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Executives

Louie Rubiola - Director of Investor Relations

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

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

Daniel Robert Romasko - Executive Vice President of Operations

Analysts

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

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

Edward Westlake - Crédit Suisse AG, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Sam Margolin - Dahlman Rose & Company, LLC, Research Division

Chi Chow - Macquarie Research

Paul Sankey - Deutsche Bank AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Faisel Khan - Citigroup Inc, Research Division

Tesoro (TSO) Q1 2012 Earnings Call May 3, 2012 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Tesoro Corporation Earnings Conference Call. My name is Shaquanna, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call Mr. Louie Rubiola, Director of Investor Relations. Please proceed, sir.

Louie Rubiola

Thank you, Shaquanna. Good morning, everyone, and welcome to today's conference call to discuss our first quarter 2012 earnings. Joining me today are Greg Goff, President and CEO; Dan Romasko, Executive Vice President of Operations; and Scott Spendlove, Senior Vice President and CFO. While we will not be referencing slides during the call, we do have a set of slides, which was filed with the SEC today. These slides, along with other financial disclosure and reconciliations for non-GAAP financial measures, should help you in analyzing our results and can be found on our website at tsocorp.com.

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

With that, I'll turn the call over to Greg.

Gregory J. Goff

Thanks, Louie. Good morning. Thank you for taking the time to join us on the call today. You have our earnings release, and Scott will go over some of the detail of the results in a moment. Despite major turnaround activity at our Martinez, California refinery during the quarter, we delivered a solid operating performance and strong first quarter earnings of $0.39 per diluted share. In addition to this solid operating performance, we made significant progress on several strategic fronts during the quarter.

We are nearing completion of our North Dakota refinery expansion. We are ahead of schedule with our project to rail Bakken crude oil to our Anacortes refinery and we took delivery of our new vacuum distillation unit at our Los Angeles refinery. These high-return capital projects reduced our feedstock costs and improved our yields, enhanced the competitive position of our assets and drive significant earnings and cash flow growth.

During the quarter, we increased our refining and marketing integration with the purchase of 49 retail stations from SUPERVALU and recently began taking possession of retail stations from Thrifty Oil Company. These acquisitions had ratable and profitable supply outlets, allowing us to sustain higher refinery utilization. And we completed the first IP post-IPO drop down to Tesoro Logistics on April 2, generating $75 million of incremental value and demonstrating our commitment to capturing the full value of our Tesoro Logistics assets. As the market value of Tesoro Logistics continues to grow, that growth accrues to Tesoro to our 52% equity ownership.

Now turning to the results for the quarter. Lackluster gasoline demand and above average distillate inventories early in the quarter pressured crack spreads plus seasonally strong domestic crude oil production and continued logistics constraint provided additional feedstock cost advantage. As a result, the Tesoro Index in the first quarter averaged just over $10 per barrel, down slightly from a year ago, while the company's realized gross margin was $12.15 per barrel or 120% of the Tesoro Index.

Refinery throughput rates during the quarter averaged 529,000 barrels per day or 80% utilization. The year-over-year decline in throughput and lower gross margin capture is attributable to the major turnaround activity at our California operations. While the majority of this impact was included in our plan, the repair scope of the Martinez turnaround was expanded mid-quarter. The work was completed in March and today, the refinery is running well.

For the second quarter, we expect throughput rates to return to about 580,000 barrels per day or 87% utilization. Despite the lower throughput, manufacturing cost in the first quarter averaged $4.97 per barrel, down slightly quarter-over-quarter, mostly on lower energy cost and continued control of our fixed operating cost.

Retail fuel sales volumes were up 7% year-over-year, reflecting the new Albertson's Express Fuel stations this quarter and the addition of the Shell wholesale supply contracts mid-quarter last year. Same-store fuel sales during the quarter were down about 1% relative to last year. This was likely driven by higher year-over-year street prices in California, which peaked in early March. Retail marketing margins were down during the quarter, both sequentially and year-over-year. This is typical in a rising price environment where street prices tend to lag rapid increases in wholesale spot prices.

