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Executives

Scott Phipps - Director of IR

Otto C. Schwethelm - VP and CFO

Everett Lewis - EVP and COO

Bruce A. Smith - Chairman, President and CEO

G. Scott Spendlove - VP, Strategy and Long-Term Planning

Gregory A. Wright - EVP and Chief Administrative Officer

Lynn Westfall - Sr. VP, External Affairs and Chief Economist

Dan Porter - Sr. VP, Refining

Analysts

Paul Sankey - Deutsche Bank

Neil McMahon - Sanford C. Bernstein & Co.

Doug Leggate - Citigroup

Jeff Dietert - Simmons & Company International

Paul Cheng - Lehman Brothers

Chi Chow - Tristone Capital

Ann Kohler - Caris & Company

Tesoro Corporation (TSO) Q1 FY08 Earnings Call May 7, 2008 8:30 AM ET

Operator

Good morning. My name is Lucretia and I will be your conference operator. At this time, I would like to welcome everyone to the Tesoro First Quarter 2008 Earnings Conference Call. All lines have been placed on a listen-only mode. [Operator Instructions].

I would now like to turn the call over to Mr. Scott Phipps, Director of Investor Relations. Thank you, Mr. Phipps. You may begin your conference.

Scott Phipps - Director of Investor Relations

Good morning everybody and welcome to today's conference call to discuss our first quarter 2008 earnings. Joining me for today's call are Bruce Smith, our CEO; Everett Lewis, our Chief Operating Officer; Otto Schwethelm, our CFO and other members of senior management.

Before, we get started I'd like to point out that we have modified our earnings conference call format to include an accompanying PowerPoint presentation which was filed with the SEC about 30 minutes ago. Since management will be referencing these slides throughout the call, I encourage you to have these available as we progress through this morning's material.

If you don't already have the presentation you can visit the Investor section of our website at tsocorp.com in order to download them. On the website you can also obtain a copy of the earnings release we issued yesterday afternoon and view the company's supplemental quarterly data.

The earnings release contains additional information in the attached tables on our business. In addition, we have updated the other supplemental financial and operational information on our website that is not included in the release. After reviewing this information, please feel free to contact me with any questions about this material or otherwise following today's call.

I would like to remind everyone that in the statements made during this call that are 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 said, I'll turn the call over to Otto.

Otto C. Schwethelm - Vice President and Chief Financial Officer

Thanks, Scott and good morning everyone. On slide 1, you'll see that we recorded a net loss of $82 million or $0.60 per share for the first quarter of 2008 versus net income of $116 million or $0.84 per share for the first quarter of 2007. As noted in the press release, these results included the pre-tax benefit of a $45 million settlement related to a dispute over the appropriate amount that we had been paying for the Trans Alaska Pipeline System tariffs. This is a one-time payment associated with claims filed for the period 1997 through 2000. So, remember you need to tax effect this at our 38% corporate tax rate.

Before, we start with the financials, I'd remind everyone that unadjusted, year-over-year comparisons will not be valid because we did not own Los Angeles in the first quarter of last year. However, having said that, we'll do our best to identify the appropriate comparisons. Refining reported an operating loss for the quarter of $87 million versus a profit of $256 million for the first quarter of 2007. This was primarily a result of gross refining margins which were $6.54, down over 50% from a year ago and reflective of benchmark crack spreads which were also down by roughly half.

Lower margins were caused by the failure of product prices to move in tandem with the increase in crude cost. On the West Coast, large inventory overhangs and slowing demand for transportation fuels kept margins down and bottom of the barrel products which include asphalt, fuel oil and petroleum coke which reflect approximately 18% to 20% of our total production more significantly lagged high value petroleum products.

Refining depreciation and amortization expense of $73 million was $11 million higher than a year ago due to the Los Angeles refining acquisition versus the fourth quarter of 2007 refining D&A was down $14 million. As you might remember in 2006 when the company chose to build the delayed coking unit at Golden Eagle, we accelerated the depreciation of the existing fluid coker. At that time we anticipated that we would complete the project in the fourth quarter of 2007 and so we adjusted the depreciation schedule to match that completion date. Since the first quarter we did not incur this expense, our depreciation rate was lower.

Going forward, we expect quarterly refining depreciation to be in the $72 million to $78 million range. Retail reported an operating loss for the quarter of $28 million versus a loss of $1 million during the fourth quarter of 2007. Retail sales volumes were down 5% quarter-on-quarter totaling 349 million gallons for the first quarter of 2008 versus 368 million gallons during the fourth quarter of 2007. Margins for the quarter averaged $0.12 per gallon, down from $0.15 per gallon during the fourth quarter.

Corporate and unallocated expenses for the quarter were $43 million versus $57 million during the first quarter of 2007 as well as during the fourth quarter of 2007. The $14 million difference was primarily due to the decrease in stock-based compensation expense. Interest and financing costs were $27 million for the quarter; higher than both the first quarter of 2007 and the fourth quarter of 2007. The main driver of this increase quarter-on quarter was due to borrowings on the revolver.

Moving on to slide 2, let's go through our guidance for the second quarter. We estimate throughput to be approximately 175,000 barrels to 180,000 barrels per day in the Pacific Northwest region; 75,000 barrels to 80,000 barrels a day in the Mid-Pacific; 115,000 barrels to 120,000 barrels a day in the Mid-Continent and 250,000 barrels to 255,000 barrels per day in California. California throughput rates during the second quarter will be impacted by the turnaround and tie-in of the delayed coker at Golden Eagle which ran at reduced rates for the month of April. The rest of the throughput rates are in line with historical levels, subject to the margin environment, we may look at discretionary cuts during the quarter.

On the OpEx side, guidance for the second quarter is as follows; $3.60 per barrel in the Pacific Northwest; $2.50 per barrel in the Mid-Pacific; $3.50 per barrel in the Mid-Continent and $8 per barrel in California. The per barrel OpEx numbers reflect higher energy costs. In California, the increase we're seeing this quarter is attributed to costs associated with the turnaround and coker tie-in as well as lower throughput rates skewing the per barrel number.

When the coker is fully operational, there will be an increased cost associated with incremental natural gas purchases required to run the unit. We talked about our expected depreciation refining of say $75 million. Additional, second quarter guidance items include corporate expense of $55 million, interest expense before interest income of $25 million and an effective tax rate of 38%.

Everett Lewis is now going to review some of the more significant operational highlights for the quarter.

