Tesoro Corp. Q4 2009 Earnings Call Transcript

123jump.com Staff
07 Feb, 2010
New York City

Revenues rose 12% to $4.7 billion & net loss was $179 million or $1.30 a share. It reported a refining operating loss of $213 million. In this operating income across all product channels was $100 million. Of that amount retail contributed $41 million & for the full year retail made $83 million

Tesoro Corporation ((TSO))
Q4 2009 Earnings Call Transcript
February 3, 2010 8:30 a.m., ET

Executives

Scott Phipps - Managing Director, Finance & Investor Relations,
Bruce A. Smith - Chairman, President and Chief Executive Officer
Lynn D. Westfall – Senior Vice President, External Affairs & Chief Economist
Daniel J. Porter - Senior Vice President, Refining
Chuck Flag - Senior Vice President, System Optimization

Analysts

Paul Sankey - Deutsche Bank
Evan Calio - Morgan Stanley
Arjun Murti - Goldman Sachs
Neil McMahon - Sanford Bernstein
Doug Terreson - ISI
Ann Kohler - Caris & Company
Jeff Dietert - Simmons & Company International
Paul Cheng - Barclays Capital
Mark Gilman - The Benchmark Company

Presentation

Operator

Welcome to Tesoro''s Fourth Quarter Earnings Conference Call. My name is Christian [ph] and I will be your operator today. Following today''s prepared remarks, there will be a question-and-answer session. At this time, all lines have been placed on mute. Mr. Phipps, you may now begin your call.

Scott Phipps

Thank you, Christian. Well, good morning, everyone and welcome to today''s conference call to discuss our fourth quarter 2009 results. While management will not be referencing slides, we did file a presentation deck earlier with the SEC and encourage you to have these available as we progress through this morning''s call. These slides along with other financial results including the press release and our supplemental quarterly data can be found on our website at tsocorp.com.

After reviewing this information, please feel free to contact me with any questions about this material or otherwise following today''s call. 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.

Before before Bruce''s comments, I’d like to offer guidance for the first quarter of 2010. Looking at throughput by region, in the Pacific Northwest, 115,000 to 125,000 barrels per day; in the Mid-Pacific 60,000 to 70,000 barrels per day; in the mid Continent region 90,000 to 100,000 barrels a day; and in the California region 195,000 to 205,000 barrels a day, which is roughly 30,000 barrels a day lower than our fourth quarter actuals due to maintenance at Golden Eagle on the cat cracker.

OpEx guidance for the first quarter is as follows, in the Pacific Northwest $4.85 per barrel; in the Mid-Pacific $3.15 per barrel; in Mid-Continent region $4.10 per barrel; and in California roughly $9.00 per barrel. Our depreciation for refining is estimated at $90 million. Additional first quarter guidance items include corporate expense of $45 million and interest expense before interest income of $38 million.

I''ll now turn the call over to Bruce.

Bruce A. Smith

Thanks, Scott and good morning to everyone. We appreciate you starting the day with our management team. Obviously, we are here to answer questions about the results for the fourth quarter, answer questions about the year and obviously talk about the release that we sent out yesterday. But before we do the Q&A portion of our call, I want to make a few general comments both about the quarter and also about how we see the current market environment.

I want to begin with a quick summary of some financial and some operational results. As Scott said last night we reported fourth quarter we lost $179 million or $1.30 a share. Those results include a $43 million charge for the impairment of the goodwill associated with our purchase of the Anacortes refinery in 1998. So if you exclude this non-cash non-taxable item, we reported a $0.99 per share loss which is generally in line with the consensus expectation.

While we are very, very disappointed about the results in these -- and the losses in the fourth quarter, we are not going to attempt today to try to put a positive spin on it, but the simple fact that the consensus was a negative says that results weren''t a surprise to you. Let me give you just a few facts.

The West Coast benchmark margins averaged about $8 a barrel in the fourth quarter or roughly half of what we saw in each of the first three quarters of the year. We can speculate about the reasons but they would certainly include seasonally lower demand and higher winter grade gasoline inventories.

In this weak environment, we reported a refining operating loss of $213 million. The marketing segment, however, continues to perform well. In the fourth quarter, operating income across all product channels was $100 million. Of that amount, retail contributed $41 million and for the full year, retail made $83 million.

In the face of weak demand, our marketing team has demonstrated an ability to move products into higher net back channels of trade, an ability that we believe is a core strength of the company. We also believe that marketing''s role will continue to be important in a market where supply exceeds demand.

In California, we have seen an over supplied market condition for more than the past two years and as a consequence cash stewardship has been a primary objective. Therefore, we were pleased that cash increased by $177 million and that''s excluding the $216 million net change in debt, as we ended the year with $413 million of cash.

We were able to accomplish this as a result of many successful programs. These programs include excellent capital management, expense reductions, exceeding the target for our non-capital improvement initiatives and managing our inventory down to lower demand levels. It''s certainly a commitment to these basic tactics that we now consider everyday best practices for Tesoro and they are going to continue to guide us in the future just as they have since the late 2007.

Operationally, our plants ran at an average of 530,000 barrels per day, which is about 35,000 barrels per day lower than the third quarter throughput. Lower fourth quarter throughput isn''t unusual because in Alaska, Salt Lake City and Anacortes we normally reduce runs in the winter to match lower product demand. Another difference in the statistics that may catch your eye is the fact that our manufacturing expenses increased by approximately $10 million from the third quarter, which was primarily due to higher purchased energy cost.