Retail margin so far in the second quarter have improved from the first quarter on lower crude oil prices. Capital spending for the first quarter was $139 million, including $37 million for the SUPERVALU acquisition. Turnaround spending was $126 million. We continue to plan for 2012 capital spending of $670 million, including regulatory, maintenance and income projects. We also continue to expect about $300 million in turnaround spending for 2012. As we shared with you in December, 2012 is a heavy turnaround year for us. With the completion of the work at our Martinez refinery, we are nearly halfway through our planned capital spending for the year. As we look forward, we remain reasonably optimistic about U.S. refining marketing conditions. Seasonally tighter U.S. like product inventories combined with strong exports should continue to provide support to domestic refining margins.

Independent of the favorable market conditions, we are driving significant value from our existing asset base. As we shared with you in the past, we are focused on driving operational efficiency and effectiveness with a relentless focus on becoming a superior operator. We are reinvesting our free cash flow into high-return capital projects that strengthen the competitive position of our company. And we expect to further strengthen our balance sheet, allowing us to execute future value-driven growth opportunities. Our goal for our 2012 target is between $150 million and $200 million in year-over-year EBITDA growth, and we remain on track to deliver this objective.

With that, I'll turn the call over to Scott Spendlove, our CFO, for a more detailed discussion of our quarterly results and to provide the guidance for the second quarter. Scott?

G. Scott Spendlove

Thanks, Greg. As we reported last night, first quarter net income was $56 million or $0.39 per diluted share. That compares to net income in the first quarter last year of $107 million or $0.74 per diluted share. We ended the quarter with a cash balance of $710 million. We remain undrawn on the corporate revolver with nearly $820 million of additional revolving credit capacity. Tesoro Panama and Tesoro Logistics ended the quarter $90 million and $50 million borrowed on their separate revolving credit facilities.

Concurrent with the April 1 drop down of the Martinez crude oil terminal, Tesoro Logistics drew $68 million on the revolving credit facility, taking total borrowings to nearly $120 million today. Partnership also exercised its option to double the size of its revolving credit facility to $300 million to facilitate continued growth. We ended the quarter with total debt to total capitalization of 29%, down a percentage point from year-end 2011. The use of cash for the quarter was $190 million and reflects EBITDA of $231 million, less capital and turnaround spending of $228 million funding for the SUPERVALU acquisition of $37 million, working capital and other uses of $129 million and repayments under the Tesoro Panama revolver of $27 million.

Turning to the second quarter, the second quarter typically see seasonal increases in demand for gasoline and distillates in PADD V. Quarter-over-quarter demand increases of greater than 4% are typical for gasoline and jet and increases over 7% are typical for diesel. However, high crude oil prices that result in high product prices can temper demand growth. Reductions in supply from planned and unplanned refinery maintenance on the West Coast have supported crack spreads quarter to date, which are in line with last year. In the Mid-Continent, gasoline and diesel crack spreads remain strong, in line with last year, driven by a continued significant feedstock cost advantage. So far in the second quarter, the average discount of WTI to Brent remains about $16 per barrel, in line with the second quarter of last year.

I'll close with guidance for second quarter modeling purposes. We estimate throughput to be in thousands of barrels per day, 145 to 155 in the Pacific Northwest, 55 to 65 in the Mid-Pacific, 105 to 115 in the Mid-Continent and 255 to 265 in the California region. Manufacturing cost guidance for the second quarter in dollars per barrel is as follows: $3.95 in the Pacific Northwest; $4.60 in the Mid-Pacific; $4.25 in the Mid-Continent; and $6.10 in the California region.

Slightly lower throughput rates in the Pacific Northwest to Mid-Pacific regions reflect planned turnaround activity at our Alaska and Hawaii refineries. Throughput guidance for the Mid-Continent region includes the impact of tie-in work related to the expansion at our North Dakota refinery. Our depreciation for refining is estimated at $93 million. Additional second quarter guidance items include estimated corporate expense excluding depreciation of $38 million and interest expense before interest income of $37 million.

And with that, I'll turn the call back over to Greg for closing comments. Greg?

Gregory J. Goff

Thanks, Scott. We are pleased with our first quarter results. With the California turnaround activity behind us, we now look forward to driving higher refinery utilization in the second quarter. We are also encouraged with our continued success in driving improvements in the business and delivering on the plan that we laid out for our investors.

With that, we'll now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Arjun Murti representing Goldman Sachs.

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

I think you mentioned the Mandan project was on track. I'm wondering if you could talk about what additional running room you see to further expand that facility after this phase given the pretty dramatic growth in Bakken production. And then relatedly in Salt Lake, I think a number of the E&P companies are struggling to find a home for their waxy crude. What opportunities do you see at that plant to expand and take some of the waxy crude?