Everett Lewis - Executive Vice President and Chief Operating Officer

Thanks, Otto and good morning everybody. As you know the first quarter provided a challenging environment for refiners. If you turn to slide 3, you will see average first quarter crack spreads versus both 2007 and the five year range in each of our core markets. California cracks were at the low end of the band across the quarter, averaging $14 per barrel versus $30 per barrel during the first quarter of 2007.

Northwest cracks averaged $13 a barrel during the quarter versus $23 a barrel for the first quarter, last year. Finally, Group 3 crack averaged $10 per barrel for the first quarter versus $15 per barrel during the first quarter of 2007. As Otto mentioned earlier, lower margins were a result of three main sources; we had seasonally high finished product inventory; we had slowing domestic demand for finished products and finally product price lagged the rapid crude price increases. While gasoline margins were weak, distillate margins remained relatively strong.

Export demand for distillates, specifically low sulfur diesel was the main reason that these differentials perform better. According to latest monthly Department of Energy data pad by diesel exports totaled over 3 million barrels for February which is another increase over January. We can see a lot of diesel is moving into the export markets and supporting that price.

If you look at slide 4, you can see that our throughput total excluding Los Angles refinery is 24,000 barrels a day, higher than last year. This is mainly due to the fact that we had higher turnaround activity last year when we had significant work being done at the Golden Eagle facility. Specifically, the Los Angeles refinery averaged 104,000 barrels a day for the first quarter of 2008 which is well above our original expectations for that facility. Throughput was slightly reduced to Hawaii, Alaska and Anacortes in January in response to the lower margins. Throughput in Anacortes and Golden Eagle was impacted by additional turnaround facilities... activities at both facilities, particularly at the beginning of the new coker tie-ins at Golden Eagle which began at the very end of the first quarter.

Excluding Los Angeles, operating expenses were in line with prior guidance. Energy costs rose by about $21 million, while our catalyst and chemical costs rose by $6 million over last year. Principally, the increase in energy is due to Golden Eagle running at higher rates versus the turnaround period last year. The increase in catalyst and chemicals is due to the fluid catalytic cracking units at both Golden Eagle and Salt Lake being on stream in the first quarter rather than in turnaround as they were last year. On a per barrel basis OpEx was better than expected due to the higher throughput levels and lower turnaround activity.

Going to operating income on slide 5, you will see a year-on-year operating income comparison. We saw a throughput benefit as well as crude acquisition and product sales benefits versus the benchmark indicator at Golden Eagle and versus the first quarter of 2007 due to the turnaround activity last year. The other category is primarily an $11 million write-down associated with retail divestitures and a $10 million inventory impact due to a build ahead of the Golden Eagle turnaround which we have sensed [ph] to unbound. But as you can see the bulk of the $360 million variance and the segment operating income to first quarter 2007 was due to the depressed margin environment.

During the last two weeks of the first quarter, we were in the initial stages of the scheduled Golden Eagle turnaround which completed the coker modification project. Slide 6, shows you an overview of this project. The turnaround involved maintenance on a number of units and addition to the tie-in work required to make the coker operational. The coker was down for a total of 43 days which is ahead of our original turnaround schedule. The startup of the new coker was without an incident and the unit is operating above the planned rates at this point.

The total cost of the project, including capitalized interest and labor will be around $610 million. You will recall that this project will not only bring our refinery into compliance with more stringent environmental emission standards but it is expected to operate four to five years before our major turnaround; whereas the old fluid coker generally was taken down every two to three years.

Fewer turnarounds will result in a higher average calendar rate of residue upgrading. Additionally, the delayed coker is expected to yield significantly less gas from the feedstock processes and more liquid products and gasoline and distillates than the fluid coker did. An added benefit of the modified coker operation is that it will move Golden Eagle's greenhouse gas footprint back toward 1990 levels. The project is expected to yield an incremental $100 million per year of EBITDA. While Los Angeles continues to run well from an operation standpoint, we are addressing a profitability and higher engineering cost... high energy cost issues in the current environment.

If you turn to slide 7, I will walk you through some of the initiatives at Los Angeles. First, we will continue to focus on synergies with our system. We are still on track to realize our stated goal of a $100 million of synergies in the first 12 months of operations, having realized $40 million in the first quarter. This was predominantly through the plants crude optimization and turnaround synergies with our Anacortes and Golden Eagle facilities.

This brings our total synergy benefit to $88 million through the first ten months of operation. Even in a depressed margin environment, we have been able to take advantage of opportunities to split crude cargos between our coastal refineries. On that note we are also reducing our crude supply cost to Los Angeles. The last of the crude contracts that were assigned to us when we acquired the LA plant expire at the end of this month and the alternative crudes will provide us with lower feedstock cost. Specifically, we are targeting cost advantaged foreign barrels to run through the plant.

But we are taking advantage of the strong distillate margins we have seen this year. The team has produced... has pursued opportunities to maximize diesel productions through process and the equipment changes where a minimal capital was required. We have made a minimal capital environment in LA or minimal capital investment in LA which provides an incremental 7,000 barrels to 9,000 barrels of distillates that were previously on the gasoline pool.

We have also altered the gasoline distilled cut in the crude tower at this and other locations. This adjustment allows the refinery to produce a 100% car gasoline and eliminates the need to make any conventional production. At the same time, increasing higher margin distillate production. The move to increase distillate production is not limited to Los Angeles. Throughout our refining system, we have increased distillate production by 25,000 barrels to 30,000 barrels a day with a corresponding decrease and what is now lower value gasoline production.

This was done with negligible capital cost and we continue to pursue further opportunities in this line. Also at the Los Angeles refinery, we have recently reduced fixed cost by optimizing our internal work force at the plan, now that we are almost a year in the ownership and we have shifted the workload more from a contractor base to a lower cost employee base structure.

In our last call, we discussed some of the initiatives that are expected to return Hawaii to profitability. Crude optimization continues to be a key driver. We are further exposing our refinery to solid crude economics by eliminating a requirement to process high cost light sweet crudes, mainly Asian grades. During the first quarter of 2008, the refinery reduced light sweet crudes as a percentage of total throughput to 19% from 30% a year ago by moving from light sweet grades to more advantaged heavy sweet and light sour crudes.

Further modifications that are being completed as we speak of the plant will enable us to reduce that number further. We have also increased our local product sales as we have renegotiated some contracts to light petroleum and fuels. These amended supply contracts are larger in volume and scope than the previous contracts, meet our customers' fuel needs, benefit our refinery operations and reduce our shipments of clean products to the West Coast.

