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Operator
Good morning, my name is Ashley and I will be your conference operator today.
At this time, I would like to welcome everyone to the Valero Energy fourth-quarter 2008 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session.
(Operator Instructions) Thank you.
Mr.
Smith, you may begin your conference.
Ashley Smith - IR
Thank you, Ashley.
Good morning, and welcome to Valero Energy Corporation fourth-quarter 2008 earnings conference call.
With me today are Bill Klesse, our Chairman and CEO, Mike Ciskowski, our CFO, and other members of our executive management team.
If you have not received the earnings release and would like a copy, you can find one on our website at Valero.com.
There is also a table attached to the earnings release that provides additional financial information on our business segment.
If you have any questions after reviewing these tables, please feel free to contact Investor Relations after the call.
Before we get started, I would like to direct your attention to the forward-looking statement disclaimer contained in the press release.
In summary, it says that statements in the press release and on this conference call that state the Company's or management's expectation or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws.
There are also many factors that could cause actual results to differ from expectations, including those we described in our filings with the SEC.
Now I'll turn the call over to Mike.
Mike Ciskowski - CFO
Thanks, Ashley, and thank you for joining us today.
As noted in the release, we reported fourth-quarter 2008 net income of $732 million or $1.41 per share before the noncash good will impairment of $4 billion after taxes.
Including the impairment loss, our GAAP result for the fourth quarter was a net loss of $3.3 billion or $6.36 per share.
For the full-year 2008, we reported net income of $2.9 billion or $5.42 per share, excluding the goodwill impairment loss, and including the impairment loss, our GAAP result for 2008 was a net loss of $1.1 billion or $2.16 per share.
As to the noncash goodwill impairment loss, each year, we performed our goodwill impairment review in the fourth quarter.
As you know, during the fourth quarter of 2008, there were severe disruptions in the capital and commodities market that contributed to a significant decline in our stock price.
As a result, Valero's equity market capitalization fell significantly below the net book value of equity.
This is a key indicator that goodwill is potentially impaired.
In performing our goodwill impairment test each year, we estimate fair value by discounting the estimated future cash flows from our refineries.
The market derived to discount rates that we used in our analysis this year were very high because of the significant risk premium implied by our relatively low stock price in the quarter using higher discount rates, results and a lower valuation.
When we performed our goodwill impairment test as prescribed by current accounting rules, our test indicated that all of the goodwill was impaired.
Getting back to our results, fourth-quarter 2008 operating income excluding the goodwill impairment loss was $1.2 billion versus $884 million reported in the fourth quarter of 2007.
The increase in operating income was primarily due to higher margins for diesel, jet fuel and secondary products such as asphalt and petroleum coke, as well as very good fuel margins in our retail segment.
Also contributing to the increase in operating income was the favorable effect from the year-end LIFO increment of $327 million or $214 million after taxes.
Somewhat offsetting the increase in operating income were lower gasoline margins and lower overall refinery throughput volumes.
Fourth-quarter throughput volumes averaged 2.6 million barrels a day which was 173,000 barrels per day lower than fourth quarter of 2007.
This was primarily due to the reduction in capacity from the sale of the Krotz springs refinery and lower operating rates due to a lower margin environment for gasoline.
Refinery cash operating expenses were $4.66 per barrel, which was slightly higher than our guidance of $4.50 per barrel.
This was mainly due to lower overall throughput volumes.
General and administrative expenses excluding corporate depreciation were $138 million.
The $31 million decrease from the third quarter and $22 million decrease from our guidance were mainly due to lower incentive-based compensation expense.
For the fourth quarter, total depreciation and amortization expense was $370 million, and interest expense net of capitalized interest was $79 million, both in line with our guidance.
The effective tax rate, excluding the goodwill impairment charge is 35%.
Regarding cash flows for the quarter, capital spending was $1.1 billion which includes $129 million of turnaround expenditures.
For the year capital expenditures were $3.2 billion which includes $408 million for turnaround costs.
In the fourth quarter, we spent $181 million to purchase 8.4 million shares of our stock total spending of $955 million for 23 million shares.
So for the year, we reduced shares outstanding by 4%, and since the end of 2005 by over 21%.
We currently have approximately $3.5 billion of repurchase authorization in addition to our ongoing anti-dilutional program.
Regarding future uses of cash, our goal is to maintain financial strength, considering the weak economic outlook we decided to further reduce our estimate for 2009 capital expenditures in turnaround costs.
