah. So you probably your focus is more on getting your term loans down and delevering a little bit and then probably seeing other things?

Paul L. Foster

Right. I mean, yeah, we’re absolutely committed to optimizing the assets that we have and getting the most out of those. And in reducing our debt, those are two primary objectives.

Vance Shaw – Credit Suisse

All right. Thank you very much.

Paul L. Foster

Thank you.

Operator

Your next question comes from the line of Paul Sankey with Deutsche Bank. Please proceed.

Paul Sankey – Deutsche Bank

Hi, good morning.

Paul L. Foster

Good morning.

Paul Sankey – Deutsche Bank

Just following up on the last answer, is the strategic review I guess you'd call it, on Yorktown still underway or has the process effectively ended now?

Paul L. Foster

I think it's effectively ended. There is not really an event that marks the end of it or whatever but, yeah, it has, we've set that aside for now.

Paul Sankey – Deutsche Bank

Sure.

Paul L. Foster

We continue to believe though that we’ve created a great deal of value there at Yorktown, and at some point, it might makes sense to revisit that, but we’re happy with the asset and it's performing very well for us right now.

Paul Sankey – Deutsche Bank

Just being lazy, the goodwill write-down was basically related to the Giant acquisition was it, or where was kind of goodwill generated?

Mark B. Cox

Yeah, the goodwill was generated through the acquisition of Giant we recorded the full amount of that $299.6 million. So, it was generated when we did the purchase accounting for Giant that's correct.

Paul Sankey – Deutsche Bank

Great. And just looking back at the quarter, you raised equity, could you just talk a little bit about the decision making process, you went through between the options that were open to you at that time?

Paul L. Foster

Yeah. We, well we've talked obviously about reducing our debt and making sure that we don’t ever run into any covenant problems for long-time. And we continue to be very focused on that. Our objective went out with this thing was to rise $1 billion through these three transactions and we’re really happy with the way it went. We were over subscribed on most of it and aside from the stock price that we don’t feel it was attributed really to us as much as to the industry overall, that the stock price kind of fell out there in the middle of that process and that was disappointing, but we don’t feel like that that was a result of what we were doing, that was just kind of bad timing I think, but the process itself and the interest that we had in the transactions; we were very, very pleased with.

Paul Sankey – Deutsche Bank

Sure. And then finally on the market, do you think gasoline strengths can continue out of driving season with this level of utilization, I guess with this relatively low level of imports or do you think it’s not going to be sustainable, its just quite intriguing the gasoline margins are doing what they are doing in this environment?

Paul L. Foster

Well you hit the nail on the head. Utilization is a huge key to the margin environment, and I would say that’s sort of beyond our control. Consumption does seem to be coming back somewhat or demand, but it really is largely a function of utilization across the industry, and import as you pointed out.

Paul Sankey – Deutsche Bank

Yeah, it seems its kind of tightened it basically isn't on the gasoline side? Okay guys thanks. Thanks for that I'll leave it there. Thank you.

Paul L. Foster

Okay. Thank you, Paul.

Operator

Your next question comes from the line of Gary Stromberg with Barclays Capital. Please proceed.

Gary Stromberg – Barclays Capital

Hi, good morning.

Paul L. Foster

Good morning, Gary.

Gary Stromberg – Barclays Capital

A couple of followups, first on Longhorn is there still a pipeline capacity constraints out of El Paso in terms of products?

Paul L. Foster

As far as, there is two primary lines that leave El Paso. There is a line that leaves from El Paso to Albuquerque and that line is still falling in pro-rated, that Kinder Morgan expanded the line to Phoenix, it’s been a little over a year-ago, and I believe there is capacity on that line.

Gary Stromberg – Barclays Capital

Okay, that’s helpful. On the finances on the covenant side, does EBITDA in that debt-to-EBITDA test back out the LCM or would it reflect the reported number for the second quarter?

Mark B. Cox

The interest lets the reported number for the second quarter LCM as an adjustment to our EBITDA.

Gary Stromberg – Barclays Capital

Okay. So $29.5 million would be the number used in this calculation?

Mark B. Cox

Correct.

Gary Stromberg – Barclays Capital

Okay. On working capital, any sense on whether that will be a source or use of funds in the third and fourth quarter?

Paul L. Foster

Do you know that Gary?