As you know we have also had electrical reliability issues at Hawaii that contributed to the losses there. But in March we completed work on a new electrical substation which should mitigate these. Additionally, our Hawaii controls modernization project is approximately 50% complete with one of the two phases now successfully commissioned.

With that, Bruce is going to wrap up our call.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Hey, thanks Everett. I think Everett has walked through pretty comprehensive list of some of the many, many initiatives that we have at Hawaii and Los Angeles and given you some flavor about other changes that we have made to reduce cost. Having said that, we've taken a more aggressive and comprehensive approach toward reviewing our cost and capital employed.

The company is currently rolling out... excuse me, the company is truly rolling out a set of system wide initiatives to immediately lower costs, high grade or capital program to lower our 2008 expenditures and to reduce the volume of inventory in our systems. We began these reviews, the once that Everett has mentioned when slowing demand for refined product met souring crude cost during the second half of last year.

As we moved into the first quarter, we realized that as the product marketplace was adjusting to a slower economy and increased crude volatility, we needed to adjust our business plan to reduce operating, administrative expenses and continue to pursue a goal that we had for many years. A goal to reduce the relative cost of goods sold. Obviously, the cost of crude oil is the most significant expense for refiner and we have identified further ways to increase our flexibility to take advantage of more cost advantage crude and Everett talked about the few of those ideas.

Since these non-capital opportunities are obviously important to us, one of the other ones that we have talked about is the project to take more sour grade crudes at Anacortes and that project should be completed at the end of the year. Another long-term project is the Long Beach crude terminal project that will allow us to take a 100% waterborne crudes into the Los Angeles refinery and this is expected to be completed in 2009. Increased prices of exacerbated investment that we have in working capital. In light of that fact, we have established specific targeted reductions that we wanted to achieve by the end of the year.

Moving to our capital program, we broadly reviewed all our projects, whether they were regulatory or income improvement projects to see what we could delay, differ or just simply complete for less money. Projects such as the benzene reduction and dock work which maybe more regulatory projects we are looking for ways to complete those for less money and since we have adjusted the scope of that work. Our goals are real simple here. We plan to generate enough cash flow from operations to fund our high graded capital program by reducing cost and capital.

And our other goal is to reduce our short-term revolving credit debt to the amount that we have referred to-date by managing working capital. When we began 2008, we knew that the trends from the last half of 2007 would make the year more challenging than the historic highs that we saw in the first part of 2007. Similarly, we do not expect the future to be like the low margin environment that we have seen in the first part of this year. Highs and lows tend to be created by abnormal events, and over time margins normalize from both extremes as the market finds the appropriate supply demand balance.

Our management team has been there and we believe these adjustments will enable us to manage through a cyclical low. As I have said before, after we completed the Los Angeles acquisition, we migrated to the other part of the value creation cycle that we used to talk about which is all about improving financial performance and we have had ample opportunities since we believe we have ample opportunities, since we have not had a real focus on cost in the past it's been more around acquisitions. But I believe our plan to control costs, unlock cash and redeploy capital is the right program at this point in the cycle. We are obviously, not satisfied with the consecutive quarters of losses and now we are solely focused on returning the company to profitability.

And with that we'll take questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from Mr. Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank

Gentlemen, hello.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Hello.

Paul Sankey - Deutsche Bank

Hi, guys. Bruce could you talk a bit about the cash, the cash change that we saw in Q1 it was obviously very large and clearly you have explained that the margin environment was weak. It does seem like you are very--

Bruce A. Smith - Chairman, President and Chief Executive Officer

Paul, we have got a technical problem here. I am getting every second word. Operator?

Paul Sankey - Deutsche Bank

Hello. Bruce can you hear me? Bruce?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Operator?

Operator

Yes, sir.

Bruce A. Smith - Chairman, President and Chief Executive Officer

We are hearing about every second word.

Paul Sankey - Deutsche Bank

Can you hear me now, Bruce?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I can hear you Paul.

Paul Sankey - Deutsche Bank

Okay. I will try and keep it quick. Can you just give a bit more detail on the deterioration in the cash position in Q1? It seems very large. Could you just talk through... obviously you have talked about the margin environment, but could you talk through whether there were any other issues that caused this $400 million plus of net cash outflow? Thanks.

Otto C. Schwethelm - Vice President and Chief Financial Officer

Paul, this is Otto. Basically, once we publish the statement of cash flows that will be in the queue, we funded a lot of the activity of the company as a result of the declining margin environment. We increased our borrowings on the revolver about, net increase of about $400 million which is what you are talking about. And again that utilization revolver which is right there, for the reason we have it, meeting our monthly cash cycle that peaks up around the 28th and 25th as a result of cash settlement for domestic and crude settlement with the increased price of crude. That cycle peaks out at a higher number and again several days during each of the months of the quarter, we are on borrowed on the facility. So with that it's functioning as it's designed.

Paul Sankey - Deutsche Bank

I got it. So, basically it was primarily related to the margin environment and I guess the rise in crude cost?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Exactly. And a little bit obviously our capital program as we completed the coker. I think again what we see in that way is just sort of link that up in the right way. I mean we think that we have a specific amount of inventory, we funded inventory basically with the borrowings and those do change depending on what we've got on the water, at the end of a particular period. That debt is already down substantially at the end of August or April. What we see is that being eliminated, really primarily through the reduction of inventory so that we'll get out of that revolver. Again, over a disciplined time of getting rid of inventory over the course of the year. So, we look at that as being somewhat temporary.

Paul Sankey - Deutsche Bank

That said Bruce, in Q2 to-date has the cash position continued to be negative or are we stabilized now? I mean the net cash position if you like?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Well I think it's improved.

Otto C. Schwethelm - Vice President and Chief Financial Officer

It's stable and it's declining. Again from the standpoint, with the biggest capital project completed which is the coker modification that's spending tapers off a little bit. And again from that standpoint, as Bruce mentioned the borrowing from the revolver continued to decrease as a result of improved cash flow.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Definitely been better in the month of April. I mean it's again I hate to pick a point in time Paul. Our debt was down probably yet sort of look at around in net basis because obviously the cash is a borrowed amount. So, we are not very good at projecting where we are going to be, so you end up with some cash on the balance sheet that is basically you got to net against the debt.

But we were down probably $100 million a month, over the month. That tells me that even in light of capital with improved margins that we're going the right direction and we haven't even started to liquidate the inventories that we think we can target. So, I think that it's a better situation, it looks like, but again I hate to use one month, because it does depend on where we are with crude that's on the water. And, we did have of course some additional borrowings because we held some inventory before the Golden Eagle turnaround. So, I think that the trend is right and I think our goal is very easy to achieve over the course of the year here of getting out of that short-term debt.