The only other really interesting operational fact is that we did accelerate the planned work on the cat cracker at Golden Eagle. This was originally scheduled for the first quarter of 2010, but with the miserable fourth quarter margin environment we decided to advance that work. As a result of this outage and the Los Angeles coker downtime, our production of lower valued products, such as fuel oil, increased roughly 6% compared to the third quarter.

The operational mantra for these times is to be highly flexible and committed to making any adjustment to the operating plan that will better align it with market changes the ones that are occurring every day today. This sounds pretty easy in practice, but obviously it''s much more difficult.

We have a hard time predicting demand in a normal market and when you give, when you look at the volatility that we have seen both in commodity prices and margins, predicting the future has become much more difficult. But to give you an idea of some of the flexibility that we''ve had in how this plays for us, last quarter we said in our conference call that we didn''t expect inventory levels to decline after the $4.4 million -- 4.4 million barrel draw of inventory that we had in the third quarter.

But as we saw benchmark margins begin to decline, we adjusted our crude purchases and we moved up the planned work on the Golden Eagle SEC unit, which ultimately caused us to reduce inventory by another 1.9 million barrels. Another example of being flexible was the success we had in capturing non-capital improvements or what we call our optimization program.

As our release noted, we achieved a total of $370 million from these initiatives in 2009 and we''ve earmarked more than $150 million of additional improvements for 2010. One final comment, everyone in the industry is actively managing cash cost and expenses and we are certainly not an exception to the rule. However, the most significant cash item that we''ve modified for the past several years has been the size of our capital expenditure program. Our entire team continues to scrutinize the scope and timing of our capital program.

At our November analyst meeting, we estimated that our capital spending for the first quarter of 2010 would be in the neighborhood of $250 million and that the full year would be around $675 million. As I said a minute ago, our team continues to actively review all our alternatives and in today''s earnings release we said that in the first quarter we expect to spend over $100 million less than the previous estimate, which reduces our 2010 planned expenditures to about $600 million dollars.

Just a few other comments about 2010. There are many reasons to believe that we will continue to see margins similar to those in 2009 unless we have a substantial change in the current supply or demand picture. Accordingly, in this environment, we are focused on creating self-help through the practices and programs which I mentioned earlier. One self-help program is the three year $300 million program that we refer to as our quick hit capital program.

You may recall that this program is one that contains projects that are smaller in size, they are shorter in implementation time and that they have very high returns. So I want to spend a minute explaining why we plan to proceed with this. In the past year, many of our investors and more than a few analysts have wanted to understand how we can make a difference and have expressed the concern that refining companies, including Tesoro, are bearish about the outlook for the industry.

We would like to say that the market is going to change quickly and certainly it might. But in order for margins to recover to the 2005 and 2007 levels, we need a significant change in the supply demand balance, as I said a little earlier. On the positive side, the rationalization of supply has begun albeit at a slow pace and we believe that that is going to continue. New capacity is going to be slow in arriving.

Demand will grow in certain markets, but the key certainly it is for us in the United States is going to be domestic growth and that depends on employment. But simply put we expect the year to be very challenging. There are some positive signals and we all know how quickly the market can move if more production closes, but to be conservative we are planning for a margin environment that will fluctuate, but remain close, relatively close to 2009 levels.

Given that assumption, we believe it is important to execute the capital and non-capital self-help initiatives we have outlined, which are aimed at improving margin capture and at decreasing cost. As we stated in our analyst day presentation, improving our competitive position is important to our corporate strategy. To grow shareholder value in a flat margin environment, it is important to have both expense and non-capital initiatives, but everybody is doing that.

Therefore our plan is to create growth by investing in the quick hit program. And with these investments in the first year, we project that it can be self-funding in the next year and then all the money the program generates excess cash in 2013, the benefit of which can flow to our shareholders.

Historically, January''s margins are among the lowest that we see in the year. The first quarter started off where the fourth quarter ended with an excess of clean product inventories and seasonally reduced demand. However, in past years, benchmark margins have also tended to improve in February and then they''ve continued to improve in March. The industry is making adjustments and we will continue to look at our operations. Nobody can predict what''s going to happen to margins; however, we will say two things about the future. We are going to continue to manage the business by being flexible and tailoring our operations to meet market changes. And secondly, we expect to deliver on the capital and non-capital initiatives that we have discussed. And with that, Christian, we are going to open it up so the management team can take questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue, you may press star two, if you would like to remove your question from the queue. For those participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Paul Sankey with Deutsche Bank. Please proceed with your question, your mic is now live.

Paul Sankey - Deutsche Bank

Can you hear me?

Bruce A. Smith

I can, Paul. How are you this morning?

Paul Sankey - Deutsche Bank

I was expecting the usual cheery response to me. Thanks anyway. A very specific short-term market question if I could. Firstly, could you just remind us how much incremental ethanol we''ve had impacting the market here and whether or not you think that the rate of change there is now complete, that is to say the ethanol is now in the market and has, if you like, had its negative effect. Secondly, within that same question just remind us of the timing exactly of the specification change we get in February and what you think the volume impact will be of that on the positive side. And then if you could also just and I guess it is somewhat speculative, but I know it''s been very rainy in California and I was wondering if it''s been that much more rainy this year than last year and whether or not you have an idea of how much volume impact there''s been from lower demand that might easily recover if we get less rain. That''s part one, thanks.

