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Frontier Oil (NYSE:FTO)

Q4 2010 Earnings Call

February 24, 2011 11:00 am ET

Executives

Nancy Zupan - Chief Accounting Officer and Vice President

James Stump -

Douglas Aron - Chief Financial Officer and Executive Vice President

Michael Jennings - Chairman, Chief Executive Officer, President and Member of Executive Committee

Kristine Boyd - Manager of Investor Relations

Joey Purdy - VP, Refinery Supply

Analysts

Gary Stromberg - Lehman Brothers

Jeffrey A. Dietert

Jeffrey Dietert - Simmons & Company

Ben Hur

Douglas Leggate - BofA Merrill Lynch

Chi Chow - Macquarie Research

Blake Fernandez - Howard Weil Incorporated

Operator

Welcome to the Fourth Quarter 2010 Earnings Call. My name is John, and I'll be your operator for today’s call. [Operator Instructions] I will now turn the call over to Ms. Kristine Boyd, Director of Investor Relations. Ms. Boyd, you may begin.

Kristine Boyd

Thanks, John. Good morning, and thanks to all of you who are joining us this morning for our fourth quarter 2010 earnings call. On the call this morning are Mike Jennings, Chairman, President, and CEO; Doug Aron, EVP and CFO; Jim Stump, VP of Refining Operations; and other members of our executive management team. Before we get started, I would like to read our Safe Harbor statement.

The primary purpose of this conference call is to describe the assets, operations and certain current and historical financial conditions associated with Frontier Oil Corporation. This information and associated comments made during the course of this conference call may include forward-looking statements concerning the company. These may include statements of plans and objectives for future operations, statements of future economic performance or assumptions or estimates.

The accuracy of these forward-looking statements is subject to a wide range of business risks and changes in circumstances that are described in the company’s reports that are filed from time to time with the Securities and Exchange Commission. Actual results and outcomes often differ from expectations. Please note, our call today does not constitute an offer to buy or sell any securities related to our recently announced merger with Holly Corporation. All solicitations to buy or sell securities and to secure shareholder proxy votes will be made under current SEC rules and regulations. I would now like to turn the call over to our Chairman, President and CEO, Mike Jennings.

Michael Jennings

Thank you, Kristine. Good morning. Thanks for joining us today. This morning, Frontier reported $4 million in net income or $0.03 per diluted share during the fourth quarter of 2010, compared to a 2009 fourth quarter loss of $75 million or negative $0.72 per share. Results for the most recent quarter included an after-tax inventory hedging loss of $10 million or $0.09 per share, compared to an after-tax inventory hedging loss of $5 million or $0.05 per share for the fourth quarter of 2009.

The year-over-year improvement in fourth quarter results was due to increases in each of the major contributors to refining profitability. Domestic diesel demand continued its steady increase, boosted by export opportunities in the global markets, and it ended the year about 3.5% up from 2009. Frontier's average diesel crack spread increased by more than $8 over the fourth quarter of 2009 to $15.21 per barrel in the most recent quarter. Gasoline demand improved through 2010, though to a lesser degree, at about 0.50% over 2009, and Frontier's average gas crack increased to $5.65 per barrel in the fourth quarter of 2010, up from $4.40 in the same period of 2009.

Crude differentials have also been a meaningful part of the economic recovery story over the past year, particularly for complex refiners such as Frontier. Our average light/heavy differential almost doubled to $14.86 per barrel in the most recent quarter compared to $7.71 per barrel in the fourth quarter of 2009, while the average sweet/sour differential increased modestly to $2.58 per barrel in the most recent quarter, up from $2.27 in the same period of 2009. The net effect of these improvements in crack spreads and crude diffs was a notable improvement in our gross refining margins of $7.52 per barrel in the fourth quarter of 2010, compared to $1.55 per barrel in the same period of 2009. We also lowered refinery operating costs by about $5 million in the fourth quarter of 2010 versus the fourth quarter of the prior year; on a per barrel basis, $4.18, down from $5.90.

In December, the El Dorado Refinery completed its Gofiner project, a gasoil hydrotreater intended principally for gasoline sulfur compliance, but with the added benefit of improving the effective capacity of our cat cracker and gaining higher light product yields through feedstock improvement. Jim Stump will have more on this later in the call.