Gregory J. Goff

The Mandan refinery, once we complete the expansion that we've been working on, the refinery becomes basically balanced. So we effectively use all of the assets there, and there really is no room for further expansion with one exception. And that's what we stated before where we will produce additional ultra-low sulfur diesel during 2013 by changing our yield and moving a little bit away from gasoline to diesel. Regarding Salt Lake, as you're aware, we have -- we are in progress of executing a project to process more of the -- both the yellow wax and black wax crude. Today, we run about 10,000 to 11,000 barrels a day and we anticipate doubling that over the next couple of years as we complete the work at the refinery, which will allow us to also increase the capacity of the refinery slightly, as well as improve the yields at the Salt Lake City refinery.

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

That's great. Greg, just on Mandan, you mentioned this debottleneck will kind of max it out or balance it as you said. Is it more that further expansion required significantly more material investment?

Gregory J. Goff

Yes, Arjun. I mean we basically have to put in crude units and processing units that weren't completely balanced.

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

Got it. And then, do you have any comments on maybe your same-store sales demand numbers in California for gasoline at your marketing facilities? How are those numbers trending?

Gregory J. Goff

Let me let Dan comment on the marketing activities for you, Arjun.

Daniel Robert Romasko

Okay, yes. Sure. On a year-on-year basis, same-store sales are down, probably close to 1%. And California is really consistent with that number, and that's our same-store sales year-on-year. If you take a look at our average sales per store, not make it on a same-store basis, just average per store, we are essentially flat to a bit up.

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

And do you think you are, in part, taking share there or is the market really flattening out to maybe only down 1% or so?

Daniel Robert Romasko

It's tough to -- I think we're all struggling with the DOE numbers and whether they are accurate or not. I don't have any particular insight there. We think we've got a good brand in the right markets with well-operated stores.

Operator

Your next question comes from the line of Jeff Dietert representing Simmons.

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

There's been a fair amount of volatility around Bakken discounts. We track the Bloomberg Clearbrook numbers which are public, but I was hoping you could talk a little bit about the dynamics that were driving some of the wider discounts earlier this quarter and they've narrowed significantly since. What do you think is driving that? And what are your expectations for the summer on Bakken discounts?

Daniel Robert Romasko

Yes, this is Dan, I'll take that one. The early quarter discounts, we suspect, were largely driven by reliability in Canadian synthetic crude oil production and Canadian in general and the continued increase in domestic production of Bakken and hitting logistics constraints of getting both of those crudes out of the marketplace. And to the extent that the production profile continues to increase in both Canada, due to reliability, as well as Bakken, then we expect those discounts are going to continue until pipeline capacity is built out. So that's quite a bit of a long term. There is going to be short-term volatility month-to-month. And based in part and at times on the rail commitments out of the region. It's difficult to predict on a month-to-month basis what's going to occur, but we believe the discounts are going to be with us on average for at least the next 1 to 2 years.

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

Has there been some improvement in the rail logistics out of the Bakken? Or do you think the recent compression of the discounts is caused by something else?

Daniel Robert Romasko

Well, we think there is rail traffic heading out of the Bakken. And in fact, our rail facility comes on in the middle in the second quarter, so we'll be part of that. And there is some additional railcars themselves, which are part of the logistics constraint that are coming into the marketplace. That disconnect, though, I believe, is a short-term phenomenon. I mean, it's just a matter of the purchasers securing their barrels at the lease relative to the Clearbrook trade center.

Operator

Your next question comes from the line of Edward Westlake representing Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Just general update, perhaps, on the large project at Salt Lake City.

Gregory J. Goff

Salt Lake City, Ed, is in the permitting phase right now and so we're working through it. Besides doing the engineering work behind the lines, behind the scenes, but we're progressing the permit pretty well. And at this point in time, everything looks to be on schedule, what we've talked about when we announced the project back in December.

Edward Westlake - Crédit Suisse AG, Research Division

And so in terms of going out to get sort of like actual contracts on all the items and capital equipment, that's all been done? Or is that still ahead of you guys?

Gregory J. Goff

No. That's all being done, so we're progressing well. And as we said in December, the 2 phases, December 13 and 14, should come online, in line with the production commitments that we have from Newfield.

