Tesoro's (TSO) CEO Gregory Goff on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Tesoro Corporation (TSO)

Tesoro (NYSE:TSO)

Q2 2014 Earnings Call

July 31, 2014 8:30 am ET

Executives

Brian Randecker -

G. Scott Spendlove - Chief Financial Officer and Senior Vice President

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

Analysts

Edward Westlake - Crédit Suisse AG, Research Division

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

Sam Margolin - Cowen and Company, LLC, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Paul I. Sankey - Wolfe Research, LLC

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

Evan Calio - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to Q2 2014 Tesoro Corporation Earnings Conference Call. My name is Sandra, and I'll be your operator today. [Operator Instructions]

As a reminder, this call is being recorded for replay purposes. And I'd now like to hand the call over to Brian Randecker, Senior Director of Investor Relations. Please go ahead.

Brian Randecker

Good morning, everyone, and welcome to today's conference call to discuss our second quarter 2014 earnings. Joining me today are Greg Goff, President and CEO; 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 disclosures and reconciliations for non-GAAP financial measures, 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 security act as there are many factors, which could result, or which could cause results to differ from our expectations. Now I'll turn the call over to Scott.

G. Scott Spendlove

Thanks, Brian. Good morning, everyone, and thanks for joining us on the call today. I'll review the earnings release and some highlights of our results and provide guidance, then hand the call over to Greg.

Yesterday, we reported second quarter 2014 net income from continuing operations of $224 million or $1.70 per diluted share compared to $227 million or $1.64 per diluted share for the second quarter of 2013. Results from continuing operations were $1.70 per diluted share in this quarter compared to $1.56 per diluted share for the second quarter of 2013, excluding special items. Special items in the year-ago quarter include after-tax transaction and integration costs of $0.08 per share and an after-tax California pipeline settlement benefit of $0.24 per share.

We're pleased with our second quarter results. Our results from continuing operations for the quarter are up meaningfully over last year, reflecting the addition of the Los Angeles refining, marketing and logistics assets, and delivery of $200 million of EBITDA improvements through a combination of synergy capture and other business improvements. As Greg noted in the press release, this is especially important when you consider that the Tesoro Index is down over $2 per barrel from a year ago. And our stock-based compensation expense is up $0.14 per share from a year ago.

The refining segment's operating income was $372 million for the quarter compared to $375 million last year. The Tesoro Index was $12.99 per barrel for the quarter, which was down over $2 per barrel, compared to $15 per barrel for the second quarter of last year. The overall gross margin for the quarter was $13.35 or 103% of the Tesoro Index compared to $14.75 per barrel or 98% of the Tesoro Index last year.

During the second quarter, we recorded a $76 million pretax loss related to hedging activities. Most of this loss occurred late in the quarter, as crude prices moved higher on geopolitical uncertainty. With crude prices declining early in the third quarter, we expect to see much of these losses reversed.

Throughput for the quarter was 816,000 barrels per day or 96% utilization. Direct manufacturing costs per barrel were up $0.23 per barrel to $5.88 compared to the first quarter of 2014.

Operating income in the logistics segment was $50 million, up $30 million, or 150% from the second quarter of 2013. The significant growth has been driven by the acquisition of the Los Angeles Logistics Assets and the Northwest Products System.

Tesoro currently owns 35% of the outstanding common units and 100% of the general partner of Tesoro Logistics. The 19.5 million TLLP common units Tesoro currently owns are valued at over $1.4 billion based on the market price as of June 30. The general partner received $8.3 million in distributions for the quarter or $33 million annualized. This is 380% higher than the second quarter of 2013.

We anticipate these distributions will continue to grow as we remain focused on growing third-party EBITDA streams at TLLP.

The retail segment's operating income was $72 million, a significant improvement from $25 million in the second quarter of last year, driven by the Los Angeles acquisition and improved retail margins. Same-store fuel sales were higher during the quarter by nearly a 0.5 percentage point versus second quarter last year.

Total retail fuel volumes were up over 60% year-over-year, driven by the addition of approximately 835 dealer-operated ARCO retail stations on June 1 last year as part of the Los Angeles acquisition.

We're pleased with our West Coast presence and performance and the opportunities for continued EBITDA growth. Unemployment in California continues to improve, falling below 7.6% in May.

Total vehicle miles traveled, as estimated by the California Department of Transportation, is up 2.5% year-over-year for the period of January 14 through May 14 -- January 2014 through May 2014, the highest total on record. And this is reflected in the Department of Energy statistics, which show PADD V gasoline demand at or above the 5-year range for the majority of 2014, while inventory for gasoline is below the 5-year average. And distillates are at 5-year lows.

