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Operator
Good morning.
My name is Celeste and I will be your conference operator today.
At this time, I would like to welcome everyone to the Valero Energy Corp first quarter 2009 earnings conference call.
All lines have been placed on mute to prevent background noise.
After the speakers' remarks, there will be a question and answer session.
(Operator Instructions).
Thank you.
I would now like to introduce Executive Director of Investor Relations, Mr.
Ashley Smith.
Please, go ahead, sir.
Ashley Smith - IR
Thank you, Celeste.
Good morning and welcome to the Valero Energy Corporation's first quarter 2009 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 a copy on our website at www.valero.com.
Also, attached to earnings release are tables that provide 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'd 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 expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor Provisions under Federal Securities laws.
There are many factors that can cause actual results to differ from our expectations, including those we have described in our filing with the SEC.
Now, I'll turn the call over to Mike.
Mike Ciskowski - CFO
Thanks Ashley.
Thanks for joining us today.
As noted in the release, we reported first quarter 2009 net income of $309 million or $0.59 per share.
This is a 23% increase in earnings per share over the $0.48 per share reported in the first quarter of 2008.
When you exclude the $0.12 per share benefit from an insurance recovery at McKee in the first quarter of 2008, first quarter 2009 earnings per share is 64% higher than the same quarter last year.
First quarter 2009 operating income was $507 million versus $472 million in the first quarter of 2008 or $371 million without the previously mentioned insurance recovery.
The increase in operating income was mainly due to higher refining margins on gasoline and secondary products, such as fuel oil, asphalt, and petroleum coke.
For example, benchmark US Gulf Coast gasoline margins versus WTI of $8.14 per barrel were almost double the $4.23 per barrel in the first quarter of 2008.
As a proxy for secondary products, Gulf Coast margins on high sulfur fuel oil improved 86% from $28.16 per barrel blow the price of WTI in the first quarter of 2008 to $4 per barrel below WTI in the first quarter of this year.
Lower operating expenses also contributed to the increase in operating income versus the first quarter of 2008.
The $117 million decline in refining operating expenses was due primarily to lower energy costs and in the absence of operating expenses at the cross bridge refinery, which we sold in July of 2008.
Somewhat offsetting the increase in the first quarter of 2009 operating income was the significant decline in our sour crude oil discounts and lower diesel and jet fuel margins.
From the first quarter of 2008 to the first quarter of 2009, Maya heavy sour crude oil discounts versus WTI decreased 73% to $4.46 per barrel.
And the Mars sour crude oil spreads decreased by 111% to a premium to WTI of $0.78 per barrel.
Although benchmark diesel margins in our regions averaged respectable levels in the low to mid-teens per barrel in the first quarter of 2009, the decreases from the first quarter of 2008 were approximately 25% on the Gulf Coast and East Coast, and 31% on the West Coast, and 44% in the mid-Continent.
Our first quarter throughput volumes averaged 2.5 million barrels per day, which was 142,000 barrels per day below the first quarter of 2008.
This was primarily due to the reduction in capacity from the sale of the Krotz Springs refinery and then down time at several other refineries.
Refinery cash operating expenses were $4.49 per barrel, which were favorable to our guidance of $4.80 per barrel due mainly to lower-than-expected energy costs and higher-than-expected throughput volumes.
General and administrative expenses excluding corporate depreciation were $145 million in the first quarter.
The $7 million increase from the fourth quarter and $10 million from our guidance was primarily due to higher severance costs.
For the first quarter, total depreciation and amortization expense was $378 million, below our guidance due to lower turnaround amortization expense.
Interest expense net of capitalized interest was $79 million, slightly above our guidance due to the issuance of $1 billion worth of notes in mid-March, the effective tax rate was 28%.
Regarding cash flows for the first quarter, capital spending was $902 million, which includes $167 million of turn around expenditures.
And we paid $77 million in dividends on common stock.
In March, we received nearly $1 billion from a bond offering, in which we we issued $750 million of 10-year notes and $250 million of 30 year notes.
The proceeds enabled us to pay off $209 million of maturing debt that came due on April 1, fund our acquisition of the various ethanol plants, and maintain our capital expenditure program.
Regarding the ethanol plants, we are excited about our acquisition of the plants from VeraSun.
