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Tesoro Corporation (NYSE:TSO)

Q1 2010 Earnings Call Transcript

April 30, 2010 8:30 am ET

Executives

Scott Phipps – IR

Bruce Smith – Chairman & CEO

Greg Wright – CFO

Lynn Westfall – SVP, External Affairs & Chief Economist

Frank Wheeler – SVP, Refining

Chuck Flag – SVP, System Optimization

Everett Lewis – Chief Operating Officer and Executive VP

Scott Spendlove – Senior Vice President, Finance

Analysts

Chi Chow – Macquarie Research Equities

Ann Kohler – Caris

Doug Leggate – Merrill Lynch

Paul Sankey – Deutsche Bank

Doug Terreson – ISI Group

Sean Kelly [ph] – Credit Suisse

Evan Calio – Morgan Stanley

Jeff Dietert – Simmons

Paul Cheng – Barclays Capital

Eli Bauman – The Benchmark Company

Jacques Rousseau – RBC Capital Markets

Operator

Greetings and welcome to the Tesoro Corporation’s Q1 2010 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions)

It is now my pleasure to introduce your host, Mr. Scott Phipps, director of investor relations for Tesoro Corporation. Thank you Mr. Phipps. You may begin.

Scott Phipps

Thank you, Claudia. Well, good morning everyone and welcome to today's conference call to discuss our first quarter 2010 results. Joining me today are all the members of our executive committee, as well as other members of senior management.

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

Please refer to the forward-looking statements in the earnings slides, which says that statements made during this call that refer to management expectations and or future predictions are forward-looking statements intended to be covered by the Safe Harbor provisions of the Securities Act, as there are many factors which could cause results to differ from our expectations.

I will now provide second quarter 2010 guidance for modeling purposes. In these assumptions, we have assumed the Anacortes refinery is fully shut down as of the end of this month, and will remain so for the duration of the quarter. We have used this purely for assumption purposes, and currently have no estimated time for a restart.

We estimate throughput to be 75,000 to 85,000 barrels per day in the Pacific Northwest region, 70,000 to 80,000 barrels per day in the mid-Pacific, 85,000 to 95,000 barrels a day in Mid-continent as a result of the Mandan turnaround, and 240,000 to 250,000 barrels per day in the California region, which is higher than a quarter ago due to the Golden Eagle maintenance during February.

OpEx guidance for the second quarter is as follows, $6.50 per barrel in the Pacific Northwest region. The higher per barrel number is primarily a reflection of the lower throughput. $3 per barrel in the mid-Pacific, $4.20 per barrel in the Mid-Continent, and $6.85 per barrel in the California region, which is lower than last quarter primarily due to higher throughput.

Our depreciation for refining is estimated at $75 million. This amount is lower than our historical average, as we have extended the useful life of certain process units since their previous turnaround. Additional second quarter guidance items include corporate expense of $45 million and interest expense before interest income of $35 million.

I'll now turn the call over to Bruce.

Bruce Smith

Thank you Scott, and good morning to everyone, and thanks for joining us for today's call. Before we discuss the press release, I want to express my deepest sympathy to all those individuals who have been affected by the tragic accident that occurred at Anacortes. The entire Tesoro family is deeply saddened by the loss of seven co-workers, and we are genuinely concerned about their families and friends. And our thoughts and prayers are with all our employees and their loved ones.

No one is ever adequately prepared to manage a crisis like this one, but I'm extremely proud of the way the management team and the very broad group of employees have dealt with the myriad issues created by this unfortunate incident. Don Sorensen, the manager in Anacortes and his team have done an excellent job of compassionately meeting the needs of our employees, the affected families, and at the same time they have done an exemplary job of co-operating with and providing information and assistance to the various investigation teams. We will continue to make every effort to assist those who are trying to determine the cause of the incident, and to provide support and help to the affected parties.

It is a little difficult to shift gears after those comments, but on today's agenda I want to briefly review our first-quarter results, update you on our non-capital improvement initiatives, and provide some color on what we currently see in the West Coast market. As we reported yesterday, in the first quarter the company reported a net loss of $155 million, or $1.11 per share. These results include an after-tax impairment charge of $12 million associated with the deferral of a capital project at Los Angeles refinery, a $7 million tax charge related to the recent Congressional health care legislation, and $7 million in after-tax accruals for our employees incentive compensation program, which is a change from our previous accounting practice.

The compensation committee has decided to make a quarterly accrual of a targeted amount, and then make appropriate adjustments based on performance. This adjustment is included in the guidance numbers that Scott just provided.

The first quarter segment operating loss of $145 is attributable to a Tesoro Index, which was half of what we saw a year ago. The positives in the first quarter are that we captured 10% more of the available margin compared to the first quarter of last year, and even though first-quarter margins were much lower than we anticipated, we continue to manage our operations and capital program to conserve cash, just as we have done since late 2007.

Since excess capacity among US refiners is limited margin expansion, our entire organization is focused on financial and operational excellence. Our priorities are to maximize cash, optimize the system at these low margins, and to execute the noncapital initiate program. For years, we have been optimizing system feed stock selection by acquiring new and/or economically advantaged crudes relative to available alternatives. During the first quarter we ran two new crudes in our system, and in a period of single digit indices a meaningful discount in our feedstock cost helped us achieve the additional margin capture that I mentioned earlier.

We have made adjustments to the operating system as a result of the shutdown of Anacortes. I know you have many questions about the incident, but we really don't have any new information to provide. The cause is still unknown and due to the ongoing nature of the investigations at the refinery, I can only provide a few facts. Operationally, we announced our intention to halt crude runs, and as of yesterday afternoon all the refinery process units were safely shutdown.

