Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Tesoro Corporation (NYSE:TSO)

2011 Analyst and Investor Day Presentation

December 05, 2011 2:30 pm ET

Executives

Louie Rubiola - Director of Investor Relations

Daniel Robert Romasko - Executive Vice President of Operations

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

Analysts

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Mark Gilman - The Benchmark Company, LLC, Research Division

Unknown Analyst

Edward Westlake - Crédit Suisse AG, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Chi Chow - Macquarie Research

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Louie Rubiola

Good afternoon, everyone, and welcome to Tesoro's 2011 Analyst and Investor Day Presentation. My name is Louie Rubiola. I lead our investor relations efforts for Tesoro and Tesoro Logistics. We're very glad to have you all today and appreciate you taking the time out of your busy schedule to come join us this afternoon.

A quick thing I'd like to mention. Much that you'll hear today are -- will include forward-looking statements, which are intended to be covered by the Safe Harbor provision of the Securities Act. And I also -- before we start, would like to do -- to have a safety message. In Tesoro, safety is a priority and a core value of ours, and we like to start all meetings with a safety message. So today, I'd like to share kind of the appropriate route in the unlikely event of an evacuation. If we, for any reason, have to leave the building, the appropriate way to leave would be straight out back the way you came. You'll take a left out of the main door, and there will be a set of stairs on your left. You'll go down to the lobby floor, and once you come out of the staircase, you will take a left, and it will exit onto the Wall Street level. So that will be the appropriate way out.

With that, it's my pleasure to introduce -- oh, I'm sorry. Also, please turn off your cell phones and pagers. And with that, it's my pleasure to introduce Greg Goff, our President and CEO.

Gregory J. Goff

Thanks, Louie. Welcome, everyone, and thanks for taking your time to come here today. It's -- when we were walking here, it actually seemed like to some of us that we were just here yesterday, doing the 2010 presentation. So it's been a frantic and a quick year.

What we'd like to do today is we'd like to take about an hour or so and share with you our plans for 2012, and some of the things that we'll talk about may lead into a little bit beyond 2012, particularly as it relates to our capital program. And then once we're done, we'll provide sufficient time for questions, and we'll be glad to entertain any questions that you may have as we finish the presentations.

2011 has actually been a very successful year for Tesoro, and we're very proud of things that we have accomplished. We really -- we believe that with the changes in management back in 2010, we really embarked upon a very ambitious plan to really fundamentally and significantly improve the business. And we thought when we put this plan together back in 2010 that it would take us about 3 years to really achieve all the things that we set out to do, and 2011 was really the first year where we really got things going, and we'll share some of the accomplishments that we think we have accrued [ph] today on this journey to really significantly improve the performance of the business. And really, this improvement, it's really characterized by a lot of things. I mean, our focus, like Louie said, on both personal and process safety, driving performance in our overall environmental performance to really be able to go in and get -- develop a better cost structure for the business, drive improvements in the reliability around our assets, really being able to exercise a lot of capital discipline and take our free cash flow and with our stated intent to reinvest it in the business to generate additional earnings as we go forward, and then really to drive a high level of integration between refining a market. And because of our geographic location, like we said last year, we felt one of the things that was very critical was that we have a high degree of integration so that we could get higher utilization out of our refineries, and we've made a good step forward in that. And then finally, it's just to maintain a strong financial position.

So what we'd like to be able to do today is -- our presentation is really broken into 3 parts. I'd like to take a few minutes and really talk to you about 2011. One of the things that we felt last year was that we needed to develop a plan, and we also needed to develop a reputation of being a company that delivered on what we said, and we'd like to take some time and share with you what we said we were going to do and, more importantly, what we’ve accomplished. Then I'd like to spend a little bit of time talking about the market and kind of what our outlook is as we enter 2012. And then finally, we're going to talk about our plans for 2012 and really get into the substance of what we see going on. And to be able to do the presentation today, I’ll take the first 2 parts. I'll talk about 2011 and, really, our market outlook. And then Dan Romasko, who runs our operations, will then talk about our plans for 2012.

But before we get started, I'd like to just take a minute and introduce the members of the Tesoro management team with me here today. And actually, as a company, we've gone through a fair amount of change from a leadership standpoint, and so I'd like to just introduce some of the key people here today. And they'll be available to answer any questions either during the Q&A part of the -- after we finish the presentation or even after we finish the -- after we're done with the Q&A section. But with me today up on the stage is Dan Romasko. Dan joined the company earlier this year. Dan is responsible for operations. So he runs refining, marketing, logistics and our marine business. Sitting next to him, which I think most of you already know, is Scott Spendlove, our CFO; and Louie, he just introduced himself just a minute ago. On the front row up here is Dave Kirshner. Dave is responsible for our commercial operations, and Dave just joined us at the beginning of October. Next to Dave is Claude Moreau. Claude Moreau runs all of our marketing operation. Next to Claude is Chuck Flagg, which many of you probably know. Chuck runs our corporate strategy and business development. Phil Anderson, which many of you know. Phil is now responsible for our MLP, and he's been out actually talking to investors about our MLP today. And we'll touch briefly on the MLP during the presentation today. Chuck Parrish is the General Counsel for the business. Tracy Jackson is our treasurer. And for some reason put over in the corner to be away from all the rest of them is Frank Wheeler, who runs our refining operation. And in the very back of the room is Ralph Grimmer, who is -- who runs the logistics part of the company. So Ralph and Phil have been out talking about the logistics company today.

So personally, we've gone through a lot of changes. And one thing that I feel really good about, I am extremely confident in our management team. We work together really well, and it's just such an enjoyment to have the people you have assembled to really take the business. And we're all very focused on where we're trying to take the company, and I think that's a very important thing.

A little bit about the company. I don't think I need to spend a lot of time because most of you are pretty familiar with the company, but there are probably 2 or 3 things that really stand out. We've had a focus to really drive the integration between refining and marketing, and you'll see on this slide that our marketing business last year, we had about 900 retail stations that were branded 1 of our 3 brands. We grew that to about 1,200 this year. And as most of you are aware, by starting next year, we'll have -- we already have planned growth of another 300 stations, not including anything else we may do. So we've made good progress to really strengthen our refining and marketing integrations in our core areas. The second thing is one of the advantages of the markets we operate in is we enjoy a higher gross margin, which has been really a focus of what we've been trying to do to really drive even a higher gross margin. And then finally, in most cases, we enjoyed some crude advantage that we really try to take to use so that we can get lower crude cost into our refineries.

So maybe some of the key messages for 2011 is that, one is that we have exceeded what we set out to do for 2011. We set out and we shared with most of you last year our plans for 2011 that showed that we set out to deliver some pretty significant improvement in the business. I'm going to talk about those, but we really did exceed those. It was the first year of, like I said, which we consider a multiyear plan to really continue to drive fundamental, sustainable improvement in the business, and as that would happen, we’ve laid out -- we will lay out the next steps with you. Dan will go through a fair amount of that with you as we talk today, but that is the second step of what we intend to do.

Our priority last year was to take the free cash flow and invest it into high-return projects. We continue to do that. One of the big changes that we have in the business this year is that as we've gone through 2011, we've identified really more projects that really has increased our portfolio of high-return projects. Some of those we've talked about publicly, some of them we've just -- one of them we made available to the public today because we're able to conclude everything last week. But really, our portfolio projects that are fundamentally driven to improve the business has really increased quite substantially.

