瓦萊羅能源 (VLO) 2005 Q2 法說會逐字稿

Thank you for standing by and welcome to Premcor’s second quarter earnings conference call.

All participants will be able to listen only until the question and answer session.

This conference is being recorded at the request of Premcor.

If you have any objections, please disconnect at this time.

I would now like to turn the call over to your host Ms. Karyn Ovelmen, Vice President of Investor Relations and External Reporting and Mr. Jefferson Allen, CEO of Premcor.

Ms. Ovelmen, you may begin.

Thank you operator.

Good morning and thank you for participating on our call today.

Joining me today is Jay Allen, our Chief Executive Officer, Hank Kuchta, our President and Chief Operating Officer and Joe Watson, our Chief Financial Officer.

Our press release was sent out this morning and posted on our website.

If you don’t already have a copy, you can access it there.

I’m sure you’ve all been following the progress as the proposed merger agreement for Valero to acquire Premcor.

As we stated in this morning’s press release, at this time both companies are complying with the FCC’s second request for additional information.

A special meeting will be held on August 30th for Premcor’s stockholders to vote on adopting the plan of merger and we expect to close in the third quarter.

Our comments this morning will be focused on our record results for the second quarter of 2005 and Premcor’s outlook for the remainder of the year.

Just a reminder, as we indicated in the first quarter earnings release call, we revised the content of the tables included in our earnings release and have included more summarized information regarding gross margin and operating expense by refinery.

The detailed throughput and production by product by refinery can be located in the MBNA section of our Form 10-Q.

Our Form 10-Q will be available on our website once it has been filed with the SEC.

Let me also point out that in this morning’s press release as well as on this conference call, we may make references to our SEC filings and we encourage you, as always, to review those filings thoroughly to get a better understanding of the company and our industry.

As required, I’d also like to direct you to the forward-looking statement disclaimer contained in the press release.

Certain statements made in our press release and others that may be made on this call will constitute forward-looking statements.

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 in our filings with the SEC.

Therefore, any forward-looking statements made may prove to be inaccurate and we cannot assure you that our expectations will be achieved.

At this point, I would like to call-- turn the call over to Jay Allen.

Jay?

Yes, thanks Karyn.

As you can see, our second quarter financial results outlined in this morning’s press release were excellent.

These results should not have been unexpected as the drivers of our profitability, namely refinery operations, our basic margin or crack spread, and the heavy/light crew differentials were all very good during the quarter.

Indeed Premcor has now reported at least a 100% year-over-year gain for the past five quarters, a record not duplicated by any of our competitors.

This is real progress, accompanied by real cash, and even in an environment of high mandatory capital spending, has produced a dramatic improvement in our credit worthiness.

The credit rating agencies are necessarily dilatory in the face of improving credit.

In the real world, our results have produced balance sheet improvements second to none in the industry.

And in the first six months of 2005, have allowed us to generate some $600 million of cash.

More importantly, today’s results do not represent some passing confluence of good luck, but merely reflect the fundamentals of our marketplace.

Even given rational expectations of the seasonally declining margin for the second half of the year, although we haven’t seen it yet, offset nicely by an expectation for seasonally improving light/heavy spread, it does not take much imagination to expect Premcor’s earnings per share for the full year to be in double digits.

Furthermore, even in a static market place, Premcor earnings would grow.

We previously announced long-term expansion projects at two of our refineries that will lead to higher throughput.

At Port Arthur, there is a 75,000 barrel per day expansion.

And at Lima the second phase of our tier two compliance work will result in an increase in throughput of approximately 30,000 barrels a day.

The impact of these projects, had they been in place beginning April 1st or for the second quarter, would have resulted in about $.75 additional earnings per share or approximately 20% increase to the second quarter.

There are, of course, many small incremental improvements that would also be made, further enhancing growth.

The reason I use today’s market conditions to talk about the future is two-fold.

The first is to demonstrate that Premcor will grow, even if margins and crude discounts do not.

But more importantly, to make the point that I believe today’s market conditions, which are not static but fluctuate and are affected by seasonal factors, are likely to be sustained in the foreseeable future.

Demand remains good despite high prices.

There is no conceivable increase in refining capacity over the next few years that will alter the present tightness.

