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Executives

Jeffrey S. Beyersdorfer - SVP, Director IR

Jeff A. Stevens - President, CEO

Gary R. Dalke - CFO

Analysts

Paul Sankey - Deutsche Bank

Chi Chow - Macquarie Capital

Evan Calio - Morgan Stanley

Joe Citarrella - Goldman Sachs

Jacques Rousseau - RBC Capital Markets

Western Refining, Inc (WNR) Q1 2011 Earnings Call May 5, 2011 10:00 AM ET

Operator

Good morning and welcome to the First Quarter 2011 Western Refining Earnings Conference Call. After the speakers’ opening remarks, there will be a question and answer period. (Operator Instructions)

I would now like to turn the call over to Mr. Jeff Beyersdorfer, Treasurer and Director of Investor Relations of Western Refining. Mr. Beyersdorfer, please go ahead sir.

Jeffrey S. Beyersdorfer

Thank you Julianne and good morning. I would like to thank you for taking the time to listen in today and for your continued interest in Western Refining. Again my name is Jeff Beyersdorfer, I am the company’s Treasurer and Director of Investor Relations. Joining me for today’s call are Jeff Stevens, our President and CEO, Gary Dalke, our CFO, Mark Smith, our President-Refining and Marketing and other members of our senior management team. If you need a copy of the earnings release, you may obtain one from the IR section of our website at wnr.com.

Before we proceed, I would like to make the following Safe Harbor statement. Today’s presentation will contain forward-looking statements and I incorporate and refer you to the forward-looking statement section of our earnings release and recent filings with the SEC. We assume no obligation to update or advise any forward-looking statements to reflect new or change events or circumstances. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, we report certain non-GAAP financial results.

Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on the investor relations section of our website.

I will now turn the call over to Jeff.

Jeff Stevens

Thanks Jeff. Welcome to everyone on the call. Today we will discuss our first quarter performance and the steps Western is taking to capitalize on the strong market conditions we have seen through the beginning of 2011. After my opening remarks Gary will review our earnings in more detail and provide operating guidance for Q2 2011. Then we will open up the call for your questions.

As stated in our press release, we reported net earnings of $12.2 million or $0.13 per diluted share for the quarter ended March 31st, 2011. This compares to a Q1 2010 net loss of $30.7 million or $0.35 per diluted share. Excluding unrealized loss on economic hedges of approximately $17 million and a onetime loss on retirement of debt of $4.6 million, after tax earnings in the first quarter would’ve been $26.1 million or $0.30 per diluted share.

The Gulf Coast 3-2-1 benchmark crack spread average more than $18 a barrel in the first quarter as compared to $7.40 in Q1 2010. A continued widening of WTI to Brent crude oil differentials was a significant contributor to the refining margin improvement that we saw during the quarter. As I mentioned, we took several steps during the quarter to capitalize on the margin environment we are seeing.

We quickly responded to the weather related outage we experienced at El Paso in February, allowing us to operate at full capacity during the month of March. I would also like to point out while this weather event impacted most of the refineries in the region our Gallup refinery operated at near capacity throughout the first quarter.

Given the strong WTI/WTS spread, we increased our sour-crude runs at El Paso. And are currently running approximately 10,000 barrels per day more sour than in 2010.

We added to our gasoline and distillate hedges. As of today we have approximately 20% of our Q3 and Q4 2011 gasoline production hedged at an average crack $14 per barrel. And approximately 19% of our Q3 and Q4 2011 distillate production hedged at an average crack of $24.71 per barrel.

For 2012, we’ve hedged about 16% of our total distillate production at an average crack of $27.59 per barrel. For 2012 gasoline we have hedged approximately 7% of our Q1 gasoline production at an average crack of $12.18 per barrel and 3% of our Q4 gasoline production at an average crack at $7.70. These cracks are all tied to the US Gulf Coast. Our target for both 2011 and 2012 is to hedge about 20% to 25% of our total production.