We're very pleased with the performance of the logistics company. Besides being a standalone company, the really significant thing there is it's really allowed us to take those assets and use them in support of our refining and marketing business, and the amount of efficiency that we've driven in using our terminals at higher levels, the growth plans that we have up in the -- in North Dakota to support our pipeline, our gathering operations to get crude not only to the Mandan refinery but to Anacortes later next year has all worked really well. So it's -- and here, we'll show you a little bit about what the potential is for the logistics company. But besides just the pure financial impact, the fit into our infrastructure logistics has really worked out extremely well for us.

And then finally, we've, like, we’ve done a good job of being disciplined, like we said we would, and strengthened the balance sheet, which really positions us to achieve the things we want to as we go forward from here.

So last year, we laid out what we considered were our 4 strategic priorities, and those priorities are shown up here. One, we said that we were really going to focus on driving operational efficiency and effectiveness because we saw so much value in it. We saw incredible value if we became superior operators and executed our plans to drive this operational efficiency and effectiveness to what some people refer to as operational excellence. And in that, we wanted to drive a higher gross margin, we wanted to improve our reliability and dramatically improve our cost structure, and we really wanted to focus on putting money back into the business that basically created a higher level of profitability on a sustainable basis.

The second thing we wanted to do is we really wanted to -- because we believe our business really needs to be managed as a total value chain, we really wanted to focus a lot on the commercial aspects of the business to really enhance the overall profitability by both how we position ourselves in the crude oil market from a crude oil supply, both short term and longer term, and then really how we manage the production out of the refineries to capture the highest values. So that second priority to really drive commercial excellence is important to us, and fortunately, we've been able to bring Dave on. Dave and I worked for many months to get him to join the company, and so we're really far better positioned today than we have been in the last little bit to really take the next step forward in our focus on commercial excellence.

The third thing was really to be very disciplined financially, whether it be around how we redeployed capital in the business, how we got our balance sheet in a better position, but we feel like we've made good progress there, and we have some plans to continue that into next year.

And then finally, last year, we laid out our plans, which we call value-driven growth, which with everything we had going on last year was really focused in 2 areas: One was to take advantage of our logistics position and create that as a vehicle for growth, both in support of our refining and marketing business and, really, to really enhance the overall value of those assets, and then finally to really focused on our marketing business because we believe that to create a stronger company, we really needed to have that connection between refining and marketing to give us higher run rates.

This is just a way to really summarize what we think are the key points of what we accomplished last year. I'm going to run through them quickly. We’ve kind of set this up to say that we had these priorities. As a company, we're very focused on those priorities. We were focused on them this year. We'll be focused on them next year. But you can kind of see it's something that we're actually pretty proud of. You can see that our utilization improved by about 13% this year. We drove our reliability up by 4 percentage points. This year, we've had about 98% reliability, which means we were available to run 98% of the time, which is really -- it's a good place to be, and it's a place where we need to continue to be. We have an incredible performance from a gross margin standpoint. And a lot of things came together that allowed us to deliver through the first 3 quarters over 50% improvement in our gross margin capture. Our refining costs are down both on an absolute basis in 2011 versus 2010 and naturally on a per unit basis because we've been able to get our run rates up to a higher level, but they've been -- on a per-unit basis, they're down by about 16%. We've improved our total debt to total cap. We've talked about that a lot. We're now kind of in the range that we targeted. We wanted to be down below 30% in somewhere in the 25% to 30% range as a place for us to be. We put in place a program to really manage the dilute effect of our equity compensation. We've talked about that publicly. We spent about $100 million this year, buying back stock from past equity programs, because we really wanted to hold our shares outstanding constant at about 140 million shares, and we have a program in place for future equity awards to basically maintain that outstanding share count. We talked about Tesoro Logistics, how successful it's been for the company. And then the -- really, the final thing and the thing that's probably quite a bit different from last year to this year for us is that we've been able to identify a fair number of projects, which are kind of outside the -- what we call the small capital, high return, short payback projects, and we've talked about some of those. But that's probably a big difference, and we've been able to really identify some really significant projects that over the next couple of years we'll implement, which adds tremendous earnings to the company, and we're excited about those as we go forward.

So maybe, just to talk about the 3 areas around operational efficiency and effectiveness, the first one was our -- driving our gross margin capture. And you can see on this chart that versus the index on the right on the top bar chart there, you can see that between '10 and '11, over $1 a barrel improvement in our gross margin capture, partly because of the crude flexibility and things we were able to do to lower our crude supply cost in the market. The other thing that we've been able to do is really take advantage of our logistics system to really support our product supply, particularly with exports and that off of the West Coast, which has been a really important part for the industry to be able to move products out because of the excess refining capacity. And then really, the focus on our high return, short payback projects but to really get our utilization rate up, which through the first 3 quarters has been a little bit below 90%.

The second area really is driving improvements both in reliability and in our cost structure. And you can see that as we've driven our improvements and reliability, we've been able to run and lower our cost. Our all-in cost per barrel are down quite a bit when you look at what's happened over the last 3 years prior to 2011, so right around at about $8 a barrel. And we've driven some pretty significant improvements in energy efficiency. For example, we spent about $1 million at our refinery in Kapolei to change the furnace controls and that, which yields about a $3 million cost savings. So it's part of those efforts to really drive the improvement through our entire system no matter where they are and no matter how small to really capture those benefits.

As a company, we continue our focus and our absolute commitment on asset integrity, not only in refining but in our transportation business, as well as our marketing business, and we have programs in place to really continue to strengthen our asset integrity. And Dan will talk a little bit more about our capital commitment to that area as we go forward. We said we were going to reduce our overhead cost. We've done that, and we have that behind us. We also put in changes, as everyone is aware, to reduce our postretirement comp, which helps us both from a cost standpoint as well as a liability on our balance sheet, and that's been put in place. And finally, we drove about $15 million of improvement this year through our sourcing efforts that had a big impact on the company as we really tried to capture more benefits through strategic sourcing.

And finally, our high-return capital program. This is probably one area where we didn't deliver what we expected to do. And you can see on the right that we had expected to achieve a higher level of EBITDA from our small capital project, high payback -- short payback, high-return capital projects, and you can see that it didn't happen. We were about 20% short. And primarily, what we decided to do is as we started 2011, we really saw opportunities to address some of these other projects, like Mandan and Anacortes and some of the other refineries. And so we shifted our engineering resources to really start doing work on those, and it was just a balancing that we chose to do that. So those projects that we have in our portfolio is things that we've just deferred out in time because we believe that these other projects are just higher value, and that's where we've really committed the resources, but this is one area where we probably weren't able to deliver what we had expected to do this year.

And really, just to kind of give you an idea, this has just like 7 different projects because we talk about a lot of value that we're trying to create by how we reinvest our cash back into the business through our capital program. And this just gives you some examples, and I'm not going to go through all of them, but I may just touch on 2 or 3 of them. For example, at Los Angeles, we spent some money to really go in and make improvements in the way we could capture propylene off the cat cracker, and you can see the EBITDA that was attributable to that. Frank's team up in Mandan was able to go in and do some work on one of the hydrotreaters and basically increase the amount of ultra-low sulfur diesel we supply to the local market up there, which is the demand for ultra-low sulfur diesel in North Dakota because of the development of the crude play up there. It's really been quite substantial. And then finally, we spent some money up at Kenai, really doing some work on the hydrocracker. We spent about $7 million to really help improve the yield of gasoline and diesel off the hydrocracker and get about a $3 million a year improvement for that. So that's just an example of some of the things that we're really working on as we redeploy our capital.

