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Tesoro Corporation (NYSE:TSO)

2014 Analyst and Investor Day Conference

December 10, 2013 9:00 am ET

Executives

Brian Randecker

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

David K. Kirshner - Senior Vice President of Commercial

Daniel Robert Romasko - Executive Vice President of Operations

Keith Casey - Senior Vice President of Strategy & Business Development

Brenda Peterson - Vice President of Enterprise Business Improvement

Phillip M. Anderson - President of Tesoro Logistics GP

George Scott Spendlove - Chief Financial Officer and Senior Vice President

Analysts

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

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

Edward Westlake - Crédit Suisse AG, Research Division

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Chi Chow - Macquarie Research

Paul Y. Cheng - Barclays Capital, Research Division

Evan Calio - Morgan Stanley, Research Division

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

Paul Sankey - Deutsche Bank AG, Research Division

Faisel Khan - Citigroup Inc, Research Division

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

Sam Margolin - Cowen and Company, LLC, Research Division

Blake Fernandez - Howard Weil Incorporated, Research Division

Jeffrey Louis Lignelli - Incline Global Management, LLC

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

Steven Gambuzza

Adam Zirkin

Allen Good - Morningstar Inc., Research Division

Brian Randecker

All right. Good morning, and welcome to the 2014 Analyst Investor Day for Tesoro Corporation. I'd like to first remind everybody to please turn your cell phones on silent or off. In the case of an emergency today, there are 2 emergency exits, one located back to the front of the room and then one is at the back of the room past the elevators. There is a floor safety monitor that if something happens, they will come and direct everybody to where they should go.

For those listening on the webcast, the materials that we will be reviewing today can be found on Tesoro's website in the Investor Relations page. Please refer to the forward-looking statements in the presentation, which say, statements made during this meeting that refer to management's expectations and/or future predictions are forward-looking statements intended to be covered by the Safe Harbor provision of the Securities Act as there are many factors which could cause results to differ from our expectations.

After the presentation, we'll be taking Q&A. And so please wait until we bring you the mic to ask a question, so we can make sure it's heard on the webcast.

And with that, I'll hand it over to Greg.

Gregory J. Goff

Good morning, everyone, and thank you for taking the time to come down and listen to our presentation today. I know its tough to come from midtown to -- down to downtown, but we appreciate you taking the time to do that.

We're extremely excited today to really be able to share our plans with what we have going on in the company, particularly over the next couple of years. We believe that we've developed a very ambitious and aggressive plan to really make some significant changes in the company over the next several years. But today, we're really going to focus on what's going on in 2014 and 2015.

But before we get started today, what I'd like to do is introduce the members of the Tesoro leadership team that will be making presentations today: Dan Romasko, our Executive Vice President of Operations; Scott Spendlove, Chief Financial Officer; Keith Casey, Senior Vice President of Strategy and Business Development; Dave Kirshner, Senior Vice President of Commercial; Brenda Peterson, Vice President of Business Improvement; and Phil Anderson, President of Tesoro Logistics.

Also joining us today is Steve Grapstein, and Steve is the Chairman of the Board of Tesoro. And I talked to him earlier and he absolutely promised me that he's not going to ask any questions once we get going here today, so I'm counting on that.

Our presentation today is titled Transformation Through Distinctive Performance. And it describes how we plan to add value to the company over the next few years, as I mentioned just a minute ago. And as we go through it today, you'll see that we're going to focus primarily on 2014 and 2015.

And to tell our story, we plan to take the following approach. Since superior execution is really critical to our ability to deliver what we set out to do, what I would like to do is take the first few minutes and just briefly recap what we've accomplished from 2011 to 2013 to really set the stage for where we are to go forward. And within the company we have a motto that says, "We will do what we say." We want to demonstrate that here today.

Second, Dave is then going to talk about our market outlook for 2014 to 2016, and put a little bit of context around how we see some of the key things happening in the market that will impact our business.

Third, we will then deliver our 5 distinctive performance objectives. And each leader that I just introduced is going to come up and share each of those objectives that they're responsible for leading within the company.

For the first one, Dan is going to prevent -- is going to present delivering the significant California synergies, primarily as a result of our acquisition in 2013 as a Los Angeles business.

Keith will then discuss enhancing the gross margin. And he's going to talk a little bit about how we -- what we see going on in the crude market, both in the in-line [ph] markets and, particularly, what we plan to do moving to the West Coast and improving crude supply to the West Coast, and then also address some improvements in our retail marketing business.

Brenda will talk about improve the base. And Brenda is going to go over a number of different items that we have going on in the company that we're working on to significantly make improvements in the base performance of the business. They really drive efficiency and productivity across the entire company.

Phil will then elaborate on our fourth performance objective, to grow logistics, and talk about the things that we have planned to significantly grow EBITDA and the size of logistics over the next few years.

And then Scott's going to come up and complete the discussion of these performance objectives and talk about how we continue to maintain financial discipline, both with our reinvestment plans and how we return excess cash to shareholders. And then I'd like to come back up and then just summarize everything that's been -- we've talked about, and then open it up for questions, as Brian said at the time.

In 2010, we developed these strategic priorities, and they've really been the focus as we embarked on a journey at Tesoro to significantly improve and change the company. And they've -- these 5 strategic priorities have really been the focus of what we've done over the last 3 years in the company. As you can see up here and throughout the room, these strategic priorities on driving operating efficiency and effectiveness, commercial excellence, financial discipline, value-driven growth and a high-performing culture, we believe that as we look at the business, particularly going forward from 2014 forward, these strategic priorities that been so important in the past are as critical or more important as we move forward. And they're really at the heart of driving superior execution.

From 2011 to 2013, we have created a strong foundation. And we believe the company is really positioned for further value creation. We have changed the portfolio of assets with the transformative acquisition of a Los Angeles business and then the sales, a few months ago, of our business in Hawaii.

We've invested wisely in capital projects that have allowed us to take advantage or be better positioned to supply crude oil to our refineries, to be able to lower costs and improve yield in our system. The creation of Tesoro Logistics has generated significant cash for Tesoro, and it's an integral part of our business model to grow and strengthen our integrated value chain.

And finally, we have made a step change in our refining and marketing integration, which is also a part of an integrated business model. And today, we have a good suite of both premium and value brands that we can take to the marketplace to meet our customers' needs.

In the company, we have guiding principles of how -- of what we stand for. And one of those key guiding principles is around core values. And at the heart of our core values is our steadfast commitment to personal, process and environmental performance. And as you can see on this chart, since 2010, our personal safety performance has improved by about 40%. At the same time, our process safety performance has improved by about 70%. And at Tesoro, as we really strive to create an incident-free workplace, we are very disciplined and committed to drive improvements all of the time to get us to that place of having no incidents in our business.

And really those benefits, of having such a strong focus on our core values is -- it really shows up in this in reliable operations. If you look at our -- these charts here, the significant investment in asset integrity and the steps that we've taken to improve our maintenance and inspection systems, they really show up in our availability. And you can see, over the last few years, we've had availability. Our refining assets are positioned to run at about 97%. We believe that 98% availability continually is best in class. And that's -- our target is, that we really are really positioned because of the steps we've taken to achieve that 98% availability.

At the same time, our work on refining and marketing integration and the steps that we've taken across the value chain to drive commercial excellence under Dave's leadership has allowed us to drive higher utilization. And you can see that our target is to get about 95%-plus utilization over the next few years.

One of the keys in our strategic priority to operational efficiency and effectiveness is cost leadership. We have, in the last few years, been able to lower the refining operating cost in our California system by about $1 a barrel come. It's something we'd set out to do and we've made incredible progress doing that. We've done that by improving maintenance and labor productivity and strengthen some of our inspection systems, and that -- that I just mentioned ago, but we're -- we continue to make that progress to get to that caused leadership position that we believe that's so important. At the same time, we're pursuing opportunities to optimize our distribution costs and investing capital to drive reliability, efficiency and energy and then also to lower costs.

Our system improvement have been accomplished by doing 2 things: One is pursuing noncapital opportunities, where we can drive improvements in the business; and the second is by highly investing in highly selective opportunities in our assets that drive and strengthen our competitive position.

As you can see on this chart, during the period 2010 to 2013, we've spent about $650 million on high-return, short-payback capital projects. And that capital that we've invested has generated on an annual basis about $0.5 billion of income. So it's worked out extremely well. And some of these examples include the Anacortes rail unloading facility, the work that we've done at the Mandan refinery, to not only increase capacity, but also be positioned to have better yield with the business.

One of the big changes has been the growth of high quality crude in certain key markets around the business and it's been an excellent opportunity for Tesoro to be able to supply that crude oil to our refineries. Projects that we talked about in the past, like at Mandan, Salt Lake, Anacortes, have all worked extremely well. And today, we are really positioning the company to be able to deliver these crudes to the West Coast of the United States. And Keith Casey is going to share our view of how we see that supply unfolding as well as some of the pricing dynamics that we think will happen over that -- over the next couple of years.

Back in 2011, we embarked on a strategy to create a highly integrated refining and marketing business. And from this slide you can see that back in 2009, our integration between refining and marketing for gasoline was about 30%. Well then, this year, at about 86% integration, which is in our target range of what we expected to achieve over this period of time. So we've had good growth in this part of the business, and the we're positioned well to continue to grow, and really to optimize, make improvements to our marketing portfolio that drive increased retability, increased security and higher profitability over time.

Our fourth strategic priority of financial discipline has allowed us, as I mentioned earlier, to invest free cash flow into high-return capital projects and create pretty significant additional EBITDA. In addition, we've been able to take cash-generated from the creation of Tesoro Logistics and use that cash to both strengthen the balance sheet of Tesoro and to be able to pursue other growth initiative, like the Los Angeles acquisition. And our focus has always been to maintain leverage below 30% and have a very strong balance sheet to be positioned to really grow the company.

One of the interesting things, and Scott is going to talk about this a little bit later, is within 7 months of making the largest acquisition in the history of the company, we're going to be able to restore the balance sheet to the same position it was prior to that acquisition, as you can see on the slide here. We should end the year at about 27% leverage.

So not only have our EBITDA grown, these 2 pie charts show, not only have our EBITDA grown from 2010 to 2013, what you can see is the contribution of EBITDA from both our retail business and our logistics business has become a bigger share of the contribution of the different functions of the business during this period of time. And as we look forward, we continue -- we plan to continue to pursue this same path and grow EBITDA contribution from the other parts of the business. And we've been able to do this by optimizing our portfolio with -- through strategic acquisitions and divestiture of the Hawaii assets, as well as grow both the logistics and marketing business with some of the things that I just talked about.

Last year, we introduced this as our fifth strategic priority, and it was around a high-performing culture. And since 2010, we have built a very performance-oriented culture at Tesoro. And for us, to really be able to deliver the plans that we're going to share with you today, which we consider, as I mentioned earlier, ambitious and aggressive, we need to continue to progress our development on the culture of the company to be positioned to do that. And we are very comfortable that across our whole value chain, we have key leaders in places that can lead the progress the we are embarking upon. And this strong leadership through driving alignment with what we're trying to do with our strategic priority, we believe, is very committed to being able to support the delivery of the plans that we're going to share with you in just a minute.

So before I wrap up here, I just want to show a couple of real simple pictures here. This is a picture of what Tesoro looked like in 2010 in a simple way. It shows the company with a refining asset and the marketing position we had. We had an enterprise value of about $3.5 billion, and we had about 50% integration at that point in time with a little bit less than 900 retail stations.

You can see today, the work that has been accomplished at the company to really transform the company into something different today than it was back in 2010. You can -- the company's market capitalization is about 4x higher than it was back in 2010. Our attractive refining assets are positioned. They are -- our integration level is a lot higher level than it was in our -- to our integrated value chain. We're very well-positioned to capture opportunity as we go forward with our next plans. And so when you look at this picture and you hear what we're going to be talking about to deliver these distinctive performance objectives, I think it will all come together as a pretty powerful story about our business.

