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Tesoro Corp. (NYSE:TSO)

Q4 2009 Earnings Call

February 3, 2010 8:30 am ET

Executives

Scott Phipps - IR

Bruce Smith - Chairman & CEO

Lynn Westfall - SVP, External Affairs & Chief Economist

Dan Porter - SVP, Refining

Chuck Flag - SVP, System Optimization

Analysts

Paul Sankey - Deutsche Bank

Evan Calio - Morgan Stanley

Arjun Murti - Goldman Sachs

Neil McMahon - Sanford Bernstein

Doug Terreson - ISI

Ann Kohler - Caris & Company

Jeff Dietert - Simmons

Paul Cheng - Barclays Capital

Mark Gilman - Benchmark Company

Operator

Welcome to Tesoro's fourth quarter earnings call. My name is Christian and I will be your operator today. Following today’s prepared remarks there will be a question-and-answer session. At this time all lines have been placed on mute. Mr. Phipps, you may now begin your call.

Scott Phipps

Thank you, Christian. Well, good morning everyone and welcome to today's conference call to discuss our fourth quarter 2009 results. While management will not be referencing slides we did file a presentation deck earlier with the SEC and encourage you to have these available as we progress through this morning's call. These slides along with other financial results including the press release and our supplemental quarterly data can be found on our website at tsocorp.com. After reviewing this information, please feel free to contact me with any questions about this material or otherwise following today's call.

Please refer to the forward-looking statements in the earnings slides which says statements made during this call that refer to management 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 2010.

Looking at throughput by region, in the Pacific Northwest, 115,000 to 125,000 barrels per day; in the mid Pacific 60,000 to 70,000 barrels per day; in the mid Mid-Continent regions 90,000 to 100,000 barrels a day and in California region a 195,000 to 205,000 barrels a day which is roughly 30,000 barrels a day lower than our fourth quarter actual due to maintenance at Golden Eagle on the Cat cracker. OpEx guidance for the first quarter is as follows, in the Pacific Northwest $4.85 per barrel, in the Mid-Pacific $3.15 per barrel, in Mid-Continent regions $4.10, per barrel and in California roughly $9 per barrel. Our depreciation for refining is estimated at $90 million. Additional first quarter guidance items include corporate expense of $45 million and interest expense before interest income of $38 million.

I'll now turn the call over to Bruce.

Bruce Smith

Thanks, Scott and good morning to everyone. We appreciate you starting the day with our management team. Obviously we’re here to answer questions about the results for the fourth quarter and answer questions about the year, and obviously talk about the release that we sent out yesterday. But before we do the Q&A portion of our call I want to make a few general comments both about the quarter and also about how we see the current market environment.

I want to begin with a quick summary of some financial and some operational results. As Scott said last night, fourth quarter we lost $179 million or $1.30 a share. Those results include a $43 million charge for the impairment of the goodwill associated with our purchase of the Anacortes refinery in 1998. So if you exclude this non cash, nontaxable item, we reported a $0.99 per share loss which is generally in line with the consensus expectation. While we are very, very disappointed about the results and the losses in the fourth quarter, we’re not going to jump today to try to put a positive spin on it but the simple fact that the consensus was a negative says that results weren't a surprise to you.

Let me give you just a few facts. The West Coast benchmark margins averaged about $8 a barrel in the fourth quarter or roughly half of what we saw in each of the first three quarters of the year. We can speculate about the reasons but they would certainly include seasonally lower demand and higher winter grade gasoline inventories. In this weak environment, we reported a refining operating loss of $213 million.

The marketing segment however continues to perform well. In the fourth quarter operating income across all product channels was $100 million. With that amount, retail contributed $41 million and for the full year, retail made $83 million. In the face of weak demand, our marketing team has demonstrated an ability to move products into higher net back channels of trade, an ability that we believe is core strength of the company.

We also believe that marketing's role will continue to be important in a market where supply exceeds demand. In California, we have seen an over supplied market condition for more than the past two years and as a consequence cash stewardship has been a primary objective. Therefore, we were pleased the cash increased by a $177 million and that's excluding the $216 million net change in debt as we ended the year with $413 million of cash.

We were able to accomplish this, a result of many successful programs. These programs include excellent capital management, expense reductions, exceeding the target for our non-capital improvement initiatives and managing our inventory down to lower demand levels.

It's certainly a commitment to these basic tactics that we now consider everyday best practices for Tesoro and they are going to continue to guide us in the future just as they have since the late 2007.

Operationally, our plants ran at an average of 530,000 barrels per day which is about 35,000 barrels per day lower than the third quarter throughput. Lower fourth quarter throughput isn't unusual because in Alaska, Salt Lake City and Anacortes we normally reduce runs in the winter to match lower product demand.