We now estimate that capital will be $2.7 billion which is down $800 million from our most recent estimates.
We made several changes to the capital plan to reduce the 2009 budget.
In addition to cutting many small to medium-sized discretionary projects at our refineries, we have delayed the St.
Charles hydrocracker project which pushes back the estimated completion date to the fourth quarter of 2012.
Also at St.
Charles, we have further reduced the scope of our aromatics project, yet still plan to meet MSAT2 compliance in 2011.
Finally we have delayed the Memphis FCC reliability project, which pushes the estimated completion date to 2012.
With respect to our balance sheet at the end of December, our total debt was $6.5 billion.
In addition to our year-end cash balance of $940 million, we had nearly $5 billion of liquidity available at the end of the year.
Even with the goodwill impairment loss, we are in good shape from a covenant perspective because our debt-to-capitalization ratio net of cash was 26.2% year end.
This is well below the bank agreement threshold of [60%], and we have no coverage type ratio covenance.
Upcoming maturities are relatively low and consistent of $209 million coming due in April of 2009 and only $33 million in 2010.
Also in 2009, for terms of the indenture, we are required in October to purchase 100 million of our bonds.
In summary, our company remains in solid financial shape.
To maintain financial strength through a weak economy we will continue to look for ways to reduce spending on capital expenditures, operating costs and overhead.
However, we will prudently continue to invest in opportunities that build long-term value for our shareholders.
Now I will turn it over to Ashley to cover the earnings model assumptions.
Ashley Smith - IR
Thanks, Mike.
For modeling our first-quarter operation, you should expect the following refinery throughput volumes.
Coke should average between 1.2 million to 1.25 million barrels a day.
Midcontinent should average between 380,000 and 390,000 barrels per day.
West Coast should average between 250,000 and 260,000 barrels per day.
And the northeast should average in the range of 510,000 to 520,000 barrels per day.
Refinery cash operating expenses are expected to be about $4.80 per barrel, which is higher than the prior quarter, primarily due to lower expected throughput volume.
With respect to some of the other items for the quarter, we anticipated G&A expense to be around $135 million, net interest expense should be around $75 million, total depreciation and amortization expense should be around $390 million, and we estimate a 33% effective tax rate.
That concludes our prepared remarks.
We will now open the call for questions.
Feel free to gather the queue, Ashley.
Operator
(Operator Instructions) We will pause for just a moment to compile the Q&A roster.
Our first question comes from the line of Mark Flannery with Credit Suisse.
Mark Flannery - Analyst
Hi, yes.
With this reduced Cap Ex program that you have, can you give us an idea of how close we are to the knuckle now?
In other words, what's the -- could we go down further from here if conditions warrant it, or will we be getting very close to the levels where -- of must spend?
And then I have got a follow-up after that.
Richard Marcogliese - EVP, COO
Sure.
This is Rich Marcogliese.
I can make a comment about that.
At $2.7 billion for the year, there is some room to go lower than that.
We would say our absolute minimum capital expenditure budget is in the neighborhood of $1.8 billion which would capture things like turnaround expenditures which are on average $500 million a year and other safety and regulatory requirements on a regulatory side.
We still have our program to complete the items in our EPA114 settlement agreement.
So next couple of years, we would say $1.8 billion represents the absolute minimum.
Mark Flannery - Analyst
Great.
My semi-related follow-up is, are you guys now taking a look at the portfolio and thinking about the long-term future for some of the less good plans?
We have heard from others in the industry that they are reviewing their problem children as it were, and might be taking some permanent action by the end of the year.
Is that kind of review going on at Valero now?
Bill Klesse - Chairman, CEO
Mark, this is Bill Klesse.
It has been going on for several years.
We announced several plants were under strategic review a year or so ago, and we did sell to refineries.
This is an ongoing process with us, but we don't have any deadline or anything.
Mark Flannery - Analyst
I guess what I am trying to say is if you end up not wanting them and you can't sell them, is closure or terminalization on the table?
Bill Klesse - Chairman, CEO
Well, if I take what you said, if you don't want them and you can't sell them, I guess the answer would be, yes.
Mark Flannery - Analyst
Great.
Thank you very much.
Operator
Our next question comes from the line of Jeff Dietert with Simmons.
Jeff Dietert - Analyst
Good morning.
Mike Ciskowski - CFO
Good morning, Jeff.