Total capacity of 780 million gallons per year or 50,000 barrels per day, we will pay a total of $477 million, which is 30% of estimated replacement cost, plus approximately $78 million for working capital.
We have closed on six of the plants and one development site and we expect to close on the last plant very soon.
We consider these to be the best plants in VeraSun's system and some of the best in the industry due to their large size and advantaged access to local feed stocks.
This acquisition fits well with Valero's core business of manufacturing and marketing motor fuels.
With respect to our balance sheet at the end of March, our total debt was $7.6 billion, due to the timing of the bond offering, we ended the quarter with a cash balance of $1.7 billion and we had nearly $4.7 billion of additional liquidity available.
Also at the end of the quarter, our debt to cap ratio net of cash was 27.1% which remains far below the bank agreement threshold of 60%.
Regarding future uses of cash, we have made additional cuts to our estimate for the 2009 capital expenditures and turn around costs considering the weak economic outlook.
We now estimate capital spending will be $2.5 billion, which is down $200 million from our most recent estimate.
Regarding upcoming debt payments, we are required in October to offer to purchase $100 million of our bonds per the related indenture and in 2010, our maturities total only $30 million.
In summary, we are working diligently to manage our financial health in this weak economy.
Realizing that we are not immune from the effects of a recession, we are reducing operating costs, overhead costs, and capital spending.
However, we will prudently continue to investment in growth opportunities that build long-term value for our shareholders.
Now, I'll turn it over to Ashley to cover the earnings models assumption.
Ashley Smith - IR
Thanks, Mike.
From modeling our second quarter operations, we should expect the following refinery throughput volumes.
The Gulf Coast should average between 1.35 to 1.4 million barrels per day, mid-Continent should average between 360,000 and 370,000 barrels per day, West Coast should average between 270,000 and 280,000 barrels per day, and the Northeast should average in the range of 460,000 to 470,000 barrels per day.
Refinery cash operating expenses are expected to be about $4.40 per barrel, down slightly from the first quarter due to expected -- higher expected throughput volume and continued low energy costs.
Regarding our ethanol operations in the second quarter, we expect total throughput volumes of 1.5 to 1.6 million gallons per day and operating expenses should be in the range of $0.31 to $0.33 per gallon.
And that includes approximately $0.05 per gallon for noncash costs such as depreciation and amortization expense.
With respect to some of the other items for second quarter, we expect general and administrative expense, excluding depreciation to be around $140 million, net interest expense should be $100 million.
total depreciation and amortization expense should be around $390 million and we expect a 31% effective tax rate.
We will now open the call for questions.
Operator
(Operator Instructions).
Your first question comes from the line of -- if I am pronouncing it correctly -- Erik Mielke.
Erik Mielke - Analyst
Yes, I am here from Merrill Lynch.
I have two questions if I may.
One is a standard question to ask.
If you can give us a bit of an update on what you're seeing for demand for ethanol and for diesel in the current environment.
And my second question relates to the commentary you had in the press release today around different policy initiatives in DC.
If you can elaborate on what you expect to see come out of DC and what it might mean for your business, particularly cap and trade and other similar initiatives.
Mike Ciskowski - CFO
Well, on gasoline demand, we realize that it's weak.
2.5% from the same period last year.
Demand is also weak, much weaker than gasoline.
In our own network,though, we've seen gasoline demand in our retail operations actually increase.
It's up a percent.
So in our markets, things don't look that bad.
Erik Mielke - Analyst
What's the rate of change on the distillate side?
Is it getting worse or starting to slow down?
Mike Ciskowski - CFO
Well, it hasn't gotten any better.
The story in the distillates, of course, is the export volumes.
And we continue to have an open (Inaudible) to Europe which we're taking advantage of.
We're also seeing increased demand in South America.
Winter is approaching there and some of the traditional sources of supply just aren't available.
Export volumes, still strong.
Domestic volumes are weak.
Ashley Smith - IR
I might add on our retail network, we're up 1% on gasoline.
But on distillate, we are down about 10%.
So on an average -- when you weight that, we are pretty much flat for the year versus the first quarter.
Distillate over, diesel is only about 10% of our network sales volume.
So we are flat.