From a commercial excellence standpoint, you can see that we captured significant feedstock cost this year. And you can see in the bar chart on the right that our use of ANS has actually gone down quite dramatically. Actually, since 2007, it's dropped by about 50%, and our expectation is that once the unit train comes on to Anacortes next year, a part of that ANS may be displaced also if we take Bakken crude over to the Anacortes refinery because of the advantages of the yield benefits we get versus ANS. We worked really hard to increase our exports off the West Coast. We actually exported twice as much gasoline and diesel in '11 versus '10, and we're actually well positioned for additional exports in '12 with things that we have put in place. And then finally, even in a relatively difficult market environment, we're able to take good advantage of our position in Panama with both the pipeline and the storage tanks to not only take advantage of trading opportunities but also to supply our West Coast system and really develop some key commercial relationships with people that we believe are key to future supply for the company.

In the area of financial discipline, we've talked about a lot of these things before. I think that we've done a good job. We've been very disciplined in paying back debt. We said publicly that we intend to pay back additional debt in the coming year. We will do that. We've got our debt to cap down to where I said we wanted it to be a little bit earlier. And finally, we're actually in a very good cash position. Our cash position will probably grow a little bit between now and the end of the year, but we're positioned exactly where we want to be because of the discipline that we've exercised throughout the year.

And finally, really on value-driven growth. This really shows the significant progress that our marketing people have made during 2011, and it was really broken into 4 different areas. You can see that how we measure our integration at the beginning of 2011. It's about -- we were about 30% integrated, probably way too low for the markets that we operate in. And so we -- that's why we made it a priority to really drive a higher level of integration. But through additional customers and then increasing the duration on some existing contracts, we've been able to grow our wholesale business by about 76,000 barrels a day this year. I think everyone is aware that we successfully implemented the Shell agreement that we have around both our Salt Lake and Mandan refineries, and not only did we increase about 14,000 barrels a day of marketing business here, but we've created a really good platform as we drive higher levels of integration around Salt Lake and Mandan. Third, shortly here, we'll close the transaction with SUPERVALU, which gives us about 5,000 barrels a day of more marketing placement and particularly in some key areas where we need the integration. That's a good position for us. And then finally, starting mid next year, we'll start the integration of the Thrifty stores in the California marketplace into our network, which a substantial part comes on in 2012 and the rest in 2014, but that, we see, being another 25,000 to 30,000 barrels a day of demand. So if you look on a -- we've increased our integration on a go-forward basis by about 44 percentage points, and so we're getting out to an area that positions us a lot better to really drive the utilization that we want to.

The logistics business. I've talked a little bit about this before here, but the real thing is we've been able to unlock the embedded value of our logistics assets, and we released an information today to show the growth potential in that business with very little drop down. So I think we've talked in the past that we started off with about half the logistic assets in this company. We kept the other half within Tesoro, and so we're -- we have planned one drop-down that's all for this year, but we see tremendous organic growth in here. So it's really complemented of our efforts to drive our integration between refining and marketing, and it's been well positioned.

So maybe, just to summarize kind of 2011 is that this chart really shows our performance through the first 3 quarters of 2011. And you can see that on an EBITDA, 2011 to 2010, it's up about $1.1 billion. Granted, part of that, about $400 million, is attributable to the market. $200 million is attributable to running Anacortes this year while it was down last year as we recover from the incident of April of 2010, but the remaining $0.5 billion is really a function of a lot of things that we've done by driving higher utilization, by improving our gross margin capture, by lowering cost and that. So we've had very good success so far this year, really delivering on our improvements as we offer [ph] on this journey, this 3-year journey, to really drive a stronger, more profitable and highly competitive company.

So I'm going to shift gears now and really talk about -- start to talk about 2012 before I turn the time over to Dan and really kind of talk about the market. And if we take a step back and look at the market, we kind of see the market not a lot differently next year than we saw it this year, and we missed this year. We were far more cautious about how we looked at 2011 back in the third or fourth quarter of 2010. We just didn't expect it to turn out, particularly from a margin standpoint, like it did. But from a U.S. economy standpoint, we continue to see a slow recovery. We don't see a lot of upside. So we have kind of built that into our plans. From a product demand growth on a worldwide basis, we see, like everyone else, diesel being growth of about 2% and about 1% in gasoline. In the U.S., we see gasoline about flat but with some pretty good growth in diesel demand in the United States as we go forward. We see good growth in crude oil supply, particularly in certain regions, and we also see the impact of Canada. So particularly, where our assets are positioned, we feel really good about the growth in crude oil supply and the impact that it has on the company. We continue to see refining capacity on a global basis exceed demand and put pressure on refining margins. And we also see with alternative fuels, the CAFE standards, pressure on the hydrocarbon fuel for our business. And then really, finally, we see a very challenging regulatory environment. In a minute, I'm going to talk to you about what we see in California, but we see continued pressure from the EPA, which has been -- really been a challenge all year because of the uncertainty that it introduces into how we run the business.

From a crude standpoint, you can see what we have up here on our ranges. We also -- as a company, we use Purvin & Gertz and PIRA. We take our own, and we just kind of look at those 3 assumptions on prices and provide some averages and some ranges here. So you can see LLS crude, we see increasing nominally as we go out over time but in a relatively tight range. But we do see the differential, which we kind of felt all along. Maybe, it would happen sooner than we thought, the collapse, but we see the differential between TI and LLS coming together closer and will be driven by transportation economics.

The light-heavy differential as measured by Maya, the LLS-Maya differential. We see -- when you look at '10 and '11, kind of flat, if you take the average of the 2 years and maybe increasing -- more or less just flat really.

Crack spreads both on the West Coast and the Gulf Coast. We see not a lot of upside. We see them kind of trading in a range over the next 2 or 3 years. However, you can see on the chart that we do see pressure on them on the group on crack spreads in the group as WTI strengthens and that with some of the logistical constraints. And so we see '11 kind of being the kind of the peak year for crack spreads in the group and coming down from there, although it's still quite attractive.

Finally, just like last year, we see diesel being the premium product to gasoline and trading at the $2 to $3 a barrel premium as we go out over time, driven by high demand for diesel both here and in the rest of the world.

And probably, one of the things that really supports the market is the exports. I mentioned our position on the West Coast, how they’ve really benefited us and how we're positioned for 2012, but you can see what's happened to gasoline actually in a relatively short period of time, with the reductions in demand, the changes in alternative fuels, but the imports of gasoline in the United States have actually decreased quite significantly. We see them kind of range bound on a go-forward basis. And probably more importantly is the significant amount of diesel exports from the United States, and we see those sustained at the levels that they've been at here this year as we go forward.

From an index standpoint, as we look at our Tesoro Index, you can see that as we look forward, we see it coming down from the peak of this year primarily because of the changes in the Mid-Continent. So we see a slight decrease. We actually, if we go back and look at what we thought in 2010 for versus '11, this is probably about the same thing that we thought, not realizing the impact of what would happen in the Mid-Continent with the TI prices and that last year. So our forecast is for slightly lower margins driven by changes in the Mid-Continent.