Next year, we are targeting to deliver in the neighborhood of $370 million to $480 million of additional EBITDA improvements in the business. And they are focused on the 5 distinctive performance objectives that I laid out earlier: To deliver the California synergies, enhance growth margin, improved the base, grow logistics and maintain financial discipline. And I'd just like to offer one simple reflection here before we get started. And that's -- when I joined the company back in 2010, we developed a plan to drive what we thought that time were significant improvements in the business over the time frame of 2011 to 2013. And we had a pretty good handle on part of those opportunities, but there was a basket of opportunities that we just didn't really know what those would turn out to be. And as we look back, we have absolutely delivered on those opportunities.

The most amazing thing to me though is, now, as we sit here at the end of 2013, looking forward in that 2014 to 2016 time frame, the opportunities are actually greater than what we saw back in 2010 and that's after making all that progress. That, to me, is remarkable, and that's what we want to be able to share with all of you here today.

So with that, I'd like to turn the time over now to Dave Kirshner to talk about the market outlook from 2014 to 2016. Dave?

David K. Kirshner

Thank you, Greg. Now, let's just take a look at the key market drivers that are impacting on the refining business. It should be noted that Tesoro's views are pretty much in line with consensus external views when we go through this.

Economic growth has moderated some for the developing BRICs, but improved in the U.S. And we are now saying, "GDP growth in the U.S. should grow at 2% to 2.5%. Global refining capacities projected would be oversupply, though, with major projects in Saudi Arabia and Kuwait increasing capacity above that projected growth demand.

However, domestic refining utilization is projected to remain strong, given our relative refining competitiveness as a result of low-priced natural gas and access to advantaged North American feedstock. Product demand growth for the world and the U.S. is projected to be modest with diesel demand being the primary growth engine. As a result of our competitive production cost in the U.S., product exports are going to continue to grow.

With the RFS mandate delays in 2014, we have a reprieve on the blend wall. However, uncertainty is still out there for -- beyond 2014. With regard to the regulatory environment, Dan is going to address California market and the impacts of carbon, tax and low-carbon fuel standards a part of his presentation after this.

Turning to North American crude oil production, it's continuing to grow significantly. The U.S. now produces more crude oil than it imports, something we have not done in the last 20 years. Large increases in the Permian and in the Eagle Ford have flooded the U.S. Gulf Coast with light sweet crude oils, such that Bakken now, which totals over 1 million barrels a day, no longer has a growing market in the Gulf Coast and must move to either the East Coast or West Coast to clear.

Canadian growth remains robust. However, infrastructure to get to the market is still lagging. Unit train capabilities in Canada are just now being developed to be able to clear the market before pipeline capacity can come onstream.

Turning to the Cook Inlet. Cook Inlet production of both natural gas and crude oil is growing, which is right in our backyard in the refinery at Kenai.

Looking at crude oil price, the flat price of crude is good to be under pressure going forward as U.S. production growth displaces imports and U.S. product exports push into more of the international markets. Volatility will increase as the logistic systems and refining capacity reach to the growing light crude oil supply -- react to the growing light crude supply, especially in the U.S. Gulf Coast. In addition, international tensions will continue to play a role in short-term price volatility.

The $90 to $100 price range will continue to support North American production growth. The wildcard in all of this is going to be geopolitical. How does OPEC and Saudi Arabia react to the growing market share of U.S. production?

We've seen a wild ride on crude oil differentials over the last year. WTI broke away from the pack as pushing in the Mid-Continent became constipated with too much crude oil and not enough infrastructure to support the growing production. Gulf Coast grades began to track the international market brands.

Most recently, though, LLS has reestablished its relationship with WTI, as the benchmark for crude oil logistics has migrated south, the bottleneck has migrated south to the Gulf Coast. The relationship of Brent to TI going forward will continue to be volatile. Over the long run, we conservatively project that differentials, in general, will revert to transportation cost with appropriate quality differentials.

The key in all of the above is that there's going to be opportunities to optimize the crude slate. Having the infrastructure in place to take advantage of those advantaged crudes of the day will be paramount to successfully managing the refining business.

Looking closer to home at our upper Mid-Con Rocky sin West Coast footprint, here are the key crude oil devs for Tesoro. We expect ANS to continue to come under pressure as more advantaged American crude oil makes its way to the U.S. West Coast. In North Dakota, our prodcution -- our projection for Bakken at Clearbrook is to revert to the $2 to $4 discount under WTI, while prices in the field and the rail terminals will continue to price at a discount. These discounts, combined with a Brent TI differential, will provide enough incentive for Bakken barrels to move to both the East Coast and the West Coast and push out foreign out imports.

Canadian crude is another advantaged feedstock for Tesoro, and will continue to be challenged from a logistics perspective. We expect Canadian light crude oil to price $5 to $8 under WTI, and have these well below in the $19 to $22 range. It should be noted that Cold Lake has been selling its discounts of $35 for $40 a barrel in the current market. Longer-term, we again conservatively estimate that Canadian crude oil will price relative to transportation cost and quality differences.

Turning to the Gulf. Increased light sweet crude oil heading to the U.S. golf is causing more competition for the light sour and medium-sour grapes since the refining capacity with the ability to instantly take the light crude has been mostly filled.

Mars is the key component of the Argus Sour Crude Index, ASCI, that forms the basis for key Middle East crude oil sales into the U S. The recent drop in Mars price due to turnaround in logistics constraints has effectively created for an advantage crude oil for U.S. refiners. While we don't expect these to -- these recent lows to continue over the long run, the need to compete with light suite parity -- light sweet export parity crude oil will require imports to be priced appropriately.

Turning to California, the California heavy crude oil differential is reflecting that softer ANS pricing and will also remain under pressure with more North American barrels flowing to the U.S. West Coast. In addition, Mexico just recently announced the resumption of [indiscernible] crude oil exports off the West Coast, again expecting to put pressure on the West Coast pricing.

Fundamentally, advantage crude oil and load natural gas prices are driving higher refinery utilization in the U.S. and expanding the capture of products export markets. Total U.S. exports will go up, driven by growth in Latin America and refinery rationalization in Europe. PADD V exports should also grow, supported again by Latin America and refinery rationalization in Australasia.

Staying with the product side of the business and turning to operating modes, we project the growth in the distillate demand, combined with little or no demand growth for gasoline worldwide, will continue to provide incentives to maximize distillate production.

If we looked at other key market drivers, strong natural gas production should continue through the outlook period, primarily due to associated gas from shale oil wells, but also from very adequate supplies available from shale gas wells that are economic at the high end of the range, and this should effectively put a cap on gas prices.

Turning to the RINs side of the equation. RINs prices continue to be volatile with the spring of 2013 yielding prices above $1.40. As we stated earlier, in 2014, the requirements for renewables blending have been moderated. However, there's nothing firm for beyond 2014. Hence, our very wide band for future prices. Our assumption is that, over the long run, the cost of RINs will be fully priced into the cost of production in the marketplace. However, short-term volatility is going to provide opportunities for refiners who are fully integrated.

Turning to refining cracks, West Coast cracks are projected to be slightly stronger due to discounted ANS. There is potential for more improvement there. We're being very conservative. Mid-Continent declined from its lofty heights, but it's still supported by transportation differentials for crude needing to be clear to the coastal refining centers.

So here we are on a go forward basis. This reflects -- this index reflects the new Tesoro portfolio that includes the Los Angeles assets in and Hawaii out. And the past has actually not been restated, as we do not normally restate that past on the index.

Having said that, the base outlook for the Tesoro Index shows very little help from the market over the next several years. In order to deliver improved performance, we have to capture value well beyond the index, that's what Dan, Keith and Brenda are now going to take you through.

With that, I'll turn it over to Dan to talk about California synergies.

Daniel Robert Romasko

Thanks, Dave. It's hard to believe it's been 6 months since we went through change in control in Southern California. But during that time, we've been able to dig pretty deeply into the synergy potential. The result of that is reflected on this slide. Our current expectations are EBITDA contributions from the synergies are improved 80%, relative to what we expected and announced in August of last year. That's nearly $200 million improvement relative to what we announced at that time.

Additionally, the capture pace has significantly improved with an expected contribution of $200 million in 2014 -- excuse me, and in 2014, the first full year of our operations. Once fully integrated, the combined Los Angeles refinery has the flexibility to produce significantly greater gas, or diesel relative to gasoline, nearly 30,000 barrels a day. Now underpinning all of this California position is the steadily improving California economy.

Now before I dig into the synergies, I'd like to spend a few minutes and cover California fundamentals, which include both the market and the regulatory environment. And our outlook on the California gasoline demand is marginal to flat growth. Although all of that growth comes from

crude oil-derived gasoline because we're already at the ethanol blend wall. From a diesel perspective, it's a little bit more optimistic about a 1% per growth -- or 1% growth per year, and that growth pace still leaves sufficient capacity supply to export demand that we've experienced over the last 1 to 3 years.

Underpinning all of that California market demand is improving economy with the California unemployment rate, improving over 1% on a year-on-year basis to 8.7% around the middle of this year, which is impressive, but still leaves plenty of room for continued improvement.

On the regulatory front, which typically, in California, centers around greenhouse gas emissions, I think it's interesting and informative for us to look at what the industry has already accomplished. Since 2007, Tesoro's California assets have decreased their CO2 footprint by nearly 15% -- or nearly 10%, primarily -- or 15%, primarily driven by the Martinez coker project. Looking forward, and once we complete the integration of the Los Angeles refinery complexes, with the result of the shutdown of the Wilmington FCC, we expect to reduce another 0.5 million tons per year of CO2, which gives us a combined CO2 footprint reduction of nearly 20% from 2007 until 2017.

All right, so now let's talk about AB32 and break it into its pieces beginning with stationary sources. We expect the refining sector within California to receive full trade exposed status. What that means is that we get 100% free allowances, extended through 2017. And at 2017 through the end of the decade, through 2020, that free allowance decreases to 75%. And the conclusion of that is the financial impact is relatively low and quite manageable as it pertains to stationary sources. Switching to fuels under the cap, and if you assume carbon markets were going to stay where they are currently, which are around $12 a ton, that translates into clean fuels impact of about a dime a gallon, which gets fully transferred onto the customers. So there's no unique and independent to Tesoro relative to the rest of the industry.

Regarding the low carbon fuel standard, we've -- it's apparent that CARB is becoming aware of and is now moderating their expectations based upon the lack of availability of blend stocks to make their requirements in 2014 and beyond. And as such, we expect CARB to formalize a freeze for 2014 at 2013 carbon intensity levels. So that should be quite manageable for us.

Beyond emissions, recent industry events have raised regulatory interest in the area of safety. And this oversight is likely going to continue to complicate our ability to execute business within the state of California, but it also provides us -- those of us an opportunity to generate profit, so long as we successfully navigate through that complexity.

Let's talk about the distinctions of success on the West Coast. The keys to success on the West Coast certainly include advantaged operating cost and the production flexibility to meet the changing product demand. But those 2 factors are common, regardless of which geography we operate in. What's particularly distinctive and important for operations in California and in the West Coast is prompt and efficient access to the advantaged feedstocks that are coming from the Mid-Continent and elsewhere within the world, efficient distribution systems to take those products to market and secure and ratable placement of your refined product into the marketplace. Our Southern California acquisition gives us a step change improvement in each of those key factors.

When we announced the Southern California acquisition last year, we estimated the net investment on the refining asset bases would be around $15 per complexity barrel, which was pretty good relative to what the industry history was at that time. Friday of last week, though, when we announced the sale of the remaining Southern California logistics to TLLP, which when combined with the original sale, yields a realized value for the logistic assets of $1.3 billion, and subsequently, a net negative $300 million investment in the refining marketing, cogen and calcining assets. Now further, since closing, we've been -- we've successfully reduced the working capital by $200 million. So when you reflect on our original expectations pre-synergy EBITDA of about $0.5 billion per year, the return on that $800 million investment is exceptional.