Another difference in the statistics that may catch your eye is the fact that our manufacturing expenses increased by approximately $10 million from the third quarter which was primarily due to higher purchased energy cost.

The only other really interesting operational fact is that we did accelerate the plant work on the Cat-Cracker at Golden Eagle. This was originally scheduled for the first quarter of 2010, but with the miserable fourth quarter margin environment we decided to advance that work. As a result of this outage and the Los Angeles Coker down time, our production of lower valued products such as fuel oil increased roughly 6% compared to the third quarter.

The operational mantra for these times is to be highly flexible and committed to making any adjustment to the operating plan that would better align it with market changes the ones that are occurring every day today. This sounds pretty easy in practice, but obviously it's much more difficult. We have a hard time predicting demand in a normal market and when you look at the volatility that we have seen both in commodity prices and margins, predicting the future has become much more difficult.

But to give you an idea some of the flexibility that we had in how this plays for us, last quarter we said in our conference call that we didn't expect inventory levels to decline after the $4.4 million barrel draw of inventory that we had in the third quarter, but as we saw benchmark margins begin to decline we adjusted our current purchases and we moved up the planned work on the Golden Eagle SEC unit which ultimately caused us to reduce inventory by another 1.9 million barrels.

Another example of being flexible was the success we had in capturing non capital improvements or what we call our optimization program. As our release noted we achieved a total of $370 million from these initiatives in 2009 and we there marked more than $150 million of additional improvements for 2010.

One final comment, everyone in the industry is actively managing cash cost and expenses and we are certainly not an exception to the rule. However, the most significant cash item that we modified for the past several years has been the size of our capital expenditure program.

Our entire team continues to scrutinize the scope and timing of our capital program and at our November analyst meeting we estimated that our capital spending for the first quarter of 2010 would be in the neighborhood of $250 million and that the full year would be around $675 million.

Set a minute ago our team continues to actively review all our alternatives and in today's earnings release we said that in the first quarter we expect to spend over $100 million less than the previous estimate which reduces our 2010 planned expenditures to about $600 million.

Just a few other comments about 2010, there are many reasons to believe that we will continue to see margins similar to those in 2009 unless we have a substantial change in the current supplier, demand picture.

Accordingly, in this environment we are focused on creating self help through the practices and programs which I mentioned earlier. One self help program is the three year $300 million program that we referred to as our quick hit capital program.

You may recall that this program is one that contains projects that are smaller in size. They are shorter in implementation time and that they have very high returns. So I want to spend a minute explaining why we plan to proceed with this.

In the past year many of our investors and more than a few analysts have wanted to understand how we can make a difference and have expressed the concern that refining companies including Tesoro are bearish about the outlook for the industry.

We would like to say that the market is going to change quickly and certainly it might, but in order for margins to recover to the 2005 and 2007 levels, we need a significant change in the supply demand balance as I said a little earlier.

On the positive side the rationalization supply has began albeit at a slow pace and we believe that that’s going to continue. New capacity is going to be slow in arriving. Demand will grow in certain markets but the key certainly is for us in the United States its going to be domestic growth and that depends on employment.

But simply put we expect the year to be very challenging. There are some positive signals and we all know how quickly the market can move if more production closes, but to be conservative we are planning for a margin environment that will fluctuate but remain close relatively close to 2009 levels.

Given that assumption, we believe it is important to execute the capital and noncapital self-help initiatives we have outlined which are aimed at improving margin capture and at decreasing cost. As we stated in our analyst day presentation, improving our competitive position is important to our corporate strategy. To grow shareholder value in a flat margin environment it is important to have both expense and noncapital initiatives but everybody is doing that. Therefore, our plan is to create growth by investing in the quick hit program and with these investments in the first year, we project that it can be self-funding in the next year and then ultimately the program generates excess cash in 2013, the benefit which can flow to our shareholders.

Historically January’s margins are among the lowest that we see in the year. The first quarter started off where the fourth quarter ended, with an excess of clean product inventories and seasonally reduced demand. However in past years benchmark margins have also tended to improve in February and then they've continued to improve in March.

The industry is making adjustments and we will continue to look at our operations. Nobody can predict what's going to happen to margins. However we will say two things about the future. We’re going to continue to manage the business by being flexible and tailoring our operations to meet market changes and secondly we expect to deliver on the capital and noncapital initiatives that we’ve discussed.

And with that Christian, we’re going to open it up so the management team can take questions.

Question-and-Answer Session

Operator

We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank

A very specific short term market question if I could. Firstly could you just remind us how much incremental ethanol we've had impacting the market here and whether or not you think that the rate of change there is now complete. That is to say the ethanol is now in the market and if you had a negative effect. Secondly, within that same question, just remind us of the timing exactly of the specification change we get in February and what you think the volume impact would be after that on the positive side and then if you could also just, I know it's been very rainy in California and I was wondering if it has been that much more rainy this year than the last year and whether or not you have an idea of how much volume impact there has been from lower demand that might easily recover if we get less rain.