Mike Ciskowski - CFO
On the Washington initiatives, I'm going to let Kim Bowers, who is our Executive Vice President in charge of government relations.
But just keep in mind that we have -- and we are still auditing this number, but about 36 million metric tons of CO2 emissions.
Kim Bowers - EVP
Thanks, bill.
We're reviewing the Waxman Bill but there are so many details to work out that we haven't evaluated the impact.
What baseline they choose, credit, whether they're going to be allocated or auctioned off.
All the details still need to be worked out with the Waxman Bill.
We're watching it very carefully.
We still think there are unintended conflicts that will result from this, pushing us to foreign crude oil to foreign products coming in and unfairly it is giving advantage to foreign competition over domestic competition here.
Mike Ciskowski - CFO
Obviously, we think this is a bad idea.
Also, the devil is always into details.
Obviously, our government is looking for cash.
And so we'll see what happens on that.
The other initiatives that we have also spoken about is some of the tax consequences of eliminating LIFO just for energy companies.
Putting the super fund tax back in, which quite frankly, we do collect from our customers.
In reality, corporations -- we just collect taxes if you think about it.
Also, the manufacturers' credit, which has been a benefit.
They're talking about eliminating that just for energy companies.
So there is an effort here at the moment to raise money from a segment of the business and that is just deemed to be able to pay.
So those are only a few of the things.
And as you read the newspaper like we do.
The major issue is CO2 is that the United States will, in fact, enforce this.
We'll have a department here that will track it, regulate it, and file reports.
And we'll pay whatever we're told we have to pay.
But in the rest of the world, it will not be as rigorously enforced as it would be here.
And thus, it changes the global competitive situation.
So they need to be very careful.
Erik Mielke - Analyst
Say the introduction of carbon pricing would add -- I'm throwing out a number here.
I'm not asking you to confirm or deny.
But say it adds a dollar per barrel to your overall cost base.
If you do not have an equivalent cost applied to product imports, what will that do to your business?
Mike Ciskowski - CFO
I have no idea.
Except that as Joe mentioned, we are -- this is a global business.
It's very capital intensive business.
You know by looking at our data, our operating costs, just say for this conversation, $5.00 a barrel.
If you add $1.00 a barrel, or $2.00 a barrel, you can see what it's doing to your cost situation for a refiner.
But as far as what the sensitivity or elasticity is, I don't know.
Erik Mielke - Analyst
But I'm thinking more about the pricing dynamics.
If it's applied to the imports, then presumably it will be passed through to the consumer because it's the same for everyone.
If it's not applied to imports, it becomes a question of where the pricing power lies.
Mike Ciskowski - CFO
That's exactly right and freight gets into this.
If it's a dollar,as you just said, it would two and half cents a gallon.
So we will just see what evolves.
The thing that I say, and I know this sounds a little bit like motherhood and apple pie.
We have good jobs in this industry.
We pay a good wage.
People can work for us and own their home and educate their children.
And some of these initiatives and the social change agenda will have a big impact on part of the backbone of our country, which is a lot of the manufacturing jobs.
Erik Mielke - Analyst
Nothing wrong with motherhood and apple pie.
Thanks for your answer.
Operator
Your next question comes from the line of Mark Flannery with Credit Suisse.
Mark Flannery - Analyst
Thank you.
I have a question on CapEx.
And how we should think about where this CapEx line is going.
If you cut another $200 million off it, should we infer that you're trying as best as you can to run cash neutral in 2009?
In other words, if things don't really pick up over the summer, should we expect another $200 million to drop off that number?
Or am I thinking about it the wrong way?
Mike Ciskowski - CFO
You can think of it that way.
Look at the first call estimate.
What we are trying to do is manage our business here.
But we still have a very strong balance sheet.
Part of the thing we are doing though is getting our projects to a point where we can orderly stop them.
For instance, we have our large hydrocracker projects, which our whole management team believes are good projects long term.
But we're getting them to a point if we can stop here as we weather the storm that we're dealing with.
But if you go through first call and do all the adds and subtracts, you can see that we're pretty close to being in balance at $2.5 billion.
Mark Flannery - Analyst
Right.
Last quarter I think you mentioned $1.8 billion as a minimum CapEx number.