I'd like to revisit for a moment the two demand numbers for 2010 that I mentioned previously: 3.5% and 1.5% growth for distillate and gasoline, respectively. These statistics represent what most of us in the refining industry have been forecasting since 2009 when the catchphrase among refiners and analysts became one of cautious optimism for 2010. And the year was just that, a slow but upward trending improvement in demand and a year of results that, for most of us in the business, were not spectacular but certainly better than 2009. From my perspective, the demand outlook continues to be one of a gradual recovery for refined product demand over the next few years, with distillate leading the way as a global product and gasoline trending upward with domestic employment and improvements in the U.S. economy.

However, in 2011, a very different dynamic has emerged to drive refining profitability, one not necessarily demand-related but instead, attributable to the disconnect between the pricing of mid-continent crudes versus those available on the coast. As our friends in the upstream side of the business saw a return to profitability with crude prices ramping from $35 to $80 in 2009 and hitting $90 per barrel by the end of 2010, capital investments in North American crude production have returned, and domestic drilling has flourished, aided by recent advancements in drilling technologies.

The combined estimate for annual production growth in Canada, the Bakken, the Permian, Eagle Ford and Niobrara is over 300,000 barrels a day, and recently completed crude pipelines flowing this month are now providing a route for this rapidly increasing domestic production to reach Cushing, Oklahoma. However, there's been no substantial addition to the refining capacity in the mid-con to absorb this new supply of crude, and Cushing currently lacks sufficient pipeline offtake capacity to move crude into different markets. The resulting oversupply has driven a significant decline in WTI pricing of as much as $20 per barrel off of similar coastal light sweet crudes, and it has widened the discount on other mid-continent crudes that are forced to compete in this landlocked dynamic.

In January and February, the monthly averages for differentials on heavy sour crudes widened to $26 and $23, respectively, compared to about $14 in October and November of 2010. In addition, we're seeing some unusual weakness in WTS with the differential approaching $7 and averaging over $5 for the month of March, relative to about $2 in the past year.

The interesting question becomes one of how long will this last? While there is certainly incentive at these spreads to find short-term transportation alternatives to get this crude to the coast, no obvious low-cost logistical solutions have emerged to narrow the arbitrage. In the meantime, all of the crudes being processed at Frontier's refineries are priced at WTI or less, and our refining margins are benefiting significantly.

While the operating environment has improved materially for us in 2011, we also remained focused on our internal improvement efforts. This year, we'll be installing the LPG recovery project in Cheyenne by midyear and completing the final phases of the profitability improvement initiatives by year end. Both refineries continue to focus on safe, efficient and reliable operation, and we continue to be conservative with our approach to operating and capital expenditures. We're really pleased to be reinstating our regular quarterly cash dividend of $0.06 per share this year and to supplement this with an additional special dividend of $0.28 per share.

Finally, the biggest news for our company in 2011 is clearly our recently announced merger with Holly Corporation, which is expected to close early in the third quarter. Matt [ph] and I spoke with you on the call earlier this week about our objectives in combining these two companies including scale, diversity, financial strength, operating synergies between the refineries and logistics and marketing opportunities. What I'd like to highlight about this combination is the strengths of the businesses we are bringing together. As you know from prior calls, Frontier's strategic review cast a broad net, but in each case, I came back to viewing Holly as the obvious partner to build Frontier Oil for the future. With that, I'll turn it over to Jim Stump for a discussion of our quarterly operations.

James Stump

Thanks, Mike, and good morning, everyone. In El Dorado for the fourth quarter, crude throughput averaged at about 130,800 barrels per day and total charges about 144,100 barrels per day. Operating expenses averaged $3.64 per sales barrel or $50.1 million on an absolute basis.

