瓦萊羅能源 (VLO) 2004 Q3 法說會逐字稿

Welcome to the Premcor Third Quarter 2004 Results Conference Call. (OPERATOR INSTRUCTIONS). Now, I'll turn the meeting over to Bill Hantke, Premcor Chief Financial Officer. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thank you joining us this morning. I'm joined on this call by Tom O'Malley, our Chairman & CEO; Henry Kuchta, our President & COO; and Jay Allen, currently a member of our Board of Directors. As required, I would like to remind you that in addition to our comments concerning our third quarter results, we may make certain comments regarding the forward-looking statements and response to you question that deal with our expectations. Actual results may differ from those we currently expect. And the factors that could cause actual results to be different are described in our earnings release and our filing with the SEC. As always, I will assume that everyone has read last evening's press release. And I'll comment mostly on items of particular interest to those who are trying to analyze the Company or model the Company's financial results.

I would like to focus on Premcor's net income from continuing operations, excluding special items. Premcor earned $145 million or $1.59 a share in the third quarter of '04, as compared with $60 million or 79 cents are share for the third quarter of '03. Our third quarter gross margin was $563 million as compared with $312 million in the prior period. Third quarter results reflects strong refined margins in our markets, lower throughputs due to unplanned shutdown of the crude unit at Port Arthur Refinery, and a lack of crude at Memphis due to Hurricane Ivan. And Kuchta will describe our operations in more detail in a minute.

Turning to operating expenses, natural gas cost remains above the starboard averages. As you analyze the Company's expenses going forward, you should keep in mind that we presently consume around 34 million MMBtu's use per year. Third quarter G&A excluding stock option expense was $37 million, up $15 million from the third quarter of '03. G&A expense excluding bonus increased in prior periods primarily due to higher employee related cost, and a total 3 months of the Delaware operations in the third quarter of '04. During the third quarter, we accrued $19 million for 2004 bonus, we expect fourth quarter G&A excluding bonuses and stock out to be roughly $18 million. Totally bonus accruals obviously will burn on Company's financial results, bonus compensations is based solely on our achieving net earnings in excess of $2 per share on an annual basis. Our Board of Directors typically excludes special items, bonus expense, stock option expense when determining the EPS number. Third quarter 2004 and 2003 depreciation and amortization was $41 million and $28 million respectively. In the future D&A should approximate $40 million a quarter adjusted for increases in capital expenditures.

Net interest expense was $33 million compared to $31 million in the third quarter of '03. This rate will continue at approximately that level going forward. The effective tax rate in the third quarter of 2004 was 36.5 percent as compared to 35.9 percent in the third quarter of '03. That expense should continue to be booked at in the effective rate of around 37 percent. The rate will vary since overall rate is dependent upon where our earnings are generated.

Our September 30, 2004 balance sheet is strong, our debt to capitalization ratio was 48 percent as compared to 56 percent at December 31, '03. Cash in short-term investments at the end of September was $655 million, plus restricted cash of $55 million for the pack bond debt service for a total of 710 million. Backed by our strong cash

position and expanded credit facility we're confident that we can fund our capital program through '06 including our $200 million Port Arthur expansion with our earnings and existing liquidity. Henry Kuchta will describe the capital program in a little more detail later. In due of our stronger quarterly position combined with our solid prospects in the future, Premcor's Board of Directors has declared a dividend of 2 cents per share payable on December 15 to shareholders of record on December 1. While modest of the stock are go to dividend over the coming years.

Finally, for modeling purposes, our share count is 89 million primarily shares outstanding with our diluted shares based roughly 2 million more of a basic. I'll now turn it over to Henry Kuchta for a brief review of operations and our capital program. Henry?

Thanks, Bill. Generally speaking WTI crack spread weakened in all of our refining regions as compared to the second quarter. As a reference, the 3/2/1 crack in New York Harbor and Chicago dropped from $11 to $12 a barrel range in early July to the $5 range in the second half of August. Fortunately, we experienced a rebound of this loss and returned to the mid $6 level in September. Of course there was one saving grace in the market and that was the widening spread of sour crude to WTI. But this benefit was principally focused on the heavy sours, where we saw Maya average $11.65 under WTI for the quarter, compared to $8.75 under for the second quarter. Certainly our Port Arthur refinery benefited from this move, which helped offset the weakening of the Gulf Coast 2/1/1. Gulf Coast 2/1/1 crack dropped from $7.20 a barrel in the second quarter to $5.85 in the third quarter. In the end, the Gulf Coast Maya crack expanded by over $1.50 a barrel for the third quarter. Directionally, the medium sour crude such as Arab Medium widened versus WTI, but only by approximately 50 cents a barrel. This was not enough to offset the average second quarter to third quarter drop in 3/2/1cracks of over $3 a barrel.

For the sweet crude refiners, the market was a little less forgiving. Rate differentials on domestic crude oil such as LLF moved from a discount to WTI of 25 cents a barrel in the second quarter to a premium of 25 cents a barrel in the third quarter, resulting in an overall 50 cent a barrel premium, second quarter to third quarter. One market factor that did not erode was the

. It remained constant at 20 cents over the quarter. In the end, sweet crude margins were attractive, but just not as good as they have been in the second quarter. Specifically, Gulf Coast margins were $1.50 to $2 a barrel less and Chicago margins were almost $3.50 to $4 a barrel, less attractive.

So this is the average and as we all know things were looking up by the end of September, particularly on the crack spread and sour crude fronts. The fourth quarter has started very nicely. But there are mixed signals out there for the forecasters. First of all, natural gas has made a dramatic move recently. In the third quarter as well as the first 9 months of this year, natural gas averaged around $5.50 per MMBtu. In October prices had moved above $7 while prices are above $8 for November and above $9 for December and the first quarter of '05. This may make Exxon happy but it doesn't do much for us. As a point of reference, we consume approximately 3.5 to 4 million MMBtu's per month in the winter months. Therefore, for every $1 increase, our expenses will increase by $3.5 to $4 million per month.

