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Executives

Louie Rubiola - Director, IR

Greg Goff - President and CEO

Scott Spendlove - SVP, CFO and Treasure

Everett Lewis - EVP and COO

Analysts

Doug Leggate - Merrill Lynch

Chi Chow - Macquarie Capital

Eli Bauman - The Benchmark Company

Paul Cheng - Barclays Capital

Rakesh Advani - Credit Suisse Group

Paul Sankey - Deutsche Bank

Jacques Rousseau - RBC Capital

Tesoro Corp. (TSO) Q2 2010 Earnings Call July 29, 2010 8:30 PM ET

Operator

Greetings and welcome to the Tesoro Corporation’s Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions).

It is now my pleasure to introduce your host, Mr. Louie Rubiola Director of Investor Relations for Tesoro Corporation, thank you Mr. Rubiola you may begin.

Louie Rubiola

Thank you Jacky, good morning everyone and welcome to today’s conference call to discuss our second quarter 2010 earnings. Joining me today are Greg Goff, President and CEO, Everett Lewis, Executive Vice President and COO and Scott Spendlove, Senior Vice President and CFO.

While we will not be referencing slides during the call, we do have a set of slides which was filed with the SEC today. These slides along with other financial disclosure should help you in analyzing our results and can be found on our website at tsocorp.com.

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

With that, I will turn the call over to Greg.

Greg Goff

Thanks Louie, good morning everyone and thanks for joining us on the call today. As everyone knows I joined Tesoro about three months ago. The first three months have been challenging and exciting and we have embarked on a very focused and ambitious agenda to drive fundamental improvement in the business.

Later in the call today, I will talk a little bit about some of those key initiatives. And then during the fourth quarter of this year we will also provide a very compelling plan to deliver shareholder value during our analyst meeting.

Today, we are pleased to report second quarter earnings of $0.47 per share or $0.30 per diluted share for one time benefit of $0.17. These earnings were achieved with Anacortes refinery idled and then Mandan refinery down for a planned turnaround, as industry spreads improved significantly, during the quarter and our capture rate also improved.

The Tesoro index in the quarter was nearly double what we saw in the first quarter, and it was up about 15% in the second quarter of last year. We saw positive signs of economic recovery during the quarter specifically on the West Coast port traffic and rail activity, which we believe supported higher distillate margin.

Gasoline spreads meanwhile continues to suffer from weak demand as unemployment in California remains high.

Capture rate throughout our system were up significantly in the quarter, driven by 3 or 4 key things. One strong commercial and wholesale margins, two improved crude differentials, three an ethanol discount to Gasoline, of about $0.55 per gallon, which improved the margin on ethanol blended gasoline. And finally as a result of the shutdown of the Anacortes refinery. We were still able to profitably meet our customer requirements in the Pacific Northwest.

Retail marketing margins were also strong during the quarter as spot price fell more rapidly than street prices. And of course our throughput rates during the quarter, were down significantly from last year second quarter as we tided the Anacortes refinery following the fire on the naphtha hydrotreater.

Additionally our Mandan refinery successfully completed its propane turnaround during the quarter it’s probably important to note about the Mandan refinery it’s on about a 6.5 year plus turn around cycle.

Anacortes remained ideal today, but we have begun work to repair the damaged units. That work is progressing well and on schedule, and we expect the plant should be operational as early as September.

Meanwhile, we continue to work closely with the investigators regarding the incident. We have successfully moved unfinished product produced at Anacortes during April to our other refineries for further processing.

Additionally, we were able to devour water borne crew cargos heading to Anacortes to our California refinery and we continue to successfully supply our customers with products either sourced from out [control] refineries for our third party purchases.

Regarding Anacortes, it is also important to note that we expect the financial impact of this incident to be limited to our insurance deductibles. And finally I can’t stress enough how thankful we are to our employees at the Anacortes facility, they have worked admirably to get us through this terrible tragedy.