We refinanced our term loan reducing interest expense by $9.5 million annually, extending the maturity from 2014 to 2017 and eliminating all financial maintenance covenants. These actions contributed to our improved first quarter results and helped us start off the year well. As an indicator of our strong start during the month of March our refineries ran at capacity and we effectively managed our operating expenses. El Paso ran at $3.85 per barrel in operating cost and Gallup at $6.24 per barrel. As a result the company generated most of the quarter’s EBITDA in the month of March alone and this positive momentum has carried into Q2.

In our other businesses wholesale posted another successful quarter driven by improving demand for transportation fuels and lubricants in the Southwest. Fuel volumes in the Southwest were improved by 13% and lube sales were improved by 12% compared to Q1 2010.

In retail poor weather conditions and rising wholesale fuel cost created a challenging quarter, resulting in fuel volume and margins that were flat relative to Q1 2010. However, merchandise sales and margins were modestly improved. Moving to our East Coast business, we continued to make progress in upgrading Yorktown’s capability as a terminal asset, we expect to complete the Colonial Pipeline connection in June. Although we have not secured terminal customers in line with our original timeframe we are working to ensure that the terminaling and storage agreements fit well with the potential asset monetization. Our goal is to maximize the long term value of Yorktown’s terminal assets.

With respect to debt reduction Western ended the quarter with about $1.05 billion in debt, a reduction of about 16 million during the quarter. Debt reduction continues to be a primary objective of management, and over the last couple of quarters we’ve shared some of the initiatives that we are pursuing, which will generate cash that can be used to reduce debt. Also we’ve completed some very important transactions with the refinancing of our revolver and term loan, resulting in the elimination of all financial maintenance covenants and the reduction of interest expense by about $13 million annually.

With market conditions we are experiencing, we believe we will generate strong cash flow, which will be another source of debt repayment. While we continue to pursue monetization initiatives the refining margin environment has given as time and flexibility to organize our debt reduction efforts.

Turning to the second quarter, we continue to see very strong crack spreads with the Gulf Coast 3-2-1 of $25.67 per barrel in April and a forward curve for the rest of the quarter of approximately $25 per barrel. These have to improve relative to the Q1 2011 level of $18.28 per barrel primarily due to improved gasoline craft and the breadth of UTI spreads.

In summary, we remain encouraged on how 2011 is shaping up. Our crude site and location advantage will allow Western to continue to benefit in this market environment.

Now Gary will go through out first quarter financials in more detail and provide operating guidance for the second quarter.

Gary R. Dalke

Thank you Jeff. For the first quarter we reported net income excluding special items of $15.2 million or $0.17 per diluted share. On a GAAP basis the company have net income of the quarter of $12.2 million or $0.13 per diluted share. These results compare to a Q1 2010 net loss of $30.7 million or $0.35 per diluted share. A reconciliation of our net earnings to earnings excluding special items is included in our press release.

Gross margin in our Southwest refineries was $15.79 per throughput barrel during the first quarter compared to $8.05 per throughput barrel in Q1, 2010. In the quarter, gross margin at El Paso was $18.70 per barrel and Gallup came in at $19.70 per barrel.

Direct operating expenses at our Southwest refineries were $6.39 per barrel for the quarter compared to $4.82 per throughput barrel in Q1, 2010. El Paso's costs were $5.91 per barrel for the quarter compared to $3.77 per barrel for Q1 2010. The costs at El Paso were significantly impacted by the downtime in January and February which added one-time costs and reduced operating rates.

In the first quarter, we expensed approximately $7.9 million in El Paso repair costs associated with the freeze [inaudible] in February. As we mentioned last quarter, our property insurance deductible is $5 million. We are working with our carriers to finalize our insurance recovery and we expect to receive these funds in the second and third quarter of this year. Dallas operating costs were $6.70 per barrel for the quarter, down from $7.54 cents per barrel in Q1, 2010. This reduction and per barrel cost was primarily a result of improved throughput.

On the East Coast cost related to the temporary suspension of refining operations at Yorktown were approximately $1.7 million in Q1 2011 and now total approximately $6.2 million since we announced the suspension in 2010. The remaining suspension cost of approximately $13 million primarily related to tank cleaning and pension termination will be expensed later in 2011. Total company SG&A cost were $20.4 million for the quarter, this compares to $16.4 million in Q1 2010, which contains a bonus accrual reversal of approximately $6 million. Excluding this onetime reversal SG&A in the first quarter was improved by $2 million compared to Q1 2010.