Is that still a valid number?
Or do you think we could chop away at that a little bit?
Mike Ciskowski - CFO
We still consider that to be the minimum expenditure level over the next couple of years.
When you consider turnaround expenditures, reliability, safety, projects, and environmental capital.
And environmental capital in particular for the next couple of years, we have a couple of regulatory obligations that we have to meet.
We have to reduce benzene and gasoline.
It is known as the MSAT2 regulation.
We have carryover projects that come out of our EPA 114 agreement and then we have a large air quality project in Benicia that we're completing.
We would still say that $1.8 billion represents a minimum level for the next few years.
Mark Flannery - Analyst
Thank you very much.
Mike Ciskowski - CFO
Thanks, Mark.
Operator
Your next question comes from the line of Roger Read with Natixis Bleichroeder.
Roger Read - Analyst
Good morning, gentlemen.
Mike Ciskowski - CFO
Good morning, Roger.
Roger Read - Analyst
Just wanted to follow up on the gasoline demand you're seeing in your retail.
Is that a year-over-year comparison, the 1% and the 10%?
And if it is, how would it compare to what you saw in the first quarter to the fourth quarter or currently even?
Mike Ciskowski - CFO
That's a first quarter 2009 versus a first quarter 2008 comparison.
In the fourth quarter of 2008, we were up just a little bit compared to the first quarter.
Not much difference between the two quarters.
Roger Read - Analyst
All right.
Thanks.
And then, following on with the CapEx question, kind of the last time we had an update, the expectation was the CapEx number would be maybe more spent rather than less spent.
Has something changed in the last 60 days that leads you to be more conservative about that?
Or something in your expectation 60 days ago that is now not as bright as you thought then?
Mike Ciskowski - CFO
The only thing I would tell you the we're looking at the economy just like you are.
And we have a lot of people telling us we'll see a recovery here at the end of the year and next year.
And we just look at the data.
We know unemployment is most likely going to continue to increase from 8.5.
I've heard some numbers as high as 10.5.
So we just look at the situation.
And we don't see any stimulus money doing anything.
We don't see a lot of things happening.
So we're just being a little more conservative.
Roger Read - Analyst
Okay, thank you.
Operator
Your next question comes from the line of Jeff Dietert with Simmons.
Jeff Dietert - Analyst
Jeff Dietert with Simmons.
Good morning.
Bill Klesse - Chairman, CEO
Good morning.
Jeff Dietert - Analyst
Stocks are up and the demand is pretty weak.
Have you guys hedged some of your distillate going through the summer?
And if so, is it significant?
Bill Klesse - Chairman, CEO
We are always in these markets as I've said every time we do a ratability when we buy oil.
We have forward sales in normal course of business.
We have pretty darn good traders that manage our business for us.
When it comes to strategic type positions like significant sales or so, then actually our entire management team gets involved.
And I'm very involved in these things.
We have a strong office.
To your question, we are in these markets all the time.
Some of you know, a lot of this is my background.
And basically, we are there.
We have done some forward selling.
But on the on the other hand, this is competitive.
It's very competitive, what our positions are.
And so Jeff, I prefer not to get into too much detail.
In our 10-Q that will be filed in a couple of weeks, there will be some disclosures.
Jeff Dietert - Analyst
Okay, thank you.
And on the -- it seems the east coast market has been more challenged than some of the other regions.
Utilization rates have been lower there.
And yet stocks are above average.
Do you see that correcting over time as the economy recovers?
Or is that just a fundamentally more competitive market?
Bill Klesse - Chairman, CEO
I think focusing on the east, if I understand, we have taken our Delaware City refinery down.
We had a problem with the coker in February.
And if you can think about that operation, a large fluid coker, we could not get it restarted when it came down.
Thus, we wound up shutting down the entire refinery.
We have had that refinery down here for the month of March and frankly, for April.
We've done the repair work on the coker.
Did a turnaround.
We fixed our steam system because we took some of that down.
Things that you never fix.
We added some other steam.
We have lost a boiler due to regulatory and Delaware and we've had to bring in temporary boilers.
We've decided we don't have enough steam.
So we've been doing things like this.
The plant is scheduled to start up and we are in the process of starting back up.