Nor are we relying on continued increases in crude prices.

Crude prices could fall, yet refining margins will remain robust.

This is an important distinction to make when evaluating the downstream business.

Even if demand growth is modest, our fundamentals will remain strong.

The point I’m making is that we don’t expect to grow to 100%, but we’ll grow at a very acceptable rate.

Furthermore, Premcor in my opinion is clearly undervalued at today’s market and today’s market is likely to persist for some years.

I’ll now turn it over to Joe Watson for a more detailed review of our second quarter results and provide additional information for the third quarter and remainder of 2005.

Joe?

Thanks Jay.

Looking at the second quarter, Premcor earned approximately $333 million or $3.60 a share from continuing operations excluding special items.

This is more than double the $140 million or $1.61 a share we earned in the second quarter of 2004.

Our second quarter gross margin was $906 million as compared to $539 million in the year ago quarter.

Our second quarter results reflect strong refining margins in all of our markets, our ability to capture the benefit of wide crude oil price differentials, high throughput rates at our refineries, and favorable crude economics.

In particular, robust worldwide demand for distillates has led to a strong distillate market for this time of year and solid earnings from the middle of the barrel.

I want to focus for a minute on gross margin, as this is the area that a lot of financial analysts may have had some difficulty modeling.

When we examined the significant 30% shortfall in the Thomson First Call estimate on Premcor’s second quarter earnings per share, the miss is generally in our realized gross margin.

The second quarter of 2005 should provide you with the clarity needed to model the earnings capability of Premcor’s assets more accurately going forward as it by in large reflects normal operations at the refineries with a few expectations that I’ll get into in a minute.

Historically, the refineries’ patterns of gross margin realization against their respected bench marks have been fairly consistent, absent major turnarounds which are always announced in advance.

For example, for the past few years Port Arthur’s gross margin has been approximately 70% of the combined Mexican Maya discount and Gulf Coast crack spread benchmarks that we publish.

Lima has averaged approximately 80% of the Chicago benchmark.

Memphis has averaged approximately 115% of the Gulf Coast benchmark.

And Delaware City has averaged approximately 60% of the combined Arab Medium and New York Harbor benchmarks that we publish.

Of course, fluctuations in market or operating conditions do cause some movement around those realization patterns.

For example, premium product differentials or location differentials between the Gulf Coast and Chicago, but that movement is fairly modest.

If you apply these percentages and use the throughput guidance that we always give, you should expect to land within a reasonable range of our actual earnings.

Whatever your view of the prospects for refining market conditions, we believe it is very important for you to understand the earnings power of the Premcor assets in that environment.

And for those of you who publish, to publish it.

In regards to our refinery operations for the second quarter, throughputs at our Port Arthur refinery averaged approximately 264,000 barrels a day of total throughput, well above our plan of 240 to 250 a day.

The increased throughput can primarily be attributed to increased reliability following the first quarter turnaround.

In addition, the turnaround work being completed in connection with the Port Arthur expansion resulted in some coker and vacuum tower debottlenecking.

Specifically, the debottlenecking of the vacuum tower resulted in fewer barrels going out of the bottom of the tower.

So we were able to send more barrels to the hyrdocracker and catcracker, allowing us to increase our total throughput.

With regard to the Port Arthur industry benchmarks, the Gulf Coast 2-1-1 refining margin increased over $2.40 a barrel in the second quarter versus the same period in 2004.

And the Mexican Maya WTI crude oil differential averaged $13.11 a barrel in the second quarter as opposed to $8.73 a year ago.

In addition to the wide Maya TI crude oil price differential, we were able to purchase several heavily discounted feedstocks from South America and Eastern Europe, averaging some $17 to $20 a barrel discount to WTI to further reduce the overall cost of our feedstock.

On the product yield side of the equation, pre-turnaround at Port Arthur, we averaged approximately 85% light product yield.

While post turnaround, during the second quarter, we averaged approximately 90%.

All of this resulted in excellent results for the quarter from Port Arthur.

And of course the debottlenecking benefits should be sustainable.

We expect third quarter throughputs at Port Arthur to average around 255 to 265,000 barrels per day.

The Lima refinery also ran very well during the second quarter, averaging 150, 2,000 barrels a day, above our plan of 140 to 150 a day.