And then finally, just to wrap up on the look on the market is just to talk about the regulatory environment and probably a couple key points to make about the regulatory environment. As we continue to see with everything that's going on with the U.S. EPA and really all the uncertainty around Tier 3 gasoline and other things, we see continued -- trying to operate in that world and do capital planning is pretty challenging. In the short term, we haven't -- because there's nothing right there that requires us to invest any capital, as we finish up our benzene compliance programs, we're kind of in a window where we don't see a lot of significant capital requirements to comply with regulatory requirements, but that may be short-lived. We'll see how that develops over time. But probably more importantly is around what's going on out in California with AB 32 is that it's starting to be more developed and it's still -- there's still parts of it that needs further development. But as we look at AB 32, we kind of break it into 3 areas: One is the emissions from stationary sources, and the government has put their -- the regulatory bodies have put their -- started to develop their regulations in that. What we see the impact both to the industry and to ourselves is in the short term not that significant actually, but it does grow as you get out into the latter part of this decade. So more out into the '18, '19, '20, we see the cost of complying with that to be a little bit more significant, but it's something that we think is manageable as we see it that has been developed.

The second part of it is the mobile sources or the emissions from automobiles, which kick in 2015, and those actually have the potential to have a significant impact on consumers because the way the regulations are drafted, it's intended to be a tax, really, and the consumers will pay the cost of those emissions, and those have the potential to be really quite significant and could have an impact on demand as we get out that point in time, but those really kick in starting in 2015.

And then finally really is around the low carbon fuel standard, which has a couple of parts to it. One is, which I think everyone knows, is basically to reduce the carbon intensity by about 10% between -- before 2020, and it shows up in a couple of places. One is in crude supply to the refineries, and that's something that's actually changing. It's going through a pretty significant change versus what was originally envisioned and where that is now. So we don't quite know the full impact on that, but they're moving more to a state average. So it impacts all the refiners on a similar basis, depending on the type of crudes that are run. But then, the second part of it is really to drive alternative fuels, fuels that aren't readily and economically available today, with cellulosic fuels and that, that aren't available. So somewhat like the renewable fuel standard, where, as this graph shows, there are higher requirements as we go on time for a product that's not either technically or commercially really available to be there. So once we get out to about '14, '15, that becomes another challenge that we'll have to work our way through. And those are really the big impacts that we see on AB 32.

So with that, I'd like to now turn it over to Dan and let Dan go through our 2012 plan.

Daniel Robert Romasko

Okay. Thanks, Greg. So we're going to shift the presentation a bit and walk through our business plan for 2012. Our strategic priorities remain consistent with those that Greg covered for 2011, and those strategic priorities form the foundation for this business plan. If you take a look at the key elements of the plan, the plan is intended to deliver between $150 million and $200 million of EBITDA in 2012. Our focus remains consistent at least in 3 areas. Those areas are asset reliability to ensure our capacity is available. The second is our refining and marketing integration work to ensure our availability has been utilized. And then the high-return capital projects and our Tesoro Logistics LP to grow the business.

Additive an emphasis for 2012 comes really in 2 areas. The first is the large high-return capital projects that Greg mentioned before and I'll cover in a little bit more detail later in the presentation, and then some expanded supply and trading activities around our assets to capture the market volatility.

If I unwrap that business plan in order, we'll unwrap it first from a functional perspective and emphasizing the functional priorities, and then we'll switch to a regional perspective and get a look at a compiled view of the business performance.

So let's begin with refining. On the refining front, we're really looking for more of a good thing on the operating efficiency and effectiveness front. We need to preserve the improvements that we made in 2011. We do -- we are focusing again on a large multiyear cost improvement program for California. It's a bit of an acknowledgment that we've actually made some good progress on our operating costs there, but the fundamental change that we're looking for from a quartile perspective is going to take us a few years to grind in. We also have a heavy turnaround year in California, Pacific Northwest, inclusive of Alaska and Anacortes. And like I said earlier, I'll highlight the income capital program, probably mostly in the regional section of the program and then during my wrap-up before I turn it back to Greg.

Marketing from a functional perspective is going to be focused on integrating our new SVU and Thrifty stations. The Thrifty stations generate a market short for us in Southern California that we actually quite like. It provides outlets for us for our Northern California production both on the physical side but also on a trading -- swap opportunities. SVU primarily integrates Anacortes but also provides some support for Salt Lake City, and we continue to look for opportunities for improved margin by operating our marketing channels of trade. That is a bit restricted by the capital intensity necessary to either acquire or build retail outlets.

Tesoro Logistics LP. The formation of TLLP highlighted the strength of our logistics assets, both in North Dakota and also on the West Coast. We intend TLLP to rapidly increase in value for Tesoro, growing to somewhere around $0.75 billion to $1 billion enterprise value in the 2013 timeframe. You'll notice the entrance of a red bar showing up there, indicating the significant increase in the general partner value. This is driven by the anticipated increase in cash distributions and corresponding value of incentive distribution rights held by Tesoro Corporation. The MLP is kind of a great opportunity for us. It gives us an opportunity to invest in both internal and external projects that otherwise wouldn't be viable from a TSO Corp. perspective.

Our plate of opportunities is quite full, and it includes some organic growth opportunities, inclusive of nearly doubling the crude oil gathering and delivery system in North Dakota, taking us up to almost 100,000 barrels a day of volume moved through that system. We will also add about another 40,000 barrels a day of product terminaling volumes, some of which was relatively easy to put on, which required permit changes in the Los Angeles product terminal, but also some physical capacity expansions requiring capital at Los Angeles, Stockton and Mandan.

We also have a pretty good long list of drop-down opportunities, the first of which is the marine terminal at Golden Eagle. That's about a 145,000-barrel-a-day wharf, with 5 crude oil storage tanks and then the interconnecting piping. So it's a great opportunity for us that we intend to drop down in the -- towards the end of the first quarter of 2012.

If you look more broadly across the system, the drop-down portfolio spreads across the entire refining and marketing footprint. It includes product terminals, marine terminals and pipelines. Just maybe for a bit of perspective here, the aggregate book value of the assets retained by Tesoro today to which the MLP has the Right Of First Offer is about $240 million. That compares to or is nearly 125% of the size of initial assets that we’ve contributed into the TLLP at formation.

Commercial. We're looking for an incremental $30 million to $50 million worth of EBITDA contribution from the commercial team in 2012. So we're really pleased to have Dave on board. That includes really a couple of major areas, the first being active management of our inventories to arbitrage the market structure as well as the basis. The other area is really capturing the market volatility and arbitrage surrounding our physical assets. A couple of examples for us there that will be a bit unique to us in 2012 are capturing the value around our Bakken unit train and gathering system, where we can sell those barrels either into our own production system or elsewhere. We remain and are gaining confidence in our experience around the Panama assets. And then we look to our supply and trading team to secure advantage feedstocks, sourcing agreements similar to what we announced this morning with the Salt Lake City project and the Newfield agreement, which are -- is a significant value-adder for us at least in the Salt Lake City area. In short, our regional geographical presence coupled with excellent logistics assets provide an opportunity to capture the market volatility around those assets and recognizing that we buy or sell about 1 million barrels a day just to keep our system operational.

Now, let's switch a little bit to a regional perspective, and we'll try to compile our competitive position along with the changes we're making to drive improvements. These slides should look pretty familiar to those we reviewed last year. As a matter fact, they are the same slides that were reviewed last year with the exception that we've added directional arrows where we're attempting to make improvement areas. And we'll start with California, which is the area where we have the greatest competitive improvement opportunity to go after. If we start on the yields front, Los Angeles yields are materially improved with the installation of the vacuum tower project that we announced earlier this year, a project we'll discuss a little bit later in the presentation. Cost-reduction includes programs to improve our maintenance efficiency, reduce our contractor utilization and then also heavily in the FCC catalyst area. And I normally wouldn't bring up a single little item like that, but rare earth costs got quite expensive for our industry this year. And so through an effort of reformulation of that catalyst plus some investment in the siphon system within the FCC, we can reduce both the loss and the cost of that catalyst, and that's a pretty material improvement for us.