And thus, you will see rates based on Ashley's guidance to you here in the second quarter.
But the plant at Delaware City is starting up.
Now, having said all of that, in this environment that we're in, there's too much refining capacity, too much capability to make refined products.
I've said this publicly.
The industry needs to maintain discipline here during this environment until the economy picks up.
If the industry does not maintain discipline, then these margins are going to come down.
And it'll be a lot tougher environment.
Jeff Dietert - Analyst
Thanks for your comments.
Operator
Your next question comes from the line of Paul Sankey with Deutsche Bank.
Paul Sankey - Analyst
Hi.
Good morning, gentlemen.
In the past, you've been quite specific about merges and acquisitions.
Particularly, in terms of disposal candidates.
Bill, could you talk a little bit about firstly, how you're viewing disposals.
Secondly, about acquisitions as well in the current market.
And I'm also thinking not just refineries but about ethanol.
And based on what you just said on the potential for international activity either disposal or acquisition.
Bill Klesse - Chairman, CEO
Sure.
We still are looking for strategic options for our Reuben refinery and will continue to do that as the world continues to evolve.
As a general statement, the markets have shifted dramatically.
As I've said.
You can buy assets for a lot less money than you can build them.
And this is kind of what we always expected.
And we're back to a market year where acquisitions, the proper hardware in the right location is attractive to us.
So to some of your detail on ethanol, we've got a stake in the business.
It's got a critical mass.
It is policy in the United States.
We are still a firm believer in sound science.
But it is policy.
And all this is an extension for us.
But I do not see us adding to our ethanol business through acquisitions unless it is absolutely a golden opportunity.
We are also looking at little bits and pieces in what we'll call the second generation ethanol, just like every company is.
On international acquisitions, we are very interested.
And we see some plants coming on the market.
We continue to look at those.
If we find one that we think, one, two, or three that fits our situation, we are interested in making an acquisition.
It's got to be the right plant, the right location, and the right price.
What we would like to do is broaden our geographic base.
But we need to do it in the right way.
Paul Sankey - Analyst
A couple of refineries domestically that aren't running any more.
Is it fair to say about Delaware for instance?
Bill Klesse - Chairman, CEO
No that's not fair to say.
We are starting the plant up.
Paul Sankey - Analyst
Right, but I guess that was part of the low throughput for Q2 and --
Bill Klesse - Chairman, CEO
Well, sorry, Paul.
We've lost one month, obviously.
So if you think about it, we're not startling up until right now.
And that's the main reason.
That refinery has a good confirmation.
But I'm not going to deny.
We have operated that refinery very poorly.
And we have a major effort here to improve the operation of that plant.
Paul Sankey - Analyst
So if I summarize, basically, the existing, if you like disposal candidate is only Aruba.
And you are looking for international opportunities and you may add ethanol.
Bill Klesse - Chairman, CEO
Yes.
I think the last thing you said is very, very selectively add ethanol.
Is that what you said?
Paul Sankey - Analyst
Yes.
Bill Klesse - Chairman, CEO
I would agree to that.
Paul Sankey - Analyst
Just to be clear, does international count Canada?
Bill Klesse - Chairman, CEO
Oh, sure.
I was thinking -- I thought you were asking me more about Europe.
Paul Sankey - Analyst
I was, but I wanted to be quite clear.
Bill Klesse - Chairman, CEO
To be honest with you, we are already operating in Canada.
And so we're always interested in the correct opportunity there.
Paul Sankey - Analyst
Yes.
Okay.
Thanks.
That's great.
Thank you.
Operator
Your next question comes from the line of Michael LaMotte with JPMorgan.
Michael LaMotte - Analyst
Thanks.
Good morning.
If I could follow up, Ashley, perhaps on the guidance for this quarter on ethanol.
How does your current balance and you petition to get blender credits sort of fit into that guidance?
Can you give us an update on those two things.
Mike Ciskowski - CFO
You want to answer?
Let me just say -- from a supply perspective, we deal with the compliance at the RFS on an ongoing basis.
The acquisition of VeraSun for us is the acquisition of a stand alone business.
And there will be opportunities I'm sure for Valero to purchase ethanol from the VeraSun but it is not the reason that we did the acquisition and we don't see the two being related the way you link them in your question.