Edward Westlake - Crédit Suisse AG, Research Division

Right. Okay, good. And then, obviously, there's been a little battle going on in the Mid-Continent with CVI. So it seems like there will be a package of assets for sale out there. And there's Gulf assets and there's probably more other refineries out there that we're not aware of that are for sale. So just remind us of your appetite to leverage the balance sheet, given interest rates are very low, to perhaps bulk up outside California.

Gregory J. Goff

Our intent has basically been -- remains unchanged. And that is, in our geographic area, in our footprint, if assets that fit our kind of our integrated model become available, that we would be very interested in looking at those assets. But as you described some of the assets that are available in the market today, most of those aren't in our area.

Edward Westlake - Crédit Suisse AG, Research Division

So it's still a very focused approach.

Gregory J. Goff

Yes, absolutely.

Operator

Your next question comes from the line of Paul Cheng representing Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

A number of quick questions, hopefully. Scott, can you give me what is the working capital?

G. Scott Spendlove

Sure, Paul. Working capital was $838 million, including cash, $520 million excluding cash and debt.

Paul Y. Cheng - Barclays Capital, Research Division

$838 million is including the cash already?

G. Scott Spendlove

Yes, $838 million including cash, $520 million excluding cash and the current portion of long-term debt.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And maybe this is for Greg. You guys talked about the same-store sales down 1% in the first quarter. So far in April, you said similar or that is getting a little bit better, a little bit worse?

Daniel Robert Romasko

This is Dan, let me take a shot at that. We're seeing April demand increase seasonally. Year-on-year, we're flat to a bit down.

Paul Y. Cheng - Barclays Capital, Research Division

Flat to a bit down. And it doesn't really make such a big difference, whether it's California or the rest of your system, I presume?

Daniel Robert Romasko

Yes. California is within 1% or so of the rest of the regions.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Dan or maybe Greg, do you have an update of your logistic of the view or action on Hawaii?

Gregory J. Goff

Yes, Paul. On Hawaii, we actually went to market with our teaser on the beginning of this week. So we are in full process to try to move forward along the lines of our original schedule, which we expect to have a decision made by the second half of this year.

Paul Y. Cheng - Barclays Capital, Research Division

And I don't know if this is appropriate, but does the Tesoro Logistics look at the logistic piece of the asset and see what kind of revenue it may fit?

Daniel Robert Romasko

Paul we look at every possibility. I mean, we don't -- no stone goes unturned as far as when we look at an asset. So we absolutely look at everything that we would consider as ways to capture the best value with the asset.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Can you give us some, share with us some preliminary -- you'd probably -- well, it's okay -- I think you probably not going to talk about what logistic company think that their assets make worth.

Daniel Robert Romasko

Yes, probably not.

Paul Y. Cheng - Barclays Capital, Research Division

Too early and not competitive.

Daniel Robert Romasko

Yes, right.

Paul Y. Cheng - Barclays Capital, Research Division

From a competitive position, you don't want to comment probably.

Daniel Robert Romasko

No.

Paul Y. Cheng - Barclays Capital, Research Division

I know that it's still early on, but I'm sure that you guys already looking at the next wave of potential investment. Is there anything that you can share that what may be a likely investment project that you guys are currently -- seriously consider?

Gregory J. Goff

In answer to your question, Paul, I think previously we stated that we have -- our approach is to have a group of people go out and look at the entire refining, marketing, logistics assets around each of our refineries and we -- that was the origination of the projects that we're implementing now. And that team of people is out doing that work now, so it's just too early to comment on that, but I think it is important to state that we are continuing that scan across the assets to see what possibilities there are. And if there are any, we'll talk about those when the time comes.

Paul Y. Cheng - Barclays Capital, Research Division

Greg or Scott, I think previously that you gave some form of expectation of the CapEx for the next couple of years. And is those expectation now change or that is still pretty much intact?

Gregory J. Goff

At this point in time, our plans for both turnaround and CapEx that we provided in December of last year, Paul, those are the best estimate at this point in time. When we rework our budget during the second half of the year, if there are any modifications, then we'll talk about them in December.

Paul Y. Cheng - Barclays Capital, Research Division

But so far, there's no cost pressure or anything that had led you to believe that the number may need to change?

Gregory J. Goff

No.

Paul Y. Cheng - Barclays Capital, Research Division

So you change that, you will be -- if you're adding new project, there are costings.

Gregory J. Goff

The projects, some of them are a continuation of what we've been doing and there is no change at this point in time.