Since the fire, Anacortes had been producing primarily unfinished product that couldn't be upgraded in Anacortes. So we have been moving that product to other plants within our system. We have diverted the crude cargoes that were scheduled to arrive at Anacortes to other refineries. In order to minimize potential product supply disruptions to the extent necessary, we have been supplying our transportation fuel customers with product from third parties.

To date, we have not made any significant adjustments to our capital program, nor do we know what the post financial impact might be. We believe we have adequate insurance coverage, including property and business interruption insurance. Our business interruption deductible is 60 days, and then a loss of $25 million, primarily related to the operating plan that existed prior to the incident, and the property deductible is $10 million.

I will repeat that in light of the investigations, which are still taking place we are not going to speculate about any matters associated with this event, and we will not take speculative questions about it.

From a capital spending perspective, the highly disciplined review process that we initiated several years ago continues to have very positive cash benefits. Today our capital spending is considerably lower than it was projected to be three months ago. Why, because the objective of this process is to identify the most efficient use of capital in all aspects of project management, including optimum design, scheduling and cost management without compromising our two fundamentals, safety and reliability.

The capital management process involves structured review at multiple key points in the development of each project to ensure all possible alternatives are considered, centers of safety, reliability and regulations are met, expenditures are timed to meet requirements, and the most effective cost materials and labor are used. The result is in many cases the early estimates of project costs are reduced, and our actual costs could be below productions.

As noted in the press release yesterday, our first-quarter capital spending of $99 million, which includes turnarounds came in below guidance as this review process resulted in lower turnaround spending at Golden Eagle and projects spending at Salt Lake City. When we reported our 2009 results in February, we revised our full-year 2010 capital program estimate down from $675 million to $600 million. Including our first-quarter progress and continued efforts this year, we now expect the 2010 capital program to be in the $500 million to $525 million range. The $75 million to $100 million decline is another example of the success of this process.

A specific example, we expected to spend almost $50 million for the remainder of the year on a number of projects in LA, but we found ways to reduce that spending. And then as I said at the start of today's call, we also took a $12 million impairment charge related to a multi-year deferral of a group of regulatory projects at LA that totaled around $350 million.

I also mentioned that effective cash management involves not only our capital review, but it also focuses on our operating plans to improve our capture rate. In the first quarter we realized $27 million from noncapital initiatives, despite the difficulties created by the extremely low margin environment in January and early February.

To highlight some of these benefits, the optimized our marine fleet by out chartering excess ship capacity to other parties. Additionally, in our marketing channels we made some changes that delivered benefits in both margins and cost, a trend that we expect will be sustainable going forward. And within our refining and optimization groups, we saw improvements in yield and inventory execution.

In many cases, capturing the full value of these noncapital initiatives requires teamwork within a department, as well as cross functional coordination. Turning to the second quarter, we started to see improvement in the differentials for California heavy crudes, which historically lagged foreign heavy crude differentials.

While the domestic differentials didn't materialize until late in the first quarter, we do expect to see the benefit during the second quarter. On the product side, I would say in broad terms, we are seeing demand and stability for light products. But clearly gasoline supply is above last year’s inventory level and also the five year range.

We believe, like many of you write about the industry, that unemployment right now is the largest factor in preventing return to growing gasoline demand. While the increase in unemployment in California has declined and it appears to be stable, we need to see a sharp decline in that statistic before we expect to see demand growth. Accordingly, I do not believe that we will change the corporate philosophy outlined in our last earnings call.

We will continue to manage and focus business execution around safety, reliability and cash conservation. To achieve this, we need to be diligent, flexible and sensitive to changes in the marketplace. We must deliver on system noncapital initiatives, which we still expect to be in line with our original guidance of $160 million to $170 million. And finally, even though we've reduced our 2010 capital program, we expect to spend approximately $60 million of income improvement in those quick hit [ph] projects we talked about. So we expect to spend $60 million this year. We expect these small high return projects located across our entire asset base to improve cash flow and generate real return for our shareholders, particularly since those returns are little more resilient to margins.

Before I open the call to questions, I want to thank everyone for their support, for their interest and for great analytical work that you have given to me during my almost 18 years of services here at Tesoro. In any corporation there are highs and there have certainly been some lows. But nevertheless, it is been a real privilege and honor to be in this position for so many years.

I want to thank my management team, and I want to acknowledge the excellent commitment that they have shown to our shareholders. I know Greg Goff, and the management team will continue to do an excellent job for our shareholders, and I'm very confident that you will enjoy working with and getting to know Greg.

Finally, just one last thing, in the not too distant future the other Greg, Greg Wright, is also going to join me in retirement. And I want to take this opportunity, since he won't be participating in future calls to thank him for his tireless support and wise counsel for so many years. I know that many of you have known Greg for a long time, and I wanted you to have the opportunity to say goodbye.

And Greg, would you like to say anything before we take questions.

Greg Wright

I would Bruce. Thank you. Bruce is correct in that I will soon be concluding my 15 year career at Tesoro, and if I count right some 38 years in the energy industry. I have been humbled by the support I have received during my 10 years of CFO. If you look at just the investor relations area, I began doing investor relations back in the dark ages 1983, and it has been a part of my responsibility virtually every year since then. And I will miss the relationships I have with many of you, and I wish you the very best going forward.

I'm appreciative of the tremendously talented management team and the hard-working employees, with whom I’ve worked. We have accomplished some great things together during some difficult times and I will miss the challenge, but I know the new management team will be up to meeting it.