Capital spending was $119 million for Tesoro during the quarter and $48 million for Tesoro Logistics.

We anticipate slightly lower full year 2014 capital spending of approximately $625 million. This is before Tesoro Logistics capital spending, which has grown 25% to approximately $200 million, reflecting expected spending related to the construction of the Connolly Gathering System and the Anacortes, Washington truck rack, which is funded by TLLP from excess cash flows and the use of its own balance sheet.

Turnaround spending was $19 million for the quarter. The company now expects full year 2014 turnaround expenditures of $195 million.

Full year 2014 deferred retail branding costs are now expected to be $25 million, a 50% reduction from prior guidance.

Yesterday, we announced that the Board of Directors approved a new $1 billion share repurchase program to become effective upon the full completion of the company's current $1 billion share repurchase program expected by the end of 2014. We purchased $100 million worth of Tesoro shares during the second quarter. Through the end of July, we have purchased an additional $50 million worth of shares. This brings total purchases under the current $1 billion authorization to $750 million.

Tesoro Corporation, today, also announced that the Board of Directors has approved an increase in the regular quarterly dividend by 20% and declared a regular quarterly cash dividend of $0.30 per share.

Our corporate and unallocated costs on a pre-tax basis were $67 million, excluding $4 million in corporate depreciation, and $26 million from stock-based compensation expense. The noncash variable portion of the stock-based comp expense was $13 million for the quarter, compared to a benefit of $15 million in the second quarter of last year. The nearly $30 million swing in expense is a result of the stock increasing $8 per share this quarter compared to a decrease of $6 per share last year during the quarter.

The impact for $1 share movement -- $1 movement in the share price from this legacy stock compensation program has declined by 40% since last year to just now $1.5 million.

We ended the quarter with a cash balance of about $1.2 billion. Sources of cash include adjusted EBITDA of about $548 million, changes in working capital and other of about $185 million and changes in debt of about $230 million. Uses of cash include acquisition, capital and turnaround spending of about $205 million, shareholder distributions and buybacks of about $175 million and cash interest and taxes of about $130 million.

We had excess revolving credit capacity of approximately $2.3 billion on the corporate revolver and $347 million on the TLLP revolver. Total consolidated debt was $3.1 billion. Tesoro's portfolio was just under $1.7 billion, and TLLP's was about $1.4 billion.

Excluding TLLP debt and equity, Tesoro's total debt to total capitalization ratio was 28%.

Turning to the third quarter guidance. We estimate throughput to be in thousands of barrels per day, 505,000 to 525,000 in the California region, 175,000 to 185,000 in the Pacific Northwest and 120,000 to 130,000 barrels per day in the Mid-Con. We expect manufacturing costs in dollars per barrel to be $6.45 to $6.70 in the California region, $3.95 to $4.20 in the Pacific Northwest and $4.10 to $4.35 per barrel in the Mid-Con. Depreciation for Tesoro refining is expected to be $105 million and $16 million for Tesoro Logistics.

Additional guidance items include estimated corporate expense, excluding depreciation, of $60 million and interest expense before interest income of $43 million. And with that, I'll now turn the call over to Greg.

Gregory J. Goff

Thank you, Scott. We are pleased with our progress towards achieving the 5 distinctive performance objectives discussed at our Analyst Conference last December: first, delivering the California synergies; second, enhancing our gross margin; third, driving other business improvements across our system; fourth, further growing our Logistics business through TLLP; and finally, maintaining strong financial discipline.

During the first half of 2014, we delivered $200 million of EBITDA toward our synergy and business improvement objectives, and are on track to deliver fully on these commitments. This year, we expect to deliver $160 million to $180 million of EBITDA improvements related to the California synergies, $140 million to $160 million of improvements related to our efforts to enhance gross margins and $70 million to $90 million of improvements related to improving our base business.

Through June, we have delivered approximately $100 million of EBITDA improvements related to the California synergies, $75 million of improvements related to our efforts to enhance gross margins elsewhere across our system and $25 million of improvements related to improving our base business.

We are very pleased with the California synergies we are delivering. The improvements are clearly visible when you compare our capture rates during the second half of 2013 with the first half of 2014. The overall capture rate increased from 99% to 104% of the Tesoro Index, while the Index increased from $6.46 to $9.89 per barrel. This is equally impressive when you consider we completed the $650 million sale of the Los Angeles Logistics Assets to TLLP in December, which moved an estimated $60 million to $65 million of EBITDA to Logistics.