In Cheyenne in the fourth quarter, crude throughput averaged about 46,600 barrels per day and total charges about 49,300 barrels per day. Operating expenses averaged $5.72 per sales barrel or $27.8 million on an absolute basis, which include about $2 million of restructuring write-offs related to Cheyenne's warehouse inventory. For the first quarter of 2011, El Dorado's expected average crude rate is about 134,000 barrels per day; total charges, about 145,000 barrels per day; and expected operating cost of about $3.50 per sales barrel. Cheyenne's expected average crude rate in the first quarter will be about 42,000 barrels per day; total charges, about 44,000 barrels per day; and expected operating cost, about $5.70 per sales barrel, which is inflated due to 10% fewer sales barrels in the first quarter, which is a result of building gasoline and win stocks in front of our upcoming turnarounds.

As Mike mentioned we have had a wide variety of crudes to choose from at steeply discounted pricing this quarter and are increasing our heavy crude runs to about 25% heavy in El Dorado and about 60% heavy in Cheyenne, which is a combined total of about 60,000 barrels per day or about a third of our total crude capacity. As Mike mentioned, the final phase of the El Dorado Gofiner project was installed late in the fourth quarter. The unit started up as planned and is easily meeting our requirements to produce low sulfur gasoline. We'll be providing our determination of additional yields on light products as a result of the Gofiner project in next quarter's call once we have a full quarter of operations under our belt for the new unit.

We continue progress on our profitability initiative in Cheyenne with the LPG recovery project on track for completion in mid-2011. Our next scheduled major turnarounds will be the FCC and alky [alkylation] units in Cheyenne in late March and April of this year and the El Dorado alky unit turnaround has been rescheduled from the fall of this year to the spring of 2012. And with that, Doug is going to wrap up our call.

Douglas Aron

Thank you, Jim. We generated $172 million in operating cash flows, net of $164 million decrease to working capital and spent $23 million on capital investments in the fourth quarter of 2010. We ended the year with a cash balance of $559 million, which exceeded debt by $211 million. As of December 31, we have remaining income tax receivables of $49 million, of which $18 million relates to overpayment of 2010 estimated tax returns [ph] and the remaining $30 million is a carryback from prior year's tax returns.

For our capital budget, we spent a total of $85 million in 2010, leaving some unspent capital by year end, which will carry over into our 2011 budget. Including $25 million for the LPG project in Cheyenne, our 2011 capital budget is expected to total $110 million.

We had a reclassification of expenses this quarter that I would like to highlight. To be more consistent with our industry peers, the company has reclassified turnaround and catalyst amortization from refinery operating expenses to depreciation and amortization. This reclass increased our DD&A for the fourth quarter by $5.8 million and for the full year 2010 by $23.8 million. It reduced our average operating cost per barrel in Cheyenne by $0.34 for the fourth quarter and by $0.42 for the full year. And at El Dorado, reduced operating expenses by $0.31 per barrel for the fourth quarter and $0.32 per barrel for the full year.

During the fourth quarter, build in intermediate inventories had a material impact to raw material cost at each of our refineries under the LIFO inventory accounting method. In Cheyenne, the inventory impacts reduced fourth quarter gross margins by about $0.42 per sales barrel. And in El Dorado, the inventory impact reduced fourth quarter gross margin by about $0.88 per sales barrel. Our hedging results contributed a loss of $9.6 million after taxes to fourth quarter results due to about a $10 increase in crude price through the quarter.

Finally, let me update you on our quarter-to-date crack spreads and crude oil differentials. For Cheyenne, the gasoline crack spread averaged about $10 for January and approximately $16.50 month-to-date in February. The diesel crack spread averaged about $21 for January and about $30 month-to-date in February. Lastly in Cheyenne, the light/heavy differential, including transportation, is expected to average $20 per barrel for the first quarter of 2011.

Moving to El Dorado, the gasoline crack spread averaged about $12.50 for January and about $17 month-to-date in February. And the diesel crack spread is $20 per barrel for January and approximately $27 month-to-date in February. Lastly, the light/heavy differential, including transportation, is expected to average $17 per barrel for the first quarter in El Dorado.

Certainly, very robust numbers for the month of January and February. And as Mike pointed out, largely due to the spread between WTI and some lighter crude oils, but ones that we're very proud to be taking advantage of and hope will continue for several months to come. With that, John, completes our prepared remarks, and we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeff Dietert from Simmons.