On the sustaining capital front, Golden Eagle is actually getting towards the end of their regulatory projects. However, Los Angeles still is going to have significant sustaining capital spend, probably until the middle of the decade. But when you combine the 2, we're seeing an improvement in our sustaining capital spend across the next 3 years. When you look at our marketing and refining integration, we're about where we want to be next year once we integrate -- bear with me for just a second, my screen went blank. Yours -- thankfully, yours did not.

So the marketing integration for California is actually about where we want it to be, and that's as a result of the Thrifty assets that we're bringing on next year. If we take a look at those improvements, they actually target about $60 million to $70 million worth of additive EBITDA, and that's really driven in 3 areas. Some of it is utilization, which is what the Thrifty acquisition or the Thrifty lease agreement provides. Some of that is logistics, increasing our capacity to move across our own logistic assets. The second area is reduced fixed operating costs. We are making some improvement in the California area, in that area. And then, of course, the yields, which is the vacuum tower project that we’ve talked about a little bit earlier and I'm going to cover in a little bit more detail on the next slide. As a matter of fact, if we take a look at that distillation project, we see a yield improvement of almost 1 liquid volume percent, which is pretty significant for a project of that size and cost. The project actually recovers gas oil that would have gone to the coker and routes it to a higher conversion process unit. So instead of making fuel coke, we make clean products, and that's where the real value of this project comes to bear. The economics are great and are in line with our expectations of high return capital projects in our portfolio.

Okay, if we switch on now out of California and we go to the Pacific Northwest, we'll start with Anacortes and Kenai. Bakken crude oil is really a bit of a silver bullet for us at Anacortes as it provides a really profitable alternative to Alaska North Slope as a feedstock. It also provides a great yield without having to spend capital on the kit within Anacortes. And the way it does that is it produces a quite a bit -- greater volumes of clean products, gasoline, jet and diesel and less fuel oil, and that fits really well with the infrastructure that we have within Anacortes. So that's a really good fit for us. And then as I mentioned earlier, the SVU purchase helps Anacortes' market integration, but we also integrate Anacortes from a marketing position through the Thrifty lease agreement in Southern California. We do that because the kit up in Anacortes has the ability to produce CARBOB-quality gasoline, which we can place in the short we have in LA.

We take a look at those improvements for the Pacific Northwest. We're targeting up to $20 million worth of competitive improvement, again, driven some by the integration utilization but also a full year improvement of the 2011 small capital projects. Greg gave you a bit of a view of that on a slide earlier in his presentation, but I'll just highlight again one example of that, and that is the hydro cracker project that we are now just bringing online and up in Alaska, which removes some impurities and allows us to add heavier intermediates into that unit and improve the clean product yield coming out of the refineries. So they're great small capital projects that we're completing as the year goes along, and next year, we get a full year value of those projects.

And of course, we’ve talked about the Bakken crude oil supply to Anacortes. We previously announced the Anacortes rail project remains on schedule for fourth quarter completion of next year, and this project, as I mentioned, replaces about 30,000 barrels of Bakken -- excuse me, of Alaska North Slope crude with Bakken. We actually expect the laid-in cost of the Bakken crude oil into Anacortes to be at or below the Alaska North Slope crude, and the yields are materially improved. So we expect to generate quite a bit of value out of that project. Interesting to note too that, that rail offloading facility has capacity that’s significantly in excess of 30,000 barrels a day. 45,000 barrels a day would be a reasonable level we can put through that. So we have other opportunities that we can use that facility for to capture incremental value.

If we switch to the Mid-Continent unit, from a competitive perspective, our Mid-Continent refineries are quite strong. But we have some fairly large project plans in 2012 and beyond to further drive improvement in both of those refineries, and I'll cover those in the subsequent slides.

But also with the use of our Shell brand and longer-term contracts, we're gaining ground on the refining marketing integration front. We're not all the way there in Mandan in our plan, but we're very close at Salt Lake City.

The combined value -- our expectations of the work we have planned for 2012 within the Mid-Continent amounts to a plan of about $40 million to $50 million of EBITDA contribution, really being driven again by the small capital project improvements. In addition to the major Salt Lake City project, which I'll cover later in this deck, we've already expanded the black wax processing capability at Salt Lake City by about 25% this year. That was one of our small capital projects that we have recently completed. And then we'll -- we have also completed in Mandan the conversion of a gasoline hydro treater over to diesel hydro treating, which allows us to produce an incremental 1,000 to 2,000 barrels a day of diesel instead of gasoline. And the diesel to gasoline spread is quite wide. It's seasonally driven. But when that season is there, you can generate a great deal of profit to supply a needed market.

And then of course, next year, we have the second -- in the second half of the year, we'll have the value of our Mandan expansion. So if we take a look at that Mandan refinery expansion project, which was previously announced, it's still expected to come online on schedule towards the end of the second quarter next year, increases the capacity of the refinery by about 10,000 barrels a day and does so while filling the downstream conversion units. As a matter of fact, the per barrel cost of that expansion are quite low if you’ve compared that with industry norms. And the reason it's quite low is because the majority of that expansion work is restricted to the crude unit. The conversion units have an incremental capacity in them to handle that volume. So that is a great project for us.

We're also announcing today a Mandan distillate desulfurizer unit expansion. This project is complementary to the crude expansion project. As a matter of fact, we submitted the permits for both of those projects at the same time at the time. At the time that we submitted those permits, we weren't 100% confident we would go forward with the DDU expansion project and have recently decided that is wise and profitable to do so. Although the EBITDA looks a bit low at about $10 million to $12 million a year, it provides us the ability to swing significantly into a diesel production mode, and the seasonal volatility of that market is quite strong. So we expect there to be significant upside to the value of this project.

If we now switch to the Salt Lake City conversion project, which we just announced this morning, we're quite excited about this project. It expands our crude capacity by about 4,000 barrels a day, increases our waxy crude processing capacity by 100,000 barrels a day to a total of 21,000 barrels a day. So the total refinery throughput goes up by only about 4,000 barrels a day, but the percentage of it that's waxy crude gets up closer to 30% to 35%. And the other significant piece of this project is improved yields. Our clean product yield off of the feedstock rises by almost 3 liquid volume percent, which is very significant. And that's accomplished by some significant capital work that takes place in the fluidized catalytic cracker.

The project is supported by a 7-year crude agreement with Newfield exploration, which was part of the announcement this morning also. Although the terms of that agreement are confidential and we've been tested on that already today, they do provide both Newfield and ourselves, Tesoro, with great opportunities for our individual projects.

So swinging into Hawaii, Hawaii remains challenged for a couple of reasons: One is it sits there in the middle of the Pacific and open to imports from anybody in the Pacific and also has a bit of an operating cost disadvantage because of the island effect, island effect meaning that you have to produce your natural gas consumed in process from crude oil, and when the natural gas relative to crude spreads wide, that's cost prohibitive. That said, we are making advantage -- progress on our feedstock and yields. And probably the single biggest improvement in that area is the installation of a naptha contamination unit that we'll be putting in next year. That unit allows us to clean up our naptha product for sale, which certainly improves the yield side of the equation. It also opens up some of the crude slate for Hawaii. The combined effect of that is strong. As a matter of fact, if we take a look at the overall view of Hawaii, although not as great as the other regional areas, we do and are looking for a target of $10 million of EBITDA improvement there, driven by that naptha project I just mentioned but also by some improvement in energy efficiency projects at that refinery which, again, are particularly profitable because of the high cost of the internally produced fuel.