In addition, the first half of this year was also impacted by maintenance activity and the hedging activity Scott mentioned previously. We are making good progress on the integration of the 2 facilities. We are off the interim crude oil supply agreement and continue to focus on improving the optimization of the crude oil slate. We expect to continue to run Basra and ANS but are continuously increasing the variety of crude oil we run.

The Wilmington portion of the facility can now access the Carson inbound crude oil logistics network, which improves our flexibility.

During maintenance activity at the Anacortes refinery in the quarter; we were able to move some barrels of Bakken down to our Los Angeles refinery and realized refinery values relative to ANS similar to those that we experienced at Anacortes. We are integrating the refined products logistics between the 2 refineries and are now moving finished barrels from Wilmington into the new Carson logistics system.

We just completed a connection between the 2 facilities that allows blending and sharing of both the gasoline and jet supplies.

Meanwhile, we are advancing through the engineering phase of the project to shut down Wilmington's cat cracker and increase distillate production flexibility at the Los Angeles refinery. We anticipate starting the permitting process this year and expect to complete the project in early 2017. The project remains subject to final scoping, board approval and permitting.

Efforts to enhance gross margins elsewhere in our system and drive other business improvements are also yielding strong results. This can clearly be seen in the Mid-Continent region. We realized a gross margin of $22.79 for the first half of 2014. This is a 128% capture of the Group 3 crack of $17.79, which is an improvement from the 85% capture of the crack last year. This improvement is a direct result of the completion of the first phase of the Salt Lake City Waxy Crude expansion, Mandan diesel desulfurization unit expansion, which will also allow the refinery to run an additional 3,000 barrels a day of total throughput.

These improvements, along with some smaller project, improved results by approximately $60 million during the period or about $2.50 per barrel.

We've also been focused on enhancing gross margins through further optimizing our marketing portfolio. We closed on the acquisition of 15 retail stations in the Salt Lake area during the quarter and have added over 80 Exxon and Mobil-branded stations to our portfolio.

Turning to growth in our Logistics business. TLLP had an excellent quarter, and our operations are running well. With the growth we have seen, we have the opportunity to achieve an EBITDA run rate of $450 million to $500 million by the end of 2015.

We completed the sale of the logistics assets in July, providing an additional $28 million of estimated annual EBITDA for TLLP, and generating an additional $210 million in cash and $30 million in TLLP equity for Tesoro.

We expect the remaining $30 million portion of that drop-down to be completed late this quarter or early in the fourth quarter.

TLLP just raised its distributions per unit by 4% to $0.615 per unit, and we expect to continue to increase quarterly distributions, in line with our growth expectations.

As Scott said, the market value of Tesoro's interest in the common units now exceeds $1.4 billion.

The value and distributions we received from the GP interest continues to grow rapidly. Today, those GP distributions stand at about $33 million annually, a nearly fourfold increase from last year. And given the organic growth we're pursuing, we could see those distributions more than double over the next year.

Our strategy to deliver a growing stream of committed third-party revenues is highly differentiated from that of other refining MLPs and will drive significant shareholder value. We are making substantial progress on our organic growth projects as we expect to spend $200 million in capital within TLLP this year.

Tesoro has additional legacy, logistic assets, as well as multiple projects under development, which assures a rateable flow of drop-downs to TLLP over the next few years.

We are clearly focused on growing our Logistics business, and our goal over the next 5 years is to increase third-party revenue to 50% of total logistics revenue.

Finally, to support our commitment of maintaining strong financial discipline, we have increased our dividend by 20% and announced a new $1 billion share repurchase program. We have purchased $750 million through July under the existing $1 billion program, and expect to complete the first $1 billion authorization by the end of this year.

We continue to focus on maintaining the balance sheet.

The permitting process for the 360,000 barrel per day Vancouver Energy project is progressing. Despite some strong headwinds and a thorough Energy Facility Site Evaluation Council, or EFSEC process, we have taken several positive steps forward in the EFSEC process. EFSEC issued the environmental impact study or EIS scoping report. We have already submitted the majority of the preliminary draft environmental impact study to EFSEC and expect to submit the remaining portion in August.

The EFSEC approved the land use consistency, which means the facility uses in line with city zoning requirements. And the governor of Washington, Governor Inslee, has directed state agencies to issue a report on rail safety to be completed by October 1.

Once the EIS is submitted, we expect to begin the adjudicated phase shortly thereafter, which is the final stage before the recommendation is submitted to the governor. We expect the facility will be operational in 2015.

At this point, we have also completed upgrading our crude oil railcars and have 100% of our fleet compliant with the post-2011 CPC 1232 design specifications.