We are also seeing fundamental weakness in gasoline, as you would expect at this time of the year, but since inventories are not particularly low to begin with, this is an area to keep an eye on. On the other hand

stocks continue to fall, which is constructive. The turnarounds will be ending in November which give the shorts something to look forward to. And just to keep everyone honest I am going to wait until my heating oil tanks until December along with many of my just-in-time inventory neighbors; we'll see who blinks first. Finally, with respect to crude oil, sour crudes continue to look fundamentally weak, and sweet crudes were fundamentally strong. But they both share one attribute, if you have to put them on a ship, the cost has moved up dramatically. FMX rates from the cribs from to the USA seas have than more than doubled recently from world scale 200 levels to world scale 400.

Before I comment specifically on the refineries, I would like to touch on our hedging program. We ran a fully hedged crude position during the quarter, but only incurred a 4 cent a barrel cost and 20 cent a barrel market. As far as the Gulf Coast crack that we had on from last quarter, these were liquidated at a small profit and we can thankfully say we have no forward crack positions in place. I understand at least one of our competitors has put on a small distillate position.

Now for our refinery operations. The total throughput rate at Port Arthur refinery was 240,000 barrels a day as compared to our plan of 235 to 245. In the third quarter throughput rates were restricted due to an unplanned shutdown of the crude unit for about 10 days. From that point forward throughput rates were at maximum levels. The refinery is currently processing 245,000 barrels a day of total feed. We expect to average between 240 and 250 of throughput in the fourth quarter. There is no major maintenance planned in the fourth quarter. However we will be preparing for the coker and FCC turnarounds in first quarter '05. At Memphis, the total throughput rate was 154,000 barrels per day including 14,000 barrel per day of feedstocks. This rate was slightly less than our plan of 155 to 165. This throughput rate however is comparable to 165,000 barrel a day crude rate using only crude and no feedstock. The processing rates during September were affected by hurricane Ivan, which forced us to reduce our crude runs as Gulf of Mexico crude production was shut and the principal crude pipelines were idle. Approximately 500,000 barrels or five and a half thousand barrels per day of crude processing was lost during the quarter. The crude cost at Port Arthur and Memphis resulted in lost opportunity of approximately $10 million during the quarter. The refinery is currently processing 140,000 barrels per day of total feeds as limited by crude quality from the Gulf of Mexico. Sulfur levels are higher and overall crude quality is lower while Gulf of Mexico producers are struggling to bring rates back up to normal. Because of these issues we expect to average only 135,000 to 145,000 barrels per day of total throughput as limited by sulfur handling capacity. I'd also like to mention that we received an allocation or exchange of crude oil from the SPR in both October and November for a total of 1.2 million barrels. We of course must redeliver over the next few months.

Total throughput rate at Lima was 146,000 barrels per day as compared to our plan of 140 to 145. Refinery runs were limited by economic outlets for high sulfur diesel. The refinery is currently processing 154,000 barrels per day of total feeds. We expect to average between 140 and 150 of throughput in the fourth quarter. Once again as limited by high sulfur diesel demands. There is no major maintenance planned in the fourth quarter at Lima. The total throughput rate at Delaware City was a 181,000 barrels per day including 11,000 barrels per day of feedstock. This compared favorably to our plan of 170,000 to 180,000 barrels per day. The planned turnaround of the fluid catalytic cracking unit, started on September 25, and it is expected to be completed during the first week of November. The refinery is currently processing 150,000 barrels per day of crude oil. We expect to average between 170 and 180 of total throughput in the fourth quarter.

I would like to provide some guidance to those who model our refineries. Previously, we had suggested that the

quotations could be used as a reasonable proxy for average crude price and to the Delaware refinery. We now suggest that you use a published quotation for air-medium, corrected for freight into the US East coast. The air-medium discount to WTI is a constant differential set by our suppliers on a monthly basis. Therefore, the Mars differential to WTI, which has been displaying high volatility from day-to-day, is no longer representative of our crude cost.

Lastly, I'd like to comment on our capital expenditure and turnarounds. Our total Tier 2 low sulfur fuels expenditures remain roughly at $645 million. As of September 30, we have spent $317 million of this total. As we continue to finalize our engineering and procurement, future revisions of the current cost estimates maybe necessary as worldwide demand for steel and equipment continues to increase overall prices. We expect 2004 CapEx and turnaround expenditures including Delaware City, to total around $600 to $610 million including spending for Tier -2 fields plus Port Arthur expansion project and capitalized interests. I'd like now to pass the mike over to Tom.

Thank you Hank, thank you Bill. I want to divide my remarks into two sections. The first dealing with the results for the quarter and my feeling about what the future holds. And the second a few words about the personnel changes that we mentioned in our press release. Obviously the quarter was good. It clearly could have been a bit better had we not experienced an upset at the Port Arthur refinery, early in the month of July. But upsets in our industry are regretfully an embedded portion of the business. These refineries are terribly complex units, each refiner has to run it in a way where safety is paramount, where the environment is paramount and if there is any question, you have to bring a unit down and you have to fix it. And indeed that was what happened at the Port Arthur refinery. You cannot chase markets. Having a good market doesn't mean you can operate something, which inherently is unsafe or will damage the environment. That's an absolute policy within Premcor. Overall, we did well. I would've liked us to do even a little bit better.