Bill Klesse - Chairman, CEO
Good morning, Jeff.
Jeff Dietert - Analyst
You highlighted in your earnings release the Texas City maintenance where you have got all units down and running.
Your SECs at 70% to 75% utilization.
I think you are showing a lot of leadership and discipline in maintaining lower runs.
Could you discuss how you think about that, how much of it is based on economics?
I know you shut down reformers because of poor economics versus perhaps inventories or your review of supply and demand balance in a particular region.
Could you talk about how you think through and make those decisions on how much volume to run?
Bill Klesse - Chairman, CEO
Well, we do forecasting.
We look at what we think is happening in individual markets as you suggest.
We, of course, run our LPs just like everybody.
Certainly we look at the market structure.
And then we make a judgment, but the bottom line of your question is, there is too much capability to make gasoline in this environment.
And if the industry does not balance supply with demand, we will have negative margins again, and as we have in December for negative margins for the foreseeable future, we will have negative margins.
But we try to balance it.
And we look then at our economics when we make those decisions based on looking at the markets forward.
Jeff Dietert - Analyst
Hopefully your -- the industry will show the same discipline that you have and it appears they are.
Second question for Mike.
The cash on the balance sheet fell quite a bit on the quarter.
Could you talk about the decline from the end of the third quarter versus the end of the fourth quarter and the impact on cash?
Mike Ciskowski - CFO
Sure, Jeff.
Okay.
In the third -- or the fourth quarter, cash decrease by $1.8 billion.
So if you look at all the various items that we provided in earnings materials, net income depreciation, goodwill, etc., that implied a change in cash flow about $150 million.
But the big difference was the change in working capital, and it really was attributable to accounts receivable and accounts payable.
So at September 30 when you netted the receivables and payables, we showed a payables balance of $3.3 billion.
At year end, the balance had fallen to $1.5 billion.
So that is the change of cash of $1.8 billion.
Receivables as a percentage of payables did not change between the two periods, but what you had is a fallen commodity price market, and the value of the float on these payables decreases resulting in the utilization of cash.
So when you look at that time as a proxy for the commodity prices, WTI averaged $41 bucks in December and it was $104 in September.
So that's a a decrease of about 60%.
And you take that 60% and apply it to our payable balance at the end of September, and you get about a $2 billion change which is very close to the $1.8 billion that we had.
Offsetting that a little bit were some deferred taxes.
Jeff Dietert - Analyst
Thanks for your time, guys.
Ashley Smith - IR
Thanks, Jeff.
Operator
Our next question comes from the line of Paul Sankey with Deutsche Bank.
Paul Sankey - Analyst
Hi, guys.
Mike Ciskowski - CFO
Hi, Paul
Paul Sankey - Analyst
You mentioned that under the goodwill impairment test that you -- it was really the equity value falling that by extension made the future discount rate or the discount rate you will apply higher.
Can you share with us what that discount rate was that you had to use?
Mike Ciskowski - CFO
We increased it 2% to 3% is what we normally done so that is what resulted.
Richard Marcogliese - EVP, COO
That's right.
Paul Sankey - Analyst
So there was an increase in the rate from year to year of about 2% to 3%.
But I guess you won't share with me the overall level?
Mike Ciskowski - CFO
No.
Paul Sankey - Analyst
Can you make any observations of how that would compare to your cost of capital and what your cost of capital is?
Mike Ciskowski - CFO
Yes, it was probably -- that is a very similar number.
Our cost of capital was probably up about 3% also.
Paul Sankey - Analyst
But you wouldn't share with me your cost to capital?
Mike Ciskowski - CFO
All different ways to compute that, and the cost of debt right now.
The capital markets are pretty volatile.
So I mean, several different ways to do it.
Generally we said our cost-to-capital is around 10%.
I would say in this environment it would be a little north of there.
Paul Sankey - Analyst
Yes, I've got you, but essentially the trigger for the impairment was the higher discount rate.
It wasn't any sort of trailing measure that you would have used for margins to test the impairment.
Mike Ciskowski - CFO
That's correct, Paul.
Paul Sankey - Analyst
Okay.
On -- if I can just switch to a little market question here.
[Disilent] markets remain very interesting.
They held up well.
Can you talk about the usual components, the demand side.
We have seen some scary DOE numbers but on the demand side but still to crack, hold up better than you would have expected.
Might be to do with exports.
Anything you can share with us?
Thanks.