Jeffrey Dietert - Simmons & Company

You mentioned in your opening remarks that West Texas sour was trading $5 to $7 below WTI, could you talk about some of the major drivers there at the production that's coming on in the Permian in particular, but maybe some of the other regions, how much of that is sour versus sweet?

Michael Jennings

Let me ask Joey Purdy, who's in charge of our commercial operations, to talk about that dynamic. It's really interesting the way it has moved in the last few months. Joey?

Joey Purdy

I think I don't have a number for you as far as a percentage of sweet versus sour out of the shale plays, but I do believe it's predominantly the lighter sweet crudes. And I think the same thing is going on in the Permian. The other thing that's going on, on sour crude, or at least at West Texas sour, we believe, and this has been a little bit under the radar screen, there were certainly some -- there's been some weather-related down time in West Texas, right, and that's probably in the numbers as well. But I mean, the $5 number, we haven't hit that since, I think, December of '08. What happened in the past, when we got heavily in contango on the Merck [ph] contract, right, you'd see TS [ph] pull in against WTI and actually get tight as well. And we saw that both in Q1 of '09 and Q2 of '10 and this time, it was different. And I think it's a little bit early to say for sure what's happened in the back. You got Valero [ph] months are trading this week as the prompt [ph] months certainly, but we think this is a phenomenon where the West Texas sour crudes are going to have to increasingly compete against Canadian heavy crudes that are getting ready to come into Cushing via Keystone. And that's a fundamental shift. Instead of trading off of TI [ph] minus a discount, they're going to trade more at Canadian heavy plus a premium, right. And El Dorado's bread-and-butter for years and years was WTS, and we have a lot of leverage or potential leverage to that barrel if the market pays us to run it. So that's something we're going to be watching closely.

Jeffrey A. Dietert

Could you make some remarks as to what you're seeing with the use of rail, truck and barge equipment? Are those types of transportation methods capacity constrained? How are you seeing them being utilized to try to take advantage of the arbitrage between WTI and LLS?

Michael Jennings

Joey, can you speak to that please?

Joey Purdy

I mean, that is certainly going on -- when you get a $20, whatever you want to call it, arbitrage, to move a crude from one region to another one, right, you mobilize a whole fleet of entrepreneurs out there, right, to take advantage of it. The problem you have is that's very fragmented, right. You can't see it, right. You hear a lot of anecdotal stories about barges moving out of Wood River, down the river, which I expect to happen. There are certain -- or is happening. Certainly, there are unit train operations in the Bakken that I expect are moving flat-out. But at the end of the day, it takes a while to gear up those resources and if you don't have the rail facilities and whatnot to do that right, there's only a limited volume that you can move in the short term, right? So that is certainly going on, but I'm not sure it's enough to kind of clear the market. I mean, I think, one of the thing -- a lot of this is about increased domestic production, but one of the things, I think, that's been missed a little bit is pipeline capacity into the Chicago market and eastern Pad 2 market is still limited. There are clearly a lot of barrels coming into Cushing or getting ready to come into Cushing via Keystone that would prefer to go in the Chicago or eastern Pad 2 market, and they can't get there because of limits on imbrages [ph] system and I believe some logistic limits on Keystone's deliveries into Patoka as well. And I don't believe enough barges and trucks and rail cars can move to clean that volume up in the short term. So a lot of moving parts, but it feels like this is somewhat sustainable.

Operator

Our next question comes from Doug Leggate from Bank of America.

Douglas Leggate - BofA Merrill Lynch

Just on the question of sustainability, I mean I guess it's right on the back of Jeff's question. Obviously it's kind of difficult to put a number on it but we're seeing, I guess, LLS or Brent versus WTI up in the mid-teens. Assuming the geopolitical situation gets some resolution over the next several months, winter is over and so on, what do you guys think is a reasonable kind of guesstimate at this point as to how the actual mechanics of the pipeline constraints translate into, I guess, a normalized WTI Brent discount? What should we be thinking in terms of what that advantage should be on a go-forward basis?