Regarding the fourth quarter, the start that we've had has been superb. Certainly, we are impacted by the turnaround going on at Delaware on the cat cracker. Hopefully Delaware for the month has a breakeven operation, I think it will be, and hopefully we will as we mentioned in the press release be able to exceed the results that have been forecast for us. It certainly looks like we will. Nothing that has happened has changed my mind in terms of the call on the longer-term market. This is really a worldwide supply and demand balancing situation relative to clean transportation fuels. We have more demand than we have capacity, the imbalance perhaps is not so great, but I believe it's growing. And again I think as I've been forecasting I suppose for the last 18 months that we have a very bright future in front of us.

The other issue which is of paramount importance particularly to Premcor is the differential between light and heavy crude. It is my view that there is absolutely no shortage of overall crude in the world. It's certainly true that we haven't seen a build in inventories but I'd like someone to point out the management of the company that would be rewarded for building inventories in a $55 crude environment. Nobody is going to do it. Everybody is trying to keep inventories at a reasonably low level because everybody is afraid of a decline in the market. Now, once you go within the crude slight so to speak you can say that there is a shortage to one part of it and that is probably on the sweet crude side and the surplus on another part of it, and that's on the sour and heavier crude side. That gives Premcor and companies like Premcor an advantage over companies that can only process sweet crude. It is something that we are constantly aware of; it should allow us to provide our shareholders with an excellent return in the months and years to come.

Switching over to the second portion of my remarks, we come to the personnel changes. We announced that I would be giving up my title as CEO and that I would be replaced by Jay Allen. Many of you know Jay from his days at Tosco where if not in name, in fact, he was co-CEO of the operation, and frankly, he was better at running things than I was. I was Chief Development Officer and chief credit-taker in the organization. Certainly within the Premcor organization, I can tell you that my concentration has been on the development side. On the acquisition side of the business, it was certainly a side that Premcor needed to concentrate on, needed to grow. We are today a much bigger Company than we were a little bit over two years ago when we first became a public organization. We are a Company that needs confident management at every level of the organization. Now, I don't want to tell you that having me as the CEO brought a certain level incompetence to the organization. But I will tell you that I believe Jay Allen functioning in the role of CEO will enhance what was already a good operation in terms of the CEO. I am personally committed to the Company. I will remain its largest individual shareholder. I am remaining on the Board. I've committed for another 2 years as an employee of the Company. I, in essence will function as the Chairman of the Board to which Jay and the other executives of the Company will report. But in terms of the employee section, I'm reporting to Jay. Jay is running the Company. He's the guy that's going to be in charge and I as a very large shareholder with a big economic stake in this Company am very happy about that. I do want to take this opportunity to thank my colleague, Bill Hantke. When he and I joined a little less than 3 years ago, we both agreed that we were both getting a bit older and we probably wanted to do the job and it wouldn't be forever and Bill has brought Joe Watson along. He is certainly capable of taking over that position and he is the, going to be the new CFO of the Company come January 1.

With that in mind, we'll be pleased to take any questions that you may have and indeed since we have Jay Allen here, he'll be pleased if he's addressed directly to respond to any questions you may have. Well though, I'm still CEO, so I'll choose which questions we'd let him answer. Operator you can open it up for questions.

(OPERATOR INSTRUCTIONS) Arjun Murti - Goldman Sachs & Company

Jay, welcome back. Wonder if you could provide any color on what attracts you to come back out of retirement here and how should we think about the duration of your tenure as CEO? Are you now back for some period of time or is it maybe a one-year, two-year kind of thing? How are you thinking about your duration here?

The only fact that I'll suggest to you is that I'm more or less much retired at 65, so you should think of me as doing this job over the next 5 or 6 years. Why I'm back, it's a terrific opportunity for me. It's -- we believe and I believe the right thing for Premcor, in that, I know the industry, I know the Company and I certainly know the people here. I'm a fit from that standpoint, it's terrific but as we did at Tosco, we think that you can continue to grow this Company and that is my intention, not only to run it as CEO. I don't care about the Board activities, from the standpoint of being Chairman of the Board. I do care about focusing just on Premcor. So, I'm back to do that because it would be fun for me, it will be remunerative for myself and everybody else and it should benefit the shareholders.

Thanks Jay and just a follow-up, if I can recall a conversation from several years ago, any change to your thinking on international refining extension of petrochemicals, I know you've tried it a little bit at Tosco and probably with hindsight it has worked out, but on the outset you were at the time, petrochemicals, you never really went down that road. Any change in thoughts at this time?

Not particularly -- people when you say you going to grow the Company naturally ask for a road map and that road map is unclear, as circumstances change we certainly find ourselves in a different refining environment today than existed 3 years or so ago or even a year and half ago. And we have to take that into account, but there are plenty of opportunities out there. International certainly is an opportunity. I would put petrochemicals down further on the list as possibilities and I would put retail much further down the list. So, we'll try to focus on refining, primarily and but will expand our view globally on it. If it can make money for us, it is a chips in a long-term view, this business, we'll be happy to pursue it. But exactly how and when you do it, that's just not knowable and that's the uncertainty shareholders have to have and well, I appreciate all of you focusing on the quarter-by-quarter results. My job really is to look down the road and focus on growing the Company over time. Its system starts a bit, but it will happen.

And you are moving back to Connecticut?

Yes, of course. This is a full-time job for me. I've eliminated or reduced to any activities that I developed since Tosco, this period in September of 2001, and I will be full-time here. Again, not as a just an interim fill-in, but this will be my full-time job. I will accept no other board memberships while I am working here. This is it. Premcor is my home.

Fred Leuffer, Bear Stearns.

Other than for the possibility that Jay got bored in retirement, I don't understand what triggered the management changes at this time.