The Chicago 3-2-1 crack averaged $10.50 a barrel for the second quarter.

And combined with excellent reliability, Lima was also able to benefit from the strong distillate season and its market.

For the third quarter of 2005, we expect Lima to average around 145 to 155 a day.

Total throughput at Memphis for the second quarter averaged 133,000 barrels a day, as compared to our plan of 130 to 140 a day.

As you will recall from the first quarter, we conducted unscheduled maintenance on Memphis’s continuous catalytic reformer, which continued into the second quarter.

In addition, Memphis’s fluid catalytic cracker was brought down for unscheduled maintenance for a total of 14 days during the quarter.

Partially offsetting reduced throughput, Memphis results benefited from the roughly $2.40 a barrel increase in the Gulf Coast 2-1-1 crack versus a year ago.

We expect Memphis throughputs to average around 140 to 150,000 barrels per day for the third quarter of 2005.

Total throughput at Delaware City for the second quarter averaged 192,000 barrels per day compared to our plan of 175 to 185 a day.

The increased throughput is attributable to improved operations and increased reliability of processing units within the plan since our period of ownership began.

The Delaware City refinery operations benefited from a strong New York Harbor RFG 3-2-1 refining benchmark of $10.42 a barrel and a WTI Arab Medium crude oil price differential of just over $8 a barrel.

Delaware also benefited from the purchase of some heavily discounted crude oils and feedstocks from South America and Eastern Europe.

The combination of safe, sustained operations and low cost feedstock led to a very good second quarter for Delaware City.

We expect third quarter throughputs at Delaware City to average around 180 to 190,000 barrels a day.

Regarding turnarounds, at Delaware City the coker and hydrocracker will be brought down beginning the last week of September for 40 to 45 days of scheduled maintenance work.

There are no other significant turnarounds planned for the third or fourth quarters at the Premcor refineries.

Turning to operating expenses, variable expenses were on a per barrel basis in line with our expectations but did increase in total year-over-year due to our increased throughput, the price of natural gas, and a full quarter of operations at Delaware City.

Natural gas averaged $6.85 per MMBTU versus $6 in the second quarter of 2004.

Second quarter G&A, including stock option expense, was $65 million up from $43 million for the same quarter last year.

This increase was primarily due to the increase in incentive compensation, of which we accrued $38 million in the second quarter.

As you know, incentive compensation is calculated based on our earnings per share, which as you can see, was substantial for the quarter.

Year to date, we have accrued $52 million for incentive compensation.

Our program maxes out at $55 million for 2005.

We expect to record the remaining $3 million in July.

Second quarter depreciation and amortization increased to $43 million from $37 million in the year ago period, primarily due to the Delaware City acquisition and new capital investments.

Our balance sheet continues to improve.

We’ve ended the quarter with a debt-to-capitalization ratio of approximately 41%.

At June 30th, we had approximately $1.4 billion in cash and short-term investments including $75 million in restricted cash.

Cash flow from operations was over a billion dollars for the quarter.

And the significant drivers were net income, inventories, and accounts payable.

There was a net increase of approximately $400 million in accounts payable, due primarily to utilization of our new $260 million cash back credit facility.

With the new facility in place, we can now issue low cost letters of credit to secure some of our crude purchases that we had previously prepaid on a weekly basis.

This, in turn, allows us to present the company on a more industry comparable basis in regards to crude payment terms.

Regarding the temporary inventory build, mentioned in the first quarter, as of June 30th, we’ve returned to roughly our normal base inventory level, which also generated cash in the second quarter.

Capital expenditures including turnarounds were approximately $200 million for the second quarter and we expect that total capital expenditures for the company will be approximately $725 million for the year.

As we’ve indicated before, we will fund our 2005 capital program with cash on hand and available cash flows from operations.

For the remainder of 2005, depreciation and amortization should be approximately $45 to $50 million per quarter, adjusted for increases in capital spending.

G&A, including stock option expense but excluding any incentive compensation, should be around $25 to $30 million per quarter.

Net interest expense for the year should approximate $110 million, which represents gross interest of $150 million plus deferred financing costs of $10 million, less capitalized interest of $40 to $45 million and interest income of $9 million.