Paul Y. Cheng - Barclays Capital, Research Division

In Mandan and Salt Lake City, given the dynamic of the crude discount and it look like that everyone is going to want to exploit it if they could, including you guys. So will the company, as a result of targeting that region, to have 100% cost integration between the refining and the retail, trying to fund as much all that as possible, and where are you right now? I presume that you want 100%, but where are you now?

Gregory J. Goff

I mean, we are targeting a very high level of integration around both Salt Lake and Mandan, as you stated, and we have made a lot of progress on the integration levels. But we have some room to continue to improve the integration at both of those refineries.

Paul Y. Cheng - Barclays Capital, Research Division

Greg, can you tell us what is the percent of integration in those 2 markets at this point?

Gregory J. Goff

Paul, let me let Louie follow up with you on that. I don't have that on my fingertips, but it is an area where we need to grow more, I can tell you that.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. As final question on the Bakken loading facility, I believe you have permit for 30,000 barrels per day and that if you're going to do every day, then you will be able to essentially double it to 60,000. So have you already submitted the application and where are we in that process?

Gregory J. Goff

Regarding the project to deliver Bakken crude oil to Anacortes, first, let us say we are -- the project -- our people are doing a great job of executing that project. And as I stated in my comments, we are ahead of schedule. So that, to us, is very encouraging because of the value that's there, and the physical design of the system is designed to take -- it could physically take a unit train every day, which would be 60,000 barrels a day. We are currently permitted for less than that, but we are working through the process to hopefully increase the capability to maximize the use of the facility.

Paul Y. Cheng - Barclays Capital, Research Division

Have you already submitted the application?

Gregory J. Goff

We are in -- that's in progress, Paul.

Operator

Your next question comes from the line of Sam Margolin representing Dahlman Rose.

Sam Margolin - Dahlman Rose & Company, LLC, Research Division

We've seen some correlation in the past with the long-haul import barrels and just directionally where underlying Brent-WTI migrates. As Seaway starts up here, I think there's a lot of uncertainty around that. People have quoted ranges all over the map, and I was just wondering if there's any kind of change to the mechanics of those long-haul imported barrels that come into California just for -- or an easier way to think about that as we deal with this volatility in the benchmark?

Gregory J. Goff

Sam, during the first quarter, we made the decision to transition our barrels to Brent benchmark on the foreign waterborne barrels, and so we have completed that. And so we now price the domestic land barrels on WTI and the rest on Brent. So that's completed for us.

Sam Margolin - Dahlman Rose & Company, LLC, Research Division

Okay. Great. And those are fixed at typically at a discount, I would imagine, because of the grade?

Gregory J. Goff

Yes, well, they're tied to the grade of the crude oil and the location.

Operator

Your next question comes from the line of Chi Chow representing Macquarie Capital.

Chi Chow - Macquarie Research

Greg on the Bakken-Anacortes project, you said you're ahead on the project. Can you give us details on any changes to schedule?

Gregory J. Goff

Originally, Chi, we said that the project will come on the fourth quarter. Now, it looks like it will be operational in September.

Chi Chow - Macquarie Research

In September, okay. So initially here, is it just your swapping out 30-day ANS for Bakken. Is that how we should think about this?

Gregory J. Goff

Yes, that is a good assumption.

Chi Chow - Macquarie Research

Okay. And then on the product side, you mentioned a yield improvement. Can you give us some details on how much incremental light product volumes you're expecting and what production are you backing out on the product line?

Gregory J. Goff

Yes. Probably as a rule of thumb, Chi, the best thing to assume is, is that for the Bakken barrels that we substitute for ANS, it will improve the gas and diesel by about 16%.

Chi Chow - Macquarie Research

Okay. Each or...

Gregory J. Goff

In total. We've basically reduced the fuel oil production by 16% and produce gasoline and diesel.

Chi Chow - Macquarie Research

Okay. So fuel down and gas and diesel up.

Gregory J. Goff

Yes, on the 30,000 barrels a day.

Chi Chow - Macquarie Research

Got it, okay. Another question, it looks like your cost structure in refining is trending well downwards. The first quarter results, is this going to be kind of a ratable level that we could expect going forward on costs?

Gregory J. Goff

Let me let Dan give you some feedback on that, Chi.