All right, so now let's dig into the synergies, and we've broken that into 4 categories: feedstock advantages, logistics optimization, production optimization, operating costs. Each of these categories are improved. And as I said earlier, the combined improvement across all of those categories is up over 80% or over $200 million. The delivery pace has also accelerated, and we now expect to achieve the full originally estimated $250 million improvement within the second full year of operation, that being 2015. And then move on to achieve the $430 million to $490 million worth of EBITDA contribution by 2017, when we complete the final tie ins of the 2 plants to make it 1 plant.

While all 4 of those categories have grown, the area of greatest absolute improvement is the production optimization, which represents nearly 1/2 of the $200 million improvement, and I'll provide additional detail on each of those categories shortly.

Now supporting that $460 million of EBITDA improvement is net capital investment of nearly $380 million, which is approximately $110 million above that which we assumed at the time of the acquisition. Now if you contrast the $200 million of EBITDA that I've mentioned previously with our approximately $110 million worth of incremental net capital investment, we've got a yield of about $2 of EBITDA for every dollar of net capital invested, which assures us that we're maintaining our commitment to high-return investment.

Now for clarity, we refer to net capital as the synergy capital required for the projects, less the capital, avoiding and see same project secure.

The largest single investments that we have is the integration of the Los Angeles refinery complex, and Scott is going to provide additional detail on that later in the presentation, so I won't dwell on it here. The logistics investments statistically link the 2 refineries together and allow -- as well as those refineries to our marine and product terminals. Examples include the pipeline installations between the 2 plants that allow us to efficiently transfer intermediates between the 2 refineries, as well as installation off all these surrounding facilities is one example at our product terminals.

The processing projects focus on removing feedstock constraints, fully utilizing the assets, improving our conversion capabilities and subsequently, our yield. A great example of this that we've already achieved is the recommissioning of the hydrogen plant at Wilmington, which now is producing 15 million standard cubic feet per day of hydrogen, which then removes the constraints for the hydro crackers and hydro treaters at both the facilities. It took us about $4 million to bring that system back online. We expect it to yield benefits in the $5 million to $10 million per year range.

Okay, so the next 4 slides start to unwrap and provide some additional on each of the synergy categories. Beginning with the feedstock advantage, which has grown 30%, relative to what we assumed at the acquisition. And that category includes blending improvements to allow us to fully utilize the conversion capabilities of the refinery. An example here was the completion of a crude blending system at Carson, right about the time of acquisition, which allows us now to take advantage of opportunistic crudes that we couldn't have otherwise taken advantage of because of metallurgy or yield constraints, which we can now take advantage of because we can blend those crudes concisely with the rest of the crudes within our slate.

It's also on this category that we acknowledge the substitution or partial shift in our crude slate from ANS and other lower-value feedstocks to more attractive alternatives, such as Mid-Continent and North American advantaged feedstocks. And we also capture the freight rate advantages associated with VLCC and Suez mass [ph] shipping.

Now the last area of improvement here is intermediate feedstock optimization across the full West Coast. Now we now have over 700,000 barrels a day of refineries spread across the West Coast, which allows us to split cargoes and bring advantaged feedstocks to multiple other plants. It also allows us to remove constraints, actually without capital, by taking the intermediate if it's long at one facility and taking it to a local conversion at another facility.

From a logistics perspective, synergy has grown over 150% relative to our acquisition assumptions. We're already well underway shifting our retail volumes from third-party carrier s into our own terminals and pipeline system. In fact, our U.S.A. and Thrifty volumes have already been shifted and we expect to complete the Shell shift by the middle of 2014. But the bigger growth opportunity within this category is the new opportunities that have surfaced on capturing value. An example of this includes moving our gasoline into our own systems from third-party carriers, where those carriers required higher octane as the entry into the pipeline system, relative to what we do at our own system. That allowed us to decrease the reform or severity at our refinery, which improves our yield. And that improvement in yields is worth about $15 million a year, and that's just at the L.A. complex. When we add to that the ability to blend suboctane gasoline from Martinez to fill our marketing demand short in Los Angeles, there's another $10 million opportunity. Another example that we've already started on is the blending of the FCC decamp from Wilmington into the 1% fuel market, which generates, we believe, somewhere between $5 million and $10 million a year.

Production optimization is the category that had the largest absolute growth from acquisition assumptions. That 110% increase is reflected on this slide, represents over $100 million worth of improvement by the time we get all the way up to 2017.

We suspected, actually, that will be the case pre change of control because that was an area we weren't able to deeply investigate, either the assets or the business opportunities, because of anti-competitive law. We expect the impact of integration project to yield somewhere in the $50 million to $75 million per year range, subject to final scope freeze.

The fiscal pipe connections, which will make the 2 plants into 1 plant, allows us to more efficiently move feedstocks across the facilities and to fully utilize our conversion capacities. An example there would be to convert the length of butane from Carson into isobutane to the low [indiscernible] and then use that isobutane and across the LAR complex but also with our refinery in Martinez. We also have excess FCC decamp volume that's produced out of the Carson facility and we have room in the coker in the Wilmington facility, so we can turn that into finished fuels through the coking unit. So these intraplant moves, we believe, will generate somewhere in the order of magnitude of $60 million a year of EBITDA.

The last category is fundamental yield optimization. The biggest price for us here was optimizing the existing facilities without capital investment to increase your greater distillate yield relative to gasoline. That suite of optimization, we believe, is worth $35 million a year, at least in that range. And although it's the smallest category on an absolute basis, we've more than doubled our expected improvement in operating cost. We've certainly remain focused on reliability and mechanical integrity to drive availability of the assets and support their high utilization. In fact, we expect this combined facility to be first quartile in utilization.

The maintenance and personnel efficiency that we expected pre-change of control appears to be fully there. We've also identified additional opportunities. Examples are the combining of engineering resources across both plans to decrease our dependency and subsequently, our costs for third-party engineering resources. We also benefit from an increased scale of the site in the company to improve our non-hydrocarbon supply chain materials and rates.

Before I turn it over to Keith, I'd summarize this to say that we've made, we believe, a material change in the potential of the synergy deliver. Both the size and the pace of capture of the prize have taken a step change improvement in the right direction.

With that, I'll turn it over to Keith who's going to walk us through enhancing the gross margin. Thank you.

Keith Casey

Thank you, Dan. Great synergy story. And it probably comes as no surprise by now, but when it comes to enhancing gross margin, the dominant strategies continue to be centered upon North American advantaged crude oil production. The key messages that I really want to share with you today, what really makes this distinctive for Tesoro. In addition to being uniquely positioned to capitalize in the North American advantaged crude, as Greg said in presentation this morning, Tesoro has a demonstrated successful execution record.

Our first unit train unloading facility in Anacortes, Washington continues to provide significant advantage, and the next big step is to develop the capability of driving 300,000 to 325,000 barrels a day of advantaged crude oil to the West Coast. We expect that availability of the significant quantity of advantaged crude oil for West Coast market will improve refining margins. The expansion of these West Coast capabilities is expected to drive an additional $250 million to $290 million in gross margin capture by 2015.

So we have already leveraged our unique position by optimizing our Salt Lake City and Mandan operations, which are closest to the production, and we've extended that advantage to Anacortes, Washington. So the real near-term opportunity is to extend the advantaged crude oil to the rest of the West Coast.

At Kenai, between the increased production of Cook Inlet and the delivery of Bakken, the potential is to satisfy more than 2/3 of the crude appetite with advantaged crudes. Martinez will potentially increase crude -- advantaged crude by 20% and will satisfy more than 67% of their crude appetite with advantaged crude. Los Angeles, which is the largest of our West Coast facilities, will potentially see an increase of 125,000 to 130,000 barrels a day of advantaged crude. All total, the potential is for more than 190,000 to 200,000 barrels a day of additional advantaged crude oil to our West Coast system. With these significant shifts, there's a likely potential impact on ANS and, other substitutable waterborne West Coast crudes from both the competitive pricing and the crude quality perspective.

So our demonstrated experience with executing advantaged crude projects deliver significant value. As you can see from the bar chart, the Anacortes rail unloading facility has delivered over $140 million in the past 12 months. And it's also important to note that crude quality, whereas we refer to a relative refining value, contributes approximately 35% of this value. In addition to securing access to advantaged crude, we have invested in our facilities during close proximity second quarter advantaged crude production. These high return, short payback projects continue to deliver in excess of our initial expectations.

For example, the Mandan refinery expansion was originally scoped at 68,000 barrels per day. In fact, it is currently demonstrating the ability to safely and efficiently run at 71,000 barrels per day. At 2013 margins, every 1,000 barrel per day of capacity translates to roughly $10 million in annual EBITDA contribution. Continued optimization of our rail unloading, coupled with full year benefits with the completed expansion and upgrade projects will deliver $270 million to $305 million in EBITDA in 2014.

Now the current West Coast infrastructure has limited PADD V's ability to fully utilize the opportunity for advantaged crude oil. As you can see from the box in the bottom right, PADD III has significantly shifted towards North American crudes. And given the nearby production, we expect this market to be saturated with light oil.

It also highlights PADD I, and they had been able to take advantage of existing rail infrastructure and shift more towards North American crude oil. By contrast, the barrels representing PADD V's crude oil supply clearly show the opportunity for advantaged crude has been limited. This is due to the lack of the present rail unloading capacity in the West Coast. As this landscape continues to evolve, the Gulf Coast becomes saturated and northern crudes, such as the Bakken, should clear the PADD I in the PADD V. Of these 2 markets, PADD V is advantaged by rail transportation costs.

This may be a familiar slide, but it's important to note, it's been updated to only reflect the rail cost and it does not include the loading or unloading fees. And the real big message is actually in the table. As you can see, Bakken production continues its impressive growth profile and, very importantly, the loading capability is keeping pace with the production growth. Now if you look at the East Coast rail unloading capacity, it doesn't go appreciably, which is suggesting that it's meeting the anticipated forward demand. Now look at the West Coast unloading capacity growth. It is anticipated that the current constraint will essentially be removed over the course of the next few years and reach approximately 910,000 barrels per day in 2015. Essentially, 1.2 million barrels of Bakken production capacity will be underpinned by 910,000 barrels a day of unloading capacity in the most transportation advantaged market, the West Coast.

This slide really highlights the West Coast logistics development, and the big story is shown clearly in the bar charts to the right. There's currently about 800,000 barrels a day of substitutable waterborne crude in PADD V. The current West Coast rail unloading capacity is only about 25% of our volume.

In 2015, the rail capacity is expected to grow more than 900,000 barrels per day and will actually exceed the substitutable waterborne volume by more than 100,000 barrels per day. We will use this as a recipe for a Gulf Coast-like situation, where the West Coast crude should price more competitive. Tesoro is driving a large percentage of this capacity expansion, with the centerpiece being our development of the 300,000-barrel a day Port of Vancouver facility.

The Port of Vancouver will be the premier West Coast advantaged crude oil facility. And as you can see from the picture, a lot of the major components, such as the rail and marine facilities already exist. These were part of the port's $275 million investment program to improve capabilities and attract new businesses within the port. The Port of Vancouver is truly an advantaged port. It's got great access in the facilities that support safe and cost-efficient operations. I will also again point out, this is the most cost-effective rail unloading destination for Bakken crude oil.

After solicitation for bids by the Port, Tesoro and our JV partner, Savage Companies, were successful and granted the lease in 3Q of 2013. Our JV terminal facility will be designed to safely and efficiently handle up to 300,000 barrels a day of rails and marine activities. This will be a fully capable facility, including rail unloading, crude blending and storage and marine loading facilities. Washington State has a well-defined permit process, which takes 12 months. We are progressing through the process with an expected completion in third quarter of 2014.

This chart exemplifies our history with our Anacortes. Advantaged crude is not just about transportation. As I spoke earlier, the crude quality, or what we call it, relative refining value is another key component of the advantage. And this is, again, representing our experience in Anacortes. The cleaning product yields from Bakken crude oil are 14% to 16% improved relative to ANS, which translates to $3 to $5 per barrel yield advantage.