Paul Sankey - Deutsche Bank

Great thanks, Bruce. And one very quick one from me, you mentioned that the Golden Eagle OpEx in Q2 would be $8, but then said that that was an unusual, not a representative quarter. Could you give an indication of what that number would be going forward?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Paul, I am sorry. Again, you broke up every other word. That's something about OpEx. Could you repeat that?

Paul Sankey - Deutsche Bank

Bruce, sorry. It was OpEx at Golden Eagle, you mentioned $8 for 2Q, but that was not a representative number. What would be the better number moving forward for the OpEx at Golden Eagle per barrel? Thanks.

Everett Lewis - Executive Vice President and Chief Operating Officer

I think our historical run-rate in California is borne more in the mid 7... 730, 707 rather than the $8 kind of number.

Paul Sankey - Deutsche Bank

Thanks. I'll leave it there. Thank you.

G. Scott Spendlove - Vice President, Strategy and Long-Term Planning

But Paul this is Scott. We still expect that number to be higher because of the increase in the natural gas usage and we work with everyone's model to understand how the higher gas is offset by the benefit that the delay coker provides.

Paul Sankey - Deutsche Bank

Thanks guys.

Operator

Your next question comes from Doug Leggate with Citigroup.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Hi Doug. Doug? I guess, hello. Operator are we still connected?

Operator

Yes sir, you are. Mr. Leggate your line is open, sir.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Can we go to the next question please?

Operator

Okay. Your next question does come from Mr. Neil McMahon [Sanford C. Bernstein & Company].

Bruce A. Smith - Chairman, President and Chief Executive Officer

Doug is leaving Citibank, maybe he left today.

Operator

Mr. McMahon your line is open, sir.

Neil McMahon - Sanford C. Bernstein & Co.

Hi. This is Neil McMahon with Sanford Bernstein.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Neil, how are you this morning?

Neil McMahon - Sanford C. Bernstein & Co.

Hi. Good, thank you. Just a few questions, maybe following on from Paul. If we hold the current West Coast margins where we are today, through the end of the quarter, will you be posting another loss based on everything you have said so far in the conference call?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Neil, I am sorry. If there is something about the margins if we focused on today for the quarter and I missed that... maybe somebody else caught it.

Neil McMahon - Sanford C. Bernstein & Co.

No, basically it was... if we have the same West Coast margins through the end of this quarter, will you be posting a loss again based on what we know so far through April?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I think that... what we have done in our plan is we have taken the current, really the current margin environment and we have projected that obviously in our operating plan. We've got these the guidance numbers that we build in. I think everybody can model that. The wild card of course for us tends to be what's going to happen with actually with crude prices and relative to what we have to do to marking-the-market to current prices.

So, I really can't answer that question. I mean I think that our goal is to be profitable in the second quarter. I said that yesterday our goal is to be profitable in the second, third and fourth quarters. We think that, it gets a little easier to see in the last half of the year profitability at these levels because we have additional benefits that are coming on stream, many of the initiatives that we talked about at Los Angeles as we get out of those crude contracts, many of the initiatives that we have at Hawaii.

So, we really feel better about that and again in more of a stable crude market. But crude is jumping around so much in this quarter. It's a little difficult for me to answer that question. I think it's... our goal is to be profitable in the second quarter.

Neil McMahon - Sanford C. Bernstein & Co.

Maybe just another question, just zooming in on some of those costs. In terms of your administrative costs, what sort of savings do you think you could make there in dollar terms? We have got the overall number but just in dollar terms?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Greg?

Gregory A. Wright - Executive Vice President and Chief Administrative Officer

I don't want to posture with the number, but we have taken a look at our admin cost already. We have cut about 10% out of the number we had budgeted. We'll continue to look at that number but admin is highly sensitive to people. That's the biggest cost we have in the admin side. The next various cost is projects we are pursuing in the IT area, we tend to keep our people involved and lot of that is managing contractors that we command a work on these projects. So, we have already cut some projects out of that saving quite a few of the dollars that you saw from our lowering of the CapEx number. We'll continue to look at those projects again relative to what kind of margin environment we are in.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Yeah. Those projects have both a capital and an expense component. One of the real opportunities for the company is really technology and automation, and we have for... as an example one of the IT projects that we've got this year is a system that will enhance our ability around managing this supply chain. And we think it has pretty substantial benefits but it also is expensive to put in. And so, we are really... we have another project that we have talked about which is an integration of a program that's going to enable us to better manage the risks of the corporation around exchange balances inventories. It's a very comprehensive system that will enable us to manage from the day we purchase crudes to the day we sell product.

All those things have a lot of people associated with them and some capital. We made some cuts and if we had to we could make some additional changes there. But I think we have been very targeted in things that we think are... would be great to be able to do. We've avoided some expenses for the time being and I think our goal is to simply balance the books this year. The goal as I said is to reduce debt, sort of through liquidation of inventory and then to be able to balance the cash flow in this margin environment, not on improved margin environment with... by reducing capital and costs. And I think that becomes that... puts us in a profitable position, it's real simple from there.

Neil McMahon - Sanford C. Bernstein & Co.

Just one last, really quick one. What is the latest demand looking on the West Coast? That's obviously been low. Has that stabilized a bit recently?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Yes. Lynn you want to--

Lynn Westfall - Senior Vice President, External Affairs and Chief Economist

Yes, it looks like both from our internal data and what we can see on the total U.S. demand picture. It looks like it's stabilizing. It was a very bad January as you know, with gasoline demand down about 6% on the West Coast, primarily due to the weather as we saw out there, but that's stabilized in February, which was virtually unchanged for demand. Then I'd say, the preliminary data going out in March and April again indicates to us that this kind of stabilize basically.

Neil McMahon - Sanford C. Bernstein & Co.

Great. Thanks.

Operator

Your next question comes from Doug Leggate with Citigroup.

Doug Leggate - Citigroup

Good morning. Can you hear me now?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I can hear you Doug. Were you on the phone?

Doug Leggate - Citigroup

I was. I am in a hotel in Houston so I think the line was a little wacky. I'm still here Bruce, another couple of weeks, yes. But a couple of questions from me; first of all, could you quantify what is the inventory in your system and what do you think you can take that down to in terms of barrels? I know that's the [ph] number that's, easy put your hand on.