Bruce A. Smith

That''s -- first of all, that''s a good question. It''s one that we''ve spent quite a bit of time looking at and looking where margins are and just with talking with the board yesterday and really a similar question. I am going to let Lynn give you sort of a view around ethanol. He''s got on his weather hat so he can also, I think, talk a little bit about the weather, but certainly all the things that you mentioned have had an impact. Maybe I''ll make a comment at the end. So Lynn, you want to…?

Lynn D. Westfall

Sure. Let me start off and, Paul, if I don''t hit all your questions, please remind me. I think the first one was around the ethanol addition to the marketplace. Certainly, that started January 1 of this year. I think everyone that we are aware of is blending to the 10% number in California. So on an energy adjusted basis what you are looking at is an addition to the supply of about 28,000 barrels a day of gasoline. Whether we have seen that effect in the marketplace is a little hard to tell right now. You mentioned a lot of other things that are affecting the market. There are turnarounds going on. Seasonally, January is about 5% lower in demand anyway than December. And you also mentioned the rains, which had to be a factor.

Looking at the rain situation, I tried to gather some data from the last time they had heavy rains but that was in 2006 and that averaged only about eight inches over a three to four day period. This last go around in January was 20 inches. So we really don''t have anything to fall back on. The last time, we had heavy rains, as I mentioned, there really was no demand effect because it was pretty short lived. It looked like it just temporarily caused people to stop driving, but I think this time it was probably more pronounced with the flooding that we saw in both the major population centers of San Francisco and LA.

So I think there is an effect going on with that right now. As I say, what the effect will be of the additional ethanol addition, we don''t know at this point in time, probably will not know until summer time when refineries are up and running at their maximum capacity. I think the other question you asked was on the specification changes going from winter grade to summer grade, February 15th in Southern California, LA and Northern California is a month delayed at March 15th. Did I cover most of your issues, Paul?

Operator

Thank you. Our next question comes from the line of Evan Calio with Morgan Stanley. Please proceed with your question, your mic is now live.

Evan Calio - Morgan Stanley

Great. Good morning, guys and thanks for taking my call this morning.

Bruce A. Smith

Sure.

Evan Calio - Morgan Stanley

Question, I was hoping you could give us a little more color or granularity on the CapEx reduction in 1Q and in 2010 aggregate in terms of where the reduction is, what is being pushed and where to. I know, you mentioned in your commentary of remaining on the three-year quick hit plan of $300 million, but is there, has there been some reduction of what you include in the $600 million for 2010?

Bruce A. Smith

I''ll let Dan answer the question since the majority of it is going to be work that he has done. I think that the program here and Dan you might just make a comment about sort of what we''ve done over the past three years. I think that -- I don’t know how many -- I''m not going to try to answer this question for people, but I think this program has been so active for us that we are going to give you a sense not only of what were with this answer, but put it in a perspective for the last several years.

Daniel J. Porter

Okay. Great. Certainly during the first quarter of this year, probably the biggest impact is round our turnaround activity. Originally, we had planned to do a major turnaround at our Golden Eagle refinery and ultimately we elected to take a modified scope of work on that. But we did take the cat cracker down in November or really December 1st of last year, at Golden Eagle and we are completing some regulatory work on there, but we are deferring significant portion of the major turnaround work to 2011. So that is a substantial portion of the change.

We''ve also been able to re-optimize our overall program around some of the regulatory capital needs based on credits that we had already generated for benzene and gasoline and around NOx credits we generated or a NOx credits we''ve been able to acquire that have allowed us to reduce the scope of work or defer some of the capital spend. But overall if you look back starting at the end of 2007, we''ve reduced about $1.3 billion of total capital out of the program that we had at that time. A fair piece of that, a reasonable piece of that, around $500 million of that, was income improvement capital, but we have put back into that $300 million of that for this quick hit program and of that in 2010, we are still planning on approximately $70 million of quick hit income spend in our $600 million program for 2010.

Our philosophy has been really about trying to scrub our work to optimize on the regulatory spend, get the most efficient spend that we can, find new and innovative ways of complying with regulatory needs, but always it''s about safe compliance and reliable operation. So this whole program still complies with all of that, but it has enabled us in some cases to defer some turnaround activity to fit with inspection results that we have. So it''s based on good sound engineering and inspection information, but it''s been a good program overall. We have got a great team that''s put a lot of energy and effort into how do we optimize that program over multiple years without building a big capital requirement out there in the future years. So as we look forward to 2010 to 2012, we think that we have got a good program that is not substantially increased.

Bruce A. Smith

We’ve reviewed this with the board and talking about what we are compromising, if anything, relative to reliability, safety and maintenance. And we have spent time with our -- we are one of the few companies that have an environmental health and safety committee which has people that have been in the industry. And I think that the board is very comfortable with what we are doing and a lot of it is just better management all the way around of scope and timing. But I think that the quick hit program to put it in a perspective, if you want to look at the bad margin environment that we''ve got, even when you take, in which reduces EBITDA obviously for the entire industry, this program becomes even more meaningful with a smaller EBITDA.

So it''s much more significant for our shareholders and we believe that over the course of time here that we''ve got to do everything we can to be able to augment our income in a low margin environment, which we believe will be substantial and then if margin pick up. Obviously, we''ll take the benefit that goes across to the entire market. That''s the perspective on our capital.