Michael Jennings

Well, Doug, I think that if we look back, we saw a consistent $5, $6 a barrel for the TI/LL [ph] differential. At times when the Canadian pipes were not constrained due to the Femsa [ph] and maintenance issues and since then, we've had continuing production growth. Further, we're going to have Keystone deliveries direct to Cushing. So I think Joey said it best, there are a lot of moving parts and that's why it's difficult to forecast. But I would say it's directionally in excess of what it's been in the past because you have more pressure on the Cushing market through additional delivery capacity and production growth. So looking forward, it's going to take very substantial pipeline investment out of Cushing in order to rebalance that. And the pipes that we're talking about will take years to put in the ground.

Joey Purdy

I'd add to that, while it gets very hard for us to forecast that number and I don't think anybody expects it to stay perhaps as wide as the $20 or $23 that it got to at its widest point. I also think the forward curve was sort of representing that historical view of $3 to $4 by the time we get out to the fourth quarter that Mike mentioned. And we just don't see how it could go back to that, given all of the constraints that exist, that Joey described in the short term. So I think somewhere between those answers but something that represents double digits for 2011 average is certainly something we expect.

Douglas Leggate - BofA Merrill Lynch

If I could ask two quick follow-ups, the first one is on your diesel yields. I mean, as normally, the system as a whole for the U.S., I guess, would typically look at maximizing gasoline yield as we get into the summertime. But given what's happening with diesel and I guess, some help from that Brent differential to some extent, how would you see your yields -- how would you look to operate your system as you go into the summer? Would you stay max diesel or how are you thinking about that?

Michael Jennings

Well, we're driven by current economics and my view is that distillates will trade in advance to gasoline, just principally, because of the global dynamic. I mean, distillates are obviously trading right in line with Brent, and we see a sustained discount of TI to Brent through the summer. So my expectation is that we'll be in a max distillate mode. We tend to be able to produce about 60,000 barrels a day of distillate in El Dorado versus 80 of gasoline, when we're in max diesel mode. In Cheyenne, the comparable numbers are more like 17, 17.5 of diesel versus about 26, 27 of gasoline as blended up with ethanol.

Douglas Leggate - BofA Merrill Lynch

Mike, I guess it's is one for you. If you think this is sustainable and Frontier obviously has a substantial exposure to that, you've basically just sold the company when this is only really just getting started to some extent, clearly you're merging is a merge of equals and all the rest of it. Is there a part of you considers well, perhaps the valuation is a little understated in the way that you -- the price that you decided to do this deal?

Michael Jennings

In the way that the question is asked, it sounds like you have a view, Doug. My view is absolutely opposite of that. Our merger partner has a lot of the exact same exposure as do we. If you look at the geography and the drivers there, I think you can draw a reasonable conclusion that they are very exposed to inland crudes. They're exposed to sour discounts. They're exposed to a Salt Lake market, which has been phenomenal and probably improves as the result of the UNEV pipeline. So I believe we've chosen wisely. And in respect to selling the company, I really don't view the transaction in that manner. I view it as a merger of equals. Our shareholders continue to participate in a bigger, stronger, and I believe, more profitable combined company that retains a lot of the very strong differentiated advantages that Frontier has while diversifying our exposure over a few more plants and a few more product markets. So I obviously think it's a big winner, and I think it's going to drive value growth and actual growth in the company going into the future.

Operator

Our next question comes from Evan Calio from Morgan Stanley.

Ben Hur

It's actually Ben Hur. Just wanted to first congratulate you guys again on that merger with Holly. But my question is on the product side, actually, versus the crude side this morning. I was just wondering if you could comment on the supply/demand balance in your markets and maybe talk about the impact of running at higher utilization rates, obviously for the crude prices, and what's the impact that will have on product imports and regional balances in your markets?