Two more slides for you before I turn the floor back to Greg to summarize, and these slides are on our capital and turnaround summary. If you take a look at sustaining capital, which is the maintenance and regulatory spend, you'll note that the regulatory spend is trending downward, and that's mainly the impact of the wind up of our benzene compliance spending, which really completes in the first quarter of next year. Maintenance spend itself is actually up in 2012 and 2013, and that's linked to a turnaround spend and infrastructure programs. And if you take a look at the turnaround spend, it's high for both 2012 and 2013, and that's not a sustained high spend. That's the reality of reaching near the end of the turnaround intervals for some of our major conversion units.

Income capital is the bright spot for us. It's up to close to 50% of our total capital spend and is the driver of our EBITDA growth going forward.

If we unwrap that just a little bit more, again not looking at the specific projects which we've already covered but just kind of a general term, we are digging a bit deeper into the income capital. We remain focused on executing the small capital projects like the Alaska contaminant removal and the naptha project in Hawaii, those that Greg mentioned. But we also have a relatively large portfolio of what we think of as major capital projects, those projects that are above $35 million and probably finish around $100 million but -- and include Salt Lake City. These investments drive significant EBITDA up to nearly $0.5 billion by 2014. So we're really excited about that capital program. We think it's a bit unique for Tesoro to have a bucket of those sorts of programs. You normally have to give a bit on the return and payback period for these projects, and we've got a great portfolio of them. So that's a summary of 2012, and I'd like to turn it back to Greg to finish up and summarize.

Gregory J. Goff

Yes. This last slide here where Dan did -- the thing didn't flip it, but you can kind of see in summary his points around the amount of growth capital and really the impact on EBITDA so that when we get out to 2014, the projects that we've been investing from '11 to '14 will generate almost $0.5 billion of EBITDA based on our assumptions of the market as we go forward.

Our priority to really focus on financial discipline is also unchanged, just like Dan said earlier. And what we -- as we've gone through the year, we've determined that for the company, we need to average -- we need to maintain an average cash balance of somewhere between $600 million to $750 million because that really allows us to conduct the commercial activity they want to do to really get the capture across the value chain, whether it be in the crude supply or product. So we’ve kind of established that as a cash balance position that we want to have as we go forward.

The second thing really is and I -- we've said this that we intend to retire the notes that mature in 2012. So over the next several months, we'll be repurchasing those notes. And then finally, investing in our high return capital projects. From a growth standpoint, we want to continue to focus on our efforts to drive our refining and marketing integration in our logistics business. I think in between '12 and '13, we'll invest about $100 million through logistics into growing that business, and that's a significant focus area for us. And finally, we really believe that with the steps that we've taken, we are really better positioned to look at opportunities to grow the company through any type of opportunity that we feel will be accretive to the business.

So really just to summarize from what we've talked about today is that, one, in 2012, we're targeting to deliver somewhere between $150 million to $200 million of additional EBITDA as a result of the -- our priorities and what we're trying to, to drive value independent of what happens to refining margins. Our biggest focus, like Dan said, is to really drive additional EBITDA through our high return capital program. You can see that between '11 and '14, we'll spend about $1 billion in that program. But because of the nature of the projects and the value they add to our system, the income contribution is actually quite significant and has a big impact on the performance of the business going forward. We're relentless in our focus to continue to be a superior operator. Our focus on driving operating efficiency and effectiveness is kind of a -- it's almost a value of the company in what we're trying to do. We want to maintain our strong balance sheet, and we have a very committed organization. We believe that's extremely important. Like I started off on the discussion today, the leadership team that you have here today is very aligned and committed to really deliver what we think is a very ambitious plan for next year. And when we look at the turnaround schedule that we have, the capital program that we have and then the other things we're trying to do in the business, we really plan to make a significant step forward on that journey to really drive significant value in the business over the next few years.

So with that, that really concludes our prepared comments for today. And so I'd be more than glad to entertain any questions.

Question-and-Answer Session

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Greg, it's Arjun Murti with Goldman Sachs. I'm just curious how acquisitions fit into your strategic plan, whether by geography -- you focused on the Mid-Continent area or other areas. What role does that play for Tesoro going forward?

Gregory J. Goff

Yes, good question, Arjun. One, I think we've said in the past that our -- we've defined our geographic area to be the marketplace that we operate in today that we don't see a place for our company either on the East Coast or Gulf Coast of the United States, and we also don't see it from a hard asset standpoint outside the United States. So one, we’ve defined our geographic area in that area. The second thing is, is that over the last 12 months or so, we’ve gone in and looked at all the different opportunities that we would like to pursue. And so we see assets that would complement our business extremely well. Those aren't for sale today. So we are -- with the steps that we've taken to really get the company position to where it is today with its strong balance sheet, stronger operating performance and that, we would like to be able to look at opportunities that would fit in if they become available over time. But it is in our geographic area.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

And maybe I could ask just one more growth question. The Mandan project’s an interesting one where it's not that much CapEx for the incremental 10,000 barrels a day. How many more of those can you do at that refinery, at that kind of very favorable CapEx to throughput barrel increment?

Gregory J. Goff

Yes. Maybe let me let Dan go ahead and address that.

Daniel Robert Romasko

I think we've announced all of the projects that we are ready to do or ready to announce. We have a -- the way that we generate these projects is we put in strong engineering and finance-type SWOT teams, and we complete a cycle. We have 2 more refineries the complete that cycle with, and those will be done probably in the first quarter, and we'll see what comes out of those projects. We're hopeful but not ready to make any announcement yet.

Gregory J. Goff

But specifically on Mandan, there probably -- your question was around Mandan, Arjun. There aren't really any more opportunities like that at Mandan. I don't think, are there?

Daniel Robert Romasko

Not in Mandan, Greg.

Gregory J. Goff

Yes, yes. Like Dan said, by the -- running the additional 10,000 barrels a day of crude, now we get higher utilization of the back end of the refinery. So not a lot of opportunities there. Louie?

Edward Westlake - Crédit Suisse AG, Research Division

Ed Westlake, Crédit Suisse. Just had a question on M&A that's been answered, but how do you think about returning cash to shareholders via dividends and buybacks? At the moment, the focus has been on debt reduction, self-help EBITDA growth. When does that switch, if ever?

Gregory J. Goff

Yes. Ed, I think as we look at our plans, as we look at 2012 with our intent to buy back the remaining debt, which is about $300 million, with the program both through our turnaround and capital of almost $1 billion that we spend and where we currently are from a cash standpoint, we feel like we need to continue to manage that position without any -- we don't have any intent at this point in time to either do a stock buyback or issue dividends. But as we see how the market materializes and that, that's probably something we'll have to address as we get further out in time. Ideally, we'd like to actually find more projects like the ones we've shared with everyone. So far, that basket of projects are far more valuable to growing the company and for our shareholders than we believe turning -- returning the money to the investors. So in the short term, out into at least until the first part of 2013, we don't feel like we have to do anything there because of our current cash position.

Edward Westlake - Crédit Suisse AG, Research Division

And a follow-on. You mentioned high turnarounds in 2012, and I think you've given us some color on that. But in 2013, it seems like the spend is still relatively high. Could you just -- not necessarily timing, but which assets are going to be down?