Michael LaMotte - Analyst
Okay.
Ashley Smith - IR
The utilization rates are just based on when we can acquire them and get them up and running.
Michael LaMotte - Analyst
Okay.
It's helpful to think about it as a stand alone business.
Thank you for that.
And on the issue of cash management.
How should we think about how you all are managing inventory levels?
And can you give us an update as to how many days crude you're currently sitting on?
Mike Ciskowski - CFO
Cash management?
Ashley Smith - IR
No, how many days crude.
Bill Klesse - Chairman, CEO
We still run our business normally.
We have about 115 million barrels of crude products, all kinds of things in our system.
Our LIFO number at the end of last year was 114 million if you look at it.
Obviously, the market is in carry.
And so where we can in the mid-Continent, we try very hard to take advantage of the carry just like you would expect us to.
We have not gone out and leased the -- We don't think carry is quite enough.
However, we have had earlier in the year when the carry got out to be several bucks, a lot more oil on the water in the sense of trying to catch it.
And it's been difficult because in the mid-Continent, we catch it, some of the international stuff gets priced, we have trouble capturing it.
But we try and manage it.
As a general statement, we have that.
We have bought crude on the water.
We're buying more crude obviously from Venezuela, the Iraqis, and some of the other places because the Mexican volumes are down.
We had different numbers.
We have a priced number, which is actually our price risk inventory on crude oil tends to be around 22, 23 days.
If you look at the supply function, it's actually a different number, tends to be slightly higher.
We buy a lot of crude FOB.
So it's hard for us to give you a number except to say that we're basically running the business as we always have.
However, where it's not in contango, we are trying to get our inventories out of the refineries for instance and into the marketplace to generate the cash.
Michael LaMotte - Analyst
That's helpful.
Thank you.
Bill Klesse - Chairman, CEO
It's a normal process for us.
Michael LaMotte - Analyst
Yes.
Yes.
Okay.
And normal is important as year on year.
Bill Klesse - Chairman, CEO
We have not gone into -- we have 115 million.
We run our inventory situation the same.
Although, we're watching it.
Michael LaMotte - Analyst
And last one for me just on shipping rates as it relates particularly to the ARB window in Europe.
How sensitive is that window to shipping rates?
Mike Ciskowski - CFO
It's a fairly sensitive point.
And we've had very inexpensive shipping here over the last several months.
And then it started to tighten up a little bit.
It has chewed into the ARB but the ARB remains open.
Bill Klesse - Chairman, CEO
Actual rates got down to just a couple of pennies.
And so it's been as low as I've seen it in years.
And thus, we've been able to chase the ARB when it's $0.04 or $0.05 a gallon.
So there's a buck profit in it for us a barrel to move stuff to Europe.
This is as low as rate as I've seen in a long -- I'm trying to remember when.
It does facilitate those type of trades.
Michael LaMotte - Analyst
Great, Thanks, guys.
Operator
Our next question comes from the line of Mark Gilman with the Benchmark Company.
Bill Klesse - Chairman, CEO
Good morning, Mark.
Mark Gilman - Analyst
Hey, bill.
I assume from your prior comments and also your answer to an earlier question regarding exploiting the deep first quarter contango, that there might be significant supply trading gains embedded in the first quarter results.
Can you quantify what that is?
Bill Klesse - Chairman, CEO
We'll certainly tell you what we do on contango, Joe.
Joe Gorder - EVP of Marketing & Supply
Well, Mark, the number if you take into consideration all the domestic barrels, it is $150 million for the quarter.
All right.
And I think Bill answered the question what we're doing on inventories here pretty clearly just a minute ago.
So anything else there?
Mark Gilman - Analyst
Well, Joe, that's just the domestic number.
I'm assuming there might be another element to that as well.
Joe Gorder - EVP of Marketing & Supply
Mark, on the international book, we make catch a little bit of the contango, but not much.
And it varies by the crude that you're buying.
The one thing that we need to keep in mind for example is that the way that the Middle Eastern oil is priced and the way that the Mexicans priced Maya.
It doesn't take into consideration the market structure.
And you typically don't capture the contango unless you get something physically in storage at that point in time.
As Bill mentioned, that's now the way we run our business.