Our tax provisions should continue to be booked at an effective rate of around 37%.

The rate will vary since it’s a blend that depends in part on where our profitability is generated.

Finally, our share count is 89 million common shares outstanding with our diluted share base approximately 3 million more than basic.

And on that note, operator we can now open the lines for any questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Jeff Dietert, your line is open.

Good morning.

Morning.

There’s plenty of incentive to maximize distillate yields in the second quarter.

I was wondering if you could update us on what your linear programs are running now.

And how that might impact yields for the third quarter?

We always look at the market place.

This is a moving target.

Everybody recognizes that the distillate margin was actually better contra seasonally than the gas margin for a period during the quarter.

We simply keep rolling with the punches, whatever the market tells us we do.

But ultimately, you know that the, towards the end of the third quarter and fourth quarter are distillate heavy for the industry and we’ll be there too.

Nothing particularly unusual in our system.

We’re always trying to maximize profitability.

I think some would argue that with the industry focused on distillate yields that heating oil stocks are building more rapidly than they typically do this time of year.

And yet, if you look at a forward curve, heating oil margins are still in the $10 to $12 per barrel range, significantly a multiple of what it’s been historically.

Do you expect those margins to hold for the back half of the year?

Yes, we as I indicated in the early part of my prepared comments, we think the fundamentals we’re seeing in the industry are not some oddball circumstance based on inventory changes or anything else.

They’re based on supply and demand.

They’re here to stay for a while.

So of course, we do expect good margins in the future based on the good margins we’ve seen to date and the good results the company gets from those margins.

As the inventory changes, look it’s one of the pieces of the puzzle, but frankly it’s a very small piece.

We should expect gas lean inventories to be declining seasonally at this time and distillate inventories to rise this time.

And sure enough, that’s exactly what’s happening.

And I, but the fundamental issue for us is, is demand good?

Yes.

And is supply being fully utilized in the form of operations?

The answer to that is also yes.

So sure we think the back half of the year will be every bit as good as the first half with some products dominating other products seasonally exactly.

And could you talk a little bit more about the South American crudes and the Eastern European crudes that you used at Port Arthur for the quarter.

What brands of crudes were those?

What’s the API gravity and sulfur content?

Yes, Hank wanted to comment on that.

The Eastern European crudes basically you’re talking about the Urals and also the stray run resid that comes off of the Urals and other crudes out of whether it’s Russia or one of the other states in that area.

As far as Venezuela goes, you know we buy a variety of crudes from there and at Port Arthur though the principal benefit that we got was running the very both heavy and cheap Urals straight run resids.

Okay.

And did you see any impact from the hurricane on your input at Port Arthur in the beginning of the third quarter?

No, well we did have the Mexicans came out and backed up on some of their crude supplies.

But we had enough to keep us going.

We’re back into the normal flow.

Very good.

Thanks for your comments.

Thank you.

Our next question comes from Jay Saunders.

Your line is open.

Thanks a lot.

Just one more on the crudes.

What kind of growth did you switch into at Del City?

At Del City we also ran some of these straight runs and Ural crudes out of Eastern Europe.

We also ran the-- some heavy sweet crudes, the Brazilian, the Marlin.

We also ran some of the heavy sweets out of-- well I wouldn’t really call them sweets, but some of the medium sours out of Venezuela.

Okay and are you--

And the issue here is we are always searching for additional crude input at these refineries.

They’re reasonably flexible.

And depending on the producing country or company, some of these things appear cheaper from time to time then the regular flow of crudes and we take advantage of them.

I’m sure other people in the industry do likewise.

Yes, to that point, at Port Arthur, was there the situation this quarter in the second quarter that use the discrepancy between Maya and other discounted crudes get so wide that you run-- that you’d like to switch more but the contract doesn’t allow that, the Maya contract?

We’ve never been constrained by the contract.

There’s always room to do additional crudes there that’s why we have large storage capacity at the front end of our plants.

But no, Maya fairly represents mostly a good feedstock for our plant as a very large base load.

So we’re not unhappy.

You’ve seen the fluctuation based on resid pricing.

That’s going to be a seasonal factor.

Look the Asians turn their plants around at that time, others do the lack of resid compresses the discount from time to time.