Gregory J. Goff

Well, I think -- we typically don't like to share all of the plans. Dan gave you an indication that we definitely have high turnaround activity on the West Coast in 2012. We don't -- our plans for 2013 are a little bit preliminary. We may do some optimization as we get into 2012 to look at that level. So on an indicative base, I think that's a pretty good idea of what 2013 looks like. For example, you can see that we're going to be bringing some work to some units and that on 2013, for example, Salt Lake. Dan talked about that coming on in 2013. That's going to require us to be down and do some work then. But it's a little bit too early to really kind of look at what 2013 will be until we do more work next year.

Unknown Analyst

Dan, I wonder if you could tell us what kind of crude is being backed out at Salt Lake in terms of the upgrading project that's being discussed. And also with respect to that incremental offtake arrangements for the additional light product, I think you mentioned you thought you stood pretty well on integration. Was that intended to embrace the additional light product yield or relative to where it is right now?

Daniel Robert Romasko

Okay. So make sure I understood the 2 questions. The first was what are we backing out from a crude slate perspective which is, we won't get into specifics of the crude that we run into the refineries, but the Mid-Continent refinery of Salt Lake City runs a variety of relatively regional sweets, right? So those will be backed out in favor of the waxy crudes. The incremental product yield can be placed in the market somewhat through the volume of the SVU acquisition and also through increased contract volumes, which are really longer term. And that -- a big growth that we're seeing in our market integration in Salt Lake City is attributed to the longer-term contract agreements that we have. I think the last area that helps out Salt Lake City is the UNEV pipeline and access into Las Vegas. Not usually a great market for us to want to get into, but it provides an outlet for the Salt Lake City area.

Chi Chow - Macquarie Research

Chi Chow, Macquarie Capital. Could you talk about your exports out of California? What products are you exporting, what sort of volumes and what the limitations and sustainability are of that program?

Gregory J. Goff

Chi, I mean, you saw that on that one side we showed that exports from an industry standpoint were about 100,000 barrels a day out of California, which is both gasoline and diesel. We export both gasoline and diesel out of California to Mexico primarily, and that's growing, and we see that continuing really as it is. And from a limitation standpoint, there really aren't limitations as far as getting it to our infrastructure to get out to the water. So we can handle more exports if necessary.

Chi Chow - Macquarie Research

Okay, great. I have a real short-term type question. We've noticed that some of the crude differentials on the West Coast relative to ANS, some of the heavier grades have really tightened up. What's the dynamic going on there? And are you making any changes to your crudes slate as a result near term?

Gregory J. Goff

Yes. I mean, we managed around in the near term to make changes. We've made in some cases where we've gone out and we would actually -- if the crude is an economic to run [ph], we'd sell the crude back in the marketplace. Part of it is the lag. We think it's a lag effect of what's happening because the refining values on the crudes the way that they're pricing relative to the sweet crude doesn't make sense. And it's a short-term phenomenon until it works its way out. So we've seen it continuing to prove week by week, but it's taken a while since latter part of October, through all of November and that, it's been a difficult market.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Greg, it's Doug Leggate from Bank of America. The comments I think that Dan made regarding you’re where you want to be pretty much next year in terms of market integration with refining in the West Coast, but can you just talk a little bit about how you see expansion opportunities in marketing generally for the company? Is that something that overall you would like to bring a little bit more stability into the earnings? And I have a quick follow-up.

Gregory J. Goff

Yes, it's a good question, Doug. We showed on that one chart the -- kind of the growth that we have experienced either through some retail acquisitions, the lease that we did with Thrifty, the long-term lease to get access there and how we really tried to look at the duration of some of our wholesale commercial contracts. And so we'd like to get to about an 80% -- on a total system basis, about 80% integrated because that gives us the flexibility during turnaround. In fact, some of our markets are pretty tight as far as getting access in there. So we'd like to be about 80% integrated over time. And we really need to look at it and deal with each market individually because they have their own unique characteristics. So Dan talked a little bit about Salt Lake, and we need to grow our integration more up in Mandan as we do it. We've got -- we're over integrated in Southern California, but we manage it as a system to get good placement from either Golden Eagle or Anacortes. So we still have opportunity to grow. But our real focus is not to -- we don't necessarily want to buy retail stations. We're really focused on our return on capital employed. And so we really would like more -- to grow more of our wholesale business if possible.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

My follow-up is really just observing this year versus last year. Last year, it seemed to be about cost reduction and improved efficiency and so on. This year, it seems more about organic growth if I'm interpreting it correctly. But should we take from that, that you think you've done as much as you can in terms of self-help? And specifically, given the potential drop-downs into the logistics business, what are the implications for operating costs for Tesoro Corp. if you achieve the level drop-downs that you're targeting?

Daniel Robert Romasko

Yes. The answer to your first question, Doug, around the self-help is, no, we haven't achieved everything that we can. But when you look at kind of our plan for 2012 and how we commit our resources, particularly with our significant turnaround schedule, the amount of capital that we're spending, which is a fair amount of capital on so many different projects for a company our size. We also have our -- like the industry, our contract expiring in February at 5 of our refineries. So we, from a self-help standpoint, as we allocated our resources for next year, we really, like you said, we shifted a little bit from driving improvements in costs and that. Dan mentioned California. That's still a target area that we'll work on. That's why I said it's going to take some time to get those costs because of the turnaround activity, the capital projects we're doing. But then, we'll continue to drive those improvements. We talked about this as about a 3-year plan, that we felt like from where we were in 2010 as we looked out to do the things that we wanted to be able to do, was going to take us about 3 years. So there will be more of what you described as self-help that will continue on outside of 2012, but we're very focused on what we need to do for 2012. You asked me one other question. You're going to have to ask me again. I've forgotten your other question.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

[indiscernible]

Gregory J. Goff

Yes. The drop down -- the slide that Dan showed you has just one drop down for 2012. It's the dock facility to support the Golden Eagle refinery. So as we've said before that any type of drop-down activity is based upon market cost to get that same service, and there, it’s easy because plain [ph] has an adjacent facility. So we kind of know what the rates are on a market basis. So in 2012, they're not significant at all. We have other drop downs that we see going on out into the future, but we haven't worked those enough to really see what type of cost impact because we're really focused more on organically growing the business and, potentially, some acquisitions. So at this stage, they're not material, and it's something we're really not prepared to talk anymore about because it's further out in time.

Paul Sankey - Deutsche Bank AG, Research Division

Paul Sankey, Deutsche Bank. Greg, you announced a big increase, in fact, pretty much doubling of CapEx after a couple of years, where you really have got CapEx down to lower levels, more like the $300 million level at the same time as you've got a very significant step up in your turnaround spending. Firstly, I was wondering how comfortable are you with the cost that you've announced here and the extent to which they're locked in, if any, particularly obviously on the large single slug which is $180 million project that you've got there? And then secondly, how much risk there is to both the CapEx and the turnaround costs in any other way that might cause those to come in higher than you're anticipating here?