Evan Calio - Morgan Stanley

Great. One more question if I may. I know inventory reduction in 2009 was a material net add for cash. Can levels be reduced further, how or are they too low? I mean how do you give us some color on how you think about inventory as a either potential source or use of cash on a go-forward basis in 2010? Thank you.

Bruce A. Smith

Chuck, I am going to let Chuck Flag answer your question. Let me give you just a top level view. I mean, a lot of this involves, obviously, what you think is going to happen relative to what we don''t want to see, truthfully, is a margin environment where we take inventories down just because margins are coming down. But we''re -- Chuck, do you want to talk about the -- and I would probably go ahead and talk just a bit about the risk of run out now.

Chuck Flag

Evan, last year we ended at -- I''m sorry -- 2008 we ended at 23.5 million. This year was 20.1 million. If you would have asked me last year if we could go lower than 23.5, I probably would have said no. However, we have changed our philosophy as margins have deteriorated in that we are not as concerned about short-term run outs. We are willing to take a little more risk around run outs in crude oil and products again because margins have deteriorated so much that the economic penalty for those run outs has diminished significantly. So depending on the level of margins, we will adjust our inventories appropriate to the market.

Bruce A. Smith

I think it''s Paul -- Paul Sankey asked a question earlier. But, I mean, in looking at the risk and, of course, everybody is focused on risk and everybody is running scenarios. The appropriateness of what Chuck is saying is meaningful and it does fit where I think we as a company are and where others are in the sense of we are willing to take, accept that risk. When you look at the first quarter and what''s happened with the growth in inventories, we know that there -- and it''s I don''t know whether it''s public knowledge. There are several other refineries on the west coast that are going to go into turnaround and do -- they are going to be down. The traditional philosophy is that you build inventories in advance of a turnaround because you are not going to be producing products.

Now, why you do that in this market, I don''t know. But there are people that are still thinking traditionally and maybe they are larger companies that are thinking traditionally and potentially you could attribute some of the growth in inventories to the simple fact that people may be still subscribing to an older philosophy rather than being able to just purchase that product in the marketplace. So we think that there are many things that have happened in the first quarter, but our view is that we are willing to tolerate the risk of having just to run to recirculate the refinery if we have to.

Evan Calio - Morgan Stanley

That''s great. If you look at that turnaround kind of on a go-forward basis, is it March where it really kind of begins to look like you may see a much tighter market?

Chuck Flag

There are substantial turnarounds in March which should tighten things up. We are also seeing the -- hopefully seeing the results of lower RVP production that is also going to tighten the market.

Bruce A. Smith

Yeah. We have already seen, I mean I said to the board yesterday, if you put on your rose colored glasses and you really have to do this, but from where the pure bottom of the market has been, it looks like there''s a new trend developing for some strengthening margins, which would correlate, although starting from a lower level, it would correlate to what we traditionally see in February, which is some improvement and then in March being really the strength of the first quarter.

Evan Calio - Morgan Stanley

Great. Thanks guys.

Chuck Flag

You''re welcome.

Operator

Thank you. Our next question comes from the line of Paul Sankey with Deutsche Bank. Please proceed with your question, your mic is now live.

Bruce A. Smith

When did you get two for one?

Paul Sankey - Deutsche Bank

No. I just come straight back on, I thought everyone else would have a go. I will wait until the end, but my question was actually a follow-up that I was on mute for. I was going to ask you about turnarounds and you''ve actually pretty much answered that with Evan, so I''ll hop off. And if I get another chance I will come back.

Bruce A. Smith

Okay. Thanks, Paul.

Operator

Thank you. Our next question comes from the line of Arjun Murti with Goldman Sachs. Please proceed with your question. Your mic is now live.

Arjun Murti - Goldman Sachs

Thank you. Bruce, I was just curious how you are thinking about additional refinery run cuts versus potentially closers in an environment where the EBITDA is kind of zero or negative. I certainly appreciate the business can change dramatically on short notice and so no one wants to over react to a few months of zero or negative EBITDA, but how do you think about duration of kind of running at no cash flow and run cuts versus maybe more meaningful actions with your facilities? Thank you.

Bruce A. Smith

No. Arjun, that''s a great question and obviously one that we wrestle with and certainly I know other people are wrestling with it. Everybody''s view is that somebody else will blink first. I think that you are absolutely right. It''s sort of difficult to make what''s a pretty significant decision relative to temporary idling or temporarily shutting down or permanently shutting down a facility. We’re pretty active in looking at our facilities and, obviously, there are some that are still in markets that are performing extremely well and there are some that are in markets that are not performing well at all. But when you look at it, you sort of have to look forward, which is the hard part of the equation and not get stuck on the fact of exactly where it is today. And look, when we focus on it, we are really focusing on what is going to be the net cash impact and how much time do you have to make a decision, what the commitments are to the capital programs. And so we have a pretty active review program of looking at the factors and have spent time discussing it among ourselves and with the board about what we think strategically are timing issues relative to the point you raised, which is negative cash.