Gene Edwards - EVP, Corp Dev, Strategic Planning
Yes, Paul, this is Gene.
I guess what we're saying on the demand side, heating oil demand obviously up quite a bit with the colder weather we have, particularly in January.
Although the transportation fuel demand is down as indicated by some of the indexes we see on rail and trucking.
But offsetting a lot of that is the export markets to Europe continues to be quite favorable.
Paul Sankey - Analyst
Can you hang some numbers on those various components for me?
Gene Edwards - EVP, Corp Dev, Strategic Planning
You are talking about specifically about export volume.
Paul Sankey - Analyst
Heating or how much that is up.
Transport, how much you think that is down, or any kind of details on export would be great.
Gene Edwards - EVP, Corp Dev, Strategic Planning
Yes, I don't have the exact numbers on heating oil percentage, but last January was very warm.
This January has been very cold and indication are -- the net numbers of the US are down about 5%, but I think that the transportation index is probably down around 10% and healing oil offsetting a lot.
Bill Klesse - Chairman, CEO
Actually one of the industry consultants has said transportation is down 10%.
Paul Sankey - Analyst
Great.
And exports?
Joe Gorder - EVP, Marketing, Supply
Paul, there is Joe, the export market remains pretty strong, and last year I think we averaged somewhere around 125,000 barrels per day.
And it looks like that is going to continue.
We are actually exporting at higher volumes now.
We are still open to western Europe and to the Med and so we see significant demand and good activity.
Paul Sankey - Analyst
And Latin America?
Joe Gorder - EVP, Marketing, Supply
Latin America is less of our activity right now.
We are sending a lot more to Europe.
Paul Sankey - Analyst
Interesting.
Okay.
Great.
One final one which is a wild card.
Do you know how much CO2 you guys produce?
Bill Klesse - Chairman, CEO
Yes.
38 million metric -- why don't you call us back.
We will give you the right number, but it's somewhere around where I am saying here.
Paul Sankey - Analyst
38 million metric tons per --
Bill Klesse - Chairman, CEO
We will check and make sure we have the right number.
Paul Sankey - Analyst
Brilliant.
Thanks, guys.
I will leave it there.
Thank you.
Operator
Our next question comes from the line of Erik Mielke from Merrill Lynch.
Erik Mielke - Analyst
Yes.
Hi there.
Mike Ciskowski - CFO
Hey, Erik.
Erik Mielke - Analyst
I just have a simple follow-up question.
On the markets that we had in the beginning of January over the last couple of weeks, we have seen some extreme relative pricing of crudes, particularly for WTI, which is the benchmark refining margins that people look at.
Can you talk about how you were able to capture those margins and how we should be thinking of your operations in that sort of environment?
Mike Ciskowski - CFO
Yes, the high inventories particularly at [Cushing] have really exaggerated the steepness in the market which has come off quite a lot over the last several days and is now about $3.
In addition to that you have OPEC cutting and it is compressing the sour crude discounts relative to TI, because TI is so cheap.
Now the questions is will the cuts outpace the production in demand going forward and if not we are going to see produced oil continue to go into tankage land keep us in a Contango market structure and it could in fact exaggerate those markets going forward.
With that being said as it specifically relates to us, we do capture the Contango on TI barrels really our domestic market.
We don't capture the Contango on our international barrels because international oils don't take the market structure into effect when look at our pricing.
You look at our particular situation, you have to net the two and right now we believe when you do net the two it's a push to slightly positive for us.
Erik Mielke - Analyst
Okay.
That's great, thanks.
Operator
Our next question comes from the lining of Roger Read with Natixis Bleichroeder.
Roger Read - Analyst
Good morning.
Mike Ciskowski - CFO
Good morning, Roger.
Roger Read - Analyst
A question for you.
As you look at these turnarounds and seems like we are extending the length of them and certainly the depth of them with the full shutdowns of the plants, what impact does that have in terms of your spending?
Is that increasing it, decreasing?
Mike Ciskowski - CFO
Well, I would say for the year, if it is a question of what is the 2009 impact, directionally the changes we have made have moved from turnarounds out of 2009 into 2010.
So 2009 will come in lower than we originally anticipated.
Now from an execution point of view, you don't really slow down the execution, because you want to be efficient in what you spend from a maintenance point of view.
So I would say duration of turnarounds really do not change because it's sufficient execution that we are looking for.