You don't get it by virtue of the fact you're running it.
Mark Gilman - Analyst
But Joe, normally, wouldn't you have taken inventories down in the first quarter?
Joe Gorder - EVP of Marketing & Supply
Did we?
Mark Gilman - Analyst
Apparently, you did not.
Joe Gorder - EVP of Marketing & Supply
They were up slightly.
Bill Klesse - Chairman, CEO
Hang on Mark.
We are going to give you the answer here.
Mike is going to give you the details.
Mike Ciskowski - CFO
They were 115.7 million barrels versus 114 at year end.
And crude was up one and products up a half.
Mark Gilman - Analyst
Right, but is that normal first quarter behavior for you?
Mike Ciskowski - CFO
Yes, I don't think we did I didn't go out of the ordinary.
We're running the system to satisfy our utilization rates too.
To the extent that they were different would have more to do with that than any kind of play.
Mark Gilman - Analyst
Let me shift gears for a second.
How are you guys going to report the ethanol activities, both operationally and financially.
Separate segment embedded in the regions?
What are you going to do?
Bill Klesse - Chairman, CEO
It's going to be a separate segment.
Mark Flannery - Analyst
And implicit in Ashley's $0.32 per gallon operating cost, second quarter guidance, what's the corn price embedded in that?
Ashley Smith - IR
There's no corn cost in that?
That's just operating cost, just like in our refinery operating cost.
We don't include feed stock costs in that.
Bill Klesse - Chairman, CEO
I think it's $3.77.
$3.77.
It's $3.00.
Just say $3.80 a bushel is how we're looking at it today.
For the quarter.
Mark Flannery - Analyst
Is that a hedge number, Bill?
Bill Klesse - Chairman, CEO
No, that is not.
But in this business it is a lot different.
There's a lot of forward buying.
There's contracts with the farmers.
And Gene, do you want to comment?
Gene Edwards - EVP
Mark, what we are trying to do is to keep everything spot spot.
So basically we're seeing the spot foreign price and the spot ethanol price every day.
That may mean you're out there buying our fixed price contracts for the farmers and sell it and convert it back to a floating price until you run the corn.
Mark Flannery - Analyst
Okay.
Regarding the throughput numbers for the second quarter, give me a rough idea how much of that is maintenance, how much is economically oriented curtailment?
Gene Edwards - EVP
On the refinery?
Mark Flannery - Analyst
Yes.
Gene Edwards - EVP
I don't have that with me right now.
Mark Flannery - Analyst
Okay.
Last one for me.
Can you identify where the $200 million in CapEx reduction is going to hit on a project by project basis?
Bill Klesse - Chairman, CEO
We can.
We've gone through this in excruciating detail.
As you can imagine, we're all involved.
We are deferring some projects out.
We've been able to move a turnaround from the fourth quarter to the first quarter because we're doing this work at Saint Charles.
There are details.
I think you should just accept from us that it's in this.
We're going to come in at around 2.5 billion.
Mark Flannery - Analyst
Okay, guys.
Thanks very much.
Bill Klesse - Chairman, CEO
Mark, I want to answer the other question.
When you asked normal behavior in the first quarter.
It is normal behavior on the inventory management except for the fact that we did have contango.
And thus in the mid-Continent where -- and I mentioned that to the earlier question.
We went ahead and tried where we have tankage and things like that to capture the contango.
If the market had been backward dated.
Then we would have been pushing it the other way.
Mark Flannery - Analyst
The benefit is captured the 150 million?
Bill Klesse - Chairman, CEO
It's all in Joe's numbers.
We've tried to calculate what that was all worth to us.
Mark Flannery - Analyst
Okay.
Thanks a lot.
Operator
Our next question comes from the line of Neil McMahon from Stanford Bernstein.
Neil McMahon - Analyst
I've got a few questions.
First one looking at your outlook for the summer in terms of gasoline imports coming from Europe to the US.
Given the really low diesel crack in Europe.
And one presumes a falling utilization rate of european refineries.
Just wondering if you're factoring that at all in some of your thinking around summer imports.
Bill Klesse - Chairman, CEO
I don't think that we expect anything to be different this year than last year relative to gasoline imports from Europe.
Neil McMahon - Analyst
Okay.