Bruce Smith

First of all, it's a good question. It's one that we've spent quite a bit of time in looking where margins are and just we’re talking with the board yesterday and really a similar question. I will let Lynn give you sort of a view around ethanol. He's got on his weather hat so he could also I think talk a little about the weather but certainly all the things that you mentioned has had an impact. Maybe I'll make a comment at the end.

Lynn Westfall

Let me start off and Paul if I don't hit all your questions, please remind me. I think the first one was about ethanol addition to the market place. Certainly that started January 1 of this year. I think everyone that we’re aware of is blending to the 10% number in California.

So on an energy adjusted basis what you’re looking at is an addition to the supply of about 28,000 barrels of day of gasoline. Whether we’ve seen that effect in the marketplace is a little hard to tell right now. You mentioned a lot of other things that are affecting the market. There are turnarounds going on. Seasonally January is about 5% lower in demand anyway than December, and you also mentioned the rain which had to be a factor. Looking at the rain situation, I tried to gather some data from the last time they had heavy rains but that was in 2006 and that averaged only about eight inches over a three to four day period. This last go around in January was 20 inches. So we really don't have anything to fall back on.

The last time we had heavy rains, as I mentioned there really was no demand effect because it was pretty short lived. It looked like it would just temporarily cause people to stop driving but I think this time it was probably more pronounced with the flooding that we saw in the both major population centers of San Francisco and LA. So, I think there is an effect going on with that right now. As I say what the effect will be of the additional ethanol addition, we don't know at this point in time. Probably we’ll not know till summer time when refineries are up and running at their maximum capacity.

I think the other question you asked was on the specification changes going from winter grade to summer grade. February 15th in Southern California, LA and Northern California is a month delayed at March 15th. Did I cover most of your issues, Paul?

Operator

Our next question comes from the line of Evan Calio with Morgan Stanley.

Evan Calio - Morgan Stanley

I was hoping you can give us a little more color or granularity on the CapEx reduction in 1Q and in 2010 aggregate in terms of where the reduction is, what is being pushed and where to. I know you mentioned in your commentary remaining on the three-year quick hit plan of $300 million. But has there been some reduction of what you include in the $600 million for 2010?

Bruce Smith

I'll let Dan answer the question since the majority of it is going to be work that he has done. I think that the program here and Dan you might just make a comment about sort of what we've done over the past three years. I don’t know I'm not going to try to answer this question for people but I think this program has been so active for us that I will give you a sense with this answer but put it in a perspective for the last several years.

Dan Porter

Great. Certainly during the first quarter of this year probably the biggest impact is around our turnaround activity. Originally, we had planned to do a major turnaround in our Golden Eagle refinery and ultimately we elected to take a modified scope of work on that. We did take a record down in November or really first of December of last year at Golden Eagle and we are completing some regulatory work on there but we are differing significant portion of the major turnaround work to 2011.

So that’s a substantial of the change. We've also been able to re-optimize our overall program around some of the regulatory capital needs based on credits that we had already generated benzene in gasoline and around NOX credits we generated over NOX price we've been able to acquire that will have allowed us to reduce the scope of work or defer some of the capital spent. But overall if you look back starting at the end of 2007, we have reduced about $1.3 billion of total capital out of the program that we had at that time.

A fair piece of that, a reasonable piece of that around $500 million of that was income improvement capital, but we have put back into that $300 million of that for this quick hit program and of that in 2010, we are still planning on approximately $70 million of quick hit income spend in our $600 million program for 2010.

Our philosophy has been really about trying to scrub our work to optimize on the regulatory spend, get the most efficient spend that we can, find new and innovative ways complying with regulatory needs, but always it's about safe compliance and reliable operation.

So, this whole program still complies with all of that but it has enabled us in some cases to differ some turnaround activity to fit with inspection results that we have so its based on good sound engineering and inspection information, but it's been a good program overall.

We have got a great team that put a lot of energy and effort into how we optimize that program over multiple years without building a big capital requirement out there in future years.

So, as we look forward to 2010 to 2012, we think that we have got a good program but it’s not substantially increased.

Bruce Smith

And we reviewed this with board and talking about what we are compromising, if anything, relative to reliability, safety and maintenance and we have spend time with one of the few companies that have an environmental health and safety committee which has people that have been in the industry and I think that the board is very comfortable with what we are doing and a lot of it is just better management all the way around, the scope and timing, but I think that the quick hit program to put it in a perspective, if you want to look at the bad margin environment that we've got even when you take in which reduces the EBITDA obviously for the tire industry, this program becomes even more meaningful with the smaller EBITDA, so is much more significant for our shareholders and we believe that over the course of time here that we've got to do everything we can to be able to augment our income in the low margin environment which we believe will be substantial and net of margin pick up, obviously will take the benefit that goes across to the entire market. So that's the perspective on our capital.