Thank you all for your support.

Bruce Smith

Well, with that I guess Claudia we will open it up to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from Chi Chow with Macquarie. Please state your question.

Chi Chow – Macquarie Research Equities

Good morning. Bruce and Greg, I want to wish both of you the best going forward and it has been a real pleasure working with you over the years.

Bruce Smith

Thank you very much.

Greg Wright

Thanks.

Bruce Smith

We both would agree with that. We have enjoyed working with you. You have done a great job.

Chi Chow – Macquarie Research Equities

Thanks. A couple of questions, I guess Bruce you mentioned the two new crudes that you ran in the system, can you give us more details on that, like what type of crude you did run?

Bruce Smith

I can – I will let Chuck answer the question. I mean, I know that there is – and what the crudes are but, you may want more information than that. Chuck.

Chuck Flag

Yes, Chi. We ran Malaysian crude called Marie [ph]. And we also have been processing a new crude from Russia, the Eastern Pacific Siberia Ocean ESPO.

Chi Chow – Macquarie Research Equities

What sort of pricing have you gotten on the first quarter?

Bruce Smith

Well, we have got pricing that provided about $2.50 margin improvement over the alternative crudes.

Chi Chow – Macquarie Research Equities

Okay, and on both of those crudes?

Bruce Smith

Yes.

Chi Chow – Macquarie Research Equities

Okay, great. And it seems like in the second quarter, the crude price discounts, mainly the Latin and South American grades have widened due to all the refinery issues down there. Are you taking advantage of any spare cargos here in the second quarter of those type of crudes?

Bruce Smith

Yes, we are. Particularly those crudes coming out of Ecuador. Those differentials have widened substantially, roughly $3 to $4 a barrel and we're capitalizing on that.

Chi Chow – Macquarie Research Equities

Will that be oriental crude?

Bruce Smith

Oriental apple [ph].

Chi Chow – Macquarie Research Equities

Okay, good. What is the status of the Panama assets at this time?

Bruce Smith

Good question, Everett.

Everett Lewis

Hi Chi, this is Everett.

Chi Chow – Macquarie Research Equities

Hi Everett.

Everett Lewis

The Panama assets have given us notice that the pipeline and the tankage are complete at this point and ready to work. So we are actually going to be reviewing with our board here in a couple of days what our operating plan is going forward. We can probably share a little bit more after that.

Chi Chow – Macquarie Research Equities

Do you anticipate some benefits here in the second quarter from those assets?

Greg Wright

I think we will probably be in a ramp up mode during the second quarter. So I wouldn't expect a big positive for your modeling purposes in the second quarter, but after that I think we can give you some guidance.

Bruce Smith

I think since we don't have approval yet, it is hard to say that we can have a benefit. I mean, we don't have anything baked in our plan really, and so I think once we know where we are and review it with the board, we can talk a little bit more about it. But it is certainly probably more likely that will be a third-quarter event from a modeling perspective.

Chi Chow – Macquarie Research Equities

Okay, great. I guess, one final question…

Greg Wright

And I would say like most things, I mean there is going to be a little bit of trial and error in what we are doing here. I think even with the plan that we are looking at its – it will take us a little bit of time to really fully realize the value of that. We will see, but I would expect that it would be more of a growing process.

Chi Chow – Macquarie Research Equities

So, it seems like you got some opportunities on the other side of the canal there with Columbia coming online, and some issues, you know, the excess crude in Venezuela but not…

Greg Wright

(inaudible).

Chi Chow – Macquarie Research Equities

Okay, one final question, what does the turnaround schedule look like for the remainder of this year, and do you have the turnaround budget for 2010?

Bruce Smith

I am going to ask Frank Wheeler, [ph] who has now taken over – he has taken over the responsibilities that Dan Porter had and I will ask him to answer just so that you can be introduced to Frank for future calls. Frank.

Frank Wheeler

Yes, thank you. We got two major turnarounds going on for the remaining of the year. One in Mandan right now, which we have the entire refinery down for about the next month. And then later in the year we have another one in Hawaii. The approximate total between those two is around 90 million.

Chi Chow – Macquarie Research Equities

Okay, great. Thanks a lot and then Bruce and Greg again best wishes.

Bruce Smith

Thanks again Chi.

Operator

The next question is coming from Ann Kohler with Caris. Please state your questions.

Ann Kohler – Caris

Good morning gentlemen. I too would like to wish both Bruce, and you, as well Greg, a great retirement. It has been wonderful working with you, and Greg we go back all the way when you are IR at Valero. So I wish you both happiness in your retirement.

Bruce Smith

We were old enough to cover at that time.

Ann Kohler – Caris

Exactly. I just wanted to follow up a little bit on the Russian crude, what do you see kind of going in the future regarding kind of the discount. Do you think that is something that is sustainable into the future over the next several years?

Greg Wright

The Russian crude is producing at about 350,000 barrels per day. The discounts, we take advantage of being one of the first ones to purchase the crude and getting substantial discounts. The good thing about the flow [ph] is that it is putting pressure on the Alaskan North Slope crude, which we also buy, and providing us a benefit in that manner.

Bruce Smith

It is a little early. I mean the production levels are supposed to grow, and it may have broader implications all the way around. It is just – it is a little early. I was asking the question yesterday about this crude as we were talking, and this is a continuation of a program that we’ve had now that is 5 or 6 years old of buying these ordinary crudes, being a first buyer. I was told that we purchased 100 new crudes, around 100 new crudes.

So, again this is one that potentially has some more positive benefits for us because it does maybe put some pressure on more broadly the quality of crude in the Pacific area.