But as I indicated in the-- my earlier remarks, the seasonality of this business remains in tact and that seasonality is fairly straight forward.

That crack spreads tend to improve during the first half of the year, peaking in May, sometimes June, sometimes the end of April and decline gently for the rest of the year.

And crude discounts, which have not been paid attention to as strongly as they have in the last 18 months or so, tend to be stronger in the back half of the year.

So a company like Premcor that relies on both these factors for its profitability has, in effect, dampened down some of the seasonality.

And, and one of the points I’m making is in my double digit projection for our earnings this year, the second half will be good, even given the seasonality of declining cracks, although we haven’t seen it yet, because the supply/demand mix is so good for the industry, it should stay good for a couple of years at least.

All right.

On the question on the gross margin, the gross margin forward relative to the one you that you get when you add up, when you add it up by refinery.

There’s always a discrepancy there.

But it seemed a little bit, a little bit larger this time than previous quarters.

Is there anything to say about that?

That-- Jay that’s essentially the price risk results, which you’ve seen us break out in grids before that results from price protecting the inventories that are accessed to our baseline, whether physical or fixed price commitments.

And the market was so far and contained though during the quarter that the rolling those futures generated a profit.

It was about $38 million.

Okay.

For those who aren’t quite familiar with this, this is an ongoing attempt to balance the price of our inputs with the price of our production in a timing basis.

It is not a hedge.

We do not hedge the crack.

We engage in no other speculative activity.

We’re simply attempting to run our plants as logically and reasonably and take what the market gives us.

And again, I go back to my comments, the market is very fine and it should remain so.

Yes, I think that answers my last question.

Is there, are there, there-- are there any hedges on or intended to put any on?

No.

Okay.

Thanks guys.

Thank you.

Paul Cheng, Lehman Brothers.

Your line is open.

Thank you.

Hi gentlemen.

Good morning.

Good morning.

Maybe that this is for, maybe for Hank.

In the Delaware City, the operating costs are running higher, about $5 I think.

At one point, we are hoping that we start to coming down at a more rapid pace.

What kind of a exit rate that we maybe now talking about.

Are we still talking about in $4 by the end of the year?

And what it take to improve that?

Well we expect them to get down into that $4 range by the end of the year.

We’ve basically decided over the past few months to allow the higher spending on reliability related items.

Just because the margins were so good, we might as well take advantage of the period, go ahead and spend the money on direct maintenance, which is what we did.

As you get towards the end of the year and into next year, some of the consent order items that we’ve been spending money on, which is a few million dollars are going to go away.

Those programs are going to finish and then, of course, we won’t be spending money on certain things.

But we decided to keep the maintenance spending at a higher level than what it will even out at.

So that’ll continue through into the fourth quarter.

And then after that we’re going to drop back to a more, what we’ll call, reasonable rate.

So that means that from now until the end of the year that expense debt will probably is going to be somewhat higher that closer to about $4.75 to $5 per barrel?

Right.

So the big factors in this too Paul is the high natural gas prices.

It goes with the high general level of petroleum products, crude oil, and everything else.

So we expect that to be a natural result.

You’re not going to find refiners dramatically reduce their costs in such an environment.

But we get paid for the higher cost as a result of the higher level of the petroleum complex itself.

Great.

And Jay or Hank, any update related to the EnCana venture with Lima?

Any update there?

Well the update is, we’re moving forward with the EnCana people.

As you know, there’s studies going on.

We’re spending money on those studies.

We like what we see from those studies, but it’s early in that game and frankly the end game will have to be decided by Valero.

And have you guys have a deadline that when that you need to have a final conclusion off this study or that this a ongoing, doesn’t really have a deadline?

Well it has a deadline from a practical standpoint and that deadline is in the early fall, decisions to be made of that going forward.

So sometime in September, October?

Yes, around there, September, October.

Because in that time period we will have developed a much better cost structure feasibility.

Remember it’s all about how much we’ll spend here--

Sure.

And the returns you’ll get.

And, and then a decision will be made to seriously move into the next step, which is really spending that kind of money and preparing for those changes at the plant.

And Jay you mentioned that in Lima that after you composite the tier two, I presume you’re talking about the low sulfur diesel for June of next year?

Are you going to also increase the production?