Adjusted EBITDA for the quarter was $95.8 million as compared to adjusted EBITDA of $26.2 million for Q1 2010. Depreciation and amortization expense for the quarter was $35.4 million, interest expense was $34.5 million, a $2.3 million reduction compared to Q1 2010 primarily a result of modestly lower debt levels.

Our effective tax rate for the first quarter was 35.7%, this rate is more in line with the statutory rate as compared to our last several quarters primarily due to the exhaustion of the small refinery ULSD tax credit.

Cash flow from operations was a negative of $21 million in the first quarter as compared to a negative of a $147.6 million in Q1 2010. The primary cause of the negative cash flow from operations for the quarter was a $65 million use of cash for changes in working capital driven by an increase in accounts receivable and prepaid group purchases. This was largely a timing issue, which was created by the unplanned outage at El Paso.

Total capital expenditures for the first quarter were $10.8 million. As of March 31st, total debt stood at $1.05 billion, a reduction of approximately $16 million compared to Q4 2010. Total liquidity, which we defined as cash and availability under our revolver was approximately $415 million at the end of Q1. Our daily average liquidity continues to show improvement. For example, the daily average liquidity since the start of 2011 has been around $380 million as compared to our Q4 2010 average of $280 million. Maintaining strong liquidity remains a priority and we continue to look for ways to further enhance our liquidity.

As Jeff mentioned earlier, we continue to look for opportunities to place gasoline and distill crack hedges. And since the place do not qualify for hedge accounting, therefore you can except some volatility in our income statement going forward. However, we feel that hedging a portion of our production is the best business decision for the company.

Turning to our expectations for the second quarter, our operating guidance is as follows. We expect crude oil throughput at El Paso to be approximately 120,000 to 125,000 barrels per day and total throughput to be approximately 130,000 to a 135,000 barrels per day. We expect throughput at Gallup to be approximately 20,000 to 22,000 barrels per day and total throughput to be approximately 22,000 to 24,000 barrels per day.

In the second quarter we expect operating cost to be approximately $3.65 per barrel at the El Paso refinery and approximately $7.90 per barrel at the Gallup refinery. Throughput and cost guidance for Gallup includes the impact of the plant reformer regeneration, which we will be completing in mid-May.

We expect total SG&A in the second quarter to be approximately $21 million, interest expense will be about $33 million and appreciation and amortization will be approximately $36 million for the quarter. Capital expenditures for the full year of 2011 are expected to be approximately $62 million. I will now turn the call back over to Jeff Stevens.

Jeff Stevens

Thanks Gary. Overall we are pleased with the quarter, while the weather event in February impacted our first quarter results I am very proud of how our team responded getting us up running quickly and safely. Since the third week in February both El Paso and Gallup had been operating at near capacity, and with the outstanding margin environment that we are experiencing, Western is positioned to have a very strong year. Julianne, we will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question is from the line of Paul Sankey with Deutsche Bank.

Paul Sankey – Deutsche Bank

Hi guys.

Jeff Stevens

Good morning Paul.

Paul Sankey – Deutsche Bank

So, did you put any quantification around the impact of the outage in terms opportunity cost or lost dollars if you want, I’m just trying to get a better idea of your earnings going forward obviously compared to this quarter.

Jeff Stevens

Yeah, if you look at February, we looked at it and back casted it. When you look at the last obvious EBITDA are now producing barrels and selling them and along with the property cost, it’s around $45 to $50 million that impacted EBIDTA Paul.

Paul Sankey – Deutsche Bank

Interesting, thanks. And then you said that things are running well right now, and think this cost will continue to run well for the rest of the year?

Gary R. Dalke

Absolutely.

Paul Sankey – Deutsche Bank

And did you talk about your turnaround, latest update from turnaround schedules for you guys?