Well, I will respond to that. First of all, in spite of Jay being retired for two and a half years, he could not in the end beat me and go. So that he wanted to give it up. Look Fred, I think it's a pretty straightforward answer here. I -- when I originally took this job, I actually sat down with the Blackstone group, with Jay, and with Wilkes McClave who you will also remember, and Bill Hantke, and the 4 of us chatted with them, and Blackstone at the time, really would have liked to take the whole team, and I think both Wilkes and Jay had not had an opportunity to experience a sabbatical, while both Bill Hantke and I had had sabbaticals in our lives. We wanted to go back to it, and Jay and Wilkes spent the time, I didn't. I am sixty three and a half years old now. I certainly think that I am coming up on the time when I want to dispose with some of my income so that my heirs and assignees are not the beneficiaries, but rather I am the beneficiary of it. So, I gradually want to pay is back a bit here. I recognized that I've had a pretty heavy role in the Company. So, a sudden and abrupt departure on a complete basis is not the way to go, and I think what we've designed here is a good retrieve for me where Jay can still take advantage of the opportunities

I've been able to generate in terms of growth, and he will be able to make a judgment on whether they are the best things for the Company, and I basically convert for him and bring them to the table, and I don't find that a funny role because in certain way, that's the way we operated at Tosco, and we can operate that way here. And I think Jay has given a fairly good explanation of why he is coming back, and my joy on that is that he is going to have fun. He is not come back in absence. He obviously wants to make money like all of us, but he wants to get back in the hunt. He knows the game. He has been a terrifically active Director. Frankly, there is nothing we've done over the past two and a half years that Jay hasn't had an involvement in. So, he is fully on board. A terrific opportunity for the Company to bring in a very experienced man, and I as a very large shareholder in the Company intend to remain such a shareholder. I am overjoyed at the prospect that he is back.

Terrific. Let me just ask one operational question. What did you do to bring down the operating cost at Delaware, Hantke?

Well, if remember the last time we talked about gradually moving down operating expenses at Delaware by reducing contractors directionally, and continuing to work on the gas supplier. So, that trend is what we are working at.

Could you expect some backup in cost this quarter?

In the fourth quarter, yes. We are going to see that because with the SEC down, and sulfur plants working down during the turnaround, the gas supplier is at a period where it hasn't done running because of the sulfur plant capacities, so, once the turnaround is completed -- we'll see a lot more operating capacity from the gas supplier and use. Although, we expect to get it running, some of the sulfur plants come back over the next week or so.

John Melloy,

.

I wanted to follow up on some of Fred's comments about the operating costs. I remember on the second quarter call, Tom referenced shooting some employees if costs didn't come down. Hopefully costs went down because of lowered headcount, but in those case -- some of your peers has seen rising costs associated with natural gas and tanker rates and lowered costs. Actually, at all refineries it was quite impressive in the quarter. I'd just like for you to supply some more color on that and tell us if you expect to keep going in the fourth quarter at the other refineries -- where

I guess.

I want to comment on a part of it. And that's the freight cost element of this operation. We move large volumes of Mayan crude from Mexico over to Port Arthur. There has been no escalation in that cost because we are probably 95 percent covered with very long-term charters of double-hull, double-bottom tankers. With regard to Delaware we have put in place, but they are not yet operating long-term charter -- a long-term charter and I think we have 1 or 2 more coming right after that to contain any cost escalation for high-quality ships. We basically don't want to service the Delaware refineries with anything, but double-bottom, double-hull ships -- modern ships and so we have been able to contain a bit the freight side of the operation. I also want to comment on the natural gas side of the operation, that's extremely important from the point of view particularly of the Delaware refinery. When gasifier is working, we in

are making most of the natural gas that we would consume at this refinery. And certainly, at the current market prices for natural gas, this is a very, very important factor that gasifier when we took the gas cracker down we also planned to do extensive work in our sulfur plants and so the gasifier more or less came down at the same time. Gasifier actually started up I think right after the Boston Red Sox won the world's series last night and hopefully we'll be within a day or 2 up at operating rates that makes it self-sufficient in natural gas there.

I would also like to point out on 2 of the commodities that we have produced, we have seen some improvements. The first of course, fields with propane and we make quite a lot of propane particularly at the Delaware refinery and propane is priced along with natural gas. It in essence sells at a premium to natural gas. So, there is some natural internal hedge. The other thing that looks much better going forward is petroleum coke. I think most of you are aware that we make about 2 million tons a year of petroleum coke. The lion's share is somewhat more than that actually. The lion share down at out Port Arthur refinery. If you look at petroleum coke on an average over this year, out of the Port Arthur refinery I suspect you would have had about $5 a ton in net revenue after placing net coke on an FOB basis. Because the coal market has been so strong and because so many utilities and cement plants are running petroleum coke, we have seen a real escalation in the price of petroleum coke and we have now sold rather substantial quantities of petroleum coke in the second and third quarter. Of next year at a price exceeding $30 a ton FOB. When you start talking about 1.5 or 2 million tons, you can see that that's going to have an income effect in a positive way for the Company. I would like Hantke to reply to the rest of that question, if he can remember.

The shootings or -- ?

No. There were by the way, with regard to any shootings, let me caution everybody that Jay Allen was a former US Army Captain. He was in Vietnam, I think, I am not going to tell you he served with the great distinction of candidate Kerry. But he certainly did well there so he is more qualified on shooting than I am.

As far as generally for the refineries on operating expenses for the fourth quarter we don't anticipate any increases from where we have been. Delaware would be the only one that would be unusual because of the turnaround and because of gasifier went down for a period.

Would you expect it to return to second quarter levels?

On the gasifier? Which refinery?

Del City.

Del City. Well I think it will be a little bit higher because we are having a, you know, we are going to be down for, now call it five weeks in the fourth quarter so it is going to be skewed but I will give you a sense -- when we report on the fourth quarter while our costs for in the period were actually running and then I will give you the total.