Are those increased primarily as the low sulfur diesel also?

Yes, it’s the increase in production results from the fact that we’ll now have more product that meets the marketplace needs and quality standards.

So the plant can run better throughout the full year and meet those specs.

Right, but I guess my question is that the 30,000 barrel per day increase, are they [inaudible] is the low sulfur diesel that is increasing or that some of them is gas, I mean and other things?

It’s primarily metal distillate make, low sulfur and others.

Okay.

Yes not all of that is low sulfur diesel?

It wouldn’t count as 30,000.

I don’t want to be coy with you, but it just, it doesn’t work perfectly that way it’s no--

Sure.

30,000 of low sulfur diesel.

But it’s primarily low sulfur diesel.

And point off expansion, the 75,000 barrel per day, are we still on track with the, by say June of next year?

Yes we, we’ve suffered our setbacks there to get it to June of next year as we discussed previously.

But spending is ongoing and it’s on track for that period of time.

And when, when that expansion are done, it seems that you are not-- I don’t think you are expanding your cracking unit.

Is there anything--

That’s correct.

It tends-- this is a front end expansion.

We think the money and the return is in the front end and we’re taking a hard look at another 75,000 barrels a day as we previously stated which will be a more expansive back end of the plant expansion.

But that has been designed in and would fit in well with the front end we’re doing.

It’s all part of a big, long term plan to--

Sure.

Pay for the--

In the meantime, that before you expand the back end of cracking units, does that mean that your Port Arthur mix the yield is going to be changing somewhat?

Sure the yield, the yield change is not dramatically so.

It comes down a little bit from a clean product make.

But you pick all that up with the benefit, financial benefit of lower cost feedstock.

This is a heavy oil product and that, the returns are predicated on reducing, increasing the throughput and reducing your crude costs.

Right.

I wondering, hence that you have a [inaudible] what kind of Maya product yield loss that we may be talking about?

And also that how the operating costs may change after that?

Well the operating costs won’t change very much and the cost of the front end of the plant is pretty much the variable costs will remain the same.

Fixed costs go up because of the investment, but we haven’t released any detail yields on it till we get it up and operating, can show you exactly what it does do.

So it’s, you can imagine an extremely robust project from anyway you measure it.

Sure.

I mean that--

Income to return on--

With a $15 Maya discount that has got to be pretty well pressed--

It’s a killer project.

Yes.

I wish it was in place now.

Sure.

Final question, any update about the [inaudible] or how, what run rate they are running and how well that they’ve been performing over the past couple of months.

And where you see the--

Several months including this month have been terrific, 1,100, 1,200 a day with very few upsets.

We did early in the second quarter bring that down, do some concerted work on it.

We got some outside advisors and who have operated not exactly these types of facilities in the past.

But we made, we spent some money there and once, since we brought it back up for a full run line, it’s run reasonably well, a couple little upsets.

But again, 1,100 to 1,200 tons per day operation, pretty, pretty satisfactory for us now.

We’re attempting to move it up to the next stage of 1,400 a day, which will be accomplished when additional sulfur capacity comes online there.

A third party is building the sulfur plant.

We’ll get access to it.

So that additional sulfur handling capability will allow us to wrench that up to the 1,400 that we think is a reasonable limit as it’s configured right now.

When do you think that you may reach the 1,400?

That would be only in the, towards the end of the third quarter.

Okay, well it seems that I mean Jay you had mentioned that you expected to be close the deal by the end of the third quarter, so this may be the last conference call that we’re going to have here, so just wanted to say thank you for all the help.

And don’t get too comfortable with the retirement that you may still get some.

Yes, it’s daunting to think.

Thanks for those nice comments.

But daunting to think that much of this good work and continuing work will go to the benefit of Valero.

And that’s okay.

Our shareholders have the opportunity to continue on with Valero and but things have really improved year over year over year here.

And we fully expecting it to continue.

Yes, thank you.

Thank you.

Our next question comes from Jennifer Rowland of JP Morgan.

Your line is open.

Thanks.

Just had two questions.

One was wondering why the guidance range for Port Arthur throughput was wide?

Normally, it’s within a 10,000 barrels a day and this quarter it’s about 40,000.

So just wondering why that range was wide?