Ann Kohler – Caris

Great. And then my next question is just in the press release you alluded to that you are seeing some improvement in gasoline demand since the start of the year. Could you just provide a little bit more color, not only from the start of the year but sort of year-over-year. And then the trends that you are seeing in light of the addition of the increase in ethanol into the California gasoline?

Bruce Smith

Lynn Westfall will be glad to help you with that.

Lynn Westfall

Hello Ann, how are you today?

Ann Kohler – Caris

I am good. How are you, Lynn?

Lynn Westfall

Good. Well, certainly the numbers we got yesterday for February were encouraging with (inaudible) gasoline showing a year-over-year increase of about 6.6%. January was at 3.2%. So it is moving in the right direction. The issue though is that was building on a very low 2008 numbers, where gasoline was down almost 11%. So the direction is good on gasoline demand, but it is building off of a very low base.

Certainly we are expecting to see what we normally see at this time of the year which is seasonality in gasoline demand. Typically second-quarter versus first-quarter demand goes up in the neighborhood of 50,000 to 60,000 barrels a day. I think it is fair to say that we are cautiously optimistic about demand, but as long as unemployment stays as high as it is and I think that is going to be with us for probably most of the rest of this year.

We wouldn't expect to see significant demand increases, but at least now we have the direction going right or maybe stable. I think that is kind of our view on gasoline demand going forward.

On your second question, CARB gasoline, we have got four months worth of data right now, but the interpretation of that data can vary. What the data says for four months out of this year for California refineries is that CARB gasoline yield which includes downstream ethanol blending is exactly equal to what it was last year. But overall gasoline yield is up about 3.5%. So right now it appears from the data the excess is actually showing up in conventional gasoline.

That is the data and now the interpretation can vary. Interpretations can be that it was caused by turnarounds that are forcing people to make more conventional than CARB. It can be that demand is only being met by CARB gasoline yield and excess is going into conventional. So the economics may be forcing people to make more conventional than CARB. So overall gasoline yield as I said is up. It is not up as much as you would expect from the conversion from 5.7% to 10%. It is only up, as I said about 3.5% versus about 4.5% you would expect from the ethanol yield.

So that data is still young, and we will look at it as we go forward. We may be able to get some better conclusions.

Ann Kohler – Caris

Okay, great. And then just following that up, how about what you are seeing on the distilling side, diesel particularly in terms of demand?

Lynn Westfall

Well, the local demand certainly isn’t what we had hoped for, but it is getting the same picture as gasoline. We saw January go up 2.1%, February was down 1%. I think the major story on diesel demand is local demand is export. We have seen I think some pretty good export activity out of the West Coast on distillate in March [ph] and April, primarily going down to South America.

So again I think that is really going to be the picture for distillate demand going forward for the next several months.

Ann Kohler – Caris

Great. Thank you Lynn, and again Bruce and Greg, it won't be the same without you. I wish tons of happiness. Congratulations.

Bruce Smith

Thank you very much Ann. And the same to you.

Operator

Our next question comes from the line of Doug Leggate with Merrill Lynch. Please state your questions.

Doug Leggate – Merrill Lynch

Hi guys. How's it going?

Bruce Smith

You changed your name. You said (inaudible).

Doug Leggate – Merrill Lynch

Well, gentlemen I'm guessing we are not going to have any more bucket tours to Europe. So, good luck to you both, and

Bruce Smith

Thank you.

Doug Leggate – Merrill Lynch

And I will miss you guys.

Bruce Smith

Thank you.

Doug Leggate – Merrill Lynch

I have a couple of things. First of all, if I could just jump back on one of the things you highlighted ESPO crude. We have been watching this pretty carefully, and I guess the question we want to ask is, how they have been aggressively pricing this crude in order to get it – to get things going or do you think the dynamics that we have seen here are relatively sustainable.

And I guess this is a kind of related question, if I look at the widening of ANS, well, obviously we are coming into maintenance in the last year pretty soon. Do you think that kind of dynamic or that kind of discount again is something we might see on a more sustainable basis? They believe the ESPO crude are looking at something like trebling the production over the next couple of years. So obviously we are pretty interested in ESPO market?

Chuck Flag

Yes, Doug this is Chuck Flag. I think initially we got a very good discount on ESPO. As refiners become more aware of the crude, particularly in the Far East, it is putting pressure both on Far Eastern crudes and as I said earlier on the ANS. The ANS has blown out. As you indicated, we're coming into the summer maintenance season in Alaska. So we would expect at least directional tightening on the ANS. But again the ESPO is coming into the West Coast and I believe it will continue to pressure the Alaskan crude.

Doug Leggate – Merrill Lynch

Okay, thank you. So, this looks like an semi permanent benefit for you guys going forward, is that fair to say?

Chuck Flag

I think that is fair to say.

Bruce Smith

Probably over the longer time it could be even larger with increase in production as you point out.

Chuck Flag

Absolutely.

Doug Leggate – Merrill Lynch

Terrific. My next one is, I've got two more if that is okay. The next one is for Lynn, Lynn you touched on diesel exports a little bit, but if we could just kind of revisit the ethanol impact, what that means for essentially the operations in the West Coast, particularly with (inaudible), perhaps the additional naphtha yield that comes as a result. Are you seeing any kind of flow of naphtha or gasoline products going east, or sorry West I should say as a response to the additional ethanol.

Chuck Flag

Doug, it is Chuck again. We're really not seeing naphtha pout into the West Coast. Clearly, there would be an ability to lend more…

Doug Leggate – Merrill Lynch

Sorry, Chuck, the other way, going the other way. I got my directions wrong.