And then one more question also regarding Delaware. I am receiving some comments from Delaware State Officials demanding 2 hundred million pollution control projects. Could this lead to delay of any plant de-bottlenecking at Delaware City and do you have any comments on their demands in the validity?

I should comment on that. First of all, the turnaround in the cat cracker was the start of the investment program that we planned and announced when we acquired Delaware. Most of you are aware that Motiva, the previous owner of the Delaware Refinery had signed a consent order promising to put in pollution control equipment on the cat cracker and Coker. These were two large state-of-the-art scrubbing installations. We committed on an absolute basis to go forward with those investments and indeed we have begun to do it. This turnaround will involve spending on the cat cracker to get it ready to hook up to those scrubbing installations. There is still some discussion going on as to exact levels and configuration but generally we reached agreement with the authorities in the State of Delaware and we intend to go forward with those projects and there is no holdback on our part and no issue on our part.

With regard to de-bottlenecking, well there is not going to be a huge amount of de-bottlenecking as at Delaware Refinery. The Delaware Refinery is about 180,000 barrel a day plant. The conversion units at that refinery are reasonably full at that level. We currently have no giant plan to expand in any way. There are days and indeed perhaps weeks when it might run at a greater rate and there are days and weeks where it would run at a lower rate than that 180,000 barrels a day. But on average that is what you are going to be looking at. Our great upside at Delaware is to get this gasifier to work in an appropriate way. Appropriate doesn't mean to its original, theoretical design capacity because frankly it is never going to get there unless you make very big investments in it, which we don't intend. That was designed to run at 18, 1900 tons a day. We have told you the investors, we have said to the government down there that on a configuration available in that plant, it looks like a unit that we can get up around 11 or 1200 tons a day capacity. That we should be able to get great reliability at that level and that we should be able to run the plant in a very environmentally sensitive and safe manner. At that level, to get it up to the radical levels, you'd need a third reactor in that plant, and you would probably also need a new sulfur plant associated with it. There are no plans for that at the current time.

Jeff Dietert, Simmons & Company.

You made a comment in your opening remarks about the Gulf Coast having a hard time, getting crude into the market. Just looking at the DOE data, despite the big crude inventory builds yesterday, the Gulf Coast is still about a million barrels a day below what it was importing before the storm. Is there any other color you could provide in what's going on in Gulf Coast as far as crude supply, specifically Suite crude supply?

Well. I think the first comment is that there is still a disruption in the Gulf of Mexico. The infrastructure, particularly the below-water infrastructure in the Gulf has sustained damage. That's taking quite a long time to come back. In think, with regard to the Suite crude oil situation, this is something that you really have to look at across the world. We are competing for relatively scarce supplies of imported Suite crude. There has been a great deal of commentary with regard to China, a lot of the theoretical in talking about the great consumption at

.The reality is that China has become a very large importer of Suite crude particularly from West Africa, indeed, I understand the Chinese are moving Suite crude from as far away as Norway. We can get all the sweet crude we want, I suppose in our marketplace. It's a question of price, and we are competing with other people. India is also taking Suite crude, why they drive for the Suite crude? Well. We don't live in an isolated world, there are a billion, million people in the world concerned with pollution and particularly the sulfur content in products. There are two ways to deal with sulfur content in oil products. The first way, which is the way we've been pursuing in the industry here in the United States, is to put in very complex equipments and remove the sulfur from the products. A number of other marketplaces have not made the investment and therefore their concept of removing the sulfur from the product is not to have the sulfur in the crude, and therefore the sulfur content in the product will be significantly lower. That's why, I would say you are going to continue to see pressure on the Suite crude side of the equation, and why I believe that wide differentials -- Suite like crude to heavy-high sulfur crude, really have become embedded, and that the differentials you might see on a 5-year average don't reflect reality going forward. As indeed, I don't think that differentials on refining margins should be modeled by anybody on any mid-cycle 5-year look back. We are just in a different market, and mid-cycle in this market has to mean something else, both on a differential basis and on absolute crack basis.

I appreciate your comments. Secondly, on diesel stocks in the US and in Europe, inventories have been falling very rapidly, despite pretty healthy domestic production of diesel, demand exports. Could you make comments on what's happening in the diesel market here?

Well. It really -- this is pure -- again Adam Smith related operation. If you look at implied demand for diesel. It's at an extraordinary level, I believe above 4 million -- 200,000 barrels a day in the US. That

, I should say. We just see a strong market, and I suspect that this may be -- although stating the obvious, I think, the economy is stronger than most people believe. I think a lot of trucks are moving around, a lot of planes are moving around, and a lot of trains are moving around. I believe the industry is producing more and there is just an absolute direct relationship. Certainly, when you take a look at natural gas prices where they are today, we are going to continue to see a strong diesel market. With regard to exports, I've mentioned now and in a number of public presentations that we've seen a historic change, where the United States were occasionally in the winter months we would see some exports of metal drift towards from the United States, Gulf Coast to Europe, to Asia. We saw that developed this summer we've seen a continuation of it -- it's a bit of fit in the new stop and start operation. I believe, we certainly saw exports during the month of October and that's having an impact on the marketplace. Once again, saying that the United States is not an island that we are a portion of a worldwide marketplace. And that worldwide marketplace is having a real effect on us. Other people are competing for Diesel produced in the United States, not just people here in this country but people outside the country. And I think that is something we are going to continue to see.

Mark Gedlemen, Bench Work Company.