Are you talking about third quarter guidance we just--

Third quarter, sorry.

Sorry.

Third quarter, yes.

Well it’s, we didn’t, we didn’t mean to signal anything if you, if you’re trying to take that as a signal. 255 to 265 a day.

Oh 255.

Yes 255 to 265.

Okay, the press said 225.

Okay, and secondly I may have missed this earlier in your comments, could you quantify the cost of the downtime that you had in the quarter, the lost opportunity?

No we don’t do that unless it’s major say an extension of a turnaround or some surprise.

But you can assume that it’s in the millions of dollars but we don’t bother to attempt to pull that out.

We’re busy beating up on the people already.

Okay.

We’re quantifying everything.

Okay thank you.

Sure.

Chi Chow of Petrie Parkman.

Your line is open.

Thanks.

Hey, can you give us an idea of how much incremental heavy sour crude you ran this quarter versus say like the first quarter of the year?

Sure--

Are you talking about the reference we were making to the other Russian, South American crudes?

Yes well that and, I don’t know if you’ve got percentage, lots of figures on type of group feedstocks, you know heavy sour versus sweet or however you want to categorize it.

This quarter versus prior?

I would characterize the say Mayan and Arab Medium slates that we typically run at Port Arthur and Del City as fairly typical in the quarter.

With about say four or five million barrels of the other, the Russian and South American crudes that Hank was referring to earlier.

Okay.

Okay.

Here we are in this year 2005 at a rough 60% heavy sour crude, in other words heavily discounted crudes.

Next year that percentage increases with the increase in Port Arthur.

And it was slightly less percentage in 2004.

But it reflected the full year of Del City being in our mix.

So 60% and it’ll fluctuate around that.

Okay.

Are you seeing those same sorts of opportunities with the Eastern European crudes and Venezuela this quarter?

They come and they go.

There’ll always be some opportunities each quarter.

But it, it’s just what’s available in the marketplace and your ability to run it, take advantage of it and produce quality products from it.

So there’s nothing special going on now and there was nothing special in the second quarter.

This stuff always happens.

Okay and then regarding Lima, has EnCana expressed any concerns to you with the upcoming transitions to Valero?

Not to us.

Okay.

And finally, how is the morale of the workforce with the upcoming transition?

I’m sorry you asked that.

Morale’s reasonably good.

People are obviously at this location, headquarters will be losing their jobs.

So we’re all-- they understand that and internalized it and will be ready to move on hopefully to bigger and better things as they go.

How about you folks at the plants?

Plant people are necessary.

Morale’s good.

Operations are good.

They’re off making money, earning their bonuses and probably many of them will look forward to being part of a bigger operation with opportunities that arise from being part of a bigger operation.

So I think you’d characterize that as generally good news for plant people and bad news for back office people.

Okay well thanks a lot and best of luck to all of you.

Sure.

Thank you.

John Vanager.

Your line is open from Loomis Sayles.

Yes, just a sort of follow-up on the comments that Joe made about the significant improvement [inaudible].

As we look forward to this current quarter, are there any working, major working capital items that would be cash streams that you can [inaudible] at this--

John no, I think the point to be made about what you see at June 30th is that is a sustainable profile for the company in, in my opinion with inventories at about the baseline level that we shoot for.

We would expect to maintain them roughly at those levels as we move on into consummating the Valero deal.

And again, the key on the build and payables was essentially having, having the cash sitting around with not a lot of other immediate uses and being able to put that to good use in the cash back facility.

So no I would say that that also is sort of a sustainable profile.

And as the Premcor assets are ramped into a higher rated company, you would expect them to enjoy payment terms and sort of a cash conversion profile like what you see we’ve achieved as of the second quarter.

You just hadn’t seen that before at Premcor.

So really if, if we want to think about disaster risks, it would be $70 crude or something like that that would really ratchet up the working capital needs and that doesn’t appear to be huge possibility.

Well say all other things being equal, all right, not getting into what happens to margins, crude dips and refiner profitability as crude prices go up and up and up.

But in general, yes, higher crude prices mean more cash invested in inventories and working capital.

But nevertheless, you’ve seen Premcor generate huge amounts of cash in exactly that type of scenario moving from below $30 crude to $60 crude today.