Evan Calio - Morgan Stanley

One more question if I may. I know inventory reduction in 2009 was a material net add for cash. Can levels be reduced further or are they too low? How do you give us some color on how you think about inventory as either a potential source or use of cash on a go-forward basis in 2010?

Bruce Smith

Chuck, I'm going to let Chuck Flag answer the question. Let me give you just a top level view. A lot of this involves obviously what you think is going to happen relative to what we don't want to see truthfully is a margin environment where we take inventories down just because margins are coming down, so but Chuck do you want to talk about and I would probably go ahead and talk just a bit about the risk of run out now and then.

Chuck Flag

Evan, last year we ended at, 2008 we ended at $23.5 million. This year was $20.1 million and if you would have asked me last year if we could go lower than $23.5 million, I probably would have said no.

However, we have changed our philosophy as margins have deteriorated and that we are not as concerned about short-term run outs. We're willing to take a little more risk around run outs of crude oil and products. Again because margins have deteriorated so much that the economic penalty for those run outs has diminished significantly. So depending on the level of margins, we will adjust our inventories appropriate to the market.

Bruce Smith

Paul Sankey asked a question earlier but in looking at the risk and of course everybody is focused on risk and everybody is running scenarios. The appropriateness of what Chuck is saying is meaningful and it does fit where I think we as a company are and where others are in the sense of we're willing to accept that risk. When you look at the first quarter and what's happened with the growth in inventories, we know, I don't know whether it's public knowledge, there are several other refineries on the West Coast that are going to go into turn around and they're going to be down.

And traditional philosophy is that you build inventories in advance to the turn around because you're not going to be producing products. Why you do that in this market, I don't know but there are people that are still thinking traditionally and maybe there are larger companies that are thinking traditionally and potentially you could attribute some of the growth in inventories to the simple fact that people may be still subscribing to an older philosophy rather than being able to just purchase that product in the marketplace. So we think that there are many things that have happened in the first quarter. But our view is that we're willing to tolerate the risk of having just to run, to re-circulate to refinery if we have to.

Evan Calio - Morgan Stanley

That's great. I mean if you look at that turnaround kind of on a go forward basis, is it March where it really kind of begins to look like you may see a much tighter market?

Chuck Flag

Yeah there are substantial in March which should tighten things up. We're also hopefully seeing the results of a low RVP production that is also going to tighten the market.

Bruce Smith

I said to the board yesterday if you put on your rose colored glasses and you really have to do this, but from where the pure bottom of the market has been, it looks like there is a new trend developing for some strengthening margins which would correlate although starting from a lower level but it will correlate to what we traditionally see in February which is some improvement and then in March being really the strength of the first quarter.

Operator

Our next question comes from the line of Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank

My question was actually a follow-up but I was on mute before. I was going to ask you about turnarounds and you’ve actually pretty much answered that with Evan. So I'll hop off and if I get another chance I will come back.

Operator

Our next question comes from the line of Arjun Murti with Goldman Sachs.

Arjun Murti - Goldman Sachs

Bruce, I was just curious how you're thinking about additional refinery run cuts versus potentially closures in an environment where the EBITDA is kind of zero or negative. I certainly appreciate the business can change dramatically on short notice and so no one wants to overreact to a few months of zero or negative EBITDA but how do you think about duration of kind of running at no cash flow and run cuts versus maybe more meaningful actions with your facilities?

Bruce Smith

Arjun, that's a great question and obviously one that we wrestle with and certainly I know other people are wrestling with it. Everybody's view is that somebody else will blink first. I think that you are absolutely right. It's sort of difficult to make, what's a pretty significant decision relative to temporarily idling or temporarily shutting down or permanently shutting down a facility. We're pretty active in looking at other facilities and obviously there is some that are still in markets that are performing extremely well and there are some that are in markets that are not performing well at all.

But when you look at it, you sort of have to look forward, which is the hard part of the equation and not get stuck on the fact of exactly where it is today. And when we focus on it, we're really focusing on what’s going to be the net cash impact and how much time do you have to make a decision, what the commitments are to the capital programs and so we have a pretty active review program of looking at the factors and have spent time discussing it among ourselves and with the board about what we think strategically our timing issues relative to the point you raised, which is negative cash.