Hi guys, good morning. I had to add three questions. First -- with respect to the SPR allocations, how did you cost them in? And head to put into place any hedge in arrangements to cover the repayment. Secondly, regarding James comments on modeling Delaware city and the use of their medium rather than that

I'm a bit confused as to whether a crude slight change has actually occurred. And if not if my recollections shows me correctly air mediums are better quality improved that Mars. And would suggest somewhat more conservative outlook. Third -- on the personal changes one of you could comment on the expense at which it is might be viewed as adding an addition of layer to the management structure. Thanks very much.

I'll do the last first, now we are not adding an additional layer because Jay Allen is taken over as CEO, and he is in charge on January the 1st, I am simply staying on as a person who will work for Jay on the development side of the business. But there is no confusion. I'll be working for Jay and that's not some kind of new layer that Jay is reporting up to me. He may find that as the Development Officer in the Company, and I mean appropriate and he will then have the opportunity to fire me, I could be the first person shot by this former military veteran. On your second question --

Let me add a comment here? Why would I give up access of terms of long-term history and success with this industry, because I am becoming the CEO, we are all used to see CEO's become Chairman of the board I think that works against shareholders' interests in many cases, sometimes it doesn't, but nevertheless I am going to live with what I believe and why give up access to term O'Malley? If you consider me a excess layer of management so be it, but I am not intending to consult with Tom over the day-to-day operations of this Company. I will be consulting with all these young tigers in the Company who are quite confident. But the truth is for development it's complex, it's a different game in the day-to-day running of the Company. And that's why he's continuing as Chairman of the Board and will continue to be available to me on that basis.

Hantke, why don't you answer the other questions, one was on hedging and I could have, because Gidlemen can remember better than me.

The first part was STR. The STR crude when it arrived will be priced in the current costs of crude which will be principally a mixture of what we are running during the month which amount us it's typically a large portion LLF, so we will price in at the current levels per LLF. And as it prices in, since we are doing an exchange, we have to replace it. We will be buying forward contracts to effectively hedge that spread. The question about Mars -- Mars was always only a proxy for estimating crude cost. Obviously, you can't move Mars crude up into a Delaware City. I think we let everyone know that we run air crudes. We run two-thirds of our

as air crudes and again even air medium is just a proxy for the blend that we have learnt at the refineries

. So, we are just saying that using air medium in these days when you have such a bulk of Mars market, you are going to get a better result on estimating the cost. If you look at the last 5 years, or 2 or 3 years, or even before, the cost of Mars versus their medium -- they are almost identical and truly the differentials on air medium

are definitely tied to the Mars market. But they are always a month behind and they don't change them everyday. They give you a flat rate discount to WTI for a whole month where as Mars prices in the domestic market at whatever the market will bear on a given day and certainly if you are buying a certain percentage everyday you will get the average of the cost of Mars quotations for the following month. So, our saying is that this doesn't apply right now to Delaware, you are not going to get the estimate that is all.

Yes, thanks. I think

to start the question regarding layer, it was not priced from an excess standpoint, but I think I used the word additional, and I was thinking more from G&A cost perspective than anything else.

Mark, your estimation of our results has not always been

but certainly adding G&A. You are absolutely right. We are adding G&A and if we weren't adding mainly on the development side, I would suspect we would be adding somebody else. I think I am probably worth it. What are you going to say?

Chi Chow, Petrie Parkman & Co.

Good morning. Jay congratulations. Bill, thanks really helping last question.

You are welcome.

Tom, what is your role going to be going forward on interactions with the investment community?

Whatever Jay asks me to do. Jay was the principal president of the investment community. He had contact with Tosco. He knows most of you folks pretty well, and he is a professional in that regard. So I suppose due to the degree we get launched on road shows and he needs another enthusiastic person to travel out there with him. He will use me, but I will leave that up to Jay to answer more completely.

To translate, you will see less of Tom and more of me.

Okay. And I

on Delaware, but I have a couple of questions regarding the plan, what is the gasification unit capacity right now?

There is -- you cannot. What do we think the gasification unit will operate at on a long-term basis we would tell you we will gasify somewhere between 11 and 1200 tons a day of petroleum coke which is the line share of what we produce at that client.

All right. I think, when you took the plant over, you had about something like 600 contractors work on the unit. Has that continued or have you --?

We are slowly decreasing the number of people working on the unit, but it is still going to be a contracted situation in the foreseeable future. We have an agreement with Connective. We really see significant improvement in the working relationship between us and them and we don't see a reason to change that at this time.

Okay and then on operating expenses at the plant, it seems like it is running well over $4 a barrel which is significantly higher than the estimate you laid out in the presentation earlier in the year, which I believe was around $2.55 a barrel. Was that protection at the time aggressive or do you plan on getting down to those levels at some point?

Well, I am going to let Hantke deal with the exact numbers, but we came out in our second quarter conference call and said that this is going to take longer than we estimated, you'll recall, when we made the presentation and when we initially acquired this plant that we thought we could get relatively low expenses within 3 to 6 months of taking it over. And at the second quarter conference call, we said this is going to take longer and the primary reason that it was going to take longer was in essence of gasifier. We got inside, we took a good look at it, and ran it for a while and Hantke, I will leave you now to continue with what we said in terms of the numbers.

Okay. We do expect this answer to get to a point where we will be running at about 1200 tons per day. The 1200 tons per day as we look into 2005, we expect with that type of operation and with the other reductions in cost that we expect to see as a refinery. We still expect to get down to that $18 to $20 million a month. That was our goal as to get down about $3.25 range per barrel for the total refinery give or take. If you look at what we originally had it was a on the order I can't remember those 258, I sort of remember the number about 275, but we have adjusted that for current fuel costs and if you look an apples-to-apples analysis versus today's market, we would have expected to get down to about $3 a barrel. So, operating the gasifier at lower rate versus our original expectation will cost us somewhere between 25 to 40 cents a barrel.

Okay, so that 3.25 per barrel range, do you think that is doable sometime in '05?