Gary R. Dalke

It was use of funds in the second quarter, and if crude prices continue to move up there could be a slight use of funds, I mean in the second quarter I think use of funds on working capital was around, hold on I've got that number handy, was around $37 million use of funds in 2Q. It could potentially be that much or less in Q3 I would say. Probably less than that.

Paul L. Foster

But as Gary pointed out, it's just a function of where prices go.

Gary R. Dalke

Right.

Gary Stromberg – Barclays Capital

Okay. And then final question is on CapEx. I know you are formulating the 2010 number, can you give us some sense generally of what maintenance CapEx is for Western?

Gary R. Dalke

Yeah, maintenance CapEx generally runs around $35 million to $40 million across all of our business units. We do have the ability to push that downwards somewhat, but that's kind of the running rate that we've seen.

Gary Stromberg – Barclays Capital

Okay. That's all I have. Thank you.

Gary R. Dalke

All right.

Paul L. Foster

Thank you.

Operator

Your next question comes from the line of Kelly Krenger with Banc of America. Please proceed.

Kelly Krenger – Banc of America

Thanks. Good morning.

Paul L. Foster

Good morning.

Kelly Krenger – Banc of America

Most of my questions have been addressed, but I guess one that I'll follow-up on that kind of came up in the Q&A was the comments Mark that you made about your cash balance being seemed like higher than what it was at the end of June, and I was just wondering if that was kind of something that's kind of you see with kind of the normal ups and downs in the quarter or if that's a sustainable or not a sustainable, but a higher level of cash kind of on an apples-to-apples basis relative to what it was at the end of June?

Mark B. Cox

Sure. Kelly what you would normally see as you can appreciate is the 20th of every month is when we settle on crude. And in between that basically we build cash, so we will normally peak that 17 to 18 period of course as you can appreciate. We have seen over the last six to eight months our liquidity has improved and it's improved quite significantly from where it was this time a year ago. And I think that’s being driven by our efforts to manage working capital, manage inventory levels, and receivables and just manage CapEx as well. So we’ve done a great job I think of maximizing cash flow and cash balances, which again has helped us to stay out of the revolver and maximize liquidity.

Kelly Krenger – Banc of America

What is kind of a target, liquidity number that you guys like to have and kind of a target cash number or how much cash do you need on the balance sheet kind of to run the system so to speak?

Mark B. Cox

Well I would say, I like liquidity normally on a combined basis in that $200 million to $300 million range is where I feel most comfortable with it. Cash level, I don't know that really give you a target cash level, because of the overall availability we have within the revolver and the cash flow we generate out of this business. But to kind of give you a range that we’ve seen over the last six months, kind of minimum cash has been $50 million, $60 million, $70 million and cash has gotten as high as really a little over $200 million. So that’s kind of the range we’ve operated in so far in ’09.

Kelly Krenger – Banc of America

Okay. Thank you.

Mark B. Cox

You bet.

Paul L. Foster

Thank you.

Operator

Your next question comes from the line of Ann Kohler with Caris & Company. Please proceed.

Ann Kohler – Caris & Company

Great, thank you. Good morning gentlemen.

Paul L. Foster

Good morning.

Ann Kohler – Caris & Company

Just a question, did you sell any product into Mexico during the quarter and if so how much?

Paul L. Foster

Yes, we did. We always sell quite a bit of product, both gasoline and diesel to PMI, which is a division of Pemex. The volume, Jeff, do you have?

Jeff A. Stevens

It's around 16,000, 17,000 barrels a day of gas and diesel.

Paul L. Foster

And it's very consistent volume.

Ann Kohler – Caris & Company

Great. Thank you very much.

Paul L. Foster

Thank you.

Operator

Your next question comes from the line of Arjun Murti with Goldman Sachs. Please proceed.

Arjun Murti – Goldman Sachs

Thank you. I think you mentioned in response to a question that Yorktown is likely to stick with the company now. Can you comment on where you think it is on the retail operations, which I think were also a candidate for possible divestiture?

Paul L. Foster

Retail as we stated, we're really pleased with the way retail is operating and similar to Yorktown and anything else we just don't feel like it's been a great environment and a great time to divest these assets and so I similar to Yorktown there's really nothing on the books right now that we're working on to divest, whether retail or anything else.