Now Dan talked a little bit about the logistics synergies because of the Los Angeles assets. And this chart really brings home Tesoro's unique position that capitalize on advantaged crude oil includes distinctive waterborne logistics capabilities. Now let me explain this by using the map. The blue arrows represent our ability to move advantaged North American crude from the production fields to the Port of Vancouver, the most effective -- cost-effective transportation plant and then to the entire West Coast system.

The red arrows represent our waterborne domestic and foreign capabilities. This includes our VLCC capable dock in Los Angeles, where we can effectively spread those advantaged transportation economics to the rest of our West Coast system. In essence, we have the flexibility to source and leverage advantaged feedstocks regardless of origin. While this is largely representing the transportation advantage, another key part of our strategy is to optimize these feedstocks across our large and competitive 720,000-barrel per day PADD V refining system.

The opportunity to improve realized margins, as Dave went through, showed that margins -- we don't expect a lot of help from the market. So we improve those margins ourselves. And the opportunity to prove these realized margins of our West Coast system is depicted by the shifts from the Tesoro consolidated West Coast index, which is the barrel on the left.

As you can see by the actual crude oil throughput in 2013, we have shifted our crude diet to improve our realized margins relative to the consolidated index. By the end of 2015, which is depicted by the barrel on the far right, we expect WTI-based crude to be close to 40% of the diet, which is a significant shift and resulting advantage.

To further support our strategy, we're developing and reviewing some key pipeline and crude storage projects. The first phase of Bakken storage hub is actually nearing completion and will have an initial capacity of 480,000 barrels per day. Phase 2 will have a potential capacity of over 200 million barrels per day. This storage hub will further strengthen our ability to supply Bakken to the West Coast. Dave spoke earlier about the growth of the Cook Inlet production. We're evaluating a potential pipeline that would safely deliver 15,000 to 30,000 barrels per day, further providing advantage to our Kenai facility. We're also reviewing the potential of building a pipeline to enable the safe and efficient movement of Uinta waxy crude oil to the Salt Lake City market.

So our efforts to enhance the gross margin extends throughout the entire value chain. Specifically, we have a distinctive suite of both premium and value brands, which we can deploy regionally.This year's addition of the Exxon and Mobil brands really fills out our capabilities in northern California and the Pacific Northwest, where previously we were lacking that premium brand offering. Deploying this strategy lat both premium and value brand markets will further build on our already strong integration and high-quality product channel net backs. In addition to deploying the regional brand strategy, we are focusing on optimizing the marketing portfolio. You can see by the product side, it really kind of represents 2 key stories. The first, as Greg and Dan talked about, is just the impressive execution of retail growth, extending expanding through 2013. And that's capped off in 2013 by the acquisition of the ARCO assets in gaining access to the Exxon and Mobil brands. Our plans are to aggressively grow the Exxon and Mobil brands in the regions where they have the greatest leverage.

Now the ARCO and AMPM acquisition provides another large leverage point. This is really a premium value brand, with excellent, excellent see store operations. And we plan to leverage that capability throughout our system. All told, these efforts are expected to deliver an additional $50 million to $60 million in annual EBITDA by 2015.

So I began by telling you, when I came, enhancing gross margin, we expected to drive $250 million to $200 million -- $290 million of EBITDA by 2015. As you can see from this chart, it's anticipated, there will be strong contributions of $140 million to $160 million next year. This is further underpinned with the delivery confidence as approximately 50% of this 2014 EBITDA is the result of full year contributions from the projects we have already executed and operationalized.

With that, it's my pleasure to turn it over to Brenda, who will walk us through how we are going to improve the base.

Brenda Peterson

Thank you, Keith. The growth in our size and complexity recently with the acquisition has resulted in opportunities in our base business also. Today, I'd like to talk about some additional cost efficiencies that we see in our base business. I'll also highlight 2 opportunities or 2 areas where the growth has created some new opportunities: one, in our supply-chain management, our procurement area; and the other, in our optimization across the value chain. I'll also talk about a couple of places we're investing in our organizational capability, our operational excellence management system and development of our capability through the implementation of Lean Six-Sigma.

Looking at our operating expenses as compared to Solomon first tercile or top third percent -- first third percent, we see that we've improved over the last 3 years, but we also see there's still improvement to go after. So overall for our organization, we've pulled up about $0.40 per barrel than. And in the California region, we've cut our performance GAAP in half by pulling out about it $0.85 per barrel.

The increase in the Mid-Continent region in 2012 is the result of some investment in infrastructure done in that region. A couple of examples, we invested in an electrical system upgrade at Salt Lake City and also some tank improvements in Mandan. These were one time intentionally done projects to support our high reliability in that region. So as we look forward, our most opportunity is going to be in the California region.

Growth has provided a number of opportunities, new opportunities in our supply chain management or procurement area. These opportunities include further leveraging our scale to drive our purchasing power, continue our focus on material management, which means to have the right equipment in the plant when you need it, but not have too much inventory, so focus in the this area impacts both reliability and cost. Expanding our relationships with our suppliers to drive cost lower, and leveraging new technologies to drive efficiency.

Optimization across our value chain is always the way that we drive value, and so we're particularly excited about the new potential offered with the growth in Southern California. Dan mentioned that after the acquisition, we had taken out about $200 million in working inventory. One project that we're working on now is looking across the Tesoro system to see if we can replicate that success by optimizing across our value chain.

We also continue to enhance our information system so that we can deliver data in a way that helps us make the best decisions quickly so that we can rapidly respond to changing market conditions.

Now I'd like to talk about some ways that we're investing in our organizational capability. Our Operational Excellence Management System, OEMS, it sets expectations, policies, standard and underlying procedures to deliver repeatable performance in the areas that we deem is important to do that. And as you can see, our near-term focus, our 5 key areas: Management, leadership, and accountability; safe operations; environmental stewardship; risk management; and reliability.

We are also investing in developing our people by rolling out Lean Six Sigma -- Lean Six Sigma, I'm sorry, across the company. This is in support of one of our strategic priorities of a high-performance culture. And you can see the circle on the middle are our guiding principals. So developing our people supports exceptional people, shared purpose, working collaboratively and delivering superior execution.

For those of you that are not familiar with Lean Six Sigma, Lean Six Sigma is a methodology and a set of tools that is used to identify improvement opportunities and to implement sustainable solutions. We see this organizational capability as integral to delivering the improvements that we've been talking about this morning. As I started out this section, The growth in Tesoro has offered a lot of new opportunities for us in the base business. This is going to require some new sets of skills. Utilizing these skills empowers our distinctive performance.

And now, I'll turn it over to Phil Anderson to talk about logistics.

Phillip M. Anderson

Good morning. So I'm really going to focus on 3 things today. The first is Tesoro's strategy to grow logistics to be a larger part of our business. The second part of that is really how we use TLLP to drive that growth, but not just for logistics, but it's really more of the growth engine for the entire company. And thirdly, how this creates value for the Tesoro shareholders.

So our key messages today, Tesoro's strategy, I think, as you heard Dan and Keith talk about, is to create distinctive advantages within our refineries by being able to bring in feedstocks that are deeply advantaged to the marketplace. And then to move our products as efficiently as possible into the highest value markets, and logistics underpins all of that. Additionally, we want to leverage that and continue to grow our logistics business to make it a larger part of our overall business structure. And that's really by going after a lot more third-party business with our assets and by acquiring assets that are more focused on that area.

The engine behind that strategy, as I mentioned at the top, is Tesoro Logistics. That gives us access to a very large pool of very low-cost capital. Its phenomenal success has been a significant strategic advantage to the company. If you just look this year, as Dan illustrated, in the acquisition of the Carson assets, and that's a distinctive advantage for us.

It's also been a significant contributor to Tesoro strategy to realize a significant amount of value for the embedded logistics assets that we had in our portfolio, as well as the assets that we've been developing and will continue to develop to drive our strategy.

So our strategy for TLLP has not changed since we IPO-ed 2.5 years to grow. There's 4 elements to it. The first is we're focused on stable, traditional logistics assets, very fee-based, very ratable cash flows. The second part is to optimize those assets and to improve the operations, drive additional utilization, consolidate Tesoro's business in these assets and really derive a lot of additional value from them.

The third aspect of that strategy is to use that as a platform to use that advantage pool of MLP capital to invest in the assets to grow, to provide new services to Tesoro. But also this is where we're investing to go after third-party business on assets that traditionally lived inside of our proprietary system.

And then lastly is to use that as a strategic tool to grow the logistics business, and there's really 2 elements to that. The first is to pursue bolt-on logistics opportunities in the Western U.S., and great example of that is earlier this year, we acquired the Northwest Products System, which serves, really, 2 of our markets and has been a great asset in our portfolio with lots of third-party potential.

The second is to partner TLLP with Tesoro to go after things that are really in Tesoro's strategic portfolio. And the example of that is what we did with LA this year.

So let's just take a quick look at what TLLP's been able to do since we IPO-ed 2 years ago for Tesoro. In total, TLLP has repatriated up to Tesoro over $2 billion of proceeds since we IPO-ed. And if you look at the transactions involved, the first 2 after the IPO, the Martinez and Long Beach terminal, are the only 2 where we went back into Tesoro's legacy logistics portfolio to provide growth. Everything else we've done was externally-focused or developmentally-focused. And the Anacortes rail facility, as Keith pointed out, is an opportunity where Tesoro was able to ultimately use TLLP's very low-cost of capital to realize a very significant value around an asset that really helps drive that crude advantage to the Western U.S. And then in LA, obviously, that's an example where we were able to leverage TLLP again to go out and find a significant piece of an acquisition for Tesoro.

And then lastly, earlier this year, as I mentioned, we acquired this bolt-on opportunity, the Northwest Products System, which gives us assets that really help us in a couple of key markets. So it's been a really significant amount of growth and a really significant amount of capital that we've been able to provide upstairs to Tesoro.

So let's look at what TLLP looks like today. Now there's really 2 core businesses here. The first is our business in North Dakota. We have a 750-mile gathering system. That pipeline traditionally served Tesoro's Mandan refinery. We've been investing in that system to help get the crude into the rail facilities for delivery to the West Coast, as well as investing in interconnections and things like that to really open it up to third parties and generate that additional value.

Our other business is the terminaling and pipeline business, and really 2 key areas. The Northwest system runs from Salt Lake City up to Spokane, Washington. That gives us access to 2 key markets in the Tesoro system with a really great asset with lots of third-party revenues in that markets. Our other big area for us now, obviously, is Southern California, where we now have the linked portfolio with 3 Marine terminals, over 100 miles of active pipeline and 8 crude and product terminals. And that's a fantastic platform for additional growth of synergies to Tesoro, all of those good things.

And then we have a smattering of other terminals in markets where Tesoro does business historically.

In terms of financial metrics, TLLP has a total enterprise value today of about $3.6 billion and our market cap is about $2.8 billion. So that's in the upper half of MLPs out there. And 2.5 years in, that's a fairly significant leap for us.

In terms of future opportunities to realize additional value for Tesoro's assets in TLLP, we see about $1.5 billion of opportunities coming from not only that legacy portfolio. There still has 8 of the original 10 assets in it. But also, as Keith talked about, these assets that are under development. So it's a great example where Tesoro's going to go out and leverage TLLP's access on low-cost to capital, to really drive this new critical structure that enables Tesoro to get that significant crude advantage into the system.

We're also growing organically within TLLP's base assets. And as I discussed in North Dakota where, where we are expanding our pipeline, growing our volumes out there, a lot of that is a very critical to aggregating the volumes that are eventually going to go West to Vancouver. So it's a very linked part of our strategy. As Keith mentioned, we're developing this major trading hub at the intersection of our High Plains system and a couple of other regional carriers. It's also in close proximity to a lot of these rail export facilities. Our first almost 0.5 million barrels is almost complete and committed. And we'll be going out to market for the second phase of that, which we can pretty easily go up to 2 million barrels with market demand. So again, driving that third-party focus of assets that are originally designed to give Tesoro an advantage on the marketplace.