By the end of the year, we will get down to that ratable type number. And for the average per year, we will be commenting on that as we complete our budgets in December. So, I suspect in the normal course we'll supply that information.

Jay Saunders, Deutsche Bank.

I don't think, and I could have missed this, I don't think we got the run rate for the gasification units in the quarter, I was just wondering if I get that. And secondly, Tom, what is going to be the change or not the change, what are you going to do differently on this front of growing the Company. Is there -- are you going to be any less aggressive data to grow the Company?

The run rate if I recall correctly was around 700 tons a day, 750 a day during the quarter, obviously, affected by a zero run rate, I think unless 10 and 12 days of the quarter relative to the work we were doing on sulfur plants. With regard to the growth of the Company, the running of the Company is in the hands of the CEO, and that is what the CEO does for living. The Board of Directors of a Company basically -- hears from the Management of the Company, what the management's plans are in terms of growth perspective and either encourages or discourages growth in the Company. The Board of which by the way, Jay, is the member and has been a member since this Company went public. It has been very encouraging on growth of the Company provided that growth brought accretion and provided growth was done within the envelope of an ever improving credit rating for the Company because Bill Hantke's long stated goal, which was the Board's goal taking this Company to an investment grade credit rating, remains as an absolute principle of the Company that we really want to make sure that we are a very, very credit-worthy organization. So I can only comment, I will be running the Company through the end of the year, and Jay is on the board through the end of the year. And we just had a board meeting, and I can assure you the Company encourage the current CEO on the growth thing in the current CEO is anxious to grow it. And I think the incoming CEO will be anxious to do the same thing and Jay I would like you to comment on that.

Yes, absolutely. You grow when you can do it profitably. We think there are still lots of opportunities out there even in today's environment. I sang that song from 1992 at Tosco, I can still sing it with a clear conscience. There is much that can be done and we will attempt to do more than our share.

Hantke, still on the asking just a kind of a market related question. Do you guys get into the heating oil market now in the mid-Atlantic, but in the North East and I thought you have a feel for what residential inventories look like.

Well as I had mentioned, my inventory is basically at minimum, because of the prices, and I just use the just-in-time inventory aspect to my neighbors who keep coming to me and ask me is it high or low, a point to get in to as you would expect. I just say, I have no idea but it sounds like a lot of money. So no one on my block is buying any heating oil. I can't say about -- we don't really look at the retail inventories overall though.

I think we are going to have an extraordinarily strong middle distillate market, certainly for the remainder of this year and I believe into next year. I think you should focus on the turnaround activity that's going to take place during the first quarter. We are a part of it, we will be bringing down our very large coking installation, for the first time, during the first quarter, the coking installation to offer. This, I believe, very, very close to an absolute record in terms of turnaround during the first quarter. I cannot see a middle distillate inventory build at any time in the immediate future, you may get a week or two, you get a pump up, but then you are going to get in to the historical marketplace in terms of seasonal draw. Normally we should still be on the edge of building a little bit of inventory. If you look at the charts and graphs, you would see that distillates stocks generally continue their rise right through the end of the month of October and then you do get a little bit of a drop off in the month of November. They climb again in December and then you start getting in to these sharp declines. You will see a little up and down, but we are starting from an absolute level, right now of something more than 115 million barrels and if you look on the charts and graphs to find a time when it was that low, you would probably have to go the year 2000, and I guess before that 1996. Certainly the year 2000, we saw extraordinary margins in the marketplace. I would say that you are going to see extraordinary margins, I doubt that people have build up their tanks. It’s putting off the bad news. I hate to admit it to my self, but I bought my residence when it was heated with natural gas, and although Jay is pressing very strongly to convert to heating oil, I am not sure I am going to do it.

Okay and justly really quickly. Over September, October have you guys seen any slowdown in the low-sulfur exports? The low-sulfur diesel exports to Europe?

Yes, sure. What we see on that marketplace is kind of a patchiness. We went through August in to early September and the orb opened up at that was when our cracks got quite weak here if you will recall and we suddenly saw a pretty substantial outflow of low-sulfur diesel to Europe. They are closed. Our markets tightened up here. We then came into October, and with a week or 10 days in October, where suddenly we saw an intense flurry of export interest, and actual exports taking place. Right now, that seems to have died off, and I think that kind of that pattern that you see in the development of a marketplace. We are not going to see this kind of absolute level every month, in my opinion probably for another 12, 18, 24 months, but make no mistake about it. You are going to see over time a constant export market develop for clean diesel.

Just to add to that it's not only Europe that's taking some of our

South Americas and equally is strong.

(Jennifer

, JP Morgan.

It's actually

. I've got a couple of questions. First, can you comment on your decision to institute a dividend and the policy for increases going forward, and besides hedges on the SPR crude exchange, are there any hedges left on either crude or products?

Well, with regard to the dividends, the Company and it's Board of Directors felt that we had improved our balance sheet to an extent where while not in absolute name but in fact, particularly on any kind of net debt calculation. The Company has come very close to achieving its goal of becoming aggressive grade. Our goal and objective as the management and as the Board of Directors is to reward our shareholders for staying with us, and certainly, one of the ways to do that is to have a dividend. This is the first dividend paid by this Company. It will be a regular quarterly dividend provided the Company continues to have reasonable results, and certainly, I can only give you my opinion as a Director of the Company that I believe as the Company continues to improve its position, that it should review this perhaps on an annual basis and review it with the idea that it should go up.