I think, I wouldn't predict that we're going to act immediately on any one thing but I would tell you that we're doing an awful lot of work relative to solving the issue, not just with closures but looking at other things and I know everybody is doing it. We've been so focused on cash that this isn't something that started just because margins got to the low point that we see today. It's been so ongoing that we've got alternatives that we've begun to implement. I don't know where it will take us, but all things are on the table all the time and I don't want to speculate on the positive side, but we see changes that are occurring politically there are things happening I mean we are going to spend a lot more time politically with other people in the industry. So I mean some of the dynamics have changed one way or the other and I don’t know, I can't predict what that's going to be, but for us we are going to be prudent about what we think we need for shareholders to preserve value and which we go back to one thing right now, we still think that the right thing to do is to try to figure out how to continue to fund this quick hit capital program and if we have to take other action to do that, I mean we have sliced our dividend, that's relatively small but when you look at it net against the $50 million to $70 million that we are going to spend, it's a nice little match that we think it's a better return for shareholders who were in a growth mode and so that's sort of where we are. Everything is on the table. We will continue to make the best judges that we can make about the future.

Arjun Murti - Goldman Sachs

I mean you've taken a capital program down a bit more, what would be a bearer balance number, how low could you take the CapEx this year if you have to?

Bruce Smith

Well it's difficult. I can't give you that answer because we certainly could change our capital program more. It would come at the expense. Its going to start at some point like anything, it comes at the expense of something. Today we've been able to, through the risk management program that Dan talked about, be able to move things around and where we feel like it was a minimum amount of risk as we did new inspections to be able to move things out. So it's been easier redesigning programs to be able to find a more effective way to do it is again is sort of like inventory. Eventually you run out of those so your options are to close the refinery that saves a bunch of capital. Your options are to stop spending on program and take the consequences, but I have no doubt that there are ways that you can cut capital. But it's part of other decisions I mean inventory and everything only going to take you so far.

Operator

Our next question comes from the line of Neil McMahon with Sanford Bernstein.

Neil McMahon - Sanford Bernstein

Really following up on that theme and just a few other questions as well. Seems like every quarter and obviously we have got a about environment, Hawaii still seems to create a bit of an issue. I am just focusing on that one particular refinery it sort of stands on its own. Is that still, when you look going forward over the next few years, is that still going to be part of the portfolio and is it dragging the rest of the portfolio down if and when there's a recovery coming? That's my first question.

Bruce Smith

Again I'll give you a generic answer. I mean everything is on the table. Hawaii is more complicated decisions for a lot of different reasons but it did produce cash last year. So at the end of the day, we are looking at sort of a net change in cash and we have to weigh that in that environment it’s not Hawaii in this market is not a huge cash generator, but there are a lot of pluses and minuses that happen relative to working capital there, how we bring product in. I am not going to say we are making a lot of money but it's one of the assets that’s certainly is in a spotlight for the corporation. I wouldn't say that it hasn't been. It's been a focus, and we continue to look at that asset as to whether in fact it's something that will remain in the portfolio but that's true of the rest of the portfolio. So, I'm not going to predict what's going to happen in that market.

Neil McMahon - Sanford Bernstein

Thanks for that. I know it's a tough question to answer and to put you on the spot.

Bruce Smith

No. Hopefully I gave you what sounds like a reasonable answer.

Neil McMahon - Sanford Bernstein

Sure. I am going to jump in and be more kind.

Bruce Smith

Oh thank you.

Neil McMahon - Sanford Bernstein

I know it's strange.

Bruce Smith

That would be the first kind question I have had. No, Paul gave me a kind question. I should say.

Neil McMahon - Sanford Bernstein

Yeah, it's strange from him. It must be Christmas a bit later than normal. Just looking at the miles traveled in the fourth quarter, looks like California in general had a pretty decent uptick year-over-year yet we really don't see the demand come back or the margins really work any better. Obviously Lynn commented on the welders situation recently, but anything you can sort of dig into there in terms of the disconnect between what we are seeing in terms of on route activity apparently and the fact that we are still in a weak environment on the West Coast?

Lynn Westfall

I will go with some of that Neil. You are absolutely right. Most people think California demand has been decreasing last year well in fact from the second quarter on we had increases in California demand. Second quarter is up four tenth of a percent. Third quarter was up almost 2%. October was up 2.8% and as you said the miles driven for November were 2.1%. So California has looked like it's coming back now. Its coming back from a very low base and when you look out to the rest of Pad 5 you still have demand declines occurring in places like Arizona and in Utah. So obviously you can't isolate this California from the overall refining and supply situation in Pad 5. As far as the reaction of the marketplace, certainly when you got excess capacity and you're running your refineries in the low 80s, you've got to have a big increase in demand I think. You have to get utilization rates back up to the high 80's to the 90's I would think before you see an appreciable margin effect. So I'm not surprised that there hasn't really been any appreciable or noticeable margin effect by a 2% demand rise.