Bruce A. Smith - Chairman, President and Chief Executive Officer

At the end of the third quarter it was... I know what the actually the published figure is. The end of the end of third quarter or the first quarter. 30. I was going to say 30 million barrels.

Doug Leggate - Citigroup

So those $3.5 billion or thereabouts of inventory in your system basically.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Right. I mean it's about, yes, that's about right.

Doug Leggate - Citigroup

So, how low can that go in order to operate the system?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Well that's, that's really a good question. I meant that's the sort of the trick. I mean I'm not telling you anything here but with reduced demand, obviously the number should be lower and we think that we can manage at a much lower number. We have got... certainly we have got a target set for our self and we actually know the areas where we want to reduce it.

But in a bad market, you have to be a little bit disciplined about the reduction obviously. We are not looking to destroy a particular market by oversupplying it either. So, we think we have got a reasonable target. I think we want to get to that point, see where we are relative to what we think supply demand balances are, day sales and we'll take a look at whether that's an adequate level or whether we can make another change.

So it's a bit of a moving target, but we have established a minimum number, and again I have great confidence that, that more than liquidates the short-term debt that we have on our balance sheet.

Doug Leggate - Citigroup

Okay. You mentioned in your prepared remarks. I think it was also the talk about the working capital move. Can you quantify the working capital change in the quarter?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I have got to

Otto C. Schwethelm - Vice President and Chief Financial Officer

And you give that.

Bruce A. Smith - Chairman, President and Chief Executive Officer

All of those.

Otto C. Schwethelm - Vice President and Chief Financial Officer

Just the change in the working capital?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Yeah. I was looking at it.

Doug Leggate - Citigroup

While we are doing that, maybe I can try one other on this, is my final one. It's kind of a hypothetical question and Bruce I am afraid it's a little unfair, but--

Bruce A. Smith - Chairman, President and Chief Executive Officer

That's okay.

Doug Leggate - Citigroup

In light of the events of last year with Tracinda and the subsequent removal of the provision in the bylaws, you noted the so called poison pill? How would you feel now if that situation had to repeat? I know it's somewhat hypothetical, but I mean are we in a situation where we get kind of yo-yo [ph] put on the poison pill, take it off again. Are you thinking a little differently, given what's happened to the environment and with your shift [ph] prices?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I think the answer... it's really two different situations. The Tracinda offer, to go back and refresh everybody's memory on the Tracinda offer, was for 60 was a premium for 16% of the company basically and the boards... and we had offered with Tracinda to let them meet every goal that they had, which was to give them; we offered them a seat on the board, we offered them. The 20% that they wanted to acquire in the company, but we wanted a clear understanding that they couldn't have creeping control and they couldn't buy a premium and then overtime take control of the company, without paying a premium to all shareholders, that was equal, and that was really the principle. It was about the quality not that that we never really applying on the number I mean we just said that it was an inappropriate offer and put in the rights plan.

So, I think that's a whole different situation. It wasn't... it was a response to a very specific governance issue of fairness for all shareholders and we had an obligation to do what did. I don't think we had any other choice. So, I think that's an unusual situation, and when that went away, we resented the rights plan because it did no longer was a threat and I don't know today where Tracinda's position is, as they would obviously gone on and done some other things.

So, I mean it's not, I don't know how to answer the question. I mean I think that if the question is, is there a possibility that somebody could offer a premium to take over the company, there is no question that they could, and with the Board, the Board would give its consider the fairness of that for all shareholders and the value that would be offered.

But, I think that it's real...it's a little bit difficult. When you look at things today, we are trading at a discount. We know that. We believe these actions will move us to eliminate the discount. I mean we are not going to tell you that we believe or going to outperform this sector, but I think we're looking to make up the discount that's out there. And it doesn't make sense. And it particularly doesn't make sense when you think about the total amount of inventory that we have in the system right now. I mean we are basically trading at sort of inventory value. That don't make any sense.

Our assets on the West Coast have certainly got a lot more value than that. So, we understand where the value proposition is. I think our whole goal here has been to take some remedial action to do some of the things that we need to do in an environment that doesn't look like its going to improve a lot over the near term. I mean it certainly has improved from the first quarter to the second quarter.

We are not projecting that it's going to improve a lot from here, it may, but we think that it's not going get a lot worse and at least we can plan around the type of environment that we see today. So our goal is real simple. Do smart things and try to eliminate the discount that's in our stock price, and I think we'll do that. I don't even think that its complicated. The math gets real simple.

Doug Leggate - Citigroup

It's a tough question to answer Bruce. Thanks for answering it. Do you have the working capital?

Otto C. Schwethelm - Vice President and Chief Financial Officer

Basically, back to the original question was on working capital was increased from to about $200 million which directly relates to all of the other questions around inventory. That is primarily due to the increase in inventory which remember, was related to the turnaround at Golden Eagle. So again, all of that is just kind of is interrelated.

Doug Leggate - Citigroup

Great stuff. Thanks a lot.

Operator

Your next question comes from Jeff Dietert with Simmons.

Jeff Dietert - Simmons & Company International

Good morning, Jeff Dietert with Simmons. Can you hear me okay?

Bruce A. Smith - Chairman, President and Chief Executive Officer

We can Jeff. We are just getting some times a little technical difficulty, where words are getting a little garbled and so if it... please forgive us if we ask you to repeat a question.

Jeff Dietert - Simmons & Company International

Yes, Doug came through clear but I think Neil and Paul were difficult. I liked the presentation format of the call and had a couple of quick questions. I think you have talked about limiting debt to total cap to below 50% are there other credit metrics that you are monitoring closely and trying to manage within?

Bruce A. Smith - Chairman, President and Chief Executive Officer

No. I think that our, what we have got in the immediate control is really the short-term debt, which we will put us back where we were at the end of last year. We have got some other debt that is out there, but really its all about that one metric right now. Obviously, we would like to see an improvement in any of the ratios that involve income, but I don't know that, I mean I can't promise that we are going to do that. I think our commitment is a simple one, which is to really be balanced in what we do right now. I think that isn't the end of the game for us.

What our next step is to obviously take a look forward in 2008 or 2009 and 2010 and really go back and try to look at the way we are spending capital in the future. We have already started that process with a goal of making some more permanent operating expense reductions, some more permanent maybe capital changes and... obviously that just makes sense. You've got to re-look at the economics of what you have got out there in projects to make sure that they still make sense.