Chuck Flag

(inaudible). I am sorry.

Doug Leggate – Merrill Lynch

Yes.

Chuck Flag

No, we are not seeing that.

Doug Leggate – Merrill Lynch

Okay. So is there any change at all than in terms of ethanol impact. I'm thinking about the feel that you guys are basically getting, you know with no wafer pressure change. So, I'm trying to get a feel as to what means for the way you your units, or the industry as a whole runs their units?

Chuck Flag

Well, we have taken advantage of shutting some former capacity in, and gaining on the expenses from that perspective. But as Lynn said we are not seeing a tremendous increase in the production of gasoline as a result of CARB.

Doug Leggate – Merrill Lynch

Has those (inaudible) Chuck?

Chuck Flag

Yes, they are. We have shut a reformer down, both at Golden Eagle and one at Los Angeles.

Doug Leggate – Merrill Lynch

Okay.

Bruce Smith

You know, it will be really good news if it is not.

Doug Leggate – Merrill Lynch

Okay. The final one from me is just on the CapEx deferrals, and I guess Bruce in your prepared remarks you talked about multi-year deferral of the regulatory CapEx, can you just talk about how you have been able to achieve that? And maybe a little more granularity as to whether that capital is just going to shift into next year, or if these aren’t so permanent with options to capital spending?

Bruce Smith

Well, I will let – do you want Frank, or do you want… They are not. I don't think they are going to be permanent, but they are not going to be in the near years. They have really been, this effort that has been going on. Just as I said in my prepared remarks, we – in order to develop a budget much of this work is done on such a preliminary basis, and with the dynamic processes that are in the market, and the way we are looking at rescheduling, and better procurement we found some ways with some permanent (inaudible) credits to do some things that we didn’t anticipate. So, you know, it really is.

A lot of solutions have come together, but at the end you probably are going to have to spend some dollars. Everett you want to comment on it or Frank.

Everett Lewis

This is Everett. Let me expand on that a little bit. We had a project that was quite a large project for NOx control in Los Angeles. And it involved a number of pieces that were relatively overturn energy savings around cogeneration and boiler replacements. When we deconstructed that project in this environment with the lower energy costs, and more constrained capital we found a combination of commercial and more efficient investments to achieve the necessary NOx control.

So we got the NOx control done with the combination of perpetual NOx credits that we bought in the market at a good price, and a much reduced capital investment. At some point in the future, but I think outside our current planning horizon, we will still go back and look at those boiler and cogeneration projects. But I wouldn’t be concerned about them in the current planning horizon.

I think the key is really through this low margin cycle, where we think whether it is one or two or three years, we have done some things to permanently change what we are going to do to be able to generate free cash flow.

Doug Leggate – Merrill Lynch

Terrific. Well, again gentlemen very, very best of luck to both of you, and if I may also say I believe this is probably Scott’s last conference call also. So again Scott thanks for all your help over the years.

Scott Phipps

Thank you too Doug.

Bruce Smith

Have you told people that.

Operator

Our next question is coming from the line of Paul Sankey with Deutsche Bank. Please state your question.

Paul Sankey – Deutsche Bank

Hi guys.

Bruce Smith

Good morning Paul. How are you?

Paul Sankey – Deutsche Bank

Hi, I literally just wanted to get on to say all the best to both of you, Greg just inspired me and Scott thanks for your help?

Bruce Smith

Well, and we've enjoyed traveling with you also.

Paul Sankey – Deutsche Bank

Yes, I think I might have been served the largest whiskey I’ve ever had…

Bruce Smith

You didn’t have to break that out.

Paul Sankey – Deutsche Bank

(inaudible).

Bruce Smith

Was that right before you bought the sell or you did the sell?

Paul Sankey – Deutsche Bank

No, I think it will – I’ll always remember having a sell on the stock (inaudible) walked in and just absolutely destroyed me. Anyway, all the best to all of you and good luck with the situation as well. Obviously, (inaudible) ask them to please do that.

Bruce Smith

Thank you very much Paul and the best to you.

Paul Sankey – Deutsche Bank

Yes, sure.

Operator

Our next question is coming from the line of Doug Terreson with ISI Group. Please state your question.

Doug Terreson – ISI Group

Good morning guys.

Bruce Smith

Good morning.

Doug Terreson – ISI Group

Similarly, I don't have a question either, but I really wanted to just say both to Bruce and Greg that I enjoyed being with you guys inside and outside the office and over the years and Scott too, and I wish you guys the best of luck.

Bruce Smith

Listen, that's so nice of you. I have to say it's been a real pleasure. We lost you for a few years, but it's awfully nice to have you back and giving good coverage to the industry, and I know that the people here will appreciate, but you've been terrific to work with and our best wishes to you Doug. Thank you very much.

Greg Wright

Thank you Doug.

Doug Terreson – ISI Group

Yes, I’m very flattered and I look forward to new guys in the future and good luck at the end.

Bruce Smith

Thank you very much.

Operator

Our next question is coming from the line of Edward Westlake with Credit Suisse.

Sean Kelly – Credit Suisse

Good morning guys. This is actually Sean Kelly [ph] calling on behalf of Ed. He's tied up on another call.

Bruce Smith

Okay Sean.

Sean Kelly – Credit Suisse

Good morning to you.

Bruce Smith

Good morning.