We are excited to unveil the new project to construct a mixed xylene extracting -- extraction unit in Anacortes, Washington, which will be supplied primarily with reformate from our Martinez and Anacortes facilities. This is another example of our continuing efforts to enhance gross margins by improving yields to produce higher valued products.

We expect the 15,000 barrel per day project will cost around $400 million and be completed in 2017, pending permitting and other approvals. We expect this to generate competitive returns similar to other large capital projects we had delivered over the last few years. The market for xylene is expected to grow 5% to 7% annually, driven by -- primarily by Asia. And we are well-positioned to compete in this global market with our existing operating cost and logistics advantages.

This is just another example of what we are doing to drive value for our shareholders while focusing on execution and improving our base business. Tesoro continues to perform well. We remain committed to driving shareholder value as we achieve the synergies and other business improvement targets we've set and focus on growing our Logistics business.

And we remain confident in our future free cash flows and the long-term value of Tesoro, as we expand our stock buyback program and maintain a competitive dividend.

And now, we'll be glad to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Ed Westlake from Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

And there was -- just a very quick clarification. You said the hedge loss was how much in Q2?

Gregory J. Goff

I think it was -- go ahead, Scott.

G. Scott Spendlove

It was $78 million.

Edward Westlake - Crédit Suisse AG, Research Division

$78 million, which was -- and so, it wasn't shouted out in terms of when you think about the EBITDA that you reported last night?

G. Scott Spendlove

No, it wasn't. It was $76 million, Ed, I apologize.

Edward Westlake - Crédit Suisse AG, Research Division

Right, okay, okay. And then a more strategic question for Greg. The -- investing $400 million in pet chems, and obviously, I'd love to hear some thoughts as to what type of ROI you have on that project. But -- and I guess, you have choices. I'm just intrigued in the thought process of why $400 million into that type of a project versus, say, trying to find $400 million of logistics projects or potential acquisitions that you could've done to drive value in the GP and LP harder?

Gregory J. Goff

Yes, we would do the latter. Ed, we would look for $400 million of investments in logistics and that also. On the other hand, as we look at our production of gasoline on the West Coast, and we're looking ways to get the highest value for the gasoline off the West Coast, we see the xylene market in Asia as a very attractive option on how we can optimize the West Coast system and make the mixed xylenes. And so as we advance that project, we see very attractive returns, like I said, returns comparable to what we've delivered on some of our other high return capital projects.

Edward Westlake - Crédit Suisse AG, Research Division

I guess, to push you a little bit on that, what sort of xylene prices have you used, like a historical average or a view forward? Because obviously, there's a lot of investments in xylene capacity as naphtha becomes more globally oversupplied.

Gregory J. Goff

Yes, we've got -- we've done a very thorough analysis of prices to both produce and look at what xylene will sell for coming from the Gulf Coast, West Coast, Japan and Adam [ph]. So we have done -- looked at it very, very thoroughly, and particularly feel like our cost to supply gives us an advantage.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then very quickly, sir, on the hedge loss, how much was realized and unrealized?

G. Scott Spendlove

Actually, Ed, $78 million was realized, and there was some unrealized that was positive. So the net was $76 million, and you'll see that in our 10-Q.

Operator

Your next question comes from Jeff Dietert from Simmons.

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

I appreciate some of the detailed discussion on the California synergy enhancement. Of the $100 million that you've captured already, what -- how would you break that down into the feedstock advantages, logistics? It sounded like you were shifting some of the feedstock around and getting some integration and blending. Were those the biggest 2 components of the $100 million?

Gregory J. Goff

Yes. The -- off of our target, it's about half of what our target was for those categories that you talked about.

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

Is there -- you highlighted and confirmed the guidance that you had provided for 2014. Is there any change to the 2015 numbers that you presented in your Analyst Day presentation?

Gregory J. Goff

Actually, Jeff, 2015 is looking very solid also from our guidance.

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

And within the California synergies for 2015, how much of that is dependent on the Port of Vancouver project?

Gregory J. Goff

Zero for California.

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

Right. So that's Port of Vancouver is all in a separate category?

Gregory J. Goff

Yes, that's right. Yes.

Operator

Next question comes from Sam Margolin from Cowen and Company.

Sam Margolin - Cowen and Company, LLC, Research Division

I wanted to ask about retail. I think, generally, we're sort of used to the pattern that when commodity prices are rising, retail margins go lower. It seemed to reverse this quarter. Can you talk about the dynamics there? $73 million is sort of a lot of money in operating income. It implies a lot of value for the system. I'm just trying to get a sense of whether it's recurring or if there was some unique components to the quarter?