Despite the improvement in margins and earnings during the quarter, we remain focused on our core objectives of driving operations excellence in capital discipline. And while we have seen some signs of economic improvement, high unemployment in California and excess refining capacity in US still way on margins and generally we continue to plan for our margin environment, similar to what we saw in 2009.

As such we remained focused on operating our assets safely and reliably optimizing the system and allowing local demand to be the primary driver of production and yield.

We remain focused on maximizing cash flows and delivering the expected results from our capital and non-capital initiative.

As we announced in our press release, our capital spending including turn arounds in the second quarter was about $140 million and our estimate for this year is now in the range $475 million $500 million.

We also expect future capital spending to be lower than guidance previously given. We remain committed to investing in safety, reliability, environmental protection and to our quick hit capital program announced last call. However, we continue to look for and find ways to capture advantages and lower our overall capital spending.

Examples of where we have been able to reduce our capital spending requirements, while still achieving objectives of the necessary work includes NOx reductions at our Los Angeles refinery and bending reductions across our whole refining system.

As we have mentioned on the first quarter call, we originally expected to comply with NOx reduction requirements through significant investments in a co-generation facility and boiler replacements.

We have since discovered that we will be able to meet our requirements through more efficient investments and the purchase of perpetual credits. This has significantly changed the scope of the multi-year projects that originally totaled about $350 million.

Similarly, we continue to assess our plans for bending compliance and reduced our expect spend by about $15 million and have found ways to push the spending out through 2013, which is about a year longer than we previously expected.

We will be completing our annual capital planning process in the fall and expect to revive our guidance for 2011 and beyond at that point.

From an income capital perspective, we continue to execute are (inaudible) capital program, we are on track to spend about $50 million to $60 million in 2010, and we expect to realize a total of $25 million in related EBITDA this year.

Also, we continue to make very good progress on our $165 million non-capital initiatives for this year, and having realized about half of that target improvements year to date.

To further strengthen our competitive position, we announced yesterday, changes to our corporate over head and benefit plans that when fully implemented by the end of this year will have a significant impact on our expenses, cash flow and future liabilities.

These changes to our corporate overhead include a reduction in force and other overhead efficiency improvements that we expect will reduce total over head cost by $40 million to $50 million annually.

In addition, we concluded a study of our benefits programs during the quarter and made changes that we expect will reduce our on going benefit expenses by $80 million to $90 million annually. The changes are primarily to post retirement medical and life insurance benefits that bring us more in line with our piers and reduce the estimated post retirement benefit liabilities on our balance sheet.

The change to the post retirement life benefits allowed us to record a pre tax gain of $43 million net of severance accruals during the quarter. And because the savings are mostly related to accruals of future obligation, the cash [baiting] started out small. In the $5 million to $10 million range, but then they grow to an estimated $25 million annually in about 10 years.

As significant is P&L and cash savings are, is the reduction in estimated post retirement benefit obligation on our balance sheet. In round numbers these changes will reduce both liabilities from a projected $900 million at the end of this year to just under $600 million, and where that liability was projected to grow to nearly to $1.2 billion by 2014, we are now projecting that liability to stay relatively constant and about $600 million, so at about 50% of the level that would have grown to.

Finally, let me update you on the status of our actions to improve the pricing for the fuel that we supply to Hawaii electric.

As we have mentioned last quarter the Tesoro and Hawaii electric public utility reached an agreement on a new pricing formula related to low sulfur fuel oil sales we are still awaiting approval from the Hawaiian Public Utility Commission. However, based on eco findings with the PUC, a [hearing] is expected sometime in the fourth quarter. At this point we prefer not to provide any financial guidance related to the new pricing formula until we have the final approval through the PUC.

Today, we believe we have the right assets in the right markets, and we see significant opportunity to strengthen out competitive position by improving our cost structure and driving improvements with our capital and non capital initiative we also continue to believe that structurally the West Coast is one of the most attractive markets and offers some advantages that we like.

Having said that, we have initiated a comprehensive strategic review of our business and as I talked about earlier we plan to discuss our strategic plans at the fall analyst day event.