Sean Kelly – Credit Suisse

I wanted to chat a little bit about demand. You guys have you know, done a good job answering –

Bruce Smith

Don't you want to say you're going to miss this? You could say that for –

Sean Kelly – Credit Suisse

I don’t have stories like Paul does with drinking whiskey on the road, I don’t know. Maybe one there [ph]. But my question actually, you know, on your website you have unemployment data and other gasoline and diesel demand data. I'm wondering if you have seen anything in the ports, anything on the ground that is kind of an indicator to what is going on with distillate demand.

Lynn Westfall

At this point in time, this is Lynn Westfall. At this point in time I think it's the same picture we're seeing with gasoline demand. It looks stable but not rising.

Sean Kelly – Credit Suisse

Okay.

Lynn Westfall

As far as the listings at the port, they're going up from where they were. They're certainly not to the level they used to be. The driver for distillate demand that is coming up shortly will be the planning season.

Sean Kelly – Credit Suisse

Okay.

Lynn Westfall

So I think that's – as far as internal demand to the West Coast. So I'm not talking about export demand. I think that will be the primary factor that we'll be looking at in the second quarter.

Sean Kelly – Credit Suisse

Okay, good. And building back on the CapEx or the capital program, I was actually at your analyst day in New York in the fall, with regards to your kind of outside 2013 guidance, you know, the question was kind of answered previously, but what are you looking at in terms of a total spend out in 2012 and 2013?

Bruce Smith

I have to defer to Everett here.

Sean Kelly – Credit Suisse

Okay.

Everett Lewis

And Frank can kind of chime in as well, but we are you know, if the question is kind of where we’re pushing out of this year and we're going to see it in the next two years, I don't think we see that kind of a trend.

Sean Kelly – Credit Suisse

Okay.

Everett Lewis

I think our outlooks are still pretty consistent in the outer years from what you saw on the previous plans.

Sean Kelly – Credit Suisse

Okay.

Frank Wheeler

I would agree. I mean there's certainly nothing beyond the capital program that we've got that we may find other ways of adding to that, but it's going to be small and probably directionally things are still down as we find this process being much more successful than maybe we expect it to be. So, you know, a lot of those projects, we may be – to have seen where we're going to be in the review, and of course the procurements will be different. So, but directionally probably still down.

Sean Kelly – Credit Suisse

Okay, perfect. And one final question if I may. You know, have you given any other guidance with respect to Hawaii and how you continue to view that refinery?

Bruce Smith

I’ll do this one. Just so you don't have to. We haven't given any other guidance on Hawaii. I think that in one of the comments that I made, we continue – we've been very active in looking at all of our assets and it goes to really the capital and the operations, and in that particular instance some of the ways that we market product. I think that we're making progress across all those fronts with our customers, and I do think that with regard to Hawaii, that we're closer to being able to unlock, potentially unlock some additional value there.

So I think that Hawaii is still a focus for us. A lot of effort is going into determine how we can improve the profitability of that on a sustainable basis and you know, I think that it's sort of multifunctional, and I think we are a bit successful in coming back to describe some of the things that we've been able to do.

Sean Kelly – Credit Suisse

Great. All right. That wraps it up from me, Bruce and Greg enjoy your retirement. I’m very excited.

Bruce Smith

Thank you Sean. I will miss you at the meeting this year in New York.

Sean Kelly – Credit Suisse

Have a good one.

Bruce Smith

All right. Thank you.

Sean Kelly – Credit Suisse

All right. Bye-bye.

Operator

Our next question is coming from the line of Evan Calio with Morgan Stanley. Please state your question.

Evan Calio – Morgan Stanley

Good morning guys.

Bruce Smith

Good morning Evan.

Evan Calio – Morgan Stanley

Hi, it's nice to have an uplifting refining call for a change here. Good luck to your retirement.

Bruce Smith

I must have missed the uplifting part.

Evan Calio – Morgan Stanley

No, it’s a positive feel, but best of luck in your retirement.

Bruce Smith

Thank you.

Evan Calio – Morgan Stanley

It really sounds like my loss for not having covered you for that long, and Scott good luck on your new role. I'm sure you will excel. I just have one question. It's on product demand and it's really on the flip side of Chi’s question, you know, lot of demand for incremental product has also been positive due to refining outages and lower hydro levels, and I was wondering if you could discuss that arbitrage or how Tesoro may be benefiting or any thoughts really heading into Latin American winter?

Bruce Smith

Good question.

Chuck Flag

Evan, Chuck Flag. We have seen a tremendous demand pull, particularly coming from Chili and Mexico in particular, where there's some refinery downtime. We've been putting cargos together and shipping it down there as have our competitors. So it's really putting an incremental demand on the West Coast, which I think is contributing to our higher margins that we've seen thus far.

Evan Calio – Morgan Stanley

How about on the flip side, I mean, if you heading east, I mean, with lower utilization, can we increase runs or secure delivery through Calnav [ph] or maybe how you think about Calnav versus the proposed Unav [ph], since you are dealing on both sides of that market?

Bruce Smith

Well, you know, the demand in Las Vegas well had been growing, has certainly slowed. You know, Unav as it now stands we have not committed any barrels to it and so, you know, it remains to be seen as far as how many barrels actually are committed to Unav.

Evan Calio – Morgan Stanley

And what about now in terms of going through Calnav?

Bruce Smith

We don't put a whole lot of barrels into Calnav ourselves. That line is currently full.

Evan Calio – Morgan Stanley

Okay.

Bruce Smith

So at the margin barrels tend to get trucked, but again demand is very much down in Las Vegas. It's one of the most impacted areas in the country.

Evan Calio – Morgan Stanley

Okay. Well, hey best of luck guys, and –

Bruce Smith

Thank you Evan.

Evan Calio – Morgan Stanley

It's been great.