Michael Jennings

Let me start out and I'll ask Joey Purdy to fill in the blanks for me. By nature, the product market's balanced, right? The question is how much imports have to come in to our various markets in order to make that happen. With respect to Pad 2, the obvious source of imports are those coming up through the explorer pipeline from the Gulf of Mexico and call that something like 600,000 barrels a day. We obviously have a much stronger crude advantage and thus, resulting refining margin in our ability to run the TI [ph] and the landlock crudes, than do the coastal refiners. With the Rockies market, at least for the Eastern front, you have probably 50,000 barrels per day coming up from Pad 3, that being the Panhandle refiners, McKee and Border, and that helps to balance, as well as products coming up through the Magellan pipeline chase system from the Tulsa market into Denver. You also have the Billings and Rawlins refineries in Casper as being able to go either to the Eastern front or the Western slope. So there's a swing factor there in Pad 4 as to which way those barrels go. The Salt Lake refiners serve that local marketplace as well as going into the Intermountain West, but the advent of the UNEV pipeline really kind of connects the system together, if you think about it. It ultimately allows, fungibly anyway, mid-continent product production to flow to California. And that's going to be a huge competitive advantage for those who are able to participate in it ourselves and our merger partner Holly are obviously high on that list, particularly given their ownership in the line. So that's something that will evolve as time goes forward, but I think it's going to be a very strong profit driver for the combined company. Joey, do you have anything that you can illuminate that with?

Joey Purdy

Just a little bit more of the same. My comment I'll make is it is our job in the mid-con to try to back out products coming off the Gulf, right. So if you look at Pad 2 and 4 together, right, there's not enough refining capacity to shut down all the product imports into the Pads. So that's what Mike is saying, how everything is going to rebalance, right. So the crude market is clearly paying us to run hard and incrementally what that does is that backs products back into the Gulf. That's our job to do that.

Operator

Our next question comes from Blake Fernandez from Howard Weil.

Blake Fernandez - Howard Weil Incorporated

I had a question for you on Cheyenne. If I recall, I think the original kind of target, if you will, on cost reductions was about $3 to $4 a barrel, of which about $1.50 was specifically going to be targeted on the OpEx side. And I know things got kind of rattled a little bit in third quarter with the fire. I'm just trying to get a feel for where we stand on that progress and how you see that going forward? I believe it's about $5.72 a barrel, which seems like maybe we're not quite all the way there yet, but wanted to bounce that off of you.

Michael Jennings

Yes. That's fair point, and we're not all the way there yet in Cheyenne. But we've had some incidents in the fourth quarter around unreliability that really knocked us off track. I think, fundamentally, we have performed a lot of the things that we need to in order to reach that goal in terms of the basic cost structure as per plan and now the issue in front of Cheyenne really is around refinery reliability and is the way to stay safe and eliminate the unplanned incidents. So Jim, can you add more to that?

James Stump

Sure, Mike. Focus is kind of OpEx. I mentioned a couple of million dollars of inventory write-offs we had in the fourth quarter. We also had a few million dollars of environmental-related expense in completing some environmental projects we had going on in the plant, which are now done. So I think the fourth quarter numbers were inflated by about $4 million by events that we shouldn't see a repeat of. Mike also mentioned some unreliability and we had kind of a handwringer of the diesel hydrotreater problem. We had a very small leak and an exchanger that took a while to troubleshoot and then took a shutdown to correct. So that kind of impacted our December operations there and ended up cutting some crude from the refinery and some added expense. So as Mike mentioned, I think the road's paved and we're well on our way and occasionally, we're hitting a few potholes but we feel like the plant's set up to do well, the LPG recovery project coming on a little later this year and still working on some energy initiatives that are a little longer term to complete.

Blake Fernandez - Howard Weil Incorporated

The other question I had for you was on the income tax receivable. We were kind of modeling $74 million. It sounds like you've only got $49 million remaining. Is that a first quarter type of event to receive that or can you give us some color on timeframe?

Michael Jennings

Nancy, can you please address that for us?

Nancy Zupan

Yes. $18 million of that was the overpayment of 2010 tax estimates and we have filed for a quick refund on that, so we would expect that in the second quarter. The remainder of it relates to NOL carrybacks from prior years and it is in the process of being reviewed, but we are currently estimating that for the third quarter receivable.

Operator

[Operator Instructions] Our next question comes from Chi Chow from Macquarie Capital.

Chi Chow - Macquarie Research

I got a couple of questions on Cheyenne as well. Can you help us out on the modeling impact of the LPG project? How should we think about the change in yield profile of the plant and/or the margin capture?