Additionally there's -- the Bakken field is relatively immature in terms of the back end gathering, the stuff that actually gets you to the well. And that's -- we use a truck fleet to accomplish that gathering now. We see a lot of significant opportunities as that field matures to put that infrastructure in place. And those will be some big projects. They're not in our numbers yet, but we see those coming here pretty soon and they may well be significant.

On our terminaling and pipeline side of the business, our focus over the next couple of years is, first off, to aggregate Tesoro's Southern California business into the TLLP terminals. And we talked about that. It's a big synergy for Tesoro. It gives Tesoro some great advantages, but it also grows our assets in terms of EBITDA, also combined with opening some of those assets up to third parties is giving us the opportunity to make some very attractive investments to expand a couple of the terminals but in new services like biofuels blending and things like that. So a great fertile field for us to continue to grow organically.

When you look at TLLP's capital spending with our present suite of assets, we expect to invest about $100 million a year organically on the projects that we've already talked about. Our typical returns at TLLP have been 15% to 25%, which in the MLP environment, is really a very attractive type of return. And we typically get those returns because we typically have some built-in synergies with Tesoro around these projects. And that's something that obviously drives us to move quickly to capitalize on these opportunities.

A couple of things to note. The first is those gathering projects that I talked about are not in this number. We don't know exactly when they're going to come, but we do, so see those coming in relatively short order. The second thing is, is that TLLP does have access to it's own capital. So it funds its own capital program, either through retained cash flows or through its own debt and equity offerings in the market to fund growth.

So let's bring it all back to the Tesoro value proposition. You can see on the left-hand chart, our rapid growth of EBITDA over the last couple of years, where we nearly doubled it this year and we'll do, do that again here over the next couple of years. The 2015 number you see is first call. And we think that, that reasonably represents our current suite of assets as well as the organic growth programs. In terms of translating that into distributions, since we've IPO-ed 2.5 years ago, we've grown TLLP's LP distributions by 62%. What's significant in that is that we've crossed that critical 50% threshold where Tesoro's GP is now getting 50% of the incremental cash flows per unit through their incentive distribution rights. If you look at the value proposition for Tesoro over on the right-hand side and you say what's that worth in terms of what Tesoro holds, you can see the LP position in the dark blue and that's moving along as we grow the business. But the really exciting thing is what's happening with the GP and where we really leverage those incentive distribution rights to grow that value significantly now over the next couple of years. So if you do the math on first call on the 2015, and you translate that over into what that means in terms of value, you're looking at over $2 billion of value inside Tesoro for its holdings, or most importantly, for share basis, for Tesoro's shares, over $16 a share. So very powerful value growth, and that's pretty darn distinctive.

So with that, I'm going to turn it over to our Chief Financial Officer, Scott Spendlove.

George Scott Spendlove

Our financial discipline objectives really have remained unchanged. And that is to maintain the financial strength necessary to provide flexibility for growth and to drive further shareholder value creation. At the root of this is solid operating results, including capturing the synergies and the other improvement objectives that we've talked about here today to really drive the strong free cash flows. We then reinvest in the balance sheet, making sure the balance sheet is strong, invest in growth opportunities, and otherwise, return excess free cash to shareholders. We've set a target of minimum cash balance of $600 million to $800 million. We think that, that is optimal to sustain the business that we have today. And by the way, backstopped by about $3 billion today in excess revolving credit and letter of credit capacity.

We have leveraged targets for both Tesoro and Tesoro Logistics. The Tesoro Logistics target leverage of less than 30% excludes Tesoro Logistic debt and equity, and both of those, we think, are very appropriate and competitive to again maintain financial strength and allow us to be prepared for the growth opportunities that may come.

And with leverage where it needs to be and the cash on the balance sheet at an appropriate level, we then look to invest in growth opportunities to drive further value creation. These are strategic high-return projects that we've talked about extensively here today, and I'm going to talk about a little bit more of those in just a minute. Beyond that, then we'll return excess cash to shareholders, which we're doing through dividends and stock repurchases and we continue to drive towards an investment grade credit rating. And as we capture the synergies in California and move that crude advantage West as we've talked about here today, we believe that we should be well-positioned to move into investment-grade territory.

Let me just touch a little bit more around the leverage story. Yesterday, we repaid another $300 million of the $1.2 billion of interim financing that we put in place to close on the Los Angeles acquisition. Bringing our total debt repayment to $800 million since the end of the third quarter, leaving us just $400 million now of interim depth that remains on our balance sheet and that we will look to repay sometime next year. With that, that reduction, that brings our Tesoro leverage down to 27%, below our 30% threshold, and again, as Greg mentioned, well within a very short period of time post the close of that transaction.

And I'll show you in the next slide, our ability to do that was driven, really in large part, by the sale of the logistics assets to the MLP. And through the sale of those assets, Tesoro logistics funded that through a combination of debt and equity. And you can see that we've been able to keep the leverage at Tesoro Logistics also low within the range that we were expecting or that we've targeted, at just under 4x leverage.

This slide really adds to what Dan already talked about, about the economic value, and it really demonstrates what we were able to do from a cash funding standpoint for the Los Angeles acquisition. You'll note that the first 2 lines totaled $1.3 billion of the $2.3 billion acquisition. So well over 50% of the acquisition price came from self-funding sources. This asset brought with it more than half of its own funding sources through the net proceeds of logistics asset sales, $1.1 billion, and the $200 million reduction in working capital that we achieved subsequent to closing.

You know, too, that the sale of our Hawaii assets earlier this year was also a redeployment of capital from what we would a nonstrategic, low-return, low-potential asset, into a very strategic, very high return, with great potential asset in our Los Angeles system. And we funded the rest of the purchase price using cash on hand and interim debt. It's also worth noting that using Tesoro Logistics' lower cost to capital funding improves the present value of this transaction and returns immediate value to our shareholders.

Let me shift gears here for a minute and review our capital spending plans for the next few years. You'll notice that next year, in 2014, our plan is to spend $670 million on sustaining and income capital. These numbers exclude turnaround spending, and I'll just touch on those here in just a minute. Note, too, that they also exclude the TLLP capital that Phil just reviewed with you, because as he pointed, TLLP self-funds its capital needs through operating cash flows in its own debt and equity capacity.

I'm not going to spend much more time on this slide. I'm going to dig into the details here in just a minute. I think the important takeaway though is that our base EBITDA, the growth in EBITDA is well -- what positions us quite well for this investment profile. And as you'll see towards the end of my presentation, still leaves us with plenty of free cash flow us to drive growth opportunities and return value to our shareholders.

Our ability to deliver the EBITDA and earnings improvement that we've targeted is really dependent on safe, reliable and compliant operations. And to sustain these operations, we expect to spend somewhere between $400 million and $500 million annually on maintenance and regulatory capital, again, before turnaround spending. The implementation of the operational -- excellence management system that Brenda talked about really works to enhance the efficiency of these capital dollars as we further capture and apply best practices and risk-based planning approaches across our system of assets when it comes to sustaining capital investment.

I want to point out on this slide, the increase in the outer years from what we've seen this year really points to 2 things. First of all, we are expecting increases in regulatory spending, primarily related to flare modifications that we need to make. And then secondly, the increased spending from the Los Angeles acquisition that, really, is in line with the expectations we laid out, when we acquired those assets on Wednesday actually when we announce the acquisitions back in August 2012.

On the income capital side, as Greg mentioned since 2010, we've invested over $650 million, on these high-return strategic capital projects that today are returning over $500 million in annual EBITDA. As we look forward, we see opportunities to invest another $875 million of income capital, about 40% of our total spend on a forward basis, in projects that replicate those opportunities we've had in the past that should generate returns low in excess of 30%.

This has been a powerful and an important source of value creation at Tesoro, and it's really part of what's driven a threefold increase in our enterprise value in the last few years.

Our priority for free cash is to continue to find and invest in projects that improve our competitive position through margin and yield enhancements and cost reductions. These strategic investments really do represent or present for us our best use of free cash flow because they generate high returns and help us improve our competitive position.

There's 2 programs that I'm going to talk about that accounts for about 60% of this total spend, and that's the California synergy project and the Salt Lake City Conversion Project. Beyond that, our spending remains focused on advantaged crude capture and yield enhancements and cost reductions.

Looking at the Los Angeles refining integration project, this is the largest of the California synergy project. This project, which includes the decommissioning of Wilmington's fluid catalytic cracking unit, is expected to increase our flexibility as it pertains to gasoline and diesel mix and reduce CO2 commission by 0.5 million tons per year.

Capital spending for this project, net of capital [indiscernible], is in the $140 million to $160 million range. And EBITDA is estimated in the range of $50 million to $75 million. We're targeting the completion on this project in early 2017, which would deliver the return in excess of 30%.

And this project, once completed, is really what's going to improve our competitive position, or really conclude the transformation of our competitive position improvement on the West Coast, with increased ability to produce distillates and reduce CO2 emissions.

Salt Lake City Conversion Project is the second major project I wanted to talk about. This strategic project doubles our ability to run waxy crude oil in the Salt Lake City refinery and also increases throughput capacity by about 4,000 barrels per day. These advantage barrels come to our refinery as a fixed take or pay discount that drives tremendous margin and value -- margin capture and value creation at the refinery.

Phase 1 of the project was completed in the second quarter of this year for a total cost of $175 million, and we are now able to run up to 17,000 barrels a day of waxy crude from this first phase. Phase 2, which we expect to be completed in early 2015, will allow us to run up then to 22,000 barrels per day and also see the increase capacity to a refinery move up by 4,000 barrels per day.

The Phase 2 portion of this project should take our total investment up to $275 million and annual EBITDA contributions should then be able to be about $100 million or returns of right around 30%. And again, investing in these kinds of projects is our preferred use of free cash flow.

On the turnaround front, you can see that 2013 was a year of higher turnaround activity, and we're looking forward to 2014 and 2015 being periods of lower turnaround activity, which obviously, will mean more throughput or margin capture and deliver you greater cash flows.

As with our sustaining capital, our average turnaround capital is going up by about $125 million in line with what we guided to when we announced the Los Angeles refinery acquisition. Although we don't give specifics on refineries or units, we do provide this information to help you understand our base cash needs.

So bringing this all together, we expect to generate some $3 billion of cash flow over the next 3 years. And this outlook is based on the consensus EBITDA estimate that exists today plus the new improvement commitments that we've laid out here today above and beyond the synergies that we expected when we first announced the acquisition of the Los Angeles refinery.

This free cash flow is after interest and taxes. It's after sustaining the turnaround capital and it's after TLLP distributions. But impressively, it's before the $1.5 billion of additional drop-down cash potential that we see from TLLP. Just under 1/3 of this cash is already earmarked for these strategic high-return investment projects, leaving is truly well-positioned for further growth and returning cash to shareholders. And we are committed to returning cash to shareholders. At $1 per share annually, our ordinary dividend is competitive with peers both in terms of yield and payout. It's more than doubled since we initiated it back in August of 2012 because our share price has nearly doubled in that time, and we've sought to maintain a competitive yield. And we've also been returning excess cash to shareholders through the form of $1 billion share repurchase program. That $1 billion program represents 12% for of our current market cap. Through the end of this year, we expect to have repurchased about $.05 billion under that program. And combined with the dividends we've been paying, we've returned over $600 million to our shareholders since 2012.

And with that, I'm going to turn it over to Greg to wrap up.

Gregory J. Goff

As really, we -- as we prepare to embark on our journey for 2014 and 2015, I think you can see, based upon what we've all talked about today, each of the different leaders of the company, that execution is critical. To make this happen, we have to execute the business extremely well.

And so, like I said at the beginning, we think our plans are very ambitious and very aggressive. And we also believe that you've captured through the theme of this discussion this morning that they're distinctive. And I think what's important is, is that, that same motto that I started with the beginning today is that, we will do what we say we do.

So as you can see, as I summarized here, from this slide, the 3 key distinctive priorities, the first 3 around -- deliver California synergies, enhance gross margins and improve their base. We expect them to deliver somewhere between $370 million to $480 million of additional EBITDA in 2014.