Daniel Robert Romasko

Yes, Chi, we're pleased with the first quarter performance. The improvement is driven by a couple of factors, one being the low natural gas prices. So as long as those are with us, we'll continue strong improvement. We're also benefiting from continued reliability of the assets, which is driving down our fixed costs. And we are making progress on our other non-energy variable. So at a constant gas price to Q1, we should expect this to be more of the norm.

Chi Chow - Macquarie Research

Great, that's a really nice performance there. The final question. You mentioned a few of the turnarounds in the second quarter. Alaska and Hawaii, I believe. Can you give us kind of a view on the full schedule for the year, what's remaining in the year?

Gregory J. Goff

I think 2 things, Chi. One is, the most important thing is that we completed an extensive turnaround at Martinez during the first quarter, as you're well aware, and then we have -- we are -- we will do turnarounds at Alaska and Hawaii during the second quarter. And once we get past that, our turnaround schedule for the rest of the year is very light.

Chi Chow - Macquarie Research

So nothing at Salt Lake?

Gregory J. Goff

No. The rest of the year is light turnaround activity.

Chi Chow - Macquarie Research

Okay. And then Golden Eagle, were you up running back full at the beginning of the second quarter?

Gregory J. Goff

No. Golden Eagle came up during March, so we were up during the -- sorry, during the second quarter, we were -- it came up about middle of March.

Operator

Your next question comes from the line of Paul Sankey representing Deutsche Bank.

Paul Sankey - Deutsche Bank AG, Research Division

If I could just follow up from Chi a bit. The overall market outlook in California in PADD V, could you just talk about how you see the rest of the turnaround schedule? My concern, I guess, is that typically, we have a lot of turnaround and margins go up and then everyone comes out of turnaround and margins go down. And I just wondered if that's the outlook for the summer or if there are things you feel may change there?

Gregory J. Goff

I think the turnaround activity in California, with what's public available to us, is that it's behind us for the most part now, so the refiners are there prepared to run. And barring any unexpected downtimes in that, the fundamentals, as far as inventory levels on that, looks supportive even. We've talked briefly about the demand, so I think the market's positioned for a reasonably good outlook here going forward for the rest of the year.

Paul Sankey - Deutsche Bank AG, Research Division

Okay. So there should be quite a bit more supply. But at the same time, I'm thinking the demand is actually looking okay, isn't it? I was just looking at some California month travel dates and it's looking quite healthy actually.

Gregory J. Goff

Yes, the demand looks good, and from what we've seen regarding exports, the exports are continuing at a really supportive level for the West Coast also. So I think the fundamentals, like I said, are supportive to a good outlook for California.

Paul Sankey - Deutsche Bank AG, Research Division

Greg, could you just dig around a bit on the exports a bit? What do you -- can you give us a sense of quantity and destination for those?

Gregory J. Goff

As far as what's publicly available, the levels last year was about 120,000 barrels a day combined for gasoline and diesel, and we see that continuing on in that. So they look good. That's industry exports off the west PADD V.

Paul Sankey - Deutsche Bank AG, Research Division

Is that to Chile? Or do you know where it's going, Greg?

Gregory J. Goff

Primarily Mexico, but there is a little other volume going down to the West Coast of South America, but primarily Mexico.

Paul Sankey - Deutsche Bank AG, Research Division

Greg, if we could -- I don't know if this is appropriate time to ask you kind of a long-term strategy question, but it seems I've got you. The CapEx is quite high this year and I think really you've re-guided towards the same number, I think. Then again, I think it stays quite high next year. But I feel that longer term it will be a much lower number. I know that you could argue that this CapEx cycle that you're going in is almost the restructuring process. What's your working number for your long-term cash flow or EBITDA or however you want to think about it? And what you think your settling endpoint is for CapEx because at the same time I'd get the sense that you're really restructuring your portfolio on an organic basis? And although you say that you look at potential acquisitions or restructuring, to me it feels like it's not really a major priority for you and your real priority is to get Tesoro right with what you've got. Is that fair?