With that, I’ll turn the call over to Scott Spendlove our CFO for more detailed discussion of our quarterly results and to provide guidance for the third quarter, and then at the end I’ll comeback and provide some concluding comments, Scott.

Scott Spendlove

Thanks Greg, during the second quarter, we reported net income of $67 million, or $0.47 per diluted share. These results include one time after tax benefits of $24 million or $0.17 per diluted share. There are three primary items that account for these adjustments. Greg already mentioned the $43 million net that is primarily related to our post retirement benefit changes. After tax these net benefits changes is a $26 million credit earnings.

Also in the quarter, there were one time after tax charges of $7 million. Related to expense accruals and asset write offs at our Anacortes refinery. Finally, we took an after tax benefit of $5 million, related to a state tax settlement arising from exploration and production activities of Tesoro over 15 years ago.

Adjusted for special items, that leaves us with net income of $43 million or $0.30 per diluted share. Segment operating income was $180 million for the quarter. $153 million net of the special items, up significantly from the $11 million, we reported for the quarter last year and driven by the margins gains, Greg described earlier.

Our manufacturing cost in the second quarter, were $248 million in line with the first quarter of this year. We ended the second quarter with a cash balance of $191 million and $713 million of availability on the revolving credit facility. Once again we were under on our net facility during the quarter.

At the end of the quarter, our total debt to total capitalization ratio was 37%. Year-to-date, cash is down over $200 million as CapEx changes and working capital and interest payments, outpaced EBITDA and tax refunds.

As Greg mentioned earlier we spend a $140 million in capital expenditures during the quarter. This was up from the first quarter, primarily due to the full plant turnaround at our Mandan refinery.

Looking forward to the remainder of 2010, the only material turnaround work we have is currently under way at our Hawaii refinery.

Turning to the quarter, we see gasoline demand on the West Coast remaining stagnant as California unemployment remains at its peak of around 12.5%, some 3% above the national average.

Supply changes, however are balancing low demand with crude around gasoline production and gasoline inventories all close to their five years lows in July. As a result so far in July the West Coast crack is up more than $3 per barrel over July of last year and the gasoline against difference for the Gulf Coast is close to its five year high for the month at over $0.25 per gallon.

I’ll close with providing guidance for the third quarter for your modeling purposes. In these assumption we have assumed the Anacortes refinery remains idle during the months of July and August, where the restart currently expected for September.

We estimate throughput in thousands of barrels per day to be 75 to 85, in the Pacific Northwest, 55 to 65 in the mid Pacific, 110 to 120 in the mid continent and 240 to 250 in the California region. OpEx guidance for the third quarter and dollars per barrel is as follows: $745 in the Pacific Northwest, $375 in the Mid Pacific, $330 in the Mid continent and 710 in the California region.

Our depreciation for refining is estimated at $95 million, an additional second quarter guidance items include corporate expense of $37 million, which includes the savings expected from recent changes to our corporate overhead structure and interest expense before interest income of $40 million.

With that, I’ll turn the call back over to Greg for closing comments. Greg.

Greg Goff

As I stated earlier when we began this call, we were actually excited about the challenges and the opportunity however we also recognize that excess capacity in the refining industry will continue to put pressure on refining margins, therefore we are very committed and focused to personnel and process safety efforts to drive continued improvement, our effort to lower our cost structure, add value with aggressive non capital and quick capital program and a very disciplined approach to cash management.

Thank you for joining me on the call today. And with that, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you, we will now be conducting a question and answer session (Operator Instructions). Thank you our first question is coming from Doug Leggate of Merrill Lynch.

Doug Leggate - Merrill Lynch

Couple of questions if I may, the review on the cost structure Greg, can you quantify the likely pacing of reductions in the cash benefit in other words corporate charges looks like they are going to be coming down beyond the $37 million guidance you gave for Q3. So what is the outlet with look like on an annual run rate basis and when would be expect the outer field benefits embedded in the numbers.