Moving from '14 into '15, you can see that we take another step change in the EBITDA contribution, another $200 million to $280 million, puts us up, approaching $590 million to $710 million of additional EBITDA improvement, attributable to these 3 distinctive performance objectives.

Additionally, as Phil described, we intend to grow our Logistics business. As like he stated it, absolutely fits our integrated business model. And from 2013 to 2015, we expect the EBITDA in Logistics to grow by $200 million a year. And if you do the math that he talked about, that translates into about another $1 billion of additional value for Tesoro shareholders.

And then finally, as Scott just stated here, around our strategic priority of maintaining financial discipline, the focus on having a strong balance sheet and running the business extremely well, allows us to have that free cash flow to -- to invest in the business and grow to business with these very strategic capital projects. And the amount of excess cash flow positions us well to return cash to shareholders.

So I think, just in summary that, today, as we've gone through and talked about our distinctive performance objectives, we actually believe that we are extremely well-positioned to continue to deliver shareholder value, and that we will do this through distinctive performance.

We appreciate the opportunity to share this with you today. And with that, I'm going to ask the leadership team to come up and then we're going to open it up for questions, and we'll take any questions that you have.

Just give me 1 second. And then, like as Brian said at the beginning here, because we are doing a webcast, maybe just for the sake of -- so people could hear it, if you'd wait until the microphone comes, and then just give your name and ask the question, I think that would be appreciated. Doug?

Question-and-Answer Session

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Doug Leggate, Bank of America. I have 2 questions, if I may. First of all, the synergy step up is clearly quite significant. Can you help us understand how you're going to report that to us, so that we can monitor the pace of delivery and the magnitude of delivery, and perhaps give us a benchmark as to what the current synergy capture is for 2013? And I have a follow-up, please.

Gregory J. Goff

Yes. The current synergy capture you saw in Dan's slide I think was around $30 million for '13. As we get into 2014 and beyond, we will provide a periodic update on those synergies, primarily targeted in the buckets that he talked about today. So we will come back and reference the progress that we've made in each of those categories.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Maybe just a request, Dan. As we look at your capture rate, relative to the index, a pre- and post-synergy might be helpful, so we can actually monitor if that contribution is coming through, if you see what I mean. Giving us some way to measure it. My follow-up is really more about the MLP. Very significant growth in the GP value. When we look around the market, things like, for example, Anadarko in the MLP space, they've come up with a fairly unique way of listing both the GP and the common units to get that mark and that value recognized in stock. What are your thoughts on how you can get market recognition for that very significant GP growth?

Gregory J. Goff

Doug, on your question on the MLP, at this point in time, our plans are to continue with the current structure that we have. We will always maintain full ownership of the GP, and we don't have any intentions today to do anything similar to like your Anadarko example. We're not intending to do that right now.

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

It's Arjun Murti with Goldman Sachs. Your analysis or points on Bakken going west, and potentially pressuring in, that's certainly very interesting. Curious if you have thoughts on California heavy pricing. Do those stay linked globally, with pressure on light prices, pressure heavy by some amount? Some of that, I think is based on, if we have a real glut of light oil in the U.S., is there scope to substitute, in your refineries, some amount of heavy throughput for like, can you do that? How easy it is to do it? And then the final part is just simply, what's scope through de-bottlenecking or otherwise is there to run more like crude oil at any of your plans, could you take them up 1%, 2%, 3%, based on what?

Gregory J. Goff

So let me ask Dave to comment on the first question. Did you get the question, Dave? And then maybe Dan can then elaborate on the changes we can do to our refineries to run different grades. Dave?

David K. Kirshner

So on California heavy, similar to the Gulf Coast, as more and more light comes in, it has a knock-off effect. For example, [indiscernible], it's not a direct competitor of the California [indiscernible] but they start getting, so [indiscernible] that just comes down. So we're already starting to see California try [indiscernible] impact by market [indiscernible] coming to the West Coast. How much that is [indiscernible].

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

Possibility to reduce heavy runs to run more light?

David K. Kirshner

I'm going to leave that to chance.

Daniel Robert Romasko

Okay, so -- yes, so as we've answered that before, the amount of light crude that we can run in Alaska is potentially all ANS. We've -- did a test run in March, April timeframe, and ran Bakken up there, and it processes very well. We expect to be able to run in the 20,000 to 30,000-barrel a day relatively easy there with little to no capital modification. Similarly at Martinez, we did a test there and actually today, run -- manifested more recently unit train volumes there, in the range of 10,000 barrels a day. We expect we should run 30,000 to 50,000 barrels a day of a Bakken-type crude there, with little capital investment. Last plant, down in the LA complex, primarily on the Carson side, up to around 100,000 barrels a day. And then maybe the final thought there is, North American advantaged crudes include crudes other than light. And so we'd take that [indiscernible] process also.

Edward Westlake - Crédit Suisse AG, Research Division

Ed Westlake. I guess the first question is on logistics EBITDA. You've obviously shown how TLLP is going to grow, and how you're going to grow. But I don't know if you're prepared to give a number of the -- sort of a range of the EBITDA that's still at the Tesoro level today, that could be dropped down over time.

George Scott Spendlove

Yes. I think at this point, because a lot of those assets remain to be commercialized, when we look at them on an aggregate, we're comfortable with saying that, that portfolio is probably worth in excess of the $1.5 billion. And you can back into that or something like that, take a multiple from that.

Edward Westlake - Crédit Suisse AG, Research Division

And then the -- there have been some reports of maybe permitting delays for the Port of Vancouver rail facility. So maybe just an update on the timeline of getting the permits to get that facility up and running.

Phillip M. Anderson

There is no delays to the permitting process. Washington State has a very defined permitting process. It takes approximately 12 months. We entered that process and we are proceeding per schedule, and anticipate receiving approval in 3Q of 2014.

Gregory J. Goff

We submitted our permit in August of this year.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

It's Robert Kessler, Tudor Pickering. 2 questions. One is your ANS relative discount to Brent of I think around $3 per barrel seems at odds with your pitch on the West Coast becoming a Gulf Coast light saturated market. It seems to only really run, a kind of quality difference, and not even a transportation difference, assuming that you do export ANS. Is it fair to say you've just sort of set that number, that conservative number level, and your sort of real view might be a more aggressive spread on ANS, relative to Brent? That's my first question. And then the second question is, as you look at the West Coast refined product, markets relative to the export market, how much high-value export destinations might there be? I guess my thought here is, you look at the Gulf Coast that came into saturation, you ramped up utilization, you spilled over into the export markets. Not that big of a deal, because the Gulf Coast is a lower, say product-price market, relative to the West Coast. Now if the West Coast comes in saturation, do you have a degradation in the margin on the product side, if you're saturated in the global market, and that global market is at a lower price, relative to domestic West Coast prices?

Gregory J. Goff

Dave?

David K. Kirshner

Okay on the second question, on the products question, clearly as the market becomes more saturated with products, and you have to export more products, you've got to find other markets. And what we're seeing now is there has been some rationalization, both in Europe and in Australasia, that allow those products to move. So yes, the West Coast ultimately does have to compete with the Gulf Coast in the export market. It has some natural markets, like the West Coast of Mexico, which it has a competitive advantage in, but the further you get away from, close in to the West Coast markets, then you're competing on a global basis. With regard to the Brent ANS discount, you're absolutely right. In fact, in the presentation we stated, we're very conservative in how we've laid out our numbers. If things work as we expect, that comes under more pressure. And ultimately, the ANS price has got to price to be competitive with advantaged crudes, whether they come from the Bakken, they come from Canadian crude, well with the expansion of the Trans Mountain Pipeline, or they come from the U.S. Gulf Coast, on U.S. flagged vessels. That would ultimately be sort of the limiting factor on where ANS should be, because if ANS was priced about that, it would drive people to move their vessels over and lift to Eagle Ford or LLS from the Gulf, and come around.

Chi Chow - Macquarie Research

Chi Chow at Macquarie, I have 2 questions. One on your integration strategy. You're increasingly contributing your logistics assets now into a third-party entity. Would you consider a similar strategy for your retail system? And if not, why is that integration still so important? And then secondly, Dan, you suggested that the state of California has increased its regulatory oversight on refinery operations. Can you give us some more details on that? And is there any way to quantify the cost or their impacts to your system?

Gregory J. Goff

Well Chi, I'll answer the first question, then let Dan answer the second question. Our retail business, as we continue to grow it, we have -- we actually completed this year of pretty extensive evaluation of our overall marketing business. And there are several outcomes in there. Keith highlighted one of those, that we saw an opportunity to drive some improvements in the gross margin capture there. And we've looked at things that we could do to monetize the assets. Right now, we have -- we're more focused on trying to optimize and grow that business than we are trying to do anything with it. And right, so we don't have any plans to do anything any different than the way it's structured today. Dan, you want to talk about regulatory?

Daniel Robert Romasko

Yes. So I was referring to the recent industry, recent meeting the last year or two, Chi, incidents. On the West Coast its raised political and public pressure. The most significant clear outcome of that was Senate Bill 54, which requires some level of trade use for maintenance activity. The financial implications of that, so long as you execute well, which we intend to do so, is not particularly difficult or impactful. What's important though is it continues to be a complicated state in which to do business. And we actually view that as a competitive advantage, not a competitive disadvantage. It does take patience, and you have to pay attention to what you're doing. But to execute well, you can navigate that complexity quite profitably.

Paul Y. Cheng - Barclays Capital, Research Division

Paul Cheng, Barclays. A number of really short questions. Greg, if we look, excluding the potential commodity price external differences, comparing to your assumption, when you look at 2014, your EBITDA improvement, where is the biggest risk that you may not be able to achieve, and where is the biggest potential upside that you may be able to get more than you talk about here?

Gregory J. Goff

Yes. Paul, I think the biggest risk is how I started my summary here, and that's in, just our abilities to execute. I mean, if we believe it's pretty aggressive and ambitious, what we're trying to do. And so it really requires a lot of different people in the organization to stand up and deliver different parts of it. So if I think, by far, the biggest risk is strictly on execution.

Paul Y. Cheng - Barclays Capital, Research Division

Really then, 1 particular project or 1 area that is more risky than the other, or that is just in general execution?

Gregory J. Goff

I think if you go back and you touch upon -- you saw that there were 2 big drivers of additional EBITDA improvement for 2014. If I look at what Keith talked about first, he made the point at the end that a significant part of that is from the continuation of things that we finished this year, that we didn't capture the full value of, so there's less exposure on the gross margin capture, if you get into the synergies, there's just -- as Dan laid out, all of those different areas that we're targeting, there's just a heck of a lot of work that needs to be done there. So I think it's probably around capturing all that value and synergies. I mean, it's a couple hundred million bucks of improvements. That's a lot of work.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Second question, then, on -- if we look at, over the next 3 years, your sustaining capital and turnaround together is roughly about $800 million a year. Is that on a going forward? That's a reasonable assumption that on an average per year basis, or what that, the next 3 years is not a good policy?

Gregory J. Goff

On just the good capital, I would say that the numbers that we have there is a reasonable estimate on a go forward basis. The sustaining and income capital that you talked about, the $750 million, give or take, is probably a good number.

Paul Y. Cheng - Barclays Capital, Research Division

No. I'm just talking about sustaining capital plus turnaround is about $800 million...

Gregory J. Goff

Turnaround, yes.

Paul Y. Cheng - Barclays Capital, Research Division

Together, so on a really [indiscernible]

Gregory J. Goff

There are some peaks, yes. Excuse me, I misunderstood the question. That's in the ballpark.

Paul Y. Cheng - Barclays Capital, Research Division

And final one. Dan, on Carson, I was so maybe surprised seeing that, that can only run about 100,000 barrels per day of ANS -- of Bakken so you essentially, I think, before you have acquired, they ran about 100 in ANS, 100 in there, you actually light? So why there is only being able to run at 100,000 barrels per day of Bakken?