I think that -- I wouldn''t predict that we are going to act immediately on any one thing, but I would tell you that we are doing an awful lot of work relative to solving the issue, not just with closures but looking at other things. And I think that -- I know everybody is doing it. We’ve been so focused on cash that this isn''t something that started just because margins got to the low point that we see today. It''s been so going -- ongoing that we''ve got alternatives that we are starting to -- we''ve begun to implement. I don''t know where it will take us, but all things are on the table all the time. And we -- I think that it''s, I don''t want to speculate on the positive side, but we see changes that are occurring. Politically there are things happening. We are going to spend a lot more time politically with other people in the industry. Some of the dynamics have to change one way or the other and I don''t know, I can''t predict what that''s going to be, but for us we are going to be prudent about what we think we need to do for shareholders to preserve value and we go back to one thing.

Right now, we still think that the right thing to do is to try to figure out how to continue to fund this quick hit capital program and if we have to take other action to do that. I mean, we''ve sliced our dividend. That''s relatively small, but when you look at it net against the $50 million to $70 million that we are going to spend, it''s a nice little match that we think is a better return for shareholders who are in a growth mode and so that''s sort of where we are. Everything is on the table. We''ll continue to make the best judges we can make about the future.

Arjun Murti - Goldman Sachs

Bruce, thank you very much for that answer. If you, I mean, you''ve taken a capital program down a bit more, what would be a bare bones number, how low could you take the CapEx this year if you had to?

Bruce A. Smith

It''s difficult. I can''t give you that answer because we certainly could change our capital program more. It would come at the expense. It is going to start at some point, like anything, it comes at the expense of something. Today we''ve been able to, through the risk management program that Dan talked about, be able to move things around and where we feel like it was a minimum amount of risk as we did new inspections to be able to move things out. So it has been easier. Redesigning programs to be able to find a more effective way to do it is, again, it is sort of like inventory, eventually you run out of those. So your options are to close the refinery, that saves a bunch of capital. Your options are to stop spending on a program and take the consequences, but I have no doubt that there are ways that you can cut capital. But it''s part of other decisions. Inventory and everything is only going to take you so far.

Arjun Murti - Goldman Sachs

That makes sense. Thank you very much.

Bruce A. Smith

You''re welcome.

Operator

Thank you. Our next question comes from the line of Neil McMahon with Sanford Bernstein. Please proceed with your question. Your mic is now live.

Neil McMahon - Sanford Bernstein

Hi. Really following up on that theme and just a few other questions as well. Seems like every quarter and obviously, we have got about environment, Hawaii still seems to create a bit of an issue. Just focusing on that one particular refinery, it sort of stands on its own. Is that still, when you look going forward over the next few years, is that still going to be part of the portfolio and is it dragging the rest of the portfolio down if and when there''s a recovery coming? That''s my first question.

Bruce A. Smith

Again, I''ll give you a generic answer. Everything is on the table. Hawaii is more a complicated decision for a lot of different reasons, but it did produce cash last year. So at the end of the day, we are looking at a sort of a net change in cash and we have to weigh that in that environment. It''s not -- Hawaii in this market is not a huge cash generator, but there are a lot of pluses and minuses that happen relative to working capital there, how we bring product in. I am not going to say we are making a lot of money but it''s one of the assets that certainly is in a spotlight for the corporation. I wouldn''t say that it hasn''t been. It has been a focus and we continue to look at that asset as to whether in fact it''s something that will remain in the portfolio, but that''s true of the rest of the portfolio. I''m not going to predict what''s going to happen in that market.

Neil McMahon - Sanford Bernstein

Thanks for that. I know it''s a tough question to answer and to put you on the spot.

Bruce A. Smith

No. Hopefully I gave you what sounds like a reasonable answer.

Neil McMahon - Sanford Bernstein

Sure. I am going to jump and be more kind and go on.

Bruce A. Smith

Thank you.

Neil McMahon - Sanford Bernstein

I know it is strange.

Bruce A. Smith

That would be the first kind question I have had. No, actually Paul gave me a kind question, I should say.

Neil McMahon - Sanford Bernstein

Yes. It is strange from him as well, so it must be Christmas a bit later than normal. Right. Just looking at the miles traveled in the fourth quarter, looks like California in general had a pretty decent uptick year-over-year, yet we really didn''t see the demand come back or the margins really work any better. Obviously, Lynn''s commented on the Weller situation recently, but anything you can sort of dig into there in terms of the disconnect between what we are seeing in terms of enroute activity apparently and the fact that we are still in a weak environment on the West Coast?

Lynn D. Westfall

I''ll take some of that, Neil. You are absolutely right. Most people think that California demand has been decreasing last year, when in fact from the second quarter on we had increases in California demand. Second quarter is up four-tenths of a percent. Third quarter was up almost 2%. October was up 2.8% and as you said the miles driven for November were up 2.1%. So California''s look like it''s coming back. Now it''s coming back from a very low base and when you look out to the rest of pad five, you still have demand declines occurring in places like Arizona and in Utah. So obviously, you can''t isolate just California from the overall refining and supply situation in pad five.

As far as the reaction of the marketplace, certainly when you have got excess capacity and you are running your refineries in the low 80s, you have got to have a big increase in demand, I think. You have to get utilization rates back up to the high 80s to the 90s, I would think, before you would see an appreciable margin effect. So I''m not surprised that there hasn''t really been any appreciable or noticeable margin effect by a, call it a 2% demand rise.

Neil McMahon - Sanford Bernstein

Sure. Well, thanks for that and maybe just the last one. You guys have got a good handle on what crosses the Pacific and it''s looked for a while, given China''s huge ramp-up in refining capacity, that they have been net exporters of diesel on to the market in India certainly been putting product on to the market as well. Do you notice anything coming across the Pacific at all towards the West Coast or is still heading more Europe direction?