Michael Jennings

I'm going to ask Jim Stump to talk you through that please.

James Stump

You bet. And I don't have numbers in front of me, but the LPG recovery project pulls LPG, butanes, propanes and LPG olefins from our fuel gas system. So we don't burn those anymore, and we have to buy some more natural gas to make up for it. But of course, natural gas remains cheap compared to refinery products. So we'll be producing more propane for sales and more butane for gasoline blending but we'll also produce more gasoline as those olefinic LPGs are recovered and fed to our alky plan. And as I said, I don't have recovery numbers in front of me but it's several thousand barrels of -- a few thousand barrels of LPG is in gasoline, increased production and about $4 million fee today of natural gas to make up those BTUs into the fuel gas system.

Michael Jennings

I just was going to add to that that for modeling purposes, in terms of additional margin capture, today's natural gas price and propane prices, you would expect on a full-year run rate a little better than $20 million of incremental EBITDA, given that we're expecting sort of a late June startup of this. Obviously, we'd pick up half of that for 2011.

James Stump

And we'll get with you offline in terms of capture rate and the specifics in terms of the refinery volume metrics.

Chi Chow - Macquarie Research

But in general, you got a couple 2,000, or 3,000 barrels a day, additional gasoline production and savings from the 20 a year on natural gas pricing.

Michael Jennings

Chi, it's not all gasoline. A significant amount is the propane recovery. So it's total propane, potentially some butane sales and gasoline production make up that couple of thousand barrels a day. But we can get exact numbers.

Chi Chow - Macquarie Research

You produced a lot more asphalt in the fourth quarter due to the higher rounds of heavies. Can you comment on the margins you're receiving on those volumes, and what does the macro look like for asphalt?

Michael Jennings

Billy, you want to speak to that please?

Billy Rigby

Wholesale margins are still, in our markets, they're in the $350 a ton range. Retail is not very active yet, but we're getting close, and we're still seeing numbers, $425-plus in our markets is kind of what we're anticipating. I mean, clearly, the heavy market, we were able to wholesale asphalt in December, January, February, we got sales, I think, some volume of sales every month and I think $350 is probably a pretty good number for -- that's an average or not, but it's in that ballpark, right. So the market appears to be holding up pretty good and clearly, the heavy market has paid us to run outside our coker and produce excess asphalt.

Chi Chow - Macquarie Research

How does the Holly integration -- how is that going to help you out with your asphalt marketing unit?

Michael Jennings

Chi, out of El Dorado we have traditionally participated very sporadically in the retail asphalt business. We've mainly sold what we called VTBs [ph] and we sell them on a wholesale basis. Holly's established network terminals and experience in that business we view as helping us get more quickly into that business and to participate in a bigger way at higher prices just through being able to use those networks.

Chi Chow - Macquarie Research

So you see you expect some margin improvement then going forward?

Michael Jennings

We do expect to be able to participate more in those markets, yes.

Operator

Our next question comes from Gary Stromberg from Barclays Capital.

Gary Stromberg - Lehman Brothers

In the past, I seem to recall that Frontier's been limited somewhat on dividends to shareholders based on your restricted payments basket, limitation on your senior bonds, can you just tell us how big that basket was at year end?

Michael Jennings

I can. It was in the $250 million. The numbers are a little different between the two, but in total, I think the more limiting one had us right at $250 million.

Gary Stromberg - Lehman Brothers

And then what impact, if any, does the pending merger have on the basket?

Michael Jennings

Well, I would tell you that as part of the merger agreement, I think both sides are prohibited from anything beyond the normal regular quarterly dividend.

Gary Stromberg - Lehman Brothers

I guess, finally, is there anything about the merger that would require those senior notes, either Frontier's or Holly's, to come out? Any covenants or limitations?

Michael Jennings

No, there is an investor put. I mean, we have, on our side, as Holly will be the acquiring company in the merger of equals, our investors will have a put, that 101. We're seeing both of our issues trading well in excess of that today. So it'd be difficult to handicap. I don't mean to presume what bond investors will do, but we don't view this as going away immediately.

Operator

We have no further questions at this time.

Michael Jennings

Thank you very much, and thanks for joining us today.

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