David K. Kirshner

Yes. you we might actually be able to run more than 100,000 barrels a day at Bakken. We've not done an evaluation to take it further than that, because our assumption is, the optimized crude slate will probably stop right around that level. And that was kind of my message on advantaged crude stocks being -- in addition to Bakken. So you got the machine and the complexity to fully convert a barrel, in the and there are barrels up to where the price is good or better than Bakken, which we believe there will be, then you're better suited to run that slate, so we think it's a good mix.

Evan Calio - Morgan Stanley, Research Division

Yes, Evan Calio of MorganStanley. A first question, and you gave a lot of information and backup for a significant improvement, a significant uptick in improvement EBITDA. It may be hard, but a different way of asking Paul's question, is there any measure of sensitivity on that EBITDA, whether it be to of Bakken, Brent diff or a Tesoro crack, I assume there's some variability around that. And then, my second question, is Carson was such a successful transaction for the company, how do you -- what are your thoughts on the M&A market, and do you think that over time, Tesoro have more refineries in its system?

Gregory J. Goff

The -- we felt, Evan, that when Dave got up and laid out our diff in that for some of our key crudes in our markets, we take a pretty conservative view of those. The main reason we do that is, is we ascribe to the belief that the market can be efficient over longer periods of time. But because we're making decisions of how we spend money and allocate our resources, we're not allocating that based upon a blowout in 1, 2, 3, 4 months. So we're really kind of taking a longer-term look to really say how is that value is going to be there. As a result, our diffs, we believe, are -- there's maybe not a lot of downside in them over the course of a twelve-month period of time, and so that risk or the sensitivity isn't that great, driven by the market factors. That's just how we look at doing that. The second -- your second question about the acquisition in Southern California. I think, first of all, we have to admit that it was unique. I mean, there's -- it was -- we were -- the proximity of the facilities, and everything about it, was a unique acquisition and you can never say never, but it -- to do something like that, again, I am not sure. But we believe, and I've said this for the last 2 or 3 years, that one of the things that we do, and it's done through Keith's organization, is we continue to look at everything in our market. We are focused in our market, that has never changed. And we think that there are opportunities, over time, that under the right conditions, could be a good fit for the company, and we'll just continue to evaluate those and see what happens.

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

Roger Read, Wells Fargo. Following up on Evan's question about, would you buy anything else. Is there, following the rationalization of why anything left, I mean, Alaska's one that maybe stands as geographically separated. Understand you could ultimately take some Bakken barrels there. But is there more rationalization that makes sense within refining? That kind of question #1.

Gregory J. Goff

So Roger, in our portfolio the answer's no. The good thing about Alaska, I mean that of the -- the encouraging thing about Alaska is the point that Keith made, is that the growth in production and cook-in leverage supplies Alaska refinery is growing and you could see that number has it up to about 25,000 barrels a day. I think now it's 15,000, 17,000 barrels a day. So that helps the crude supply cost position the refinery. And then with the ability to have that integrated West Coast system and take -- potentially take Bakken crude up all there, only strengthens that asset. So there is no further rationalization of our refining assets.

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

Okay. And then a second question was just on -- I was going back through the presentation, and if I missed it, I apologize. But trying to understand the breakdown between the synergies and the growth EBITDA that you show, and how much of that we can attribute to the distillate side? Is that something you can help us understand a little bit more? I mean, I understand the larger cracks and all that, but just trying to understand the magnitude of the diesel or the distillate upside here.

Gregory J. Goff

Yes, we're not going to get to that level of detail on the synergies. The buckets that Dan laid out is -- the level of detail that we'll provide on those synergies just for competitive reasons of how we are trying to attack the market.

Paul Sankey - Deutsche Bank AG, Research Division

Paul Sankey, Deutsche Bank. I'm going to slightly go against the weeds here. Speaking of weeds, on Page 60, Brenda, it was your slide, really like related to cost. Could you just clarify that for a little bit -- for me. If I'm reading this right, does this mean that your weighted average cost is, let's say about a buck higher than the first tercile of each region?

Gregory J. Goff

Dan, why don't you clarify that for Paul?

Daniel Robert Romasko

Yes. Versus top tercile, on a regional basis, California is just $0.85 above Pacific Northwest, it's 30% above, and it comes to $1.10 in 2012. Now we've made further progress in 2013, and I think we showed that on a slide prior to that. So these are our target areas for improvement.

Paul Sankey - Deutsche Bank AG, Research Division

And it says that you're targeting first, to sell in California only?

David K. Kirshner

Primarily California, really, for our couple of reasons. Part of the reason, and Brenda covered it in her presentation, the Mid-Continent shows the way it does is because we're intentionally investing in reliability funds at those facilities, because we want no downtime. And if that takes incremental cost, so be it. Now if the primary piece of what shows up there is electrical infrastructure work that we're doing at Salt Lake City and tank infrastructure up at Mandan. Those were fairly significant funds, and those are one-time expenses. The electrical infrastructure work is $40 million, it ends in the middle of next year, so then that's gone, and we won't have that show up. The way Solomon calculates operating cost, they include maintenance-related capital.

Paul Sankey - Deutsche Bank AG, Research Division

I understand yes, that's really -- I don't want to get too far down the road, but this -- we'll take it off-line, but it's -- I just wanted to clarify literarily what Josh said. If I could jump forward to a higher level question, Greg, you've got around $1 billion of free cash flow here. I think that's X the $300 million of growth capital [indiscernible], so there's a remaining, in theory, $600 million that I assume you're going to use to buy back stock mostly, but then also increase the dividend. Could you just -- given that we've got a pretty firm number there, for $600 million, can you just talk about how, the outlook for itinerant shareholders?

Gregory J. Goff

Yes, Paul, I'll give 2 answers to your question. One is, we've been very clear that our intentions with our dividend is to maintain a very competitive dividend, relative to our peers, on a payout ratio and a yield standpoint. And at this stage, that's what we're going to continue to do. Secondly, we've already announced the next phase of our buyback, and $0.5 billion buyback that you can see how that kind of fits in with what we have going on next year, and will execute that buyback program. The other thing I think though, that to mention there and then Scott said this in his presentation, we still have about $400 million of debt, with the acquisition of Southern California that we will repay, also.

Paul Sankey - Deutsche Bank AG, Research Division

Is that in the course of next year?

Gregory J. Goff

Overtime -- yes, over the next year.

Faisel Khan - Citigroup Inc, Research Division

Faisel Khan with Citigroup. Just a few questions. First, on tanker capacity. To execute that plan that you guys have talked about in delivering crude from your Vancouver Island project to the -- to the West Coast -- U.S. Coast facility, do have enough tanking capacity to be able to do that? You have to order new tankers. What's the status of the infrastructure you have to be able to execute on that plan? Second is, on blending, you guys talked about blending crudes at some of your facilities. Can you talk about the ability to blend lights with heavy, to kind of make medium look-ales and how much capacity you have, to be able to do that, and the third one's term contracts, do you have term contracts, middle east players, and if so, when do those expire and lastly, do you have a philosophy or opinion on the export ban, the crude?

Gregory J. Goff

So 4 questions. Yes, yes, no, yes. But -- the -- let me -- I'm going to take a couple of those, and I'll get some help here from the others. But if I -- it was a little difficult for me to hear, but I think your first one, Faisel, was on the requirements to move the crude oil. So from a rail standpoint, we are having our fleet sized to awesomely [ph] move the crude from North Dakota to the Port of Vancouver. So we have a fleet already that -- and we have additional railcars being developed to do that. So we're very comfortable with that standpoint of it. We also have ships to move crude, what we do today, and we are -- Dave's organization is complementing that capacity, and we're very comfortable, we'll be positioned when the Vancouver facility comes online to move the amount of volume that we intend to move from that -- in the crude market. That was one question. I think that second question you had was about blending light and heavy, so maybe Dan, you want to talk about that question?

Daniel Robert Romasko

Yes, I'm sorry, Greg --

Gregory J. Goff

I think Faisal's question was the capability -- we talked about blending crude oil. And when Keith mentioned blending crude oil, it was specifically at the Port of Vancouver. So if we see -- because we have capability to take crude from multiple destinations, we may want to be able to blend some of that crude. So we're creating capability there because of the investments we're making. But I think you asked specifically about taking the blending light and heavy type crudes, which there probably, isn't something we would do, but that go ahead, Dan.

Daniel Robert Romasko

Right. Now, if it was in response to the comment we made on the synergy project already completed at Carson, that was a physical blending system, where we can bring in opportunistic crudes that otherwise couldn't be run. And the reason they couldn't be run is because they have particular metallurgy or yield-related gremlins in them, and you need to control that blend very precisely. So that blending system was installed, it came online just about the same time as change of control, and it allows us to grab those crudes when they become distressed in the marketplace or otherwise available at a strong margin. As far as general blending of crude, we have the capability at most of our facilities. And Keith might be able to talk a little bit more about what our plans are in Vancouver.

Keith Casey

Yes, I think I covered it good enough.

You asked a third question, Faisel. I'm not sure I recall exactly, but let me answer your fourth question, and then come back to your third question. Your fourth question pertained to export ban on crude oil, and that, I mean, we can all speculate on how we think that's going to happen. But I can tell you what, from our standpoint, I think there are a number of factors that make that an interesting question. If you reflect back on what Keith said, Keith showed you that, on the West Coast, what he called substitutable grades of crude oil, there was about 800,000 barrels a day of crude coming into the West Coast, granted, part of that is ANS, but another part of it is Middle Eastern crude oil. So if you're going to -- as a country, if you're going to take advantage of this crude oil, then you would think that it would be easy to permit to a facility that already exists, to get crude oil produced in the United States to the refineries where they can run it, and that's a substantial amount of crude, probably 300,000 to 400,000 barrels a day. So I think there's a lot of factors going in there, and I think the overall politics of it, who knows? I think you do have to remember that those crudes have to get to the water to clear, to then be exported, then we'll see where the values are, if that happens, but we don't have really, any idea of where the government's going to come down on that, and I don't think -- go back on your third question. I didn't recall it.

Faisel Khan - Citigroup Inc, Research Division

The term contracts, for Middle Eastern crudes, do you guys have any term contracts then, do those expire at any point in time, or...

Keith Casey

Yes, our crude oil supply that Dave runs, we have a different -- a variety of different ways that we supply the crude, in no cases do we ever have long term contracts that limit our flexibility to take different crudes. So we can continually optimize around all of the refineries, with the exception of Salt Lake, because we do have, as Scott mentioned, a specific longterm agreement there, but everywhere else, we have flexibility to optimize in a short-term basis.

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

Ann Kohler, Imperial Capital. Two questions. First, when it comes to acquisitions, if you could just provide a little bit more on clarity, and some -- in terms of what criteria you would be looking for, given that, as additional refining capacity, additional -- California is unlikely, would you need to focus an entire system or reconsider as only a standalone finding asset? And then secondly, just a little bit more color on the Cook Inlet opportunity? What are the investment criteria that you're looking at to move forward with that project? Is there any sort of timing on that project, and I assume that would be able to be dropped down into TLLP?

Gregory J. Goff

Ann, the answer to your first question, around acquisitions, absolutely have to be strategic to the company to fit our integrated business model. In our geographic area, which we've talked about pretty clearly over the last little bit, and a way to be highly accretive to our shareholders, how can we create value by doing that acquisition? That -- those are the 3 major criteria, is that we look at. And so we'd have to just look at -- I mean look at all the opportunities. We stay on top of what's possible out there, and we'll see what happens over time, from that standpoint. Regarding Cook Inlet, the guys are designing and doing the engineering work on a pipeline that allows the crude to be taken from the -- instead of just being delivered by ship, being delivered by pipeline in that, and so that works is progressing on our schedule. We have great local support to do that, it makes a lot of sense for a lot of different reasons, and we just want to make sure the production materializes like it thinks it has and you're absolutely right, once that project is developed, more than likely would be so, to Tesoro Logistics.

Sam Margolin - Cowen and Company, LLC, Research Division

Sam Margolin from Cowen. If I could just go back to the GP logistics really quickly, if the asset's going to stay at the TSO level, I was just wondering how you think about the cash flow that defines that asset, because you did mention that you thought that the TLLP level was self-funding and the general partner cash flows might either be part of this billion dollar free cash flow number that you outlined or some other pod that has a different designation.