Neil McMahon - Sanford Bernstein

Sure, and maybe just a last one. You guys have got a good handle on what crosses the Pacific and its looked for a while given China's huge ramp-up in refining capacity that they have been net exporters of diesel or some market in India certainly putting product onto the market as well. Did you notice anything coming across the Pacific at all towards the West Coast shores still heading more a Europe direction?

Chuck Flag

Its Chuck Flag. We really haven't seen anything coming to the West Coast. In fact the West Coast has been an exporter of diesel.

Neil McMahon - Sanford Bernstein

Great.

Bruce Smith

Yes, actually not great but in this market it is.

Operator

Our next question comes from the line of Doug Terreson with ISI.

Doug Terreson - ISI

I just had a question on the annual break-even margin for 2010 that you guys talked about periodically and the first question was where did the number come in for 2009 for your calculation. And two you talked about the four major drivers of the improvement that you expect in this plan in your comments and I want to see, since always things have changed over the past couple of months, whether or not there's anything that you've experienced that make you more or less confident about the $2 per barrel cost improvement as a whole or and if so, which of the four specific plans when, you talked a little bit about energy efficiency earlier and so, could you just comment on those trends please?

Bruce Smith

Just on the latter question I was sort of looking around but I heard the latter part of the question. No. There's nothing that I know of that would change our outlook for that again. We're looking at, unless you give me a change in margins and we sort of took a 2009 margin environment going forward. So, obviously we could be off on that. But it's not a high level margin where we are looking at this capital and again when you look at that improvement it becomes a lot more significant at these lower levels. And the other part of your question was, where did we come out on breakeven for the 2009.

Unidentified Company Representative

It was around $10 a barrel Doug.

Doug Terreson - ISI

It was pretty close to $10 per barrel?

Bruce Smith

We had some gains and we had some losses. We actually have a slide on that.

Unidentified Company Representative

Doug, not to avoid the question, but later today at the Credit Suisse conference that Bruce is going to present and we'll web cast, and have those slides available, we're going to walk through the full actuals for 2009 as well as sort of spend more time on the program in total.

Doug Terreson - ISI

Good enough.

Operator

Our next question comes from the line of Ann Kohler with Caris & Company.

Ann Kohler - Caris & Company

A couple of questions sort of at the 30,000 foot level. One of your peers has indicated that the administration may be looking at putting on import fees for both the crude as well as for refined products and I was wondering if you had any color on that and then, that would be great.

Bruce Smith

I just read an interesting article yesterday, which talk about things that could change the market place and I think that the political environment is so active today that we really haven't introduced that as an element that could potentially be a game changer and I don't mean this in any other way, but I think just as in Massachusetts, America is getting involved in deficit, America is getting involved in jobs and my only point about that is that I read an interesting article that came out of the united Steel workers talking about the potential for loss of jobs and looking at the imports that were flowing into the United States.

And it's pretty substantial what's flowing into the United States. It's not falling into our markets necessarily but it is flowing into the United States. And there potentially is import fees that could occur that would change the dynamics there. The other thing that is happening is that there is, certainly as we look at the budget deficits and we look at what’s happening relative to whether it's AB 32 or whether its ethanol, when I think about ethanol all I see is a huge addition to the budget deficit from the subsidies that exist to put a fuel and gasoline that’s creating more supply problems. We are putting a dirtier fuel into the air and at some point it seems that we're seeing some activity around that. So you may see the political environment as we get more active as an industry and start to respond to that to the point where it could make a more significant change, and where not demand is but certainly where supply is. And I know Lynn you are in charge of government affairs.

Lynn Westfall

Yeah on your particular question about the rumors of the import fee, we just took a vote around the table and it passed unanimously. Well the rumor in Washington for the last couple of weeks has been that is part of the President's budget proposal and we think certainly if he was going to do anything immediately it would have been in the budget as a source of revenue and it wasn't. That doesn't mean he can't address it separately but for now at least the methodology that we thought he would use to impose that doesn't appear to have taken place.

Ann Kohler - Caris & Company

Great. What is the likelihood that the part of the budget we are looking at, the repealing of the LIFO accounting do you have confidence that that’s going to go forward or what’s your view on that?

Brian Smith

There is a great deal of resistance to that uniformly across the business community. That is going to be a major effort and not only by us, in our industry, but by all the big Chamber of Commerce and all the business groups are gearing up to fight that pretty heavily. I can’t handicap crude prices or political outcomes but I know there's going to be a great deal of backlash to that in the next couple of years with a consorted effort to see that that does not go through.

Operator

Thank you. Our next question comes from the line of Jeff Dietert with Simmons. Please proceed with your question, your mic is now live.

Jeff Dietert - Simmons

I appreciate the commentary on capital spending and you guys have moved pretty quickly to reduce it in the fourth quarter. I have one question left on the CapEx side and that was associated with Wilmington, you had a large capital commitment when you bought the plant. Could you give us an update on how much of that capital has been spent and how much is remaining?