And as we look forward to the next three months or the third quarter, July, August, and September, even with our high capital spending, this company will generate free cash during that period.

So, if I was to report to you a balance sheet as of September 30th, it, in my opinion, would have cash of somewhere around instead of $1.4 billion, $.6 billion.

That’s the bottom line, not a one-shot deal that’s off the balance sheet.

A holdout of ongoing cash flow generation--

Well I’m glad to hear you confirm those sorts of numbers.

They, they seem reasonable and feasible to me.

Coming from your mouth, obviously, it assumes--

From my mouth to the writing services that are here.

Oh, apparently they don’t listen.

Yes apparently not.

Look it’s been an awful lot of fun following you guys.

If this is the last quarterly call, my best wishes to all of you and congratulations to you [inaudible].

Thanks very much.

Thanks John.

Thank you.

Jeff Dietert.

Your line is open.

Jay I was just going to see if you would, could comment on gasoline input, import outlook for 2006?

How you think the sulfur change might impact that?

Are you seeing much gasoline that’s being imported now that’s over the 80 ppm limit?

What you, what you see is an awful lot of gasoline of all types that come in and get blended to standards.

This game changes dramatically next year.

U.S. adopts the lowest sulfur standards in gasoline.

It’s hard to judge.

It just says to me though that this is a bullish result for the local market refiners, not only in gasoline but in distillate.

It’s just very clear the U.S. needs to import fuels given our demand and the course of those fuels and the ability to bring them here will simply mean those imports become more expensive and that’s a good thing for the local--

Thanks Jay.

It has been fun working with you and following the stock.

So thanks for your help.

Good luck.

Thank you.

Thank you again. [OPERATOR INSTRUCTIONS] Our next question comes from Vikas Dwivedi.

Your line is open.

Hello gentlemen.

Hi.

Can you hear me?

Yes.

Yes, with respect to your current refining capacity, if you wanted to move the sour heavy crude input to levels above your plan, what would be the process bottlenecks that you would run into?

Would it be vacuum towers or de-salters or trying to get a sense of what would limit you in case you wanted to move up even higher?

Well actually the present equipment tends to limit us.

We run it as it’s designed and it is what it is.

You either have the equipment on hand to run heavy sour or you don’t.

And there’s relatively little flexibility between the two.

And so the future of Premcor on heavy sour was revolving around the changes at Lima with its supply of heavy from EnCana.

And those types of huge capital investments are needed.

That was a billion dollar investment.

So without the capital investment, [inaudible] at Premcor and indeed anybody else in the business, they’re not going to be increasing their heavy sour to any great extent.

Those capital investments can vary all the way from having Adco (ph) crews to changing the crew units to doing this, that, and the other thing.

But invariably means that you have to change your downstream too.

It’s very, very capital intensive to heavy up a plant.

Sure and when you heavy up the facilities like you would need, do you lose any flexibility to go back to a heavier component of sweet crudes, slighter sweet crudes just as far as process stability or just the ability to kind of quickly switch back and forth?

No you can, you can move right back to light sweet, get great yields from light sweet, like the light sweet guys get.

The problem is you’ve stranded your capital investment for heavy, but there’s complete flexibility to move back lighter and sweeter.

There’s not flexibility for light sweet guys to move heavy in sour.

Okay, okay.

Thank you.

And then one last question, what kind of sensitivity do you have with respect to the inputs to furnaces and other energy creation sources for just basically firing your furnaces, if gas prices come back off substantially?

Well this is-- this is one of the games in refineries.

Refineries themselves are terrifically energy intensive.

That’s why the natural gas price changes, has such negative effect on all of us from an operating cost standpoint.

But from time to time, other fuels become more economic than natural gas to fire boilers with, refinery gases, other products and they of course use that, that’s a ongoing dynamic issue in a refinery.

Every day, you’re searching for the lowest input.

And at the same time, you have to make sure that your boilers meet all your environmental standards etc. etc.

So there’s some flexibility there.

Not a terrific amount.

It’s driven by the economics of the fuel costs and how your particular plant is configured.

But it’s always an issue in refining and always an issue to capital investment, to energy efficiency.

Okay.

Thank you very much.

Thank you.

I show no further questions at this time.

Okay thanks for everybody listening and good luck to you all.

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