Chuck Flag

Neil, it is Chuck Flag. We really haven''t seen anything coming to the West Coast. In fact the West Coast has been an exporter of diesel.

Neil McMahon - Sanford Bernstein

Great.

Bruce A. Smith

That''s actually not great, but in this market it is.

Neil McMahon - Sanford Bernstein

Thanks.

Bruce A. Smith

Thanks, Neil.

Operator

Thank you. Our next question comes from the line of Doug Terreson with ISI. Please proceed with your question. Your mic is now live.

Doug Terreson - ISI

Okay. Good morning, guys.

Bruce A. Smith

Good morning, Doug.

Doug Terreson - ISI

Bruce, I just had a question on the annual breakeven margin for 2010 that you guys talk about periodically and the first question was where did the number come in for 2009 per your calculation. And two, you talked about four, the four major drivers of the improvement that you expect in this plan in your comments and I wanted to see, since all these things have changed over the past couple of months, whether or not there''s anything that you''ve experienced that make you more or less confident about the $2 per barrel cost improvement as a whole and if so, which of the four specific plans. You talked a little bit about energy efficiency earlier and so could you just comment on those trends, please?

Bruce A. Smith

On the latter, just the latter question I was sort of looking around, but I heard the latter part of the question. No, there''s nothing that I know of that would change our outlook for that. Again, we are looking at, unless you give me a change in margins and we sort of took a 2009 margin environment going forward. Obviously, we could be off on that, but it''s not a high level margin where we are looking at this capital. And, again, that''s when you look at that improvement, it becomes a lot more significant at these lower levels. And the other part of the question was where did we come out on breakeven for 2009?

Daniel J. Porter

Roughly around $10 a barrel, Doug.

Doug Terreson - ISI

It was pretty close to $10 per barrel?

Bruce A. Smith

We had some gains and we had some losses. We actually have a slide on that that we…

Scott Phipps

Doug, later today, not to avoid the question, but later today at the Credit Suisse conference that Bruce is going to present and we''ll webcast and have those slides available, we are going to walk through the full actuals for 2009 as well as sort of spend some more time on the program in total.

Doug Terreson - ISI

Good enough. Great, thanks a lot guys.

Bruce A. Smith

You are welcome.

Operator

Thank you. Our next question comes from the line of Ann Kohler with Caris & Company. Please proceed with your question. Your mic is now live.

Bruce A. Smith

Good morning, Ann.

Ann Kohler - Caris & Company

Good morning, gentlemen. A couple of questions sort of at the 30,000-foot level, one of your peers has indicated that the administration may be looking at putting on import fees for both the crude as well as for refined products and I was wondering if you had any color on that. And then that would be great.

Bruce A. Smith

I just read an interesting article yesterday, which I -- you talk about things that can change the marketplace and I think that the political environment is so active today that we really haven''t introduced that as an element that could potentially be a game changer and I don''t mean this in any other way, but I think just as in Massachusetts. America is getting involved in the deficit. America is getting involved in jobs and my only point about that is that I read an interesting article from -- that came out of the United Steel workers talking about the potential for loss of jobs and looking at the imports that were flowing into the United States. And it''s pretty substantial what''s flowing into the United States, it''s not falling into our market, necessarily, but it''s falling into the United States and there potentially is import fees that could occur that would change the dynamics there.

The other thing that is happening is that there is certainly as we look at the budget deficits and we look at what''s happening relative to whether it''s AB32 or whether it is ethanol, when you think about, when I think about ethanol all I see is a huge addition to the budget deficit from the subsidies that exist to put a fuel in gasoline that is creating more supply problems. We are putting a dirtier fuel into the air and at some point it seems and we are seeing some activity around that. So you may see the political environment as we get more active as an industry start to respond to that to the point where it could make a more significant change and where not demand is, but where certainly where supply is. And I don''t know, Lynn, you are in charge of government affairs.

Lynn D. Westfall

Yes. On your particular question about the rumors of the import fee, we just took a vote around the table and it passed unanimously. Our expectation -- well, the rumor in Washington for the last couple weeks has been that that be part of the President''s budget proposal and we think certainly if he was going to do anything immediately it would have been in the budget as a source of revenue and it wasn''t. That doesn''t mean he can''t address it separately, but for now at least the methodology that we thought he would use to impose that doesn''t appear to have taken place.

Ann Kohler - Caris & Company

Great. And what is the likelihood that the part of the budget we are looking at, the repealing of the LIFO accounting, do you have confidence that that is going to go forward or would you be on that?

Lynn D. Westfall

There is a great deal of resistance to that uniformly across the business community. That is going to be a major effort not only by us and our industry, but by all of the big Chamber of Commerce and all the business groups are gearing up to fight that pretty heavily. I can''t handicap crude prices or political outcomes, but I know there''s going to be a great deal of backlash to that in the next couple of years with a concerted effort to see that that does not go through.

Ann Kohler - Caris & Company

Great. Thank you, gentlemen.

Operator

Thank you. Our next question comes from the line of Jeff Dietert with Simmons. Please proceed with your question, your mic is now live.

Jeff Dietert - Simmons & Company International

Good morning.

Bruce A. Smith

Good morning, Jeff.