Gregory J. Goff

Yes. The -- I mean, the crude prices were volatile during the quarter. And so on the early part of that quarter, retail profitability was stronger than at the end of the quarter as crude prices moved up. So the change isn't any different than what you've talked about.

Sam Margolin - Cowen and Company, LLC, Research Division

Okay. So it's kind of broadly sustainable then, just given the expansion of the system. And was it more related to strategic?

Gregory J. Goff

Yes, and early indications are the 3Q is running very favorable also.

Sam Margolin - Cowen and Company, LLC, Research Division

Okay, great. And then on Vancouver, it sounds like you're making a lot of progress there. There's some competing applications, I think, for some similar types of projects in the region. And there've been some, I guess, sentiment or headwinds against all of these projects kind of going through the application projects in a speedy way. Do you think that you have an advantage because of your existing operational track record in the state and the Anacortes facility performing well, and that might give you sort of a leg-up in this process against some of the other applicants out there?

Gregory J. Goff

Probably it's worth clarifying, Sam, that there's 2 different processes. Our process requires us to go through the EFSEC process that we've talked about on many occasions. To my knowledge, there are no other facilities being developed in the State of Washington that will go through the EFSEC process, primarily because they're all smaller. I think there's a 50,000 barrel per day threshold if you go to move the crude oil onto the water. And so I don't know of any other facilities. There may be, but we're not aware of any facilities that are over 50,000 barrels a day. And the last answer to your question is we absolutely think we have advantages, by the way we operate in Anacortes and the steps that we're taking to permit the facility.

Operator

Next question from Doug Leggate from Bank of America.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Greg, I wonder if I could go back to the petrochemical project? When we were with you out in California a month or so ago, one of issues that was topical was how you can -- the steps that Tesoro can perhaps actually take to tighten up the gasoline markets in the West Coast. It seems this is a very interesting first step, but could you speak more specifically to how the same strategy may apply to the L.A. complex? And if you could kind of talk what you think your timeline and ultimately, the broader outlook for the market could be over the next several years when you take the cat cracker into account as well? I've got a follow-up, please.

Gregory J. Goff

Yes, well, let me clarify something, Doug. On the West Coast, our focus is to take our production, whether it be gasoline or diesel, and really find the highest valued market. So that's our first priority, is to take our production off of the facilities off the West Coast and put it in the highest valued market. Therefore, the mixed xylene project that we've talked about is an opportunity for us to take part of our gasoline pool, primarily the reformet -- reformate, excuse me, that we would produce, and then further produce that into mixed xylenes, which we have targeted the Asian market as the market for that. And so we have sized that project to fit the reformate that we would have available as we meet all of our gasoline demands on the West Coast so we could further upgrade to mixed xylenes to send to Asia. So what we, as a company, have been trying to do is to take and meet the demands of the market through our facilities, particularly Anacortes, Martinez and now, the Los Angeles complex, meet all of the demands on the West Coast, but at the same time, look to take excess production and be able to move it to higher valued markets, whether that'd be primary distillates into Mexico and Latin America or in this particular case, moving reformate or now mixed xylenes into Asia. One last point, we had just said earlier that the flexibility that we gained in Los Angeles by the project that we're working on, that we've talked about many times, that flexibility allows us to make all the gasoline that we need to meet the market demands, but really swing between distillate in that, wherever the value in the market is. And that was up about 30,000 barrels a day.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Maybe I could ask the question a little differently. I understand that the trend might devalue blending components. And perhaps, that's how I should've phrased it. But obviously you looked at reformate production in the L.A. complex or blending component production. Do you have or are you looking at similar opportunities to basically recategorize, if you like, the blending components more towards the petrochemical market? And if so, could you give us an idea as to what do you see as the structural length in the California gasoline market today that would, perhaps, need to be taken out in order to improve the longer-term outlook? That's really what I'm trying to get at.

Gregory J. Goff

We see the overall market pretty balanced on the West Coast, actually. So when we look at what the industry is doing to move gasoline into the export market, the amount of gasoline relative to total exports off the West Coast is less than 1/3 of the total exports off of there. So we -- in general, the market, because of what Scott mentioned with the vehicle amount traveled and the demand we're seeing, and the industry is running well with high-utilization rates. The gasoline market in California is pretty well balanced. And so we're just looking for ways to optimize our facilities by taking some of these gasoline components and making the xylene that we can sell to Asia.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Greg, so one final quick one, if I may, just a subtlety on the Vancouver from mid-2013 to 2015 . Are we thinking more towards the back end of the year or maybe some clarification on timing and your current expectations? And I'll leave it there.