Scott Phipps

Yes. We continue to invest in Wilmington. We've put in a, we said $1 billion is over five years. We are still a little bit less than what the original track on that mainly because some of the permitting and issues there have delayed some of the capital spent and we found some other innovative ways to be able to reduce that requirement but we are still committed to continuing on with the program at Wilmington to upgrade it.

Jeff Dietert - Simmons

What's the estimate for future capital spending there under that regulatory program?

Scott Phipps

I don't have all those numbers, that number right in front of me right now but we can get that. I'll get it for you later, Jeff.

Jeff Dietert - Simmons

Okay, thanks Scott. Second question, some of your peers have talked about carried back losses and benefits to taxes that could impact cash flow in 2010. Are you in a position to know what your benefit might be? Do you have any information you can share on that?

Bruce Smith

I have to get back to you on that one too, I don’t.

Operator

Our next question comes from the line of Paul Cheng with Barclays Capital. Please proceed with your question. Your mike is now live.

Paul Cheng - Barclays Capital

Good morning. Just a number of quick question, quick and can you give me what is the working capital at the end of the year, the inventory in excess of book spending and the long-term debt or of the total debt?

 

Scott Phipps

Paul this is Scott, we are not sure exactly when we will be filing the K this year so there is an extension between today when we file it so we are not going to provide those number on the call for right now.

Paul Cheng - Barclays Capital

That's fine. And then for Lynn, you are talking about something in California that February 15, is the change in the spent up to the (inaudible) and Northern California as on March 15. When you guys will start seeing the terminal or the pipeline those barrels being moved into?

Chuck Flag

Paul, this is Chuck Flag. Those barrels are already moving through the pipeline. They are already trading in the marketplace. We have seen about a barrel 6% or 7% per gallon improvement in the gas cracks on the West Coast as a result. The February 15 date is when it has to be in the terminals. So it takes a while to turn the package over in those pipeline system and so we have already began to produce it.

Paul Cheng - Barclays Capital

So Chuck, is it normally that about a month ago that you started making this switch hold pipe into the terminal or that is a little bit lesser time requirement than that? In other words, I'm trying to understand that how much is the washout that we have already seen. That is it pretty much done by now. That is in the pipe or mostly is already in the summer grade or there is more depth for this process.

Chuck Flag

It is the summer grade that is in the Kinder Morgan system at this point in California.

Paul Cheng - Barclays Capital

Okay. So that means that you guys already switched over your production into summer grade probably about a couple of weeks ago?

 

Chuck Flag

Exactly.

Paul Cheng - Barclays Capital

Bruce, I know that it would be difficult to say it what is the CapEx for this year when you have to cut here, but over the next two years if we look at (inaudible) capital, what may be the level that you need at the minimum for the regulatory and turnaround order for the basic work that you have to do?

Bruce Smith

Again I can't give you the minimum number only because it will continue to depend on what Dan finds as they do the inspections. The risk management program we've got today, if you go back and look in time, we acquired refineries that all had schedules that were, I don’t know how many years. They went out for 10 years and what we are going to do, and they over laid each other and as time goes on, what you do is you find it. Like last year is a great example of the demand and we had a turnaround schedule last year. They were at the point of looking at that. We did some risk inspection work and we determined that we could move that by a whole year which we did. Dan’s moved one out this year out to 2011. Obviously the safety and reliability becomes imperative but the key gets to be that as you look at it, in the old days you just did the turnarounds because the risk base practice was to do it every three years on a certain unit or four years. I'm sort of in Dan’s area here but now it's really changed. So there more rigor going into the process of trying to really determine what that is.

So give you a quantitative assessment it is that dynamic ongoing to try to figure out how we can safely move capital out and that would be the same thing we'd be doing if the margin environment were good because obviously we would rather employ capital in other ways. Dan, do you have anything you want to add to that?

Dan Porter

No, I think you are exactly right. We do take whenever we have on plant outage or something. At times we have taken the margins were low. We will take surgical outages to go in and perform inspection and do repairs that we need to be able to look at prolonging the duration between those turnarounds. So that’s an ongoing process and we'll continue to optimize as we go forward.

Paul Cheng - Barclays Capital

Dan, I think that you guys shared with us on the first quarter the turnaround schedule. Can you share with us the rest of the year, what the turnaround schedule may look like?

Dan Porter

Yeah, the big turnarounds that we have for this year are primarily at Salt Lake City. We have one beginning in the first quarter of this year and we have one at (inaudible) but it begins in the second quarter and is completed then. And then we have one in capital A that begins in the third quarter. And that's it.

Paul Cheng - Barclays Capital

Okay. The third one is what?

Dan Porter

Hawaii.