Bruce Smith

Thank you.

Operator

Our next question is coming from Jeff Dietert with Simmons. Please state your question.

Jeff Dietert – Simmons

Hi, no questions. Just wanted to thank Bruce and Greg for all the time and travel conferences, insight, education. I appreciate all your efforts over the years as well as Scott, we’ll miss you. You've kept things entertaining and fun, and greatly appreciate that. So best of luck in your new realm. Thanks guys.

Bruce Smith

Thank you Jeff.

Greg Wright

Yes, Jeff thanks very much. I would say the same thing. It's been a lot of fun being with you, being on your panels. It's always entertaining to do that. It has truly been a pleasure over the years. So we wish you the best also. Thank you very much for your coverage.

Operator

Our next question or comment is coming from the line of Paul Cheng with Barclays Capital. Please state your question.

Paul Cheng – Barclays Capital

All right. Thank you. Hi guys.

Bruce Smith

Hi Paul. How are you?

Paul Cheng – Barclays Capital

Very good. Bruce and Greg, just want to add my best wishes for your retirement, and I hope that you have a lot of fun, but don't get too used to it. You may end up like (inaudible) coming back.

Greg Wright

Well, if I come back I'm going to call you. We never know. I mean (inaudible) came back.

Bruce Smith

Well Paul, we – both Greg and I have been privileged to speak at the conferences that you’ve hosted for so many years, and I know that the company looked forward to doing that and continue to do that but thanks very much for what you've done also.

Paul Cheng – Barclays Capital

Yes, my pleasure. And Scott also best of luck with your new assignment. So thank you for all the help.

Scott Phipps

Thanks Paul.

Paul Cheng – Barclays Capital

If I could that I actually have a number of short questions, and best wishes.

Bruce Smith

Sure, go ahead.

Paul Cheng – Barclays Capital

First, I just want to clarify, Scott did you say the G&A second quarter is 45 and the interest is 35, or I misheard you?

Scott Phipps

That's correct.

Paul Cheng – Barclays Capital

Because in your presentation on the web that it is actually 40 and 30. So, we suggest they lower that. We should make it 45 and 35 right?

Scott Phipps

Yes, use the guidance that I gave you on the call.

Paul Cheng – Barclays Capital

Okay, secondly I was disappointed when you said Pacific Northwest, the throughput guidance for second quarter is 135 to 145 given, Anacortes will be shut I think in your assumption is in May and June. Is that the assumption?

Greg Wright

No, Paul throughput for the Pacific Northwest for the second quarter guidance will be 75,000 to 85,000 barrels per day.

Paul Cheng – Barclays Capital

Okay. 75 to 85. And what is the cost?

Greg Wright

We’re using an OpEx guidance of $6.50 per barrel.

Paul Cheng – Barclays Capital

Okay, so it shouldn’t take long in the second quarter guidance?

Greg Wright

Yes, I'm not sure what you're looking at, but I'll go back and check it out.

Paul Cheng – Barclays Capital

Yes, I mean, I'm looking at the page 3. I mean that's what they show.

Greg Wright

Okay, thanks Paul.

Paul Cheng – Barclays Capital

Okay, and Bruce on the first quarter the G&A is somewhat higher than usual, and also the (inaudible) was inside that number?

Bruce Smith

It's really the incentive compensation accrual. It's a change of that method. I mean that’s a principle. There's a little bit of stock-based compensation, but it is partially driven the change in compensation method, and then we’ll also have, Bill Finnerty, you may remember left the corporation, and so we took a charge relative to that. So, really sort of three sort of big baskets there. The incentive compensation was about $3 million and so that will continue and that's built into the guidance that Scott gave you.

Paul Cheng – Barclays Capital

Yes, so that is built into the 45.

Bruce Smith

Right.

Paul Cheng – Barclays Capital

Okay. And Bruce on the latest cut in the CapEx from the 600 to 500 to 525. Is there any particular project that you can share say what that maybe?

Bruce Smith

No.

Everett Lewis

Hi, this is Everett. The latest cut isn't in any one big project. It's probably scattered over 15 to 20 smaller projects, and it's part of that process that we go through where we look very carefully at each project and make sure we haven't got any excess capital going into that program. So there isn't a single big project. No, it's scattered over a range of projects.

Paul Cheng – Barclays Capital

I see, and in terms of the insurance policy, what is that you guys will be willing to share one maybe the ceiling of your current insurance policy, and if that is a one ceiling for BI and property damage combined?

Scott Spendlove

Paul, this is Scott Spendlove. I have responsibilities for business insurance. What Bruce said on the call is really what we're guiding to right now, which is we think we have adequate insurance for this incident given those deductibles.

Paul Cheng – Barclays Capital

Right, but I mean will you be able to share with us that what maybe the ceiling?

Scott Spendlove

We’d rather not do that for competitive reasons in terms of going to the marketplace to buy insurance.

Paul Cheng – Barclays Capital

Okay. A final one, for Anacortes, what is the ongoing, when they are done, what is the ongoing cash operating expense per month, and is the DD&A will continue to be expensed when they are done?

Bruce Smith

No. I have no reason to believe the DD&A expense won't be. I mean, I don't know that for a fact, but we have – in all of our forecasts we have to build in that way. We don't have any change of accounting relative to that. So, I mean, I may be wrong Paul, but I don't think there's any change the DD&A will be accrued just like it always – be amortized like it always has been.

Greg Wright

While it may end up getting amortized over a long period of time. (inaudible).

Bruce Smith

Right, but we're not going to stop doing this period of time.

Paul Cheng – Barclays Capital

And how about the cash operating expense?