But as in the case in Texas City, we have units that are being controlled and taken down and we will do very little maintenance on those.
So that's just a matter of capacity and economics management.
Roger Read - Analyst
Okay.
So just simply an opportunity cost or opportunity benefit of not running in terms of what goes down on the turnarounds this time.
Mike Ciskowski - CFO
Yes.
That's right.
And a valuation that we made because in this turnaround in Texas City, we are taking down a large hydro treater that makes sweet cat feed.
We need to to evaluate to capture sweet cat feed to turn into gasoline and wasn't an economic proposition for us.
Roger Read - Analyst
Okay.
Somewhat unrelated to my prior question but somewhat related to the prior guy's question.
As you look at the OPEC cuts that are going on out there, have you seen beyond, as we look at differentials, have you seen any issues with sourcing any particular type of crude, or is there plenty available as the market will tell us what would be the supposed crude stored out in the ocean and all that?
Mike Ciskowski - CFO
We haven't had any trouble with physical supply, but we have have seen the effects of the cuts in OPEC.
The size of the cuts back, last we ran about 250,000 a day of their oil, and I think in March, we are going to run somewhere around 190,000.
We have also been cut by the Kuwaitis by about 10%.
Now backfilling those volumes with crude like [gladamedium and keirkurk] and running more Iraqi oil.
So to answer your question on absolute supply, it hasn't been an issue but we are sourcing it differently.
Roger Read - Analyst
Okay.
And then final question.
Share repurchase.
Obviously some still remains on the revolver -- excuse me, on the authorization.
Obviously you are watching CapEx.
Do you think share repos continue at least to the extent they are flat this year or is that something you should reconsider more or less off the table until things look better?
Bill Klesse - Chairman, CEO
Today the issue, of course, is cash and liquidity, balance sheet strength.
So we know what our, we'll call it dilution, would be here from our benefit programs and we will look at it, but I am not committing anything.
Roger Read - Analyst
Okay.
Thank you.
Operator
Our next question comes from the line of Mark Gilman with the Benchmark Company.
Mark Gilman - Analyst
Guys, good morning.
A couple of things, Mike, Bill, can you tell us at the $2.7 billion level, is that program sized on being funds flow neutral in the 2009 environment that you are envisioning?
Bill Klesse - Chairman, CEO
The answer would be no.
It is sized because we are going to take delivery of our hydrocracker reactors at these two plants that were ordered in 2006.
We are going to get down into the -- well, at least we are going to take some of them into the plants, put them on the foundations.
So we are going to complete that amount of work and then we are going to stop.
We have a couple of other projects that we are doing the same thing.
And we are getting them to a point that is a good engineering practice point.
And that's what we are doing on those big jobs because we believe they are very good jobs for this company in the long run.
But today, as all of us, we are looking at what's going on all around us.
And even though we are still really strong here, we are going to keep our counters.
Mark Gilman - Analyst
Okay, Bill, so I can infer from that that the budget is set base on the assumption of being a slight net cash drawdown or net incremental order.
Bill Klesse - Chairman, CEO
We would say today, and we will just deal with consensus earnings forecast, that, yes, when you consider dividends, capital, we have some debt repayment that Mike mentioned, looking at all of that, the answer would be yes.
Mark Gilman - Analyst
Okay.
Another one if I could.
What was the level of economically related throughput curtailments in the fourth quarter and implicit in Ashley's guidance for 1Q?
Ashley Smith - IR
Yes, Mark, we are going to have to get that after the call.
I don't have the breakdown between economic decisions versus maintenance.
Mark Gilman - Analyst
Okay.
Let me try another one, and Bill, you will certainly appreciate this.
For one of the prior questions dealt with the Contango issue in TI and the extent of capture.
It would seem at least if my recollection is correct, Midcontinent, there's typically a significant benefit from the crude roll when the Contango gets anywhere near as deep as it was.
Yet in this period the margins in Midcontinent were quite a bit weaker than what we thought was going to be the case.
What am I missing?
Bill Klesse - Chairman, CEO
We have the number for you here.
Mike Ciskowski - CFO
$9.5 million.
Bill Klesse - Chairman, CEO
In the fourth quarter.
So $9.5 million was the benefit of the complex roll.
Mike Ciskowski - CFO
Mark, from an operational point of view in the mid-continent we had a cat feed hydrofeeder and a cat cracker in the refinery, so that undoubtedly impacted the margins in that region.
Mark Gilman - Analyst
Okay.