If you study management's history at the Tosco Corporation, you are going to see that we increased our dividend on a fairly regular basis over a period of years, and that should be a goal and objective here also. With regard to hedging, and this is I suppose the policy question, we came to the conclusion that significant forward hedges for the Company were only possible in a very liquid market. Interestingly, there are only 2 or 3 companies that are very active in terms of creating a forward market where you would find yourselves putting a hedge on, and thank you very much that might be easy at one moment in time but getting it off is a whole different question, and our experience with that marketplace was that you put it on and then you couldn't get it off. So, we took a little adventure in that during the first half of the year. We didn't do particularly well, and I think management and the board came to the conclusion that the reason people buy our share is to own the crack and so, we are going to give you the crack. So, we currently don't have any hedges on and we have no intention of putting hedges on. The crude question is a different question. That is the issue of should we be going long crude oil? No we're a manufacturer; crude oil is a raw material. We want to tie the pricing of our crude oil to the pricing out of our product. So, with 2 refineries that's Memphis and Lima, we have a situation where we are always pricing crude 30 days minimum before the time when we sell the products that would emanate from that crude. There, we do a roll forward and in essence, what we do is to tie the pricing of the crude by rolling that crude to the pricing of the product in the same month.

It really isn't different on the strategic petroleum reserve crude where we are taking the crude and in essence pricing it upon delivery, but we are creating a payback obligation that could be 2, 3, 4 months forward. I think in -- probably averages about 3 months forward. And there, of course, we don't want to expose the Company to the possibility that in that intervening period of time, the price of crude goes up $10 a barrel, and we certainly have to pay back crude at a much more expensive price. So we just brought them together to reduce that risk. But the crack in terms of the manufacturing margin is what you are buying when you buy the shares and that's what we are giving you when I know -- I have read some of the reports on some of our competitors and they have chosen to hedge. And I don't think that's -- it is either right decision or the wrong decision, It simply a decision and it's the way they want to run their business. We have made a decision in principle. We want to run it to give you the

.

Okay, thank you. Just now two house keeping questions. What was CapEx in the third quarter and your guidance for CapEx in '05? And guidance per Memphis throughput in fourth quarter, I think the press release had 145 to 155 and they have heard incorrectly on the call, I thought you said 135 to 145?

The CapEx and turnaround for the third quarter was $129 million and $10 million of that was turnaround. And as far as Memphis goes -- the reality is we are little bit uncertain about what the availability of crude is going to be from the Gulf of Mexico and we did with our 145 to 155. I am not going to be surprised based on what's happening that we may end up being either right at the low end of that or slightly below.

John Baringer,

.

Is the reason that Memphis is running a

, which I guess seems to be unusually sour related to the fact that you are drawing on the SPR?

No, because we haven't proceed the SPR crude yet.

Are you having received any?

No. What's happened is the normal material that we are receiving from the Gulf of Mexico is running more sour and of lower quality, that what we are expected. Now expected what we have been receiving for the past year or so. And I can't comment on exactly why that is but that's the result that we are seeing.

And when you do actually receive the shipments from SPR will they be more or less sour than what you are use to do? Do you have any idea?

It will be too dissimilar to what we are receiving probably today coming over the Gulf of Mexico, which is -- it has a limitation of 0.5 sulfur on it. But that doesn't mean that you are typically getting 0.5 sulfur from `low sulfur crude`. You could have been getting 0.3, 0.25, 0.4. But they can deliver 0.5 and there is a lot of blending that goes on the Gulf of Mexico and with high-sulfur spreads where they are, you shouldn't or we shouldn't be overly surprised going forward that sulfur level may be little high. And unfortunate, we do not have any excess sulfur capacity to begin with at this refinery because

case you are going to run as much high-sulfur as you can. Because there is always a spread and it's worthwhile running it. But, we didn't have anything in that sort and I just thought no one else.

Okay. This is a very good -- in sort of questions. Did you have any letter of credit outstanding at the end of Q3? Could you quantify that? Any other borrowings against the revolver?

I am sure. It is Joe Watson here, John. At the end of the third quarter we had just over 500 million of LC's of outstanding under the facility losses were about 500 million of availability. Low cash borrowings and the facility that haven't been and they aren't currently, and as of yesterday LC stand at just over 600 leaving about 400 million of availability. These are the natural ebb and flow in the usage as you move through the month pricing and taking delivery of the crude.

Okay and finally, with respect to the off balance sheet working capital relationships you have with Morgan Stanley, do you have any intention over time to bring those things back on to the balance sheet, and what did you owe to Morgan Stanley at the end of the third quarter?

I would not classify those transactions as off balance sheet transactions. What they -- what the facility does or what the arrangement is that given our trade creditability at the time we started those contracts, Morgan Stanley funds for us on the purchase of crude and why we do that -- we do that because we don't want use LC's and key up that capacity and it is less expensive than the LC facility. There is no OC's out there that we owe somebody hundreds of millions of dollars because Morgan's say they are appointing us on a daily basis to buy crude, and we will use their name to get free credit.

So they are basically giving you a 24-hour financing. Is that it?

It is 24 hours.

And then so any amount outstanding at the end of the quarter are essentially immaterial or just basics of timing.

Yes they are immaterial.

Okay. And in so it sounds to me like you are going to retain this relationship or maybe

.

I will -- when my balance sheet gets a little bit better and my trade credit gets better, maybe say goodbye to Morgan but they have been very good to us and we are still to give some notice on that.

Mark Flannery, Credit Suisse First Boston

All questions have been answered.

Claylen

Investology Research.

Regarding Delaware City, you have an offtake agreement with Motiva, I believe 90,000 barrels a day and if this was released or eliminated would your margins there go up or down?

We do not have an offtake agreement with Motiva of 90,000 barrels a day. I think you are -- you must be referring to the contract that we have with Saudi Arabians to take about 90,000 barrels of crude oil which Motiva, I believe, pact with Saudi Arabians.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

Thank you very much for attending today's third quarter earnings conference call. We appreciate your attention and the time you took.