Greg Goff

On an annual basis the corporate overhead charges, those will be fully implemented by 2011, so as we go through, the remainder of 2010, which we started yesterday, those changes will all be fully implemented. So will accrue some of those benefits in the third and fourth quarter and Scott can give you some specific guidance on those. But when we enter 2011, that cost will be out of our system.

Scott Spendlove

Yeah, Dough the guidance we gave on admin includes about $7 million savings in the third quarter, and we can expect similar rate of savings in the fourth quarter, but as Greg said we expect going into 2011 will be, on track to see the $40 million to $50 million.

Doug Leggate - Merrill Lynch

The balance the other, I guess the other 70 to 90, that is non-cash I am assuming.

Scott Spendlove

Generally it is, it reflects a reduction in what we expected to have to do to increase our liabilities for post retirement benefits and pensions prior to the changes we made. So mostly non-cash in the outer years, although there will be some cash savings as time goes on which Greg mentioned in the call.

Starting out small, maybe $5 million to $10 million in the 2011, but growing to about $25 million 10 years out.

Doug Leggate - Merrill Lynch

I just got a couple of quick follow ups if I may. Greg you [thought] I guess a little over couple of months now to look at the portfolio and you made to I think slightly contradictory statements. One was that you think you got the right assets in the right places. But on the other hand you are going to carry a complete strategic review.

Can you maybe just give a little bit of clarity as to what the message should be there and if you could maybe speak to Hawaii on the quarters will should within not that was, that would be good enough to one final follow up if I may.

Greg Goff

Yeah we got that regarding the question on the right assets in the right places. The markets that we operate in, we fundamentally like those markets for a variety of reasons, regarding the look at the assets where we need to go back in and look at where we can drive improvements in the assets from a competitive standpoint in to really capture more value so, hopefully it wasn’t a contradiction as much as just a point that in general we like the Western part of the United States in those markets, however we need to get the performance of certain assets up at a higher level and so they as you know some of the assets are in niche markets and so we intended to further look at ways to capture more valuable on an basis and how we can integrated it with our overall system.

Doug Leggate - Merrill Lynch

My final one is really just on the CapEx clearly there is a limited amount of flexibility in terms of the environmental stuff you got to do and of course the acquisition of (inaudible) required fairly substantial capital. I know you want to give hard numbers as directionally give us an idea where you expect the flexibility to be on capital and whether up or down on 2010 with the [vacant] place so at least got a start to try and figure out what this means. That’s it from me thanks.

Greg Goff

Regarding the capital program, we sighted a couple of examples and the talk that I just gave particularly on the NOx programs and improvement for driving in Benzing. That our negotiation on some of the cost net to for some of the projects that we continue to look at those type of opportunities, that we see at real focused on being able to drive improvements in our capital expenditures and we see numbers coming in for next year in the same ballpark of 2010.

Scott Spendlove

475 to 500?

Greg Goff

In somewhere in the same general range, we haven’t definitively got up our plans but we really working the numbers hard to make sure that we insure the integrity of our asset but also manage balance our cash, as we go forward next year, so somewhere in that area.

Operator

Thank you, our next question is coming from Chi Chow of Macquarie Capital.

Chi Chow - Macquarie Capital

As a follow up to Doug’s question on the asset base, how you viewing the [Bloomington] refinery looks like you had several operational hiccup, is there any thoughts on spending incremental capital where as you improving reliability going forward?

Greg Goff

During the second quarter we did have some operational hiccupps as you properly stated at the Los Angeles refinery it created a little bit of a loss profit opportunity for us, but if you take a step back and look at the overall programs we have been making good progress since the refinery was acquired to really bring it up to our standards to operate to improve reliability to improve the integrity of the assets, and we continue to focus on the programs where we get the greatest benefit from doing that, and so they have actually come up with some pretty innovative ways to help manage the required capital to get there and at the same time achieve the objectives of proving the overall assets so it is probably one of our highest priority assets to really look at and be able to drive the improvements we need to, but also be very cognizant of the capital that is takes to do that.