Thanks.
Guys, do you have any update at all on discussions with the government in Aruba regarding the expiration of the tax holiday?
Bill Klesse - Chairman, CEO
Well, as of now, the tax holiday is going to expire at the end of '10.
And so I am the one that is doing this now.
And I talk to the government of Aruba often.
Mark Flannery - Analyst
Nothing to update us on though, Bill?
Bill Klesse - Chairman, CEO
Nothing I can update you on.
Mark Flannery - Analyst
Okay.
Just one or two quick ones more.
Regarding the goodwill impairment, can you give us any idea of the margin outlook that was implicit in your analysis and the determination, qualitative, quantitative, however you want to look at it?
Bill Klesse - Chairman, CEO
Well are just looking to come up with a price based off of some looking at a historical price through the cycle.
So we've got some good years.
We have got some bad years, but I can't give you the exact.
Mark Flannery - Analyst
So mid-cycle type condition, Mike?
Mike Ciskowski - CFO
Yes, I would characterize that.
We have good years and bad years, yes.
Mark Flannery - Analyst
Okay.
Just one more.
The station count went up fairly significantly as did average throughput volumes in the US.
Would almost appear as if you did a retail acquisition that I either overlooked, missed, or you hadn't previously indicated.
Did I miss something there?
Bill Klesse - Chairman, CEO
We did acquire -- I guess it was fourth quarter of last year an Albertson's chain that was 70 sites.
Mark Flannery - Analyst
I thought that was third quarter of this year.
Bill Klesse - Chairman, CEO
Well, whenever we did it, we acquired Albertson's, and that would be why our station count was up.
So if you look at the average for the quarter, you have one number.
You have a different number for the average for the year.
But where we are today closing the year is at 1,005 stations?
But it is because of the Albertson's acquisition and we do have some sites that we are selling in that acquisition.
But we are going to be around 1,000-store company operated store chain.
What is the number?
Mike Ciskowski - CFO
1,010.
Bill Klesse - Chairman, CEO
1,010 was the year-end store count.
Mark Flannery - Analyst
Okay.
Guys, thanks very much.
Appreciate the help.
Bill Klesse - Chairman, CEO
Mark, I want to tell you one other thing on Aruba because I remember.
They start their election process here pretty much takes off end the February, early March.
So I would -- I don't look for any resolutions until they go through their election.
Mark Flannery - Analyst
Okay.
Thanks, Bill.
Operator
(Operator Instructions) Our next question comes from the line of Chi Chow with Tristone Capital.
Chi Chow - Analyst
Thank you.
It looks like the northeast system, the margins there have done very well the last couple of quarters.
Have there been any operational changes in that region that has driven those results?
Mike Ciskowski - CFO
Gee Chi, I am sorry you said the margins -- which direction, in the northeast, which direction?
Chi Chow - Analyst
In the northeast.
Looks like they have done very well the last two quarters.
Wonder if there was any operational changes have driven up.
Mike Ciskowski - CFO
Well, I guess -- you are not talking about rate, you are talking about refining?
Chi Chow - Analyst
Refining, yes.
Mike Ciskowski - CFO
I would tell you just as general statement, our Quebec refinery had excellent results and also our Paulsboro refinery has also done very well.
We make lubes in Paulsboro and they have been doing much better.
So that would be -- the Paulsboro refinery has done better and this would be the major thing for us here.
But Quebec, our Canadian guys had a great operation.
Chi Chow - Analyst
Is it more disdilent driven in Quebec?
Bill Klesse - Chairman, CEO
It is more disdilent driven.
Remember the yield structure out there is clearly skewed toward disdilent.
The refinery, if you think about it, has a relatively small cat cracker on a relative basis.
Mike Ciskowski - CFO
What I would add to that also we did a crude expansion project in Quebec earlier in the year which we are actually using, instead of running higher crude rates volumetrically, we have changed the crude mix, we're running more discounted heavier sweet crude in Quebec and that has a significant impact.
Chi Chow - Analyst
What sort of crudes have you switched to up there?
Mike Ciskowski - CFO
West African.
Bill Klesse - Chairman, CEO
Yes, we added that into the mix.
Chi Chow - Analyst
Okay.
Also noticed the op costs in the northeast were a bit higher than fourth quarter, any reason for that?
Mike Ciskowski - CFO
Yes, I would say that relates to the crude unit turn around that we have in Delaware City.