Gary R. Dalke

Once we are through this region at Gallup we don’t have any more work to schedule for the balance of this year. We will have a turnaround in the spring, I’m sorry, the fall at Gallup and then we won’t have any work scheduled in 2012 for turnarounds in the El Paso.

Paul Sankey – Deutsche Bank

Great, thanks. And finally from me, just could you comment on demand trends, is it the major concern of the market right now and you have always got some interesting perspective on training some things. Thanks.

Gary R. Dalke

Yeah, Paul, I mean obviously we’ve seen a dramatic increased in both the price of gasoline and diesel, and thus far we’re not seeing any demand distraction at this point. Obviously we’re getting to a point where it becomes tough on particularly consumers, but at our retail level we’re seeing in the month of April and early May kind of flat year-over-year gasoline demand and distillate demand still remains I would call pretty strong.

Paul Sankey – Deutsche Bank

That’s like 5% up year-over-year?

Jeff Stevens

Yeah, it’s 3 to 5% is what we’re seeing in our market in our region.

Paul Sankey – Deutsche Bank

And then finally, was there any – I guess you’re saying the demands is not going down, but I wondered if you had any weather impacts from the weather, on demands?

Jeff Stevens

We obviously did, we had a pretty rough first quarter in February throughout this region and that’s why I think our retail sales were basically flat.

Paul Sankey – Deutsche Bank

Great, thank you guys.

Jeff Stevens

Thanks Paul.

Operator

Your next question is from line of Chi Chow with Macquarie Capital.

Chi Chow – Macquarie Capital

Thanks. Good morning. Gary, on the last call on the fourth quarter you said that you would have about $50 million in debt reduction in the first quarter but you missed that by quite a bit. Can you explain where the shortfall occurred?

Gary R. Dalke

Yeah, Chi. Really what happened there was that we have the opportunity to refinance the term fees and do it at a much more attractive interest rate than our current term fees and also eliminate maintenance covenants. So, we when required to make that payment we made – we did make the early payment up 25 which actually netted out to 16 for the quarter. What we are really focused on as far as the next piece of debt that we’re targeting or those floaters which are now obviously at a much higher rate than the new term fees we’ve taken. So, I think we dispositioned ourselves to start making that and we’ll start doing that early December because that’s when we really have the first economic opportunity to start paying those down.

Chi Chow – Macquarie Capital

Sorry that was December, Jeff…

Jeff Stevens

Yeah. December of ’11.

Chi Chow – Macquarie Capital

Okay. I apologize for this. Could you go over your new hedges, the hedge positions you put on, didn’t quite get all of those in your prepared comments?

Jeff Stevens

Okay. Well, what we did is I think on the last call we were somewhere in the 9% to 10% range in 2011 we’ve basically taken that up closer to the 20% for both gasoline and diesel for Q3 and Q4. We currently don’t really have anything on in Q2, but looking forward we wanted to add to those positions because obviously these are very attractive price. And then really the biggest new position that we put on is for 2012, we put on about 16% of our diesel at about $27.50 per barrel and that’s for the calendar year 2012. And then we started adding some Q1 and Q4 gasoline cracks, obviously those are typically our lowest point of the year and $12 for this first quarter of 2012 looked attractive to us and then just under $8 for Q4 and we’ll probably – if those margins or those cracks stay at that level or rise, we’ll probably continue to add – we’re looking to go to maybe 20% to 25% of our overall production at these particular levels.

Chi Chow – Macquarie Capital

So you don’t have any hedges on here in the second quarter then this year?

Jeff Stevens

Yeah, we just have a little bit of gas in June I mean it’s maybe 4% or 5% and it’s at about $24. But really what we were looking to do was capture this margin in quarters that are historically poor margins for us, and obviously the distillate crack in 2012 is just very attractive. I mean, the highest US Gulf Coast distillate crack we’ve ever seen was in 2008 and I think it was at about $23 a barrel. So to be all the lock in some of that production at $27.50 we just felt like we needed to take that off the table.

Chi Chow – Macquarie Capital

Okay. And am I reading this right in the release that you realized a $37 million hedging loss in the first quarter, is that correct?