Gregory J. Goff

Probably to comment on the turnaround cost. Firs, Paul, the -- as we get into our turnaround, I think -- I mean, one of the most critical element is always your planning in that. And so I think Frank and his teams are well prepared for our turnaround plans for 2012. And as we move some turnarounds, I think we -- you can see from our schedule for last year, we consciously move turnarounds from '11 into '12 because of the market and where we felt we could do, and that's worked out really well. So at this stage, I mean, we feel like our turnaround costs are pretty firm and pretty much on target, so we don't see significant risk over those. We're really trying -- I know our first turnaround coming up at the beginning of the year, they're really trying to optimize it to get the cost where they need to be. So not a lot of -- we don't see a lot of challenges there. From the projects, the cost on the projects, and there's the ones that we call large projects or something, whatever you want to say, the one's $30 million, $30 million plus. Some of those are in different stages, the early one's that come on like Mandan. The Mandan is -- we're extremely confident in the cost on Mandan. It's -- we're extremely confident on the cost on Anacortes unit train. The Salt Lake project will still have more engineering work to do and will be refined a little bit because of just the complexity. But in general, both from a turnaround and a capital standpoint, we have a high degree of confidence in the costs that we have there.

Paul Sankey - Deutsche Bank AG, Research Division

Great. And current margins, particularly on the West Coast, look very challenging.

Gregory J. Goff

They do.

Paul Sankey - Deutsche Bank AG, Research Division

I was wondering what's driving that from your perspective. And what will drive a recovery going forward from where we are today?

Gregory J. Goff

Yes, yes. Well, in the past, you and I had these conversations before Paul and the -- if you look at the fundamentals, the fundamentals on the West Coast, except for weak demand, which has been there for a while, it’s been weak for a while, but the fundamentals from an inventory standpoint, run levels and all that, they look not that bad particularly if you go back and compare it to how it was earlier in the year and that. So I think as we go through some turnaround activity and as people cut back on the runs and that, I think we'll see their margins recover, and like Chi's question around crude differentials, I'm not sure we can fully explain the dynamics of how you can get the prices for SJV crude relative to LLS to be that way, and it's taken us a while for the market to recover. So that's both crude costs and the fundamentals. I think it will -- it's going to take a little bit of time to turn around because it's not a pretty place right now.

Edward Westlake - Crédit Suisse AG, Research Division

Ed Westlake again of Crédit Suisse. Just a follow-on, on black wax. You've probably done the best project you have which is sort of not a massive expansion but let's just process more of it. Obviously, you can do an LP to work out what the right differential should be. I'll ask you -- I'm not expecting you necessarily to give an answer. But what do you need to see on a reserve basis before you would do -- or what do you need to see before you'd launch a much bigger expansion of the refining facility that you have there in Salt Lake?

Gregory J. Goff

Ed, I think Salt Lake is not a lot different from Mandan. When you look at the total market and that, we haven't looked at that, but I think the economic proposition to do anything on a significant scale wouldn’t be justified to do that. So it's not -- if we were spending capital, particularly to that extent, we would look at other things to do in the marketplace than to spend it on the project. So I don't think that's something we would even consider. The market is just not big enough to absorb something like that to put that amount of capital in there. So this is the project that Dan described around Salt Lake is an extremely attractive project because of the nature of the crude supply, the quality of the crude, one of the things that's changed is the composition between the black and the yellow wax like we talked about. And the yellow wax has good yield properties, so it's quite attractive, as Dan talked about processing the -- through the cat cracker.

Edward Westlake - Crédit Suisse AG, Research Division

And a follow on, on TLLP, is there a tax efficient way, if you wanted to, to reduce your shareholding? Or how should we think about that tax rates for the value of that asset?

Gregory J. Goff

Yes. That's probably something -- I can't answer that question right here. That's something we haven't looked at. Our focus is not to reduce our position in that today. I mean, we just put in it place. We have enormous organic growth potential. The optimization that we can say [ph] there is our focus on that. So it's something I don't have an answer to, and it's really not our focus area. I mean, if you -- just to give you an idea of how much value that, that's added to the company through just how we operate the business by being able to take our -- the product terminals. And we don't own a lot of product terminals. But the product terminals that we do own, the amount of products we have going through there as we go to what Claude and his team has been able to do in marketing and moving through those systems of lower-cost and that adds incredible value. And that's -- we're absolutely focused on, just driving the value through organic growth optimization, and looking for opportunities where we can grow in our existing asset position.

Mark Gilman - The Benchmark Company, LLC, Research Division

Mark Gilman, Benchmark. Where or what plays of yellow is the yellow waxy crude production increasing, if you expect it to be? Is that Uinta basin? Can you be a little bit more specific perhaps?

Gregory J. Goff

Mark, Newfield did a press release this morning at the same time. I think they actually talk in there about the 2 specific areas. I don't recall exactly. Does anyone else here have that? But they talked about in their press release, they identified the areas of increased production in the Uinta basin. I don't know the exact -- they have their field broken into different areas.

Mark Gilman - The Benchmark Company, LLC, Research Division

So I assume that the economics in the project are -- reflect the expectation that the increases in production will exceed the increase, the 20,000 a day or so that you'll be increasing the feedstock to the system, thus, preserving the differential that's in place currently. Is that fair?

Gregory J. Goff

All the commercial terms around -- between Tesoro and Newfield are very supporting...

Mark Gilman - The Benchmark Company, LLC, Research Division

That was a conceptual question, Greg. That was a conceptual question.

Gregory J. Goff

No. They're very supportive of economics. I mean, we're spending $180 million to capture $100 million of EBITDA. I think that speaks for itself.

Mark Gilman - The Benchmark Company, LLC, Research Division

Help me on one other thing. I'm looking at the capital chart, and the income projects for '12, my eyes aren't as good as they used to be, but it looks like about $350 million. And if I add up most of what I can identify, what we as outsiders can identify as the larger projects, I'm not going to get very close to that even if I assume that the lion's share of Utah project is 12 in 2012. Can you help?

Gregory J. Goff

Yes. I think the -- there's other things. Probably the only thing in there that doesn't show up yet is work that we're doing on our docket to Golden Eagle refinery that's not completely finalized as we're going through permitting, but it's another significant project that we haven't fully developed yet. But the project through this that we talked about plus that come up to that total, I think.

Chi Chow - Macquarie Research

Chi Chow, Macquarie again. Last year, Greg, you talked about spending somewhere in the range of $50 million to $65 million on RINs. Where do you -- where are you going to end up on that this year?

Gregory J. Goff

Probably 10% to 15% less than that, Chi.

Chi Chow - Macquarie Research

Okay. Maybe just back on Salt Lake. Can you give us some specifics on exactly what are you doing on the project to get that crude increase to 4,000 barrels a day? Do you need new units? And what exactly are you talking about on the 2-stage completion, 2013, 2014?

Gregory J. Goff

Let me let Dan elaborate on that.

Daniel Robert Romasko

Sure. The modifications are to the FCC, including the riser and the gas plant on the back end, the handle, the waxy crude which process much differently for those units. It also includes modifications to the diesel hydro treater, crude units, desalting, that sort of investment. Included in the capital are some pollution control investments on the back end of the cat cracker as well as in the sulfur plant. The 2-stage acknowledges that we have turnaround activity that's going to occur in 2013, and we want to do as much investments as we can around the 2013 and also acknowledges that we haven't completed the gating process on our project that will allow us to complete the design for full installation in 2013, so that we'll complete it in 2014. And the last piece of that is we’re matching the ramp up production profile of Newfield. So part of what took this project as long as it did to come together is matching our 2 projects together.

Gregory J. Goff

Any other questions? We really appreciate the opportunity to present our plans for next year and beyond. Your time is much appreciated, and we thank you for the questions. And we're going to stick around for a little bit. If other people have any other questions, we'd be glad to enjoy it. So thank you very much, and enjoy the holiday.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tesoro's CEO Hosts 2011 Analyst and Investor Day Presentation - Event Transcript
This Transcript
All Transcripts