Arjun Murti – Goldman Sachs

That's helpful. You gave a third quarter total throughput guidance of about 218,000 barrels per day I believe. Could you comment on major plan turnaround activity at any of your refineries beyond third quarter maybe fourth quarter '09, and through the first several quarters of 2010 is there anything planned at the other facilities?

Paul L. Foster

There is nothing planned for the rest of this year at any other facilities. We do have a turnaround in El Paso planned for the first quarter and I think we have one either in the late first quarter, second quarter at Yorktown. Remember with El Paso that’s always a partial turnaround. We never take the whole plant down that’s, we1 basically take half of the plant down so we are coming up on four years on the South side of El Paso.

Arjun Murti – Goldman Sachs

That's terrific and just maybe a final one related to this is, I think your total throughput in the past have been as high as kind of that 230, 240 range. Are you looking to run lower just given the more challenging margin environment or can you get back up to those older previous throughput levels? Thank you.

Paul L. Foster

Yeah. I think the quick answer is, we can run more crude oil and more feedstock’s. It really comes down to economics, we look at each facility, we look at our cost on our crude oil feedstocks and we just optimize the best value for that time, but we can run more feedstocks and more crude oil throughout the system.

Arjun Murti – Goldman Sachs

Gotcha. So, the 218 is more of an optimized driven number as supposed to anything else?

Paul L. Foster

Absolutely.

Arjun Murti – Goldman Sachs

Yeah. That's great. Thank you very much.

Paul L. Foster

Thank you, Arjun.

Operator

Your next question comes from the line of Maryana Kushnir with Nomura Asset Management. Please proceed.

Maryana Kushnir – Nomuara Asset Management

Hi, I apologize if you've covered this already, but this item on the income statement called loss on derivative activities. Is that a realized or unrealized number and what is it driven by?

Gary R. Dalke

Yeah. This is Gary. I'll handle that one. Most of that loss on the unrealized derivatives were on the gain/loss from derivatives was realized for the year. We have a very small portion that was unrealized probably $350,000 positive income so most of it was unrealized and had to do primarily with hedging feedstocks, blend stocks I should say at our Yorktown refinery and also additionally in crude oil when we carried excess volumes of crude we also hedged that and with prices moving up, the hedge went the wrong way on us, but most of that was realized during the quarter.

Maryana Kushnir – Nomuara Asset Management

Okay, all right. And then regarding, how should we be thinking about this derivative loss or gain going forward, there was a significant number this quarter less so last quarter, can we expect it to be another significant realized loss number next quarter?

Paul L. Foster

Yeah. What you saw in the second quarter was we had the turnaround during or the outage at the El Paso refinery and we built up quite a bit of extra crude oil that would be above our normal, what we call our normal inventory so that was kind of a one-time event. I would say right now in the third quarter if the business stays the same the derivative would be plus or minus $1 million in the third quarter.

Maryana Kushnir – Nomura Asset Management

Okay. So in the second quarter you were basically over-hedged?

Paul L. Foster

No, what happened was we had purchased crude oil that we couldn't run in June. So were are building inventory, so we went ahead and sold futures against it because weren't going to be able to run it until into the third quarter. So the market ran up we still have the crude and we still own the crude at the lower price, but the crude market went up, so some of that should fall back into the third quarter.

Maryana Kushnir – Nomura Asset Management

So in a way it belongs in this third quarter rather than the second quarter?

Paul L. Foster

Well the loss occurred in the second quarter because that's when the hedge took place, but then we will run the crude into the third quarter.

Maryana Kushnir – Nomura Asset Management

I see. Okay.

Paul L. Foster

What it essentially does is reduce the carrying value of the crude that we would carry into the third quarter.

Maryana Kushnir – Nomura Asset Management

Yeah. Well those were probably September ODC derivatives then you have to cash settle them, right as a way to realize loss.

Gary R. Dalke

Yes, yes, its cash settled.

Maryana Kushnir – Nomura Asset Management

Okay. And then in the first quarter you realized significant benefit from storage activities. Did you have any similar or I guess smaller benefit from that activity in the second quarter?

Paul L. Foster

Yeah. The contango in the second quarter was reduced greatly from the first quarter we are starting to see though in the third quarter the contango is starting to widen out and we could see some of that benefit we saw in the first quarter into the third quarter.

Maryana Kushnir – Nomura Asset Management

Okay. And then regarding the proposed legislation, Waxman legislation, when you think about it, how do you think you will be impacted if that goes through or any thoughts on that?