Gary R. Dalke

Yeah, Chi this is Gary. Between our realized and unrealized positions we did realize – that was the total loss that we had was $36.5 million. The unrealized piece was $17 million which was related to future quarters. So what we realized in the first quarter related to trades in the first quarter was about $19.7 million, totaling net $36.5 million.

Chi Chow – Macquarie Capital

Now that’s flowing through gross margins?

Gary R. Dalke

Yes it is.

Chi Chow – Macquarie Capital

And it's split between El Paso and Gallup or is it all El Paso?

Gary R. Dalke

It's actually, if you look at total Southwest, it's reflected there.

Chi Chow – Macquarie Capital

Okay. One final question, any more progress on the sale of the crude oil inventory at El Paso or the remaining platinum catalyst there?

Jeffrey Beyersdorfer

Yeah, Chi, it's Jeff Beyersdorfer, we’ve just about completed all of the platinum catalyst during the quarter. So we realized in between the fourth quarter of last year and the first quarter of this year about $27 million between the outright sale and the sale and lease of catalyst.

On the El Paso inventory, timing is pretty critical here for us doing that, and as we shared, we're waiting for an opportunity when contango comes back, crude contango comes back in order to execute that, because that will help us maximize proceeds. So we continue to look for an opportunity or a window to do that. But as Jeff stated in his comments, we do have a little bit of luxury of time given that we expect pretty significant cash flow from operations as another bucket, if you will, to use for debt reduction.

Chi Chow – Macquarie Capital

Okay, great, thanks Jeff, appreciate it.

Jeff Stevens

Thanks, Chi.

Operator

Your next question is from the line of Evan Calio with Morgan Stanley.

Evan Calio – Morgan Stanley

Good morning guys, how are you doing?

Jeff Stevens

Good morning Evan.

Evan Calio – Morgan Stanley

Hey, a question just first on the hedging, I know you laid out a fair bit of information here to kind of digest. But big kind of target levels of 25%, I mean could you just a little bit more run me through the strategy here? What return levels are you targeting and is there an embedded crude differential in the gas and distillate hedge or are you only hedging off TI? It seems like there's an – there’s some kind of embedded crude differential in that. Am I – do I understand that correctly?

Jeff Stevens

Well, this is the swaps that we are entering into are tied to the U.S. Gulf Coast and the WTI contract. And the reason that we chose this strategy is we have customers that are tied directly to the U.S. Gulf Coast market and really the basis risk of these types of hedges is close to zero as you can get. So that's why we've chosen this type of swap in order to do it. I mean obviously we buy crude, all of our crude is bought on a TI basis or a TS basis. And so, we have contracts that are tied to that. Along with our customer contract, this swap really is a very clean instrument in making sure we realize these values.

I think what – obviously we have not had this kind of opportunity this far out to be able to lock in these types of cracks. I mean these are really historically very, very cracks and what the strategy is taking about 20% to 25% off the table, ensuring that in our situation knowing that we want to pay back debt, the strategy is that we take some of it off the table and go ahead and just lock in that margin at this point.

But at the same time, leaving a significant amount of opportunity if things get stronger. So, that's really the strategy behind it.

Evan Calio – Morgan Stanley

Maybe a question on the debt repayment side. I know you – you discussed the floaters and what’s recallable in December, that's your first opportunity if you wanted to take some of that debt out. I know you recently refinanced term loan as you know, some debt repayment restriction. I mean if cash flow permits and based upon what we think is a pretty constructive environment, can we expect or which – how much can you pay down prior to December? Are you limited in your debt retirement until you get into the window for the floaters or can you walk me through those restrictions, I guess?

Jeffrey Beyersdorfer

Evan, it's Jeffrey Beyersdorfer. Yeah, all of the pieces of debt we have, have a call premium to them including the term loan. We've got a slight call premium on the term debt at 102 for this year with repayments from free cash flow. The floaters as you pointed out are callable at the end of this year, 105 and then the senior secured notes. The 11¼s don't become callable until the middle of 2013 at 105 and 5/8ths.