Bruce Smith

(inaudible).

Greg Wright

We’ll get back to you on that one Paul.

Paul Cheng – Barclays Capital

Okay. Thank you.

Bruce Smith

I'm not – I'm really not sure quite what the cash operating expense was.

Everett Lewis

Yes, this is Everett. I mean for your modeling purposes, which you're using now in terms of cash fixed operating expense will be similar and may be slightly lower. The variable cost of course is down because we're not earning the units. So we can give you more precise numbers but we're continuing to as we've said pay the operating cost.

Bruce Smith

I mean to think about that I'm little reluctant to start isolating expenses here, because we got two refineries that are combined in there, and for competitive reasons I'm not sure we're going to break that out. I mean, I need to think about that. I mean somebody. I will think five minutes before I retire this afternoon but –

Paul Cheng – Barclays Capital

Don't take more than five minutes Bruce.

Bruce Smith

I'm not sure we're going to give you that information for that reason, because one of the things I don't want to do is start doing too much around that that starts to give competitive information relative to what the other refinery might be. So we're a little – I'm a little sensitive to that. I've talked to the team here about that even in the second quarter. So just please give us a little time to think about that and we’ll let you know where we come out.

Paul Cheng – Barclays Capital

Okay. Thank you.

Bruce Smith

Okay, thanks. Okay. Thanks Paul again. Good luck to you.

Operator

Our next question is coming from the line of Mark Gilman with Benchmark. Please state your question.

Eli Bauman – The Benchmark Company

Hi, thank you. It is Eli Bauman on behalf of Mark actually. I just have one question. I was wondering how much flexibility you have to defer LA related regulatory projects?

Bruce Smith

I can – Everett I can’t answer that question.

Everett Lewis

That's awfully prospective. We of course are going to stay in compliance with all the regulatory requirements around Los Angeles, and that's the first driver. And then we, you know, the best guidance we have today is what you've got in our forward plans and I would use that, but I think in the back of your minds, as we continue to look at that process, we tend to find ways to reduce but we can't say that at this point in time.

Bruce Smith

You know, you look at the first quarter and then just when we were looking at that in the fourth quarter, I mean, we made a significant reduction in the first quarter this year. I think that what I said earlier about when you look at the out years and when you look at capital, and you look at this low margin environment, we set a new standard for ourself and this will be even when margins improve, but the process we've got going on we believe will continue to find ways to reduce the capital investment, particularly capital investment is associated with – that is nonproductive, I mean, regulatory capital.

The safety, the reliability, I mean, we just have just as a fundamental, that is not one meeting that Everett and I go to that we don't talk about we're not going to compromise that. So it's all about finding other ways to save money and I just think it's part of what we're going to do, and you're going to continue to see revisions that go down. If all of a sudden the economy is still robust, you might see changes going up because materials and labor get more expensive than where we plan, but that's not the environment we are in.

Eli Bauman – The Benchmark Company

Okay. Thank you very much. And good luck to everyone.

Bruce Smith

Thank you very much.

Operator

Our last question is coming from the line of Jacques Rousseau with RBC Capital Markets. Please state your question.

Bruce Smith

Hi Jacques.

Jacques Rousseau – RBC Capital Markets

Hi Bruce and Greg, best of luck on your retirement. I think in my 10 years of being an analyst, one of the things I remember most will be our trip on 9/11 to Chicago.

Bruce Smith

Well, it certainly will always be memorable to me too. I still remember the movie that we saw, which was I believe of Walt Disney. But no, it's been a real pleasure to work with you Jacques and our continued best wishes to you.

Greg Wright

Thank you Jacques.

Jacques Rousseau – RBC Capital Markets

Thanks, and Scott we’ll miss you too. Quick question for you, the balance sheet looks in good shape with debt to cap of 39%. I just wanted to see if you could give a status of the tangible net worth covenant. If my math was correct, there was about a $300 million cushion at the end of the year.

Bruce Smith

That's exactly right. We – as you recall we amended the facility to take a new base in that, which is $2.3 billion and you’re exactly right. We're about $2.6 billion right now.

Jacques Rousseau – RBC Capital Markets

Okay, and one last one, what would be the approximate book value of the Anacortes refinery?

Bruce Smith

It’s – I mean, I would say roughly it's in the $500 million range.

Greg Wright

That's correct.

Jacques Rousseau – RBC Capital Markets

Great. Well, good luck to you both and happy retirement.

Bruce Smith

Thank you Jacques.

Greg Wright

Thank you.

Bruce Smith

I think – is that the last question Claudia?

Operator

Yes, that is the last question.

Bruce Smith

Okay. I want to thank everybody again. I think I appreciate all the very, very Greg and I both appreciate the kind comments that so many people made. I think the many wishes for a good retirement. The only person that may not be happy about that is my wife, Gail, who has already told me that I need to find something else to do, but I want to tell you all once again that it has truly been a pleasure.

I know that the second quarter conference call will be a little bit more unusual having done this for a long time, but I actually think that we are on the verge of starting to see some very positive changes in the marketplace. As we’ve talked you know, just if we look to everything statistically, a 12-month comparison is like day and night anymore. I mean the world was so different 12 months ago.

Just as we look at all statistics and as people look about coming out of the recession and the statistics still don't show that we're coming out of recession, I think that where we are positioned and I think that the continued focus on cash and being able to employ cash more effectively for shareholders is going to continue, and it's going to continue, it's going to start to show some real benefits here in the last half of the year. So once again thank you very much and I'd be on your end of the phone listening to the second quarter. Operator, that's it.

Operator

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.

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