Paul L. Foster

What I can tell you about that is that we are watching that very, very closely we are very engaged in that process. We don’t know either what will be passed or what impact it will have on us, a big component of that is whether or not we are able and to what extent and in what vehicle we are able to pass any additional taxes on, or cost onto our ultimate customers and consumers. And really the industry just hasn't sorted that out yet, and so it's very difficult to assess or to put any kind of dollar amount on what kind of impact it will have. Honestly, I think the biggest impact will be on the overall economy. I think if it's passed it will be a damper on the economy in general and it will drive down demand somewhat as far as the impact on our company directly, its just very difficult to assess.

Maryana Kushnir – Nomura Asset Management

Okay. Thank you.

Paul L. Foster

Thank you.

Operator

Your next question comes from the line of Adrayll Askew with Hartford Investment Management. Please proceed.

Adrayll Askew – Hartford Investment Management

Yes, thanks. Can you talk about how you feel about your debt-to-equity mix and your cash flow there that's in the current environment and talk about that in consideration of, as you consider options to take out the remaining term loan?

Gary R. Dalke

Sure. I think, as Paul mentioned earlier, we remain committed to reducing debt. Given where this cycle is we would like to continue doing that and that’s why we took the action that we took in the second quarter and we feel that that was very opportunistic for us, but we’re still focused on it, we would like to bring the debt down more and put us in a better position to weather these type of cyclical changes that we see in the industry and that continues to be our main focus.

Adrayll Askew – Hartford Investment Management

Okay. Another follow on, can you about talk the recent fluctuations in the heavy light differentials and how you use that info in your longer term planning that your feedstock runs?

Jeff A. Stevens

Well. Obviously, this is a very big topic in our industry because many of our peers has strategically set up their refineries to run a heavier slate. I think that there is a couple of factors in the marketplace that affect that. One is just the absolute demand for heavy crude and the other big driver is the price of crude and I think if we see the price of crude stay, above $60 I think we will see more heavy crude come on to the market. And overtime as both the economies gets stronger and everything gets stronger, I don’t know if we will get back to some of the levels we saw in ’06 and ’07. But I definitely think we will be at a wider range than we are today.

Paul L. Foster

Well and to follow-up on that the bottom line is that if it is profitable to run heavy crude refineries are going to stop running heavy crude and the ultimate impact of that is it will drive that price of heavy crude down relative to, to other crudes and so, it should be self correcting to a certain extent. The trick is figuring out the timing and to what extent it will be.

Adrayll Askew – Hartford Investment Management

That's very helpful. Thanks.

Operator

Our final question will be a follow-up from the line of Gary Stromberg with Barclays Capital. Please proceed.

Gary Stromberg – Barclays Capital

Hi, just a quick follow-up on cash. When are you required to offer to repurchase the term loans or have there be a paid down is there some cash flow sweep?

Mark B. Cox

No, there is not. I mean the term loan matures in June of 2014, we do make quarterly amortization payments. I think our current portion of the term loan is $13 million a year, so we pay about $3.25 million a quarter, and that's it.

Gary Stromberg – Barclays Capital

So if you wanted to take some of that out early, how would you do that, just do a pro-rated tender of some types?

Mark B. Cox

Yes, yes we do have the ability to tender and retire and it would be done on a pro-rata basis.

Gary Stromberg – Barclays Capital

Okay. So, as you build cash is that something we can look for you guys to do?

Mark B. Cox

Well I think its something we'll definitely take a look at I think as we've talked about and everyone I think has talked about in the conference call this industry continues to be challenging at this point and from our perspective another component of it, which we've talked about today is liquidity and liquidity is king. So we have to look at liquidity and debt retirement in conjunction with each other and determine how to best optimize that. So, it's something we always consider and we definitely look at, but we also want to be sure that we preserve plenty of liquidity.

Gary Stromberg – Barclays Capital

Got it. Okay. That's all I have. Thanks.

Paul L. Foster

Thank you.

Operator

I would now like to turn the call over to Mr. Paul Foster for closing remarks.

Paul L. Foster

All right. Thank you very much. I would like to thank all of you for listening in and for your interest in our company. We continue to be very optimistic about the direction this company is going and look forward to talking to you in about three months. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Western Refining, Inc. Q2 2009 Earnings Call Transcript
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