Gregory J. Goff

Yes, regarding Vancouver, I mean, we are working very diligently to comply with the requirements of the permitting process, and we are dependent upon EFSEC to go through that process. And although it's been a little bit slower than what we thought, we feel very good now that we are getting the environmental impact study submitted. And we go -- we will go through the next phase. And we are hoping that by the early part of next year, it will go to the governor for approval. And we are looking at ways to move oil through the facility early that would allow us to do it in 2015. So it's moving, as you would expect, when you go through a permitting process. So there's nothing any different here than most facilities or units that you have to permit.

Operator

Next question comes from Paul Cheng from Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

Several quick questions. Scott, on the hedging, I presume that's related to your long-haul crude supply. Do you use WTI or a brand-based contract to hedge?

G. Scott Spendlove

It's brand. And yes, it is related to our long haul.

Paul Y. Cheng - Barclays Capital, Research Division

So those are brand-based? So it's not -- the $78 million, the loss is not related to the base's difference?

G. Scott Spendlove

No.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And that maybe just, since I got you, Scott, that just maybe a request, if possible. It's great that you guys gave us the number on the GP cash flow on the call, but is it possible that you can also put your tongue into your press release? That would be really helpful, especially that the value creation becomes more visible over time.

G. Scott Spendlove

Thank you, Paul. We'll take that under consideration.

Paul Y. Cheng - Barclays Capital, Research Division

And maybe this is for both Scott and Greg. On designing portion, also your announcement, 2014 CapEx is being cut by 7%. How should we view what kind of impact to the 2015 through 2018 CapEx comparing to what you provide from, say, during the Analyst Meeting?

Gregory J. Goff

At this point, Paul, the guidance that we give -- we're in the middle of our budgeting process. We don't see any material changes yet on our plans for '15 going forward. So the change was relatively minor that we did on our capital spending for this year, partly due to the Anacortes truck rack moving from Tesoro to Tesoro Logistics.

Paul Y. Cheng - Barclays Capital, Research Division

So the new way of designing in this $400 million, should we automatically assume that, that would be on top of whatever that you gave in the Analyst Day should be on top of?

Gregory J. Goff

I think it's premature to do that, Paul, until we go through our budgeting process and do an optimization of our capital spend. So I would just hold off until we reveal what our plans are at the end of this year as we -- you need to let us go through our process to determine how we allocate capital.

Operator

We have another question. This one's from Paul Sankey from Wolfe Research.

Paul I. Sankey - Wolfe Research, LLC

Greg, you kind of seem to be getting it all done here in terms of not only growing the MLP and everything else that you want to do in terms of synergies, but also returning cash to shareholders. I kind of seem to skip this one every quarter, but there are, again, some assets known to be for sale more in the Mid-Con, Central region in the U.S. Can you just describe to us how you see the potential to perhaps diversify your refining base and allocation of capital if some of those would be potentially pretty big deals?

Gregory J. Goff

So one, I personally am not aware of any Mid-Con refining assets for sale. So you may have to be more specific, if you can. And then, secondly, we've always been very focused, Paul, on understanding our market area, and if any particular assets that we believe that would be very strategic and fit our business model, that could be acquired and be accretive to the company that we would very, very seriously look at those. And we continue to monitor that, but I'm not aware. I mean, I've heard of some assets potentially on the West Coast and Gulf Coast, but not in the Mid-Continent.

Paul I. Sankey - Wolfe Research, LLC

It's been reported the Venezuelans are looking to exit refining.

Gregory J. Goff

Yes, I'm not aware of that.

Paul I. Sankey - Wolfe Research, LLC

Fine. And could you, Greg, just address what the opposition is to the Vancouver development? And if you can summarize what the problems are and if you like, address those concerns?

Gregory J. Goff

Yes, it's a good question. I think the nature of the facility is probably impacted by 2 things. One is the concerns that have surfaced as some of the -- as a result of some of the rail incidents that have happened, and as people have looked at the rail system and the steps that need to be taken to drive improvements and the rail operations. So whether it be railcar safety or rail operations, I think that is one of the concerns. And that's something that's being addressed both by the rail industry, by shippers, by the government, by the recent proposed rule-making that the DOT issued, I think, about a week ago. So I think, one, it's all around railcar safety, and that's a very reasonable and something that we all need to address. I think the second issue that we have to deal with is there are parties in the country that aren't supportive of the use of fossil fuels. And so some of that reaction, when someone like ourselves is trying to put in place a facility like this, you do encounter some opposition from people who do not favor the use of fossil fuels, and that's something that we work through and really try to show the value of this facility because this facility will enable, take in crude oil produced in the United States and moving it to refining -- a refining area that can easily take this crude oil because of both the quality of the crude oil and the cost to deliver this crude oil to the West Coast, United States and look at this versus alternatives of bringing crude oil in, whether it be from Russia or from the Middle East, and get more -- get better use of this crude oil. And so that we find to be very, very attractive. So I hope that answered your questions.