That was one factor.
Crude unit was down for about 35 days.
In addition, the coke gasification unit was down for much of the fourth quarter.
Chi Chow - Analyst
Okay.
You talked about some crude changes in Quebec and some of the sweet crude changes with the Middle East grades.
Have there been any other meaningful changes in the crude slates throughout the system other than those?
Mike Ciskowski - CFO
No, Chi.
I would tell you if you just look at it, we ran more heavy [sod] in the quarter, but there has been no fundamental change.
Chi Chow - Analyst
Okay.
Great, thanks a lot.
Operator
Our next question comes from the line of Harry Mateer with Barclay's Capital.
Harry Mateer - Analyst
Hey, guys, thanks.
One question.
If the debt markets are open to you later in 2009, would you consider issuing a debt to refinance that's '09 maturity and maybe build up some cash or are you committed to definitely paying down maturity with cash?
Bill Klesse - Chairman, CEO
Well, we are -- we may access the debt market.
We have authorization to do so.
We may do that.
Harry Mateer - Analyst
And would be the intention be for refinancing or refinancing plus -- and a combination of already CapEx needs?
Bill Klesse - Chairman, CEO
Sure.
The answer would be yes.
Harry Mateer - Analyst
Okay.
Thank you.
Operator
Our next question comes from the line of Blake Fernandez with Howard Weil.
Blake Fernandez - Analyst
Good morning.
My question is surrounding the cost structure.
Obviously we have Ashley's guidance for 1Q, a bit of an uptick.
My question is really as we have progressed throughout the year, are there any opportunities to lower cost other than the pure and natural gas cost component?
Bill Klesse - Chairman, CEO
You are speaking in the refineries.
Blake Fernandez - Analyst
Correct.
Mike Ciskowski - CFO
Yes.
We actually are conducting a review of whether we can accelerate any cost efficiencies in the refineries.
As an example, we employ about 5,000 contractors per day, kind on continuing maintenance and operations support.
That number is up over the last few years, so we are beginning to question whether we can implement any contract or efficiencies, and if we were successful in doing that on the order of 10%, that would be a significant impact on cost reductions on the order of about $50 million per year.
So we are looking at that right now.
We are also taking a look at the size of our organizations in relation to this reduced capital expenditure profile, with the intent of trying to position of organizations for the workload that we really anticipate.
Blake Fernandez - Analyst
Great.
Thanks a lot.
Operator
(Operator Instructions) Our next question comes from the line of Paul Cheng with Barclay's Capital.
Paul Cheng - Analyst
Hey, gentlemen.
A number of quick questions.
Bill, when you are looking at Aruba, I think at one point after Petrobras that you guys are also still looking at trying to sell to other companies.
I think one rumor is lube oil.
And at this point, should we assume that there is nothing going on that is really nothing that is in the near future or within this year that you think it is going to consummate on that.
And if not and assume if you do not get the tax ready expense in the 2010 without that, based on the current situation, is this a LIFO entity?
Bill Klesse - Chairman, CEO
Well, the first question is, we have said that Aruba is a plant that we are looking for strategic alternatives, so it continues.
Whether you can expect it or not remains to be seen, and at the end of the day, it will have to do with values, I am sure.
Whether the plant -- and that's happening.
Whether the plant is a viable operation after, say, the tax holiday ends, and there are many more issues than just the tax holiday here, by the way, that remains to be seen.
Paul Cheng - Analyst
Okay.
So that you are not 100% sure that it will be LIFO because we do know, I mean structurally that in addition to the tax holiday that labor use and everything has been an issue over there.
Bill Klesse - Chairman, CEO
Well, you are asking me am I 100% sure?
Paul Cheng - Analyst
No, I am just saying that based on what you can see, do you -- if you looked at, do you believe that that is a facility you will be willing to make the -- if you cannot sell, will you be willing to make additional investment to make them a LIFO or do you think you will be able to run it as it is and be okay.
Bill Klesse - Chairman, CEO
I am going to ask you, Paul, and you are not going to like the answer.
It just depends.
Paul Cheng - Analyst
Okay.
That's fair.
Acquisition may be very far out, but of course recent opportunity comes (inaudible) is very cheap at this point and you guys remain despite that situation looked pretty bad.
But you guys remain one of the strongest.
Bill, is that something that is in you guys' minds at all or given the uncertainty, you should really not be too aggressive on that front.