Paul Cheng - Barclays Capital

Hawaii, okay. I didn't realize that that's the name, Hawaii. Neil, I think that everyone is resisting on the LIFO to FIFO that changed. In the year end its unfortunate that should get paused. What is the hit on you guys on the additional one time tax?

Bruce Smith

I'm going to pass that over to (inaudible). What little I know is

Unidentified Company Representative

It depends on crude prices.

Paul Cheng - Barclays Capital

Yeah based on today's price (inaudible)?

Bruce Smith

I don't know what that number is. We have got a kind of a rule of thumb internally that we look at. But it's too early to speculate what that number might be right now.

Paul Cheng - Barclays Capital

Okay. A final one. Just want to see if (inaudible) have any comment about one of your competitor who is actually bidding on the Bakersfield refinery. Are you surprised and disappointed someone actually may try to reopen that?

Bruce Smith

I'm surprised that anybody would be doing anything right now but I think that these low prices are certainly going to bring an opportunity for people who look at doing something different with them. But Bakersfield has been a very difficult refinery. One of those things, when you look back, Shell said they were going to close it because nobody would buy it and the state said you can't close it and the people that bought it then went bankrupt. So I never try to second guess somebody else's purchase because it may be part of a different strategy that we don't understand.

Paul Cheng - Barclays Capital

But I could assume that you guys have looked at that and you figured that at least from your standpoint you cant make (inaudible).

Bruce Smith

Let me tell you haven't looked at to Bakersfield. We looked at Bakersfield one or two years ago, three years ago when Shell was disposing of it but we have not…

Paul Cheng - Barclays Capital

Held back then that you already decide that your economic won't work on that one?

Bruce Smith

Back with those economics we didn't see Bakersfield working and we have a number of people here. Since we have a number of (inaudible) people we do have a fair number of people that have actually…

Paul Cheng - Barclays Capital

Trying to look for the expert to tell me something that I don't understand that…

Bruce Smith

But I think again changing market, changing conditions, somebody, I'm not going to say that they don't have a different strategy or something that they have thought about that may make a great deal of sense. So, I’m not going to try to criticize somebody else. I won’t do that.

Operator

Our last and final question comes from the line of Mark Gilman with Benchmark Company.

Mark Gilman - Benchmark Company

I just had two questions, one relating to crude slate choice in California. Noticed in the fourth quarter that it appeared at least versus the third quarter you heavy up a bit and as a result the residual was somewhat higher. It kind of strikes me as being just a bit peculiar given the implications of the cocker incident at L.A. I wonder if you could clarify your thinking on that?

Chuck Flag

Mark, this is Chuck Flag. I think that is primarily due to lower throughput. In another words, we kept the total volume of heavy about the same but as a percentage it went up.

Mark Gilman - Benchmark Company

Actually Chuck, I think if my recollection is correct the actual volume went up, didn't it?

Chuck Flag

I don't have those figures right in front of me, but I don't think it would have been substantial.

Mark Gilman - Benchmark Company

I'm just pulling it right out of the earnings release, but the heavy in California went from 147 to 159, 3Q to 4Q.

Scott Phipps

Mark, this is Scott. We also had two cocker units down over two pieces of maintenance that fuels the California refineries which actually increase the heavy, the residual yields that you see as well.

Mark Gilman - Benchmark Company

I'm just trying to understand the optimization aspect of heaving up the crude slate in the context to that maintenance, Scott.

Scott Phipps

The right heavy differentials are extremely small with fuel prices relative to crude are extremely high. How much should I consider 147 to 159 a significant change in optimization philosophy.

Mark Gilman - Benchmark Company

My other question goes back to a comment Lynn made against right at the offset. I wonder if you can clarify. 28,000 barrels a day I believe was the number Lynn quoted regarding the incremental ethanol. I would have thought the number was a lot higher than that. You tell me Lynn how you are getting into that 28?

Lynn Westfall

Real easily, demand in California last year averaged 976,000 barrels a day. The gross increase is from 5.7% to 10%. So the gross increase is 4.3% but you got to remember ethanol has a lower energy value. You take the 4.3% times two thirds and you come up with 2.9% of the 976 gives you the 28,000.

Mark Gilman - Benchmark Company

Great. Just the efficiency I didn't take into consideration. Thanks, Lynn.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Bruce Smith for any closing comments or remarks you may have.

Bruce Smith

I don't have any closing remarks. I’ll thank everybody we had awfully good questions today. I do want to thank everybody for being part of the call. As Scott said we are going to webcast a presentation from the Credit Suisse energy conference later today and so there will be more questions and slides that will be publicly available and if you are so inclined we would hope you join us there. Otherwise we will see you at the end of the first quarter. Thank you.

Operator

Ladies and gentlemen this does conclude today's conference. You may disconnect your lines at this time and we thank you all for your participation. Have a wonderful day.

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