Paul I. Sankey - Wolfe Research, LLC

It does. I mean, it feels like you've kind of been down this road before, I'm thinking of L.A., and you succeeded in getting local political support together there. You mentioned the mayor here, I think. Is it fair to say that you've got some pretty strong political support for you as well, right?

Gregory J. Goff

Paul, we just believe it's extremely important that we engage in the process. The State of Washington has a very good process through the EFSEC that if we go through that process and provide transparency about the operations and the safety measures that can be taken and the value to the community and to the State of Washington and work that through the process that through that process, all of the stakeholders can then evaluate the value that this contributes to, well, actually to the country and more so to the State of Washington. So we're very engaged. It's very important from a stakeholder standpoint.

Operator

And we have another question for you. This one's from Roger Read from Wells Fargo.

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

Just to come back to the xylene project but from maybe a slightly different angle. Obviously, a lot of permitting challenges on the West Coast. You've talked about the specifics for the project here, but what about availability or any restrictions on loading vessels in your California operations to move the reformate up the coast to the Pac Northwest, or as you were describing earlier, kind of the readjusting what you're doing? Are we talking about making gasoline in California, moving that up to the Pac Northwest, and then the reformate mostly, if not solely, come from that area?

Gregory J. Goff

No, the answer to your question about any type of restrictions about moving finished products or feedstocks like reformate along the Western -- West Coast, there are no restrictions. It's just a normal use of the proper ships. And the advantage that we have of our system today is that we're able to do that continually to optimize our system by moving that around. So there are no restrictions or changes from that standpoint.

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

And no incremental permitting? I just think about California and all of its challenges every which way.

Gregory J. Goff

No, the permitting that we were -- we stated is we will be required to permit the facility in the State of Washington to construct it, but that's the only permitting requirement.

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

Okay. And then as a general question about the performance of the Pac Northwest refining group, now you had a competitor close a facility up in Alaska. And I'd have to admit, we were expecting a little better margin performance in the second quarter partly as a result of that. Didn't really see it. So I'm just curious. I know that didn't happen until we were well into the second quarter, but as you look at the overall product dynamics in that region now, is that something where you would expect to see some improvements or it's really not that big a deal? Just trying to get a little clarity on that.

Gregory J. Goff

The first -- the answer to your first question regarding the second quarter was that we had maintenance in Alaska, on one of our units, and we also had maintenance in Anacortes on another unit. So during the second quarter, we experienced maintenance in both of the 2 facilities there in Alaska. So that had a negative impact, it's a onetime thing on our margins there. The second answer -- the second question about just the overall supply/demand in that, it has an impact that we can easily meet the increased demand as a result of the closure of the facility in Alaska by running at higher rates at our facility, and we are positioned to be able to do that.

Operator

We have another question for you. This one's from Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

A few quick ones for me, just a follow-up on Vancouver. I mean, to be clear, has your guidance changed on when you expect to reach full capacity in 2015? I know you mentioned the 2015 startup. And does the October rail report change anything in that regard?

Gregory J. Goff

So we would -- well, we don't know the outcome of the October rail report. I think it will be a good discovery process regarding safety. And then our guidance has always been the same, that once we begin construction, it's about a 9 to 12 months to complete it. However, because of that way we would go about it, we would be able to use the facility early on and then ramp up as we went through it.

Evan Calio - Morgan Stanley, Research Division

Got it. Then how much -- can you break down the MLP EBITDA currently at TSO with and without the Vancouver so that I could be on a different drop-down kind of timeframe?

Gregory J. Goff

So I'm not -- can you ask that question?

Evan Calio - Morgan Stanley, Research Division

Sorry, your aggregate -- the aggregate EBITDA that's MLP above the Tesoro level. I know it's inclusive of Vancouver. So what is the Vancouver MLP EBITDA component within the total MLP EBITDA component at Tesoro?

G. Scott Spendlove

Evan, we haven't provided numbers like that. I mean, we've talked about this facility in the range of $1 billion or better. We haven't provided specific total EBITDA droppable assets.

Evan Calio - Morgan Stanley, Research Division

Okay. If I could switch gears to -- on the chemicals side. I know you mentioned competitive returns on chemicals, but can you define what the return level has been, either -- not for the project, but for kind of other major projects that you've -- that you proceed with?