You've got to take a look at the scope of the regulatory projects and ask yourself whether in fact those could be changed in design, then maybe minimize those expenditures or you may have done something that was not just meeting regulatory but it was doing some other small thing and there are certain examples of that. So, I think that this is the I mean I am not going to say it's the tip of the iceberg but I think it's the tip of what we need to do, and we are going to be and committed to the Board that our plan here is to more aggressively take a look at the out-years, now we feel that we are going to able to manage in a very financially sound way in 2008.

Jeff Dietert - Simmons & Company International

At your December conference, you talked about the Golden Eagle in Hawaii Sour Up projects and the Los Angeles upgrade. Those were the big capital projects and less certain on timing with those projects, could you update your thinking on those projects for me?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Dan, you want to do that? Dan Porter has taken over refining for us and I'll let Dan answer that question and just to tell you that who he is talking now, Vice President of Refining.

Dan Porter - Senior Vice President, Refining

Yes, we still have a project in our portfolio and things that we are continuing to look at. We have deferred some of the expenditure out of it going into the next couple of years. With this stuff we're particularly around in the Golden Eagle, our projects. But Hawaii project, again we are looking at a number of different alternatives, given the initiative that we have underway there and looking at whether or not that particular project will make sense for us in the future.

Bruce A. Smith - Chairman, President and Chief Executive Officer

And I might add. We changed the refinery manager in Hawaii. We put a very talented guy from Mandan, who has been running our refinery there, who is in his I guess in early 50s, very experienced and we really are pleased to see and there have been other changes in that refinery, and in the leadership chain. I think that it's appropriately what we have tried to do is to, well we have got issues as to try to get a new looking at things and not just rely on old data or old ways. And so, we have... we took, made that change I guess about a month ago now and we are very encouraged by not by just the program that we have got but by some other things that we have seen there. So I do feel good about that.

Jeff Dietert - Simmons & Company International

I wondered if you could talk a little bit more. You mentioned the distillate markets in California and some exports out of the state. Could you talk about your participation and how you see the diesel market shaping up for the summer?

Otto C. Schwethelm - Vice President and Chief Financial Officer

I don't know what I have to speak. But I do know that this has been much more by the way. The West Coast typically has not been an exporter of diesel fuel. But certainly in January, our exports were up, year-over-year about 45,000 barrels a day. In February, they hit over 100,000 barrels a day of exports, increasing about nearly 6,000 barrels a day. So we are seeing the differential between markets supporting now, actually exports from the West Coast in total. As it was mentioned in the script, that's reflective of the very distillate demand we are seeing on the worldwide basis. As far as what we have been able to participate in those exports, I am not aware of any.

G. Scott Spendlove - Vice President, Strategy and Long-Term Planning

Yes, I don't have the figures really Jeff on what we have on terms of the export market but we have certainly benefited from the price effect that's been on the West Coast from that, not just on export barrels but on all the barrels across the system, because it's supported those prices throughout the West Coast market.

Otto C. Schwethelm - Vice President and Chief Financial Officer

Now certainly, you wouldn't want to export car diesel, which is a large portion of our distillate pool. We also have the exports of ultra low sulfur diesel. For transportation, they have been low sulfur diesel, primarily for we understand power generation, using generators because electric grid particularly in South America has been matched out. So again that's all we see on the West Coast participating in that overall market now since the beginning of the year.

Jeff Dietert - Simmons & Company International

Thanks for your comments.

Bruce A. Smith - Chairman, President and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Paul Cheng with Lehman Brothers.

Paul Cheng - Lehman Brothers

Hey guys.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Hey Paul.

Paul Cheng - Lehman Brothers

Bruce, on the revolving credit line, what is the... can you just remind me, what is the total ceiling on that?

Bruce A. Smith - Chairman, President and Chief Executive Officer

The total on the revolving credit.

Otto C. Schwethelm - Vice President and Chief Financial Officer

At the end of the quarter it's $1.75 billion.

Paul Cheng - Lehman Brothers

And also when that is need to be renewed? How long is the term?

Otto C. Schwethelm - Vice President and Chief Financial Officer

Initially when we placed that in May of last year, its a five year term. During April, if you were on the call when we originally funded that, we had the ability to exercise an accordion feature of up to $2 billion. We will include the announcement in the K or the Q that we have increased it a $100 million by the end of April. So we've got $1.85 billion

Bruce A. Smith - Chairman, President and Chief Executive Officer

Another four years.

Otto C. Schwethelm - Vice President and Chief Financial Officer

Correct. So we've got another four year term for the existing agreement.

Paul Cheng - Lehman Brothers

And, Bruce can you give us what is your natural gas consumption by system; California, Pacific Northwest and I don't think Hawaii consume any, and I think Mid-Continent also consumed some, so if you can just give out how much are you consuming?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I can't give you those figures Paul. We'd have to look at them. We don't... you are right, we don't consume any natural gas in Hawaii.

Otto C. Schwethelm - Vice President and Chief Financial Officer

Scott will get back to you on that individually Paul.

Bruce A. Smith - Chairman, President and Chief Executive Officer

And Alaska is a little unusual because it's not the same market, it does consume natural gas but it's a different price structure in Alaska than it is in the continental United States. So, I mean I don't have it, we'll adjust it. We will give you some information.

Paul Cheng - Lehman Brothers

Okay. That will be great. Thanks. Bruce on the 2008, your new capital purchase is $870 million. If we are looking at that, how much of them you still consider discretionary? Let's say, for whatever reason the market condition turned out to be even worse than we thought from the current level. Is there any additional among that you will be able to come without impacting the regulatory or safety reliability projects?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I mean yes there is. When we talk about $870 million, keep in mind the first quarter has already gone, so your ability to fine tune the number; when we talk about reducing it, we're not talking about an annualized number, we're talking about reducing it here in the remaining seven months of the year. So, is more than we can do that probably is a little bit more as we would look at the year. There is no question you can always stop things in the middle. So I mean the answer is yes, you can always make adjustments. And we have... as I said, we are taking on a review and sort of look at where we are. We've made the quick ones that we think are important for this year, that are going to get us balanced. If in our review we feel that we've got to do something else this year, we could do it more.

Paul Cheng - Lehman Brothers

Bruce I think you have said in the call as well as in the press release, you look for about $1 billion dollar cash this year from working capital reduction, the cost reduction in capital spending. The capital spending probably is $230 million, so that means that working capital and cost reduction is $770 million that you target to achieve. So we assume that the bulk [ph] that you see in the working capital?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Yes. I mean I think the majority of the remainder part will be... we actually have a firm cost number, which I am... is in that number. It's more... because it's not subject to the types of volatility that you would see relative to the... to obviously what the working capital base values are going to be and how we liquidate that overtime. But it is a fair statement to say I mean it's divided more heavily toward managing and reducing working capital.