Gregory J. Goff

It's not in the -- so the GP distribution's out in time aren't in the free cash flow number, but from a cash management standpoint, we just look into with general funds of the company, and allocate them as if it was just part of a pool of capital.

Blake Fernandez - Howard Weil Incorporated, Research Division

It's Blake Fernandez with Howard Weil. I had 2 questions for you. For 1, you have a slide on West Coast exports. I was hoping you could maybe clarify what Tesoro's roll is in that, how active of a participant you'll be? And then secondly, it looks like you're going to be fairly levered to Bakken crude discounts here, over the coming years. Just curious if there's any evaluation for other basins in particular, maybe the Permian, as an alternative?

Gregory J. Goff

The answer to your -- so Blake, on your first question, which I forgot, what was it, again?

Blake Fernandez - Howard Weil Incorporated, Research Division

Product exports.

Gregory J. Goff

Yes, sorry. The product exports in California, where we showed a range of 100,000 to 150,000 barrels a day. They are an important part of what we do. We, through Dave's organization we have they fit in to our portfolio of capturing the highest value of product, and so those -- we don't like to disclose exactly, due to the market's not as big as the Gulf Coast. It's a little bit different when you're on the West Coast than the Gulf Coast. to reveal what you do and it's an important part of what we do. Importantly, we believe we have some very strong commercial relationships with our customers that will allow us to keep that as part of our portfolio, going forward. And then the second question was, what?

Blake Fernandez - Howard Weil Incorporated, Research Division

Your valuation of the other crude basins specifically [indiscernible] .

Gregory J. Goff

Yes, that's right. So and, you're right. We use Bakken as a kind of a reference point. So just take it from that standpoint, the Niobrara crude would be a great fit into our assets, just like the Bakken crude oil. Permian, we'll have to see. We think it will -- it could flow more opportunistically, just hard to get the capabilities unloaded in California, I mean, you could look at times we're discounts in the Permian. And we have moved, through Dave's group, manifest cars that's Permian crude into California, but on a sustainable basis, with volume that matters, you need that capability to unload in California, and we believe the permitting process just takes a long time to do that and so, not a lot of potential, at least in the short term, 3 or 4 years from our standpoint.

Jeffrey Louis Lignelli - Incline Global Management, LLC

Jeff Lignelli from Incline Global. On Page 73 of the presentation, quite a dramatic expansion of the value for GP Holdings, and earlier in the presentation you mentioned $1.5 billion of future asset sales. What level of asset sales do you have to drop down into TLLP by 2015 to actually achieve this value on the page? And in addition to that, are there any -- is there ever any tax leakage when you sell these assets? Or are you going to see that -- get $1.5 billion of cash in the company you could use to create shareholder value?

Gregory J. Goff

So let me ask Phil to answer both of those questions. Phil?

Phillip M. Anderson

Okay. So the 2015 EBITDA, over on the left side of the page, that is first call, and we said is, we think that's a reasonable estimate for our existing portfolio inside TLLP, plus our organic growth. So any additional drop downs would likely be accretive to that value proposition that we show on the page.

Jeffrey Louis Lignelli - Incline Global Management, LLC

But then there's $1.5 billion of asset sales. What timeframe do you think you're going to complete those by as you kind of carve those out of the company to create a more commercial business, as you talked about?

Phillip M. Anderson

Over the course of the investment that's going on in the developed projects, plus some of the assets in the legacy portfolio are still being invested. But it's probably a continual process that takes us 3, 4, 5 years at this point.

Jeffrey Louis Lignelli - Incline Global Management, LLC

Maybe just a last question on M&A. Can you actually do any more acquisitions in California, or can you do any more acquisitions in PADD V, given the antitrust implications?

Gregory J. Goff

Yes. In California, I'm not sure we want to. We actually like what we have there, and more importantly, we're trying to create something with what we have. We've said at the very beginning of the -- of our efforts to acquire the business in Southern California, that thing that made that so valuable, was that we could make a step change in where we are in the marketplace and be a lead -- a leading refining and marketing company in that market, which gives us differential performance over there, so California isn't an area that we would target to do with anything in there, because we like our position, we have an opportunity there. PADD V in total, there's not a lot -- you mean, we're already in the state of Washington, and we sold that in Hawaii. There's not a lot of other PADD V opportunities that we would look at. So it tells you that, our focus is outside of PADD V.

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

Jeff Dietert with Simmons and Company, a question for Dave on Slide 45. You talked about Martinez and LA, crude flexibility and the potential for increase in California heavy, but there was no mention of Canadian heavy, and could you comment on that, and kind of compare and contrast the Canadian heavy versus California heavy, as a feedstock option?

Gregory J. Goff

I mean, Jeff, it doesn't -- whether its California or Canadian, it depends on available pricing and ability to get it into the market, so there is no distinction about 1 preferred over the other, from a refinery standpoint.

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

Just from a logistics standpoint, is there an intention to have the logistics in place to get Canadian heavy down, as an option?

Gregory J. Goff

So we then -- we are creating -- Port of Vancouver, probably a substantial facility in the United States to handle 300,000 barrels a day of crude oil. As we mentioned, it'll have storage, blending, segregated tankage capability that will serve all types of markets.

Steven Gambuzza

Steve Gambuzza with Millenium. Just a follow-up question on -- at Westlake's question on the $1.5 billion of drop-down inventory? Does that include -- I'm just looking at Page 70, is that based just on the Tesoro legacy assets? Or does that include some conversion of some of the assets and their development to arrive of that?

Gregory J. Goff

That does includes the assets under development.

Steven Gambuzza

And I think you mentioned in response to your earlier question, where you look at 3 to 5-year window on drop downs, just what are some of the factors that will determine the timing of that? Is it based on capital needs of the parent? Or targeting a certain level of growth at TLLP, if you could just comment on that?

Phillip M. Anderson

Right. I think all things being equal, it's sooner rather than later. As I said, a lot of these assets you've got, some that are under development. Some of the legacy assets are still being invested in at the parent side. Our Marine facility in the San Francisco Bay area has got 2 or 3 years more of investment before it's ready to come down. So it's things like that. A lot of them have regulatory -- we've got to file tariffs and work through regulatory issues and things like that. So there's a team that works on that, as a continuous process, and they'll come down if they're ready.

Adam Zirkin

Adam Zirkin from Knighthead Capital. David, a question for you, if I may, on the product markets, as we've talked a lot about the crude slates. Can you talk a little bit -- as we pump -- as you and others pump more gasoline into what's already a fairly saturated domestic market, can you talk a little bit about the local market dynamics, particularly around the more inland refineries in Salt Lake City and Mandan? How much of the product that you make is consumed locally there? Are there any seasonal variations to that, that will be Question 1. And #2 is -- we obviously get more gasoline out of the Bakken crudes, we also get more NAPTP and that's a bit of a structurally different market, so can you talk about what you're doing, with some of the NAPTP product that's coming out of the lighter barrels?

David K. Kirshner

Okay, in Salt Lake City, yes, there is a significant seasonality to gasoline in Salt Lake City. But remember, Salt Lake City is connected via pipelines to both the north and the south. So as you swing, the seasonality in the winter, it pushes farther beyond Salt Lake City in the summer, it comes back towards Salt Lake City. So that's how you manage the supply demand balance in that market. Does that address what you're asking about? In Mandan, yes, you -- NAPTP and gasoline, and we manage that we've at times sold NAPTP and it's really a supply demand balance from the refinery units, and that's moved back and forth with investment.

Allen Good - Morningstar Inc., Research Division

Allen Good, Morningstar. On Slide 51, you showed the yield change on Anacortes and then had a comment, the 14% to 15% improvement on yields from A&F. Is that representative of your whole system, or just for Anacortes, and then assuming the you achieve the greater throughput of North American crudes, you used highlight on Slide 45, is there any other changes in yield that we could expect from subbing, say Canadian heavy for California heavy, or any other light domestics for foreign lights that would impact your yield?

George Scott Spendlove

Yes, this is basis our Anacortes experience, the 14% 16% impairment relative to Bakken, so that base is real with and as we said, translates to about $3 to $5 a barrel of yield advantage in relationship to ANS. And I'm sorry, I didn't catch the second part of your question.

Allen Good - Morningstar Inc., Research Division

I guess, so could we -- could, would that be representative of [indiscernible] for Bakken, are you talking about your other refineries as well, so do you get similar opportunity?

George Scott Spendlove

So we anticipate, as Dan said earlier, we did do some Bakken test runs in a few of our locations, so we anticipate a similar type yield advantage.

Allen Good - Morningstar Inc., Research Division

And just a second one. A lot of your peers are looking at capitalizing on either on existing infrastructure in the refinery or looking to add investments, really, to capitalize on low-cost natural gas, either for chemicals or improving distillate yields. Is there any sort of opportunity today within your current refining system to look at similar opportunities? Or will that be something you're not interested in at this time?

Gregory J. Goff

Well, one of the key things that Dan and Scott talked about is, there's a pretty significant change that's going to occur in Southern California, with the flexibility to ship 30,000 to 40,000,000 barrels a day of gasoline to diesel. So the answer is yes, and we continue to always look. We've been driven by looking at other types of yield improvements, but that in itself is a pretty dramatic change in that marketplace.

Paul Sankey - Deutsche Bank AG, Research Division

Paul at Deutsche again. Just on -- you've been asked this question a number of different ways, but on the crude slate, I was just looking at your forecast for 2015, and you still have 22% foreign light as part of your slate. Given the price disadvantage, and I realize it's down from 30% in 2013, but I just wondered why there would be any foreign light in that mix.

Gregory J. Goff

And what slide is that?

Paul Sankey - Deutsche Bank AG, Research Division

53.

Daniel Robert Romasko

Again, we're being conservative on differentials. If we were to see, for instance, the ANS price drop to a level that would be more competitive than some of that foreign crude, we could, we would substitute it with that. We also have an assumption in there that there is foreign crude that continues to be priced at U.S. pricing basis and as such, it's -- that's have such a fluid market that, going out that far, there could to be a lot of change.

Paul Sankey - Deutsche Bank AG, Research Division

Yes, understood. And then, just -- I just want to double confirm that your Port of Vancouver's going to be running up to 300,000 barrels a day. That's just to be totally clear about it, then.

Gregory J. Goff

The Port of Vancouver will be -- the Port of Vancouver is actually permitted to run 380,000 barrels a day. That will be the permit. But the way the system is being built and rail shipments and all that, we estimate it at around 300,000 barrels a day of physical volume through the facility.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Doug from BofA. Just 1 point of clarification. So when you lay out all the benefits of crude advantages, are you assuming only the yield uplift? Or are you assuming a yield on the landed cost benefit? And my follow-up is a micro question. Is the ANS market as I understand it, is about 600,000 barrels a day, more or less. So if you're looking to put -- let's call it 300,000 plus barrels a day of Bakken in the West Coast, in an isolated gasoline market, where the highest -- the cost of crude is basically setting the gasoline price, what does that do to gasoline models?

Gregory J. Goff

So the -- I mean, I think the actual ANS crude's not as high as you said. From what I recall, I think it's less than 5 -- particularly when you look at what gets to the West -- down to the West Coast. I think it's probably between 350,000, maybe a little bit more than that. So then, we'll have that capability to deliver an equal amount of crude into the West Coast to compete with that, that could, and we do get higher yields off of that crude, but we're designing it so that we can process or develop -- run more diesel than we will gasoline. The synergies that we have in the short-term include the total value yield and transportation cost advantage.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Thanks. So what about the gasoline price, if the ANS is setting the gasoline price, does that mean gasoline price has come under pressure?

Gregory J. Goff

Well we look at -- because we think the West Coast to a less part -- we still believe that product prices will trade relative to Brent. And we don't see it happening at -- significant impact on the gas price -- gasoline price.

Well thank you, very much. It was our pleasure to be able to spend some time with you today. We appreciate your interest and your questions, and have a happy holidays, everyone. Thank you.

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