Bill Klesse - Chairman, CEO
Well, we will not be too aggressive on that front, but we will look at some of these plants that are coming on the market.
We are a refinery.
You buy our stock because we are a refining and marketing company, and this is our business, and as these plants come on, we are going to take a look at them.
And we will see if we get the strategic fit and the value that we say it's a good investment for our shareholders.
Paul Cheng - Analyst
Would we assume you would be using your share, but not the cash, or is that not necessarily a requirement?
Bill Klesse - Chairman, CEO
Well, it depends on size of the deal, but I think in this environment, liquidity and balance sheet strengths are absolutely imperative.
So if we found the right kind of deal, we are going to finance it the right way to keep that and keep our investment grade rating.
Paul Cheng - Analyst
Okay.
A final one, I think for Gene or maybe for Rich.
The mining discount has come down dramatically and only down to about maybe $5 or $6 at this point.
Oftentimes you guys have been able to scour and find some similar quality grade with a much bigger discount.
Is that opportunity you have been able to find a lot of opportunity at this point or that when looking at that, I mean mining not misprice order unreasonable.
The current market is this is the discount we are getting.
Joe Gorder - EVP, Marketing, Supply
Paul, there is Joe.
You are absolutely right the mining discount has compressed.
A week ago it was compared to WGI.
And with the flattening of the curve and the increase in the GI price, of course, now we have like a $5 discount today.
But through that period, even -- well, for the last several months, we have continued on find alternatives heavy sours and we're running crudes like [castilla, and berret, and napo] and then $100 which continue price at about [$9 to $10] off.
Paul Cheng - Analyst
Okay.
So you have been able to get just the quantity on those that are pretty similar to mining?
Joe Gorder - EVP, Marketing, Supply
Yes.
Paul Cheng - Analyst
Okay.
Very good.
Thank you.
Operator
Our next question is a follow-up question from the line of Mark Gilman with the Benchmark Company.
Mark Gilman - Analyst
Alright, guys, just a clarification.
Mike, when you were talking about changes in the capital program you made some reference to the air aromatics projects of St.
Charles, which frankly I thought you had shelved previously, and you talked about there there being a compliance element to it.
Could you clarify what you said there?
Richard Marcogliese - EVP, COO
Yes, Mark, this is Rich.
We have comments on that.
We have talked about that previously, and when we had, it was with the objective of recovering aromatics and producing paraxylene, to basically get into a new business for Valero.
We talked in the prior quarter, it was the paraxylene project that we made a decision to defer.
The examination that we have made in this quarter is we have taken a look at aromatics extraction as it relates and needs to comply with the MSAT2 regulations, this is mobile source air toxics, it requires getting Benzene down to less than 0.6% in gasoline.
We have made an evaluation of whether or not we would install new aromatics extraction facilities in St.
Charles as was part of the original plan.
We have made a decision to defer that, and we will take advantage of capacity that is available in existing extractors in Corpus Christi.
So that is the change that we have made this quarter compared to last quarter.
Mark Gilman - Analyst
I see.
Thanks, Rich.
Could you also clarify, you were going a little bit too quickly for me that part of the call, the adjustments that has been made in the Memphis program?
Richard Marcogliese - EVP, COO
The Memphis program, it has -- Memphis refinery has one of our cat crackers that has the poorest reliability.
We have put together an extensive revamp project for that.
It was originally slated for implementation this year.
We made a decision to defer it until 2010, and we have now made a decision to push it out to 2012.
Mark Gilman - Analyst
Okay.
Just one more if I could.
The Canadian retail generated a lot less than operating profit than frankly I would have thought.
Is there something else that impacted that, maybe FIFO or inventory considerations, or exchange rates considerations.
The numbers were way below anything we thought might be realistic given retail heating oil margins.
Bill Klesse - Chairman, CEO
We don't believe so.
Mark Gilman - Analyst
Nothing you can think of, Bill?
Bill Klesse - Chairman, CEO
No.
We had good, business has been good there.
Mark Gilman - Analyst
Okay, guys, thank you.
Operator
And at this time, there are no further questions in queue.
I will now turn the conference call back over to Mr.
Smith.
Ashley Smith - IR
Thank you, Ashley.
And for all the listeners to the call, thanks for listening.
If you have any questions, please feel free to contact our Investor Relations department.
Thank you.
Operator
This concludes today's Valero Energy fourth-quarter 2008 earnings conference call.
You may now disconnect.