Chi Chow - Macquarie Capital

Could you give us any specifics on some of those actions?

Greg Goff

May let me turn that over and let Everett talk to you a little bit about that.

Everett Lewis

Some of things we do are a lot around the basic infrastructure and refinery. And lot of our capital around LA is improving that basic infrastructure. The one example is the average that we had in the quarter was driven by an electrical average.

We have a good generation plant in the refinery and we have got some money we are spending to improve the controls. And the ability of that system to stay online, when we have any disruption from the electric supply. So it’s primarily around infrastructure and making sure that that infrastructure is consistent with our standards for reliability and safety in our refinery going forward.

Chi Chow - Macquarie Capital

And one final question Anacortes. Could you may have alluded to it. But can you discuss the business interruption insurance impacting on how that’s going to flow in here.

Greg Goff

Well from a business interruption standpoint and then we, as you are aware we have insurance on both the assets and into business interruption and we are working through with the insurance companies on those claims right now. So we haven’t put anything in our numbers to get any payment back on the actual damage to the facilities once we have collect on that claim. And our business interruption we are working through that process with the insurer’s to be able to process the claim, which as you probably are aware is either based upon 60 days or the $25 million.

And we believe (based) if you go back and look at the second quarter you can kind of see what the results would have been, if the facility would have been running and the results of that, claim. So we are already working through with the insurance adjusters and hope to get that resolved, as we move through the second half of this year.

Chi Chow - Macquarie Capital

Okay great and what’s the regulatory risk on the September restart what’s the plan

Greg Goff

Well there from we are the most important thing for us is to basically go back and make sure that the facility is absolutely in a position that we are comfortable restarting the plans. So we have intensive efforts going both through inspections, bringing giving all of the rebuild work at the facility and working with the people at the facility, so we feel like we are on schedule and working very closely with all the necessary party’s involved to restart the facility. So at this point in time there is nothing that we are aware of that would preclude us from making that restart.

Operator

Thank you our next question is coming from (inaudible) of Morgan Stanley.

Unidentified Analyst

My question is really two follow ups from the [chemical] product question. And. I have one just a follow up on CapEx you know reduced again by 25 million, that is just to confirm that’s reflecting may be some change in your NOx and Benzing compliance that you mentioned earlier, hence it’s a reduction in deferral to the out years of those cost?

Greg Goff

Yeah and good morning the actual reduction in the CapEx is by basically driving improvements in some of the things that we are working on. So where we found opportunities to lower the cost and still achieve what we set out to do so it specifically is not a deferral as you said, but it is actual a reduction in things that we have been able to do. We have some areas in our marking program where we reduced our capital expenditure lower than what we have thought and achieved the same objective so its really a combination of several small things that provide us a lower capital spends without differing anything and without changing the sculpt of what we intended to do.

Unidentified Analyst

A better way to potentially comply with NOx or Benzing maybe incremental to that is that fair?

Greg Goff

Yeah in the Benzing I think we found improvements to drive across the whole system just reduce spending that it still achieves the same objectives so and then NOx we talked about the NOx around what was going around LA with the cogeneration in that.

Unidentified Analyst

Okay, and the second follow up is on the Anacortes update I mean I know last time we met in June and would you expect this year six days week maybe preliminary results from the government investigation is that on track in conjunction with the restart how those two events relate to one another if at all?

Greg Goff

At this point in time the best we know is that at sometime probably by the latter part of August we should hear from the chemical safety board regarding their investigation of Anacortes kind of the timeframe that we are aware of and so that in conjunction with everything that we are going through to get the facility ready to restart things are progressing as we planned.

Operator

Thank you our next question is coming from Jeff Dietert of Simmons Financial.

Jeff Dietert - Simmons Financial.

Just got a question on the operating cost guidance for 3Q its higher in every region and you have been on a roll of a number of quarters in a row for reducing operating expense can you talk about if there is unusual items in the third quarter guidance or just give us some color on those cost?