Jeff Dietert - Simmons & Company International

I appreciate the commentary on capital spending and you guys have moved pretty quickly to reduce it in the fourth quarter. I had one question left on the CapEx side and that was associated with Wilmington. You had a large capital commitment when you bought the plant. Could you give us an update on how much of that capital has been spent and how much is remaining?

Bruce A. Smith

Dan.

Daniel J. Porter

Yes. We continue to invest in Wilmington. We''ve put in a, about -- we said $1 billion over five years. We are still a little bit less than what the original track on that, mainly because some of the permitting and issues there have delayed some of the capital spend and we found some other innovative ways to be able to reduce that requirement, but we are still committed to continuing on with the program at Wilmington to upgrade it.

Jeff Dietert - Simmons & Company International

What''s the estimate for future capital spending there under that regulatory program?

Daniel J. Porter

I don''t have all those numbers, that number right in front of me right now, but we can get that.

Scott Phipps

I''ll get it for you later, Jeff.

Jeff Dietert - Simmons & Company International

Okay. Thanks Scott. Second question, some of your peers have talked about carryback losses and benefits to taxes that could impact cash flow in 2010. Are you in a position to know what your benefit might be? Do you have any information you can share on that?

Bruce A. Smith

I''ll have to get back to you on that one, too.

Jeff Dietert - Simmons & Company International

Okay. Very good. Thank you.

Operator

Thank you. Our next question comes from the line of Paul Cheng with Barclays Capital. Please proceed with your question. Your mic is now live.

Paul Cheng - Barclays Capital

Thank you. Hi, gentlemen.

Bruce A. Smith

Good morning, Paul.

Paul Cheng - Barclays Capital

Good morning. Just a number of quick questions. Can you give me what is the working capital at the end of the year, the inventory value in excess of the book spending and the long-term debt how off the total debt?

Scott Phipps

Paul, this is Scott. We''ve got -- we are not sure exactly when we are going to be filing the K this year. So there is an extension between today and when we file it, so we are not going to provide those number on the call for right now.

Paul Cheng - Barclays Capital

Okay. That''s fine. And you talking about something California that February 15 is the change in the spend get through that summer grade and northern California is March 15. When that you guys would start seeing the terminal or the pipeline those barrel is being moved into?

Chuck Flag

Yes, Paul, this is Chuck Flag. Those barrels are already moving through the pipeline. They are already trading in the marketplace. We have seen about a $0.06 or $0.07 per gallon improvement in the gas cracks on the West Coast as a result. The February 15th date is when it has to be in the terminals. So it takes a while to turn the tankage over in those pipeline system and so we have already began to produce it.

Paul Cheng - Barclays Capital

So, Chuck, is it normally that about a month ago that you start to making the switch over into the terminal, into the pipe or that is a little bit, say, less a time requirement than that?

Chuck Flag

Yes.

Paul Cheng - Barclays Capital

In other words I''m trying to understand that, I mean, how much is the wash out that we have already seen. That is it pretty much done by now, that it''s in the pipe. Mostly is already in the summer grade or there is more that for the atmosphere.

Chuck Flag

It is the summer grade that''s in the Kinder Morgan system at this point in California.

Paul Cheng - Barclays Capital

Okay. So that means that you guys already switch over your production into summer grade, probably about a couple of weeks ago?

Chuck Flag

Exactly.

Paul Cheng - Barclays Capital

Okay. Good. Bruce, I know that you would be difficult to say that what is the CapEx for this year if you really have to cut here, but over the next two years if we don''t add sustainable capital, what may be the level that you need at the minimum for the regulatory and turnaround order for the basic work that you have to do (inaudible).

Bruce A. Smith

I think that, again, I can''t give you the minimum number only because it will continue to depend on what Dan finds as they do the inspections. The risk program, the risk management program we have got today, if you go back and look in time, we inherited, acquired refineries that all had schedules that were I don''t know how many years. They went for ten years and what we were going to do and they overlaid each other and as time goes on, what you do is you find it. Like last year is a great example of it at Mandan we have got -- we had a turnaround scheduled last year. We went through the -- they were at the point of looking at that. We did some risk inspection work and we determined that we could move that by a whole year, which we did. Dan has moved one out this year out to 2011. It continues -- obviously, the safety and reliability becomes imperative.

But the key gets to be that as you look at it, in the old days you just did the turnarounds because it was the risk base practice was to do it every three years on a certain unit, or four years. I am sort of in Dan''s area here. But now it''s really changed so that there''s more rigor going into the process of trying to really determine what that is. So to give you a quantitative assessment it is that dynamic ongoing to try to figure out how we can safely move capital out and that would be the same thing we''d be doing if the margin environment were good, because obviously we would rather employ capital in other ways. Dan, I don''t know, do you have anything you want to add to that.

Daniel J. Porter

No. I think you are exactly right. We do take, whenever we have on-plant outage or something or we''ve at times we''ve taken when the margins were low. We will take surgical outages to go in and perform inspection and do repairs that we need to be able to look at prolonging the duration between those turnarounds. So that is an ongoing process and we''ll continue to optimize as we go forward.

Paul Cheng - Barclays Capital

Dan, I think that you guys shared with us on the first quarter the turnaround schedule. Can you share with us the rest of the year, what the turnaround schedule may look like?

Daniel J. Porter

Yes. The big turnarounds that we have for this year are primarily at Salt Lake City. We have one in the first quarter, beginning in the first quarter this year and we have one at Mandan that begins in the second quarter and is completed then and then we have one in Kapolei that begins in the third quarter. And that''s

Paul Cheng - Barclays Capital

The third one is what?