So there are premiums associated with each of those debt instruments. But we continue to look for opportunities to chip away at debt and we may have some opportunities depending upon the markets, depending upon the high yield markets, depending upon cash flow generation to prepay some of that debt prior to year-end. But as Jeff mentioned earlier, the primary focus is first on the floaters because it's the highest we have had in the structure that's callable first and then probably the senior secured and then third, the term loan.

Evan Calio – Morgan Stanley

Okay. Maybe lastly if I could slip in one more question guys on, just a discussion on the status of any potential Yorktown terminal sales, and you know, what’s the key impediment there to an asset sale. I mean are you guys currently operating those terminals as a merchant terminal today, you know, do you have third party off-takes, maybe give me some color there please.

Jeff Stevens

Yeah. Currently you know, ever since the idling of the Yorktown facility we’ve continued the wholesale business in the region and that takes up about a third of the terminalling. We’re currently, as we said before, getting connected to the Colonial Pipeline and kind of finishing up tank cleaning and some other things to make it more of attractive terminalling asset. As we said before, we were in discussions with parties that were interested in third party terminalling agreements and at the same time we had parties that approached us about the potential sale of the terminal asset. And we are in discussions with both and what we are trying to do, and it's taking longer than we expected, but we don’t want to enter into third party terminal agreements that may affect the value to these people that have an interest in just an outright purchase. So we are kind of going down a dual path here and making sure that we don’t give up any value as a terminal. And so, they are both working at the same time and hopefully, you know, hopefully we can get some resolution to this sooner than later.

Evan Calio – Morgan Stanley

Okay. Thanks for taking my call.

Operator

Your next is from the line of Edward Westlake with Credit Suisse.

Edward Westlake – Credit Suisse

Hi good morning everyone.

Gary R. Dalke

Good morning Ed.

Edward Westlake – Credit Suisse

Just a quick question really on ability to sort of improve underlying profitability at El Paso and Gallup. What I am talking about is, is more local groups have sealed improvements and cost reduction, maybe just talk through, if there is anything we should expect there, thanks.

Jeff Stevens

Well obviously we did mention that we are with the widening of the TI/TS, we are running more sour crude than we’ve ever run before. You know, in fact in June we are hoping to run closer to 28,000 to 30,000 barrels a day which would be the most that the facility have ever run. Last year we probably averaged about 14,000 barrels, so that’s a significant increase. But probably the bigger opportunities are things that we are seeing as far as new crude fields. We are looking at some opportunities within the Eagleford, new finds and there is also other new finds. So we are modeling a lot of new crudes, we are looking at their yield pattern and how they would affect, it's not just obviously as you know, a cost per barrel, it's how the crude performs in its overall yield. So, yeah, absolutely both refineries we are pretty excited about the opportunities there and are in a position to fully take advantage of them.

Edward Westlake – Credit Suisse

Okay. And then just a follow up I think on the last call you were talking about six to nine months in terms of getting financials ready and everything in place to do a potential MOP, is that still the same timeline?

Jeff Stevens

Yes. That would still be the same timeline.

Edward Westlake – Credit Suisse

Thanks very much.

Jeff Stevens

Thank you.

Operator

Your next question is from the line of Joe Citarrella, with Goldman Sachs.

Joe Citarrella - Goldman Sachs

What do you see the sources of cash to do that is primarily strong refining margins and the potential Yorktown sale of DC, the possibility for more, I know you said in the past you entertain bids for the retail business and believe Gallup off-take would probably one potential limiting factor, but any thought as to whether that’s still the case or at this point is that out of the question.

Gary R. Dalke

Joe I hate to do this to you, but for some reason you were cut off at the beginning, so could you just kind of repeat the beginning, I think I got the gist of the question, but I want to make sure I answer it correctly.

Joe Citarrella - Goldman Sachs

No, sure. In terms of the balance sheet deleveraging and your goals there, at this point do you see – see the sources of cash to do that as really being strong margins and the possible Yorktown sale or a –

Operator

His line is disconnected. (Operator Instructions) Your next question is from the line of Jacques Rousseau with RBC Capital Markets.