Scott Spendlove

Yes Jeff, I think throughput maybe the thing that’s driving in our per barrel basis, a little higher we got the light turn around, we got. Anacortes is still down in July and August coming up sometime in September.

But beyond that I don’t know if anything that we would expect to drive the absolute cost higher.

Jeff Dietert - Simmons Financial.

Alright secondly your mid-continent refining assets are well positioned relative to growing supply in the region. Can you talk a little bit about what your expectations are for supply growth in infrastructure development and how they could influence crude discounts in the mid-continent?

Greg Goff

Well I think in both of refineries that you are talking about there are additional crude’s coming to market over time. That will have an impact on the business and that’s something that we look at all the time and determine how that availability of the crude the impact of the differentials the ones that we enjoyed a day.

How that will be impacted in the future as we go forward. So in the short term we don’t see any immediate impact although we are gaining some advantages by some crude that we can supply to the Salt Lake City refinery. But longer term that’s part of our strategic review to determine how we position ourselves as additional crude comes to the market and the impact it will have on the differentials for the supply to those refineries.

Operator

Thank you our next question is coming from Mark Gilman of The Benchmark Company.

Eli Bauman - The Benchmark Company

Hi, its Eli Bauman standing in for Mark Gilman thank you for taking my call, your mid-continent margin looks very high, did you get any special benefits from any (inaudible) discounts, versus crude discounts that you wouldn’t be getting going forward that were especially high in the same quarter.

Greg Goff

No in the second quarter Mandan refinery was down for a major turnaround, as we talked about, but the crude discounts weren’t anything thing out of the unusual so.

Eli Bauman - The Benchmark Company

And have there any been any law suits filed in relation to the Anacortes’ incident?

Greg Goff

Regarding Anacortes as of today there are no law suits that have been filed.

Operator

Thank you your next question coming from Paul Cheng of Barclays Capital.

Paul Cheng - Barclays Capital

Certain quick question may be the first is for Scott. Scott in the hedging you have about 18 million gain for the quarter? Is there any additionally hedging position during the third quarter.

Scott Spendlove

I don’t know if we have the answer to that question, right now Paul I mean we are not doing anything out of the normal as it relates our hedging activities, Everett do you have any additional insight?

Everett Lewis

No, Paul on some of the longer haul accrues that were used and some of the other [accrues] we have in storage, we of course hedge those accrues, so we have a fallen flat price we have some gains on the hedging side, which you’d expect will be offset from a fiscal side. What happens in the forward quarters depend on what happens to the flat pricing and how much crude we have on the longer haul side at that point in time. So, we look at that as an unusual variation.

Paul Cheng - Barclays Capital

I guess my question is that, (inaudible) that you have any outstanding hedges existent for the third quarter?

Everett Lewis

I don’t know this specifically off hand, but I suspect that there are a few since we don’t clear our crude or clear our storage at the end of each quarter there are usually some we are doing across from one quarter to another, so it wouldn’t surprise me if they were but those hedges would again be tied to the physical crude to some storage and we are just representing offsetting move to the physical.

Paul Cheng - Barclays Capital

Scott on the post retirement benefit from the P&L stand point to 18 million - 19 million when you are based next year, I think majority of them is on the refining operation so will that be the refinery unique operating cost or they are just being the other operating cost item, because this I suppose I just relate to the data cost?

Scott Spendlove

Other line item Paul.

Paul Cheng - Barclays Capital

So it’s not on the cash lifting cost or operating cost that you guys will talk about?

Scott Spendlove

Right it is not.

Paul Cheng - Barclays Capital

Okay, and Greg on the [second] reduction $40-$50 million it looked like (inaudible) Incorporate and maybe a little bit in the refining. Are you done with the review on your personnel [data] or that is just the first pace and third review is going to get done?

Greg Goff

Yes, Paul I mean the first step we wanted to do is get start to make the step to get our cost structure improved this year and as we develop our plans for 2011, we will all be challenged to go back in and like to drive further improvements in the business 2011 going forward. So when we get together in the fall and go over our business stance we’ll be able to share more what our plans are, but we continue to look to drive improvements in the way we do business going forward.