Daniel J. Porter

Kapolei, Hawaii.

Bruce A. Smith

Hawaii.

Paul Cheng - Barclays Capital

Hawaii, okay. I didn''t realize that that''s the name for Hawaii. I know that I think that everyone is resisting on the LIFO to FIFO that change. In the event, if unfortunately that it gets, does get passed, what is the hit on you guys on the additional onetime tax?

Lynn D. Westfall

I''m going to pass that over to maybe the finance people, but what little I know is…

Bruce A. Smith

Depends on crude prices.

Paul Cheng - Barclays Capital

Based on today''s price?

Bruce A. Smith

I don''t know what that number is. We have got kind of a rule of thumb internally that we look at, but I think it''s too early to speculate what that number might be right now.

Paul Cheng - Barclays Capital

Okay. A final one. Just want to see what Bruce have any comment about one of your competitor is actual bidding on the Bakersfield refinery. Are you surprised and disappointed someone actually may try to reopen that?

Bruce A. Smith

I''m surprised that anybody would be doing anything right now, but I think that these low prices are certainly going to bring an opportunity for people to look at doing something different with them, but Bakersfield has been a very difficult refinery. It''s one of those things that when you look back, Shell said they were going to close it because nobody would buy it. And the state said you can''t close it and the people that bought it then went bankrupt. I never try to second guess somebody else''s purchase because it may be part of a different strategy that we don''t understand.

Paul Cheng - Barclays Capital

But I assume that you guys have looked at that and you figure out that at least from your standpoint you can''t make that economic work.

Bruce A. Smith

Let me tell you we haven''t looked at Bakersfield since we looked at Bakersfield -- we looked at Bakersfield two years ago, three years ago when Shell was disposing of it but we have not.

Paul Cheng - Barclays Capital

So back then that you already decide that your economic won''t work on that one?

Bruce A. Smith

Back with those economics we didn''t see Bakersfield working. We have a number of people here since we have a number of Texaco people, we do have a fair number of people that have actually…

Paul Cheng - Barclays Capital

Just trying to look for the expert that to tell me something that I don''t understand.

Bruce A. Smith

No. But I think that again changing market, changing conditions, somebody, I''m not going to say that they don''t have a different strategy or something that they have thought about that may make a great deal of sense. I am not going to try to criticize somebody else. I won''t do that.

Paul Cheng - Barclays Capital

Absolutely. Okay, thank you.

Operator

Thank you. Our last and final question comes from the line of Mark Gilman with Benchmark Company. Please proceed with your question. Your mic is now live.

Mark Gilman - The Benchmark Company

Guys, good morning. I just had two questions. One relating to crude slate choice in California, noticed in the fourth quarter that it appeared, at least versus the third quarter, you heaved up a bit and as a result the residuals were somewhat higher. Kind of strikes me as being just a bit peculiar given the implications of the coker incident at LA. Wonder if you could clarify your thinking on that.

Chuck Flag

Yeah, Mark. This is Chuck Flag. I think that is primarily due to lower throughput. In other words, we kept the total volume of heavy about the same, but as a percentage it went up.

Mark Gilman - The Benchmark Company

All right. Actually, Chuck, I think if my recollection is correct the actual volume went up, didn''t it?

Chuck Flag

I don''t have those figures right in front of me, but I don''t think it would have been substantial.

Mark Gilman - The Benchmark Company

I''m just pulling it right out of the earnings release, but the heavy in California went from 147 to 159, 3Q to 4Q.

Scott Phipps

But, Mark, this is Scott, we also had two coker units down or two pieces of maintenance at both the California refineries, which actually increased the heavy -- sorry, the residual yields that you see as well.

Mark Gilman - The Benchmark Company

I guess I''m just trying to understand the optimization aspect of heaving up the crude slate in the context of that maintenance, Scott.

Chuck Flag

The light heavy differentials are extremely small. The fuel prices relative to crude are extremely high. I''m not sure I consider 147 to 159 a significant change in optimization philosophy.

Mark Gilman - The Benchmark Company

Okay. My other question goes back to a comment Lynn made, I guess, right at the outset. Wonder if you can clarify. 28,000 barrels a day, I believe, was the number Lynn quoted regarding the incremental ethanol. I would have thought the number was a lot higher than that. Can you tell me, Lynn, how you are getting to that 28?

Lynn D. Westfall

Yes, real easily. Demand in California last year averaged 976,000 barrels a day. The gross increase is from 5.7% to 10%. So the gross increase is 4.3%, but you have got to remember ethanol has a lower energy value. You take the 4.3% times two-thirds and you come up with 2.9% of the 976,000 gives you the 28,000.

Mark Gilman - The Benchmark Company

Great. It is just the efficiency I didn''t take into consideration. Thanks, Lynn.

Lynn D. Westfall

Okay.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Bruce Smith for any closing comments and remarks you may have.

Bruce A. Smith

I really have -- I don''t have any closing remarks. I will thank everybody. We had awfully good questions today. I do want to thank everybody for being a part of the call. As Scott said, we are going to webcast a presentation from the Credit Suisse Energy Conference later today and so there will be more questions and slides that will be publicly available and if you are so inclined we hope you would join us there. Otherwise, we will see you at the end of the second quarter or first quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today''s conference. You may disconnect your lines at this time and we thank you all for your participation. Have a wonderful day.