Paul Cheng - Lehman Brothers

And you share with us what is the cost reduction target that you expect through January? I think I'd rather not... we presented that to the Board. We gave them a number. Its in this number, we think we can be more aggressive to that. I just didn't say that we're going to free it up and it will measured in the form of looking at OpEx and administrative expense over the course of the year. And I think the key is for us to perform for the $752 billion. I think that when we look at next year, it think we'll be better positioned to give you a target around what we'd like to do over the longer term.

Our goal is to not... we are not satisfied with our cost structure. We are going to make some changes this year, which in the last seven months is a meaningful number. I don't want to give you the impression that this is a 90-10 split, with 90% of that coming from working capital. That's not right. But I think our goal is to further find ways to improve our OpEx, and that's a challenge that Dan Porter and Everett Lewis have taken on.

So, not just a whole that we are going to try to generate between $750 billion and $1 billion of cash this year in the right ways and we will look at our cost structure and we'll give you some more granularity as we get to 2009.

Paul Cheng - Lehman Brothers

And also for Otto is it possible you can give me what is the end of the first quarter the account receivable amount and account payable? And also that I think maybe you guys have talk about it but I probably missed it, the number of the barrel in inventory.

Otto C. Schwethelm - Vice President and Chief Financial Officer

We just give that to... maybe you weren't on the call.

Paul Cheng - Lehman Brothers

I probably just missed it.

Otto C. Schwethelm - Vice President and Chief Financial Officer

Okay. Receivables are 1.6 and payables is 2.4.

Bruce A. Smith - Chairman, President and Chief Executive Officer

And inventory is 30.

Otto C. Schwethelm - Vice President and Chief Financial Officer

And yes.

Paul Cheng - Lehman Brothers

$30 million --

Otto C. Schwethelm - Vice President and Chief Financial Officer

Right.

Paul Cheng - Lehman Brothers

Okay. And finally, I mean Hawaii is always difficult with that for us that to track out the multi-condition. Bruce can you give us some guidance in terms of, so far in the quarter how is that comparing to the first quarter in terms of their margin environment?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I think its following the same general trends that the West Coast are following. The gasoline price is related to Asia. The diesel price is with Asia and the West Cost. Diesel price is related to the West Coast and Asia. We have a low sulfur fuel oil component that you can track and I think overall its following the same general trends.

Paul Cheng - Lehman Brothers

In the West Coast, we probably have seen them going up by about 3 or $4 per barrel quarter-to-date. So should we assume a similar trend in Hawaii?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Well if you are talking of light product cracks, remember you are just looking at light products and our yield does are not a 100% light products in Hawaii. So you need to adjust for that. But generally, yes.

Paul Cheng - Lehman Brothers

Okay. Very good. Thank you.

Operator

Your next question comes from Chi Chow with Tristone Capital.

Chi Chow - Tristone Capital

Hi, good morning.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Good morning, Chi. How are you?

Chi Chow - Tristone Capital

Pretty good. Hey, I guess the one initiative that hasn't really been discussed are the lowering crude oil costs. Would you say that the biggest upside is at Wilmington through your system on this initiative?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I mean you faded out the biggest upside the Wilmington is what crude oil, lowering crude costs?

Chi Chow - Tristone Capital

Yes. That initiative to lower crude oil cost is the most leveraging I guess refinery to make a dent in that at Wilmington?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I think, yes. I mean I certainly would think that right this year, it is. I think as these crude contracts roll off, looking at how they are benchmarked and what we think we can do in supplying that refinery for the remainder of this year, those crude contracts have been relatively expensive. So, those are... I mean again that's non-capital that drops to the bottom-line. And then in 2009 as I said in my comments that the build leads are bringing in all foreign crudes through that Long Beach terminal, which we expect to have depending on the permitting year but certainly in 2009, will be another big opportunity to reduce our crude cost going into Wilmington.

Chi Chow - Tristone Capital

Okay. Is there any way to quantify at Wilmington the amount of barrels or barrels per day I guess that's shifting from these legacy contracts to something else?

Bruce A. Smith - Chairman, President and Chief Executive Officer

Well Wilmington had light sweet contracts there. Their local California contracts that we inherited when we got it from the shale numbers and I think we have the number of the barrels on those contracts. I don't have it in my head, do you have them Dan?

Dan Porter - Senior Vice President, Refining

We have it--

Bruce A. Smith - Chairman, President and Chief Executive Officer

We can provide some of that.

Dan Porter - Senior Vice President, Refining

And over the course of last year, this year, and we've been moving out of those contracts. I think that's totaling to foreign barrels of where that make it.

Chi Chow - Tristone Capital

I didn't catch those numbers.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Is your--

Dan Porter - Senior Vice President, Refining

Around [Multiple Speakers] barrels a day and what we've been moving out of contracts that we've had on domestic and moving more towards foreign barrels. That won't be the total over the course of time, but it will depend on whatever the market is and whatever the other opportunities we have.

Bruce A. Smith - Chairman, President and Chief Executive Officer

I know we've looked at the number and obviously it varies. But as a range, unfortunately I don't have --

G. Scott Spendlove - Vice President, Strategy and Long-Term Planning

Chi, this is Scott. We have said in the second quarter that the benefit of those rolling off will be in the range of $0.30 to $0.50. On those specific barrels and that longer term, we see $1 benefit in the crude cost going forward.

Bruce A. Smith - Chairman, President and Chief Executive Officer

I think that we have seen up to... I recall the numbers, it's been higher than the $0.30 to $0.50 at times that we have had as a discount or we've been paying a premium in this last period of time. I think we think it's now sort of normalized in the... that where we think $0.30 to $0.50 is achievable to be able to replace those barrels, and then longer term its getting into the crude that we could bring offshore, we'll reduce it to above that, sort of that dollar. So it's been... obviously it peaks back and fourth, but I mean we have paid some pretty hefty penalties under those contracts.

Chi Chow - Tristone Capital

Okay. And sorry, 30,000 barrels a day?

Bruce A. Smith - Chairman, President and Chief Executive Officer

30,000 barrels a day.

Chi Chow - Tristone Capital

Got it. Okay. Thanks. And how much yield can you shift at Wilmington to diesel? You mentioned that in one of your slides.

Bruce A. Smith - Chairman, President and Chief Executive Officer

You are talking about the yield of distillates?