Jacques Rousseau - RBC Capital Markets

Good morning gentleman how are you?

Jeff Stevens

Good morning Jacques.

Jacques Rousseau - RBC Capital Markets

How are you?

Jeff Stevens

Good

Jacques Rousseau - RBC Capital Markets

Just wanted to ask about maintenance expense and where that is getting captured now. I know in prior quarters that appeared as a separate line item and I’m just curious if what occurred in El Paso was picked up in a different manner.

Gary R. Dalke

When you were referencing to maintenance expense, are you talking about our turnaround maintenance.

Jacques Rousseau - RBC Capital Markets

Yeah.

Gary R. Dalke

We still do classify turnaround maintenance as a separate line item, however normal or even unusual maintenance such as the freeze outage would go a normal direct operating expense. The only thing we specifically carve out relates to major maintenance turnaround. Everything else will flow through direct operating expense.

Jacques Rousseau - RBC Capital Markets

Okay. Then for the rest of the year, where do you see the major maintenance expense falling out in the different quarters?

Gary R. Dalke

We don’t have any planned major maintenance expense for the duration of this year. So the regeneration that we are doing at Gallup for example will be direct operating expenses.

Jeffrey Beyersdorfer

It's reflected in the guidance.

Gary R. Dalke

And it is reflected in the guidance that we gave for the second quarter. So for the balance of the year there is no major maintenance expense currently planned.

Jacques Rousseau - RBC Capital Markets

Great. And one more if I could. In the wholesale segment I noticed a sharp increase in the fuel gallon sold, I believe the number was something in the magnitude of 217,000 to 360,000.

Gary R. Dalke

Yeah, this is Gary again. We put a footnote in our financial table, we should have made it a little more prominent. But basically it reflects our marketing activities on the East Coast that are now since we don’t have refined products coming out of our refinery there we are buying and selling third party product on the East Coast. So, that is now reflected in the combined Southwest wholesale business as well. So we have East Coast and Southwest wholesale combined in that schedule and that’s going to be the majority of the increase. Although we did have some growth in the Southwest as well.

Jacques Rousseau - RBC Capital Markets

So that’s a good number to use going forward then.

Gary R. Dalke

Yes

Jacques Rousseau - RBC Capital Markets

Great, thank you.

Gary R. Dalke

Thanks Jacques.

Operator

Your final question is from the line of Joe Citarrella with Goldman Sachs.

Joe Citarrella - Goldman Sachs

So, I will try this again. Can you hear me okay?

Jeff Stevens

Yeah Joe, sorry about that.

Joe Citarrella - Goldman Sachs

No, that’s okay, I apologize. But my question was really in terms of down GP leveraging at this point, do you see the sources of cash to do that over the coming year or two as primarily strong margins and maybe a sale of Yorktown or do you see the possibility for more and then, I know you said in the past, you would at least entertain some in the retail business and I think off-take for Gallup would be the limiting factor. But any thoughts still being given to that or is that out of the question at this point?

Jeff Stevens

No, I think you are right, I think, obviously we feel that there will be cash obviously to pay down debt here at the end of the year just from the normal operating business. Obviously, if we did a potential sale of the Yorktown asset, that would be another means of chipping away the debt. And we have been pretty clear on, we have got other logistic downsides that we would entertain either potentially doing our own MLP or look at the potential monetization of those assets. So, the position we are really in now, Joe, with the revolver refinance and the term loan refinance and the overall improvement in the business, we have the flexibility now to be patient and – but I will tell you that if there is an asset out there that we can get fair value in a big sense to help us get our balance sheet where we need to be, we are going to execute on that.

Joe Citarrella - Goldman Sachs

That’s really helpful, thank you.

Operator

Thank you. I would now like to return the call to Mr. Jeff Stevens.

Jeff Stevens

Thanks Julianne and thank you all for your participation today and your continued interest in Western Refining. Look forward to our Q2 call and updates. Thank you.

Operator

That concludes today’s first quarter 2011 Western Refining earnings conference call, you may now disconnect your lines at this time and have a wonderful day.

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