Gregory J. Goff

We would see the project in the very high teens to low 20%.

Evan Calio - Morgan Stanley, Research Division

Great. And is the chemicals, is it too integrated with refining or do you see any ability or potential to ring-fence some portion of the chemical margin into MLP that? I mean, I know it's premature, but how do you think about that?

Gregory J. Goff

It's early on, but I mean, it's something that could be looked at. I mean, it is a possibility to do something like that by the nature of the investment, yes.

Evan Calio - Morgan Stanley, Research Division

Okay. And maybe lastly for me. I mean the growth rate that you cite is very positive, 5% to 7% for xylene market. I mean, that's close to ethylene demand, and 1.5x GDP. I mean, can you just help us better, not me, help us better understand the xylene and the end markets and the depth of that -- of those markets? Because I know it's a bit more of a niche chemical market. And I'll leave it at that.

Gregory J. Goff

Yes, our analysis is we've done a very comprehensive look at all the customers throughout Asia and with more of a focus on the northern part of Asia and looked at current and future demand, and also where current supplies are coming from and see a lot of potential. I mean, we've been working on this for a year. So it's -- we see a lot of potential opportunity there. And it's really kind of -- it'll be too premature to talk about the commercial-type arrangements we would put in place to support the project.

Operator

[Operator Instructions] We have another question for you. This one's from Paul Cheng from Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

A quick follow-up on xylene, this project, what kind of permit there do you need? From what state?

Gregory J. Goff

Paul, the mixed xylene project would be constructed at the Anacortes, Washington facility. And primarily, not only they would be the permits, local permits, as well as their permits.

Paul Y. Cheng - Barclays Capital, Research Division

So Greg, does that mean that because you are pulling the reformate from, I believe, from Carson and Wilmington, right, or...

Gregory J. Goff

No, we would -- we plan to use reformate from Martinez and Anacortes and build an extraction unit at Anacortes to process those streams there.

Paul Y. Cheng - Barclays Capital, Research Division

Right. So that means that you need to pull out from those 2 facilities in California. Do you need any air permit or any kind of environmental permit or anything from California or from the local county?

Gregory J. Goff

No, we do not. And just to clarify one more time, Paul, it's just the Martinez facility. We do not...

Paul Y. Cheng - Barclays Capital, Research Division

Just the Martinez?

Gregory J. Goff

At this point in time, we do not plan to use any reformate from the Carson facility. So it's the local reformate at Anacortes, and then we will bring in reformate by ship from Martinez to Anacortes. And the only permitting required will be at the facility in Anacortes.

Operator

We have another question for you. This one's from Ed Westlake from Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Just another point of clarification and another strategic question. Just on the synergies, that sort of $200 million or so, slightly above, is that a run rate of what you actually achieved in terms of the EBITDA contribution in the first half of the year? Or is that sort of a run rate that you feel you've hit, say, at some point in the second quarter?

Gregory J. Goff

Ed, the $200 million is what we have achieved through June 30.

Edward Westlake - Crédit Suisse AG, Research Division

Okay, that's helpful. And so the bias is probably more second quarter versus first quarter, just in terms of how that builds out?

Gregory J. Goff

Yes, it's been building up. Yes, correct.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then strategically, I mean, you've -- you, obviously, you have spoken about your appetite to drive towards a much higher level of EBITDA in the logistics aspect, now thinking less TLLP, but more Tesoro overall. Maybe just give us an update on where you think you could get to and how you'd have to get there?

Gregory J. Goff

Well, we have -- I mean, we've talked about a number of opportunities that are in different stages of development. And so, one, the Port of Vancouver is one. The Uinta Pipeline in Utah is another. The Trans-Foreland Pipeline in Alaska is another. So we have a portfolio of logistics projects, as well as a pretty extensive amount of work going on in North Dakota to build out our pipeline and storage system up there. One -- I mean, one of the things you just heard us mention is that we intend to spend $200 million in TLLP this year to build out that system. So there's a number of things we have going on.

Edward Westlake - Crédit Suisse AG, Research Division

And presumably, you wouldn't be averse if the right opportunity came up to use the TLLP equity backed by Tesoro's C corp ability to borrow, to even consolidate, presumably, if the right opportunity was out there?

Gregory J. Goff

We would look for opportunities for Tesoro Logistics to acquire strategic assets that fit into our footprint, absolutely. Without using Tesoro, we would do it on a standalone basis for Tesoro Logistics.

Operator

Thank you for your questions. We have no more questions for you. So ladies and gentlemen, thank you very much for joining today's conference call. That concludes the presentation. You may now disconnect, and enjoy the rest of your day.

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