Paul Cheng - Barclays Capital

And I know that there is only three months OES, you may not have time to really go through everything yet. Can you share with us what’s your view about the [retail] and ethanol in terms of, I mean you guys are not into ethanol production. Wondering that will you join some of your key by getting into that business if the opportunity arise. And [retail] it’s kind of business that you want to be focused, expand or statistical or review. Thank you.

Greg Goff

Both those questions, Paul we’ll be able to talk more clearly and specifically later this year when we get through to get a better chance to look at it. But around the retail part of the business, because of the markets that we operate in, we need to be integrated between our refining and marketing to support that business, that integration.

For the gasoline is extremely important to us so how we do that becomes important and so today having some of our own retail is one of the things we do. But as we go through our strategic review, we love to see what is the way that, that support and integrated position in the markets that we are in and that will have a, that will have this determined that will, the retail business place going forward. So we’ll talk more about that later this year.

Around ethanol as you know we have requirement to purchase ethanol a pretty significant amount of ethanol and we’ll look how we do that. We actually like being in the market to go and inquire our needs and not necessarily to be owners of ethanol plants that’s something that right now is not in our strategy.

Paul Cheng - Barclays Capital

If I could have a final question, on the Anacortes that after say four months that, do you have preliminary funding that what may have caused the incident. And what bad debt or what the lesson we may learned and applied to the rest of your system.

Greg Goff

Paul its not appropriate at this point in time because of the ongoing investigation to make any comments where we are fully cooperating with the authorities during the investigation we are doing our own investigation and when the time is right we’ll be able to talk about what happened there but its just not appropriate to do it at this point in time.

Operator

Thank you, our next question coming from Ed Westlake of Credit Suisse Group.

Rakesh Advani - Credit Suisse Group

Hi, this is actually Rakesh Advani, just had a question, you guys mentioned the reduction in CapEx for 2011 just wondering what is the impact on, I guess the margin improvement program point going forward will you still be able to retain your goals.

Greg Goff

The guidance that we gave regarding 2011, was that our CapEx should be and about the same ballpark numbers that we see for 2010 and one of the big changes for 2011 that helps a key part of that is the co-generation plant, that was in the plan last year around the Los Angeles refinery so that and we are still working through all the details of that but as we worked through our budgeting profits right now we are it looks like we are going to be able to come in and about the same area and so that kind of [related] to us but regarding the capital improvement things and that the plan that was laid out last year we see that to be very valued accretive to what we are doing and so we fully intent to be able to build by the entire capital plans for 2011 and have the spend that was projected as well as the benefits of flow through to EBITDA because of the return on those projects.

Rakesh Advani - Credit Suisse Group

Just I guess a general commentary on what your outlook is distillate demand for the rest of the year?

Greg Goff

On distillate demand it just come up a little bit from what we saw earlier in the year I mean we believe that there was some restocking that occurred that bought the inventory level up in that but we are kind of cautiously optimistic on overall demand as we go through the remainder of 2010 and into 2011 so we are approaching the second half of the year cautiously cause we don’t feel lot of upside with the inventory levels across the United States and all products in that and seeing extremely robust in there and we are just we are pretty cautious about how that unfolds.

Operator

Thank you our next question is coming from Paul Sankey of Deutsche Bank.

Paul Sankey - Deutsche Bank

Hi Greg, on your first conference call, here could you outline the ball case for Tesoro? Thanks.

Greg Goff

Scott help me I couldn’t quiet hear the question.

Paul Sankey - Deutsche Bank

The question was Greg at your first conference call can you just outline what was the full case was the bright case such as (inaudible)?

Greg Goff

Right now Paul I made the point pretty clear at the beginning of the call is that when that overly optimistic under market I mean we see the market probably a lot differently than most people so what we fundamentally believe in is that we see opportunities to drive pretty significant improvement in the business that we as a company need to go in and be able to execute that will provide an opportunity for us to be a buyer in the market place.