Gregory J. Goff

You asked several questions there, Paul. So let me take my best shot at responding to those. I think, one, the longer-term view, I'd like to hold off until we come back in December because it will give us more time to work projects. Specifically, I think maybe when I was asked a question earlier about other opportunities, we're just working those. The second point I would like to make is that, I mean, we are -- the value, the impact to the company of the organic projects that you alluded to, these major capital projects, the earnings capability of those project is so powerful that, I mean, I find that a great opportunity for the company. And I'm actually hopeful that we can uncover some more of those projects as we go through the rest of the assets. So we are absolutely focused on capturing projects like the Mandan project, the Anacortes crude supply project, projects that help dramatically improve our crude oil supply cost and improve our yield structure. We are very focused on doing that. However, at the same time, as we look to have Hawaii leave our portfolio and we continue to focus on our footprint that we think that there'll be opportunities that will become available that will fit in strategically and be very value enhancing to both investors and to our business. So that's kind of where we stand.

Operator

Your next question comes from the line of Evan Calio representing Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

I think if I understood your comments, Anacortes rail operational in September. I mean, is there any -- should we expect a 30,000 barrel a day kind of ramp or run rate exiting September? And then secondly, given your experience through permit filing and processing or having it finalized before -- I mean, do you intend to venture any estimate of when you could expect to have an expansion there or get approval for an expansion.

Gregory J. Goff

Yes, the first question is -- the challenge for us really when we start operations will be working with our railroad to deliver the cars in. And if you could see what goes on there, it's quite impressive. But hopefully, we'll work through with the railroad and get the delivery. It appears we'll be taking in a unit train every other day as we stated and being able to unload it with highly modern, efficient and really environmentally sound operations is going to be quite impressive. So maybe a slight ramp up, but it's really all contingent upon just the smoothness of the railroad delivering it. The answer to your second question is, is that we're going through the process to permit and we're optimistic that we'll have success there. And once that happens, then we'll make everyone aware that we've been successful.

Evan Calio - Morgan Stanley, Research Division

And the permitting is the primary gating item there, right?

Gregory J. Goff

It's the only item.

Evan Calio - Morgan Stanley, Research Division

Good. Of the $55 million CapEx spend in Anacortes, I mean, do you see the opportunity to recoup most of that value in an MLP drop down?

Gregory J. Goff

It's our intent as we stated almost from day one when we reveal the project, that it is our intent to put that into the logistics company.

Evan Calio - Morgan Stanley, Research Division

And maybe lastly if I were just to comment, there's been a few reports of smaller topping plants planned in the Bakken, and just kind of maybe any comments on what you're seeing on that front and any impact that could have on local product balance.

Gregory J. Goff

From our standpoint, I mean, one of the things that we've been stressing and driving is the importance of being an integrated business. So as one of the previous questions, our focus continues to be to really have a very highly integrated refining, marketing and logistics business, not only at North Dakota but also in Salt Lake and in our other facilities. So it wouldn't have an impact on what we do as a company to get value out of the marketplace with that type of competition. That's not something that would be a threat to us.

Operator

Your next question comes from the line of Faisel Khan representing Citi.

Faisel Khan - Citigroup Inc, Research Division

Faisel from Citi. Kinder Morgan, I think, is announcing a potential expansion of its Trans Mountain pipeline into the West Coast. I was wondering how you guys think about that project and would you take capacity on that line?

Gregory J. Goff

Well, just some brief background. That pipeline has supplied crude oil to the refineries in the State of Washington for 50-plus years, and so it is vital to the supply to the refineries. And our outlook is, is that Canadian supply will continue to be one of the key parts of supply to our refinery there going forward. And we'll take the steps necessary to make sure we have secure supply into the refinery.

Faisel Khan - Citigroup Inc, Research Division

And is it possible to get some of those crude volumes down to California and the West Coast?

Gregory J. Goff

Today, it isn't. But in the future, if the plans go forward as they have talked about, then it does create more capacity out of Vancouver, which that would provide that option to do that.

Faisel Khan - Citigroup Inc, Research Division

Okay, great. And then just wondering, in California, are you guys at max blending for ethanol?

Gregory J. Goff

Yes. We stay at 10% blending. We are.

Faisel Khan - Citigroup Inc, Research Division

Okay. So there was no benefit of the drop in ethanol prices into blending it to gasoline for the quarter?

Gregory J. Goff

There is a benefit because of the way ethanol prices during Q1, there definitely less.

Faisel Khan - Citigroup Inc, Research Division

Okay. Was it significant or was it -- how should I look at that actually?

Gregory J. Goff

I mean, there was a benefit. If you look at the prices of gasoline, you can see that there was a benefit. It was a significant benefit.

Operator

Thank you for your participation for today's conference. This now concludes the presentation. You may now disconnect, and all have a great day.

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