Chi Chow - Tristone Capital

Yes.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Well, we have already shifted in the neighborhood of 13,000 barrels between two initiates. We have done there between gasoline and distillate, and we are looking at further opportunities to do more which we haven't quantified yet. But one of the things we are doing is a hydrocracker turnaround later this year. And if you understand what goes on the West Coast, a lot of the distillates are reprocessed to hydrocrackers. So we are looking at further optimizing how our yield come off that hydrocracker perhaps during that turnaround, again with minimal capital. So we think there is some further upgrades there that maybe possible this year.

But just that real simple thing you might just we might just elaborate to go back I mean. Some people may not have picked up on the number but I mean how much money $0.30 just taking... maybe take a step back on that.

Everett Lewis - Executive Vice President and Chief Operating Officer

Yes, the changes we made to increase the distillate yield there have been just very minimal capital cost. We have put in couple rental [ph] coolers with some temporary piping and the capital there was negligible, and we are looking at 7 to 9,000 barrels a day at $0.30 plus $0.30 to $0.40 a gallon differential. So it's a big number. $3 million to $5 million a month.

Bruce A. Smith - Chairman, President and Chief Executive Officer

3 million to $5 million a month just in that little change and that's what we have done is and I think its really important as we have engaged our work force to be able to really and particularly there to look for ways that we can make more immediate changes, and buoy they came through with a home run there. And well certainly as Everett said, we are looking at some other ways to improve that. But, the number of initiatives of both Los Angeles and Hawaii, I'll tell you how many... what the number is in Hawaii. I mean its over 100. I mean there are so many things that we are doing there. Again, that's just managing the business and doing the right things and looking where the market is. Those are just small examples. But they are big dollars.

Chi Chow - Tristone Capital

Yeah, that's helpful Bruce. And then two final questions; are you considering any asset sales at this point and secondly I guess for auto, are there any concerns on covenants on your credit facility?

Bruce A. Smith - Chairman, President and Chief Executive Officer

I am sorry, we considering any asset sales? Is that?

Chi Chow - Tristone Capital

Yes. Asset sales, are you considering any. And then, are you... do you have any concerns with the covenants on your credits?

Bruce A. Smith - Chairman, President and Chief Executive Officer

No. I don't have any concern at all about covenants. We are so far beyond that. We are going in the other direction now. So I feel very, very good about that. We don't have anything that might be of the station here or there that might have... but I am not going to say there is nothing. We sold a plane in the first quarter, but all the assets sales that we have are really have been small. We are going to... as we do, we were going to look all of our assets just to make sure that we like the investments that we have got as we look to put more money into the different assets, not make sure there are ways that we can redeploy capital.

We have looked at a few ideas around redeploying some of the capital that we've got committed and so we are not ready to talk about anything there. But not large asset sales that are going to be meaningful, where we change the EBITDA of the corporation in a meaningful way. So that doesn't mean that we won't do that. I am not going to say that we are not going to look at that. I think that's always on the table when we look at values.

Chi Chow - Tristone Capital

Okay. Thanks, Bruce.

Bruce A. Smith - Chairman, President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from Ann Kohler with Caris & Company.

Ann Kohler - Caris & Company

Good morning, gentlemen.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Good morning, Ann.

Ann Kohler - Caris & Company

I've got to go to totally different direction.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Okay.

Ann Kohler - Caris & Company

I have a question probably this for you Lynn. There has been certainly a lot of talk about ethanol rate and certainly Governor Perry I guess in Texas indicated that he was looking or maybe he did receive a waiver regarding the ethanol mandate. What are your thought, given that your... where the government affairs have there? What are you hearing and what kind of things are you expecting, and does this have any implications on, is it CARB IV or V that was looking at increasing the ethanol component?

Lynn Westfall - Senior Vice President, External Affairs and Chief Economist

CARB IV.

Ann Kohler - Caris & Company

Okay.

Lynn Westfall - Senior Vice President, External Affairs and Chief Economist

Okay, a really large question. Let me deal it. On the federal level, you are seeing a lot of backlash right now against ethanol requirements in the build was passed in December. We already spoke to the food for fuel debate as well as recent evidence that ethanol addition actually increases the carbon footprint versus conventional gasoline. Yet, there is a lot of backlash. There were hearings held yesterday by the house committee that has over side over that, on what we are going to do responding to the requirements of the ethanol federal legislation.

That having been said, quite frankly what we are hearing is that on the federal side, the leadership in both the house and the Senate does not want to take this issue up this year. They have too many other things on their plates and they will probably delay any meaningful action if there is going to be any until next year on the federal side.

Switching over to the California side, the CARB IV regulations were submitted last Thursday for a final 15 day review period with the office of administrator law to make sure they follow their procedures. That should come out next week and if does come out of there clean then that will be the final regulation for CARB IV, which allows ethanol content to go up from 5.7% to 10%, effective January 1, of 2010. CARB is not addressed. The increased carbon footprint when we look at this, but they are aware about the new data, so there may be some changes coming there too. But if there are any, it's going to be slow. Hopefully that answered the high points.

Ann Kohler - Caris & Company

Yes. Great. I appreciate it Lynn.

Lynn Westfall - Senior Vice President, External Affairs and Chief Economist

Sure.

Bruce A. Smith - Chairman, President and Chief Executive Officer

Ann, I thought that was a good question. I think that we talked an awful lot. As we close the conference call down today, we talked an awful lot about our plans and I think that it's fair to say that we got very focused plan here to be able to manage through what's going to be a lower environment... margin environment. At least we believe that's going to be the case.

With that said, there is certainly some potential things that could be very positive for the industry as a whole, and ethanol is one of those. And I think that if you look at some of the other discussions right now, whether it's about the economy, whether it's about the relationship of the value of dollar and crude oil prices, obviously the potential that we could see some improvement and I know there are some speculation about the crude prices going up. It could also... you could certainly make a case if crude prices are going to be stable to decline.

So, I don't know that... not everything is negative. I think we are finally in a better balance. What we've got to do is make some adjustments to balance where we are and I think we are making those in the short-term. I believe we will be positioned to make other changes as needed this year or position certainly to make changes to the out-years that we have already discussed. Certainly a challenging environment but one, we think we're really prepared for now and I think it will be... we look forward to reporting on the second quarter upon the initiatives and being able to discuss these and I want to thank everybody for joining us today.

We appreciate your attendance and we look forward to talking to you at the end of the second quarter if not before. Thanks very much.

Operator

This concludes today's conference call. You may now all disconnect.

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