So for example, the first that we’ve taken here to go in and improve our cost structure. We fully intend to continue to do that and lay out plans into 2011, how we’ll be able to drive further improvements in the cost structure?

We have a good program to on the non-capital improvements to drive value through the way we manage the value chains and make the decisions from crude selection all the way to the [streak] which we believed add value. And then finally by being able to really have a very disciplined and focused approach on our required capital spent and maintain the integrity of our assets.

And at the same time be able to re-deploy some capital to drive additional EBITDA will help our underlying performance, so kind of in summary, if we can execute well the things that we can control we believe we’ll perform at a higher level than what we have been.

Paul Sankey - Deutsche Bank

Yeah, you are going to raise underlying EBITDA by attacking the cost line.

Greg Goff

Cost and margins through the way we do the optimization about a chain and generate additional EBITDA through small capital programs.

Paul Sankey - Deutsche Bank

Where do you think you can [going to stop to]?

Greg Goff

I don’t know, you have to tell me that I don’t, we were, all I can tell you is we have a very highly committed group of people that will be very focused and we will be able to, when we get together in the fall and layout our plans be able to show what we think we can do in the areas that are targeted that would drive fundamental improvement in our EBITDA.

Paul Sankey - Deutsche Bank

Yeah that makes sense and so do you got a date for the analyst meeting for the days are you still kind of working towards it…

Greg Goff

We haven’t targeted yet, but it will probably be in definitely in the fourth quarter or sometime in the middle of the fourth quarter.

Operator

Thank you our next question is coming Cory Garcia of Raymond James & Associates.

Cory Garcia - Raymond James & Associates

I apologized I missed this earlier but do you have any update with regard to your Panama assets and some one on a related note were you able to source any new crude that you would be able to discuss this quarter?

Everett Lewis

And I would try to answer at least part of that, I am going to turn part of it over to Scott, I mean as I think everyone knows the Panama assets are active the pipeline has been reversed you know our storage is complete so we have put barrels through the pipeline we have used the storage and we have done some initial work with those assets we are continuing to develop that business and I think we will continue to develop that business as time goes forward.

But it still looks like an attractive thing for us. Scott do you want talk little bit about the funding side of that?

Scott Spendlove

We are still working on how that will be funded you know it will likely come from a separate credit agreement separate from our corporate revolver but we are still working through those details, but you know we’ll be there and ready to go when we see those opportunities.

Everett Lewis

Regarding the new crude’s we of course have a program always looking for new crude’s, we are always looking for attractive crude’s we have a very flexible system and we think its one of our advantages that we can be a first mover often time in new crude’s and take advantage of that. We don’t think it’s a good idea for us to share it specifically crude by crude what we are doing in a market because its is a very competitive environment.

In the past quarter we ran over 30 crews in our system which is a wide variety of crude’s and some of those were new crude’s. So we continue to follow that program and get some benefit from it.

Operator

Thank you our next question is coming from Jacques Rousseau of RBC Capital.

Jacques Rousseau - RBC Capital

Morning, most of my questions have been answered, but I just wanted to follow up on Anacortes and kind of get your thoughts on the supply dynamics on the west coast, because obviously if you bring this refinery back online its about 4% or so by refining capacity that’s going to put more supply on the market and probably put some downward pressure on margins and I just want to get your thoughts on those issues?

Greg Goff

Yes, I think I mean your assessment is correct I mean the market when the refinery comes back up we’ll put additional supply in the market just like it has been in the past before it went down and that’s something that we will have to work through the balance what we do and we target our runs based with economic runs to be able to meet the requirements in the system, but probably nothing further than and that’s exactly what you have said it will provide additional supply in the market and kind of put pressure on the market place.

Operator

Thank you. We have reached the allotted time for questions. Like to hand the floor back over to management for any closing comments.

Greg Goff

We have no closing comments, we appreciate everyone’s participation today and thank you for your time.

Operator

This concludes today’s teleconference you may disconnect your lines at this time. Thank you all for your participation.

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