Second one is on ethanol again.
And maybe just more of a -- question.
I can see the logic to why you've gone in and done this deal with VeraSun.
Do you expect oil companies to start doing this as well?
Not the ones playing the game already.
But a new entrance from the bigger.
And can you see yourself selling ethanol to all or maybe larger integrated companies.
Bill Klesse - Chairman, CEO
Your first question, I really don't know what the others will do.
For us, as we've said, we felt like it was a good extension.
Remember, we're an independent refiner.
And our whole business is almost entirely motor fuels.
So to us it was a good extension.
And as far as selling, we will sell.
We are going to run this as a separate business.
As Mike said, it's going to be segment reported.
We've taken advantage of synergies in the office.
when you come to rail car management, accounting, cash management, the things that you would expect, but as far as the business itself, we're a seller of ethanol.
And we'll sell to anybody that will pay our price and pays their bills.
Neil McMahon - Analyst
Okay.
Just a last quick one.
Back on gasoline demand in the US.
It seem that is from your stores that as you said you're up 1%.
Are you getting any sense of geography where that is coming through?
Are you seeing the demand coming back in the west relative to the rest of the country?
Miles travels and things picked up in the west relative to the central and eastern parts of the US?
Maybe just give us some flavor seeing some migration of demand picking up from west to east.
Bill Klesse - Chairman, CEO
I'm just give you a quick observation.
In California, vehicle miles traveled picked up.
And so we obviously moved up a little bit better in California.
I just came out the other day, report on vehicle miles traveled.
In the southwest, in Texas, and remember we're talking when Mike spoke, he's talking about the Company operated retail, which for Valero is 100, is 1000 company operated stores and in a volume sense for the first quarter it averaged somewhere around 117 or 118,000 barrels a day of gasoline.
When you look at it that way, you think about the size of the business.
Southwest here, your tend to have better volumes in Texas.
Our weather had been pretty nice.
But as far as going east, we don't directly market there.
Neil McMahon - Analyst
Just looking for your overviews.
Operator
Your next question comes from the line of Paul Cheng with Barclay's Capital.
Paul Cheng - Analyst
Hi, guys.
Are you talking about Delaware city saying that you guys have not been running as well as you should be.
Is there a hardware issue or a people issue?
Bill Klesse - Chairman, CEO
We've had a hardware issue there.
I'll let Rich speak.
Rich Marcogliese - COO
Paul, the plan has a good confirmation, but it's one of our most complicated plans from a steam, gas, and utility management point of view, which largely relates to the coke gas fire.
We had an issue in late 2008, where we had a failure on one of two gas fire reactors which really affected the operation of that whole complex to try to run it on one remaining gas fire reactor.
That affected the utility system in the refinery.
And you can trace some of that to the problem we had in the middle of February, where we had a large steam system upset that resulted in the shutdown of the coker.
My sense of this is, we have got a very complicated plan configuration.
We had an issue last year.
We made the repair.
We've gotten it behind us and I think you'll see improvement going forward.
Paul Cheng - Analyst
Okay.
Maybe I miss it.
Have you guys thought about the inventory or the trading gain in the quarter is 150 million?
Or did I --
Rich Marcogliese - COO
The number that Joe gave was the calculated contango benefit.
Paul Cheng - Analyst
The calculated contango benefit?
Rich Marcogliese - COO
That shows up eventually in our crude costs.
Paul Cheng - Analyst
And that 150 million that means in your gross profit margin that realization.
And Mid-Continent system to spread to other system?
Rich Marcogliese - COO
Primarily Mid-Continent.
Some on the Gulf Coast where we are running domestic barrels.
Paul Cheng - Analyst
Is that including any of the potential trading gain?
Bill Klesse - Chairman, CEO
No.
Paul Cheng - Analyst
Or that is already included.
Bill Klesse - Chairman, CEO
That does not include our activity where we do some spreads when you had the contango market.
Obviously, we traded some of the paper -- things like that.
Paul Cheng - Analyst
150 is the theoretical CMA adjustment.
Rich Marcogliese - COO
That's right.
That's the way to look at it, Paul.
Paul Cheng - Analyst
And given that the quarter about $5 higher than they started the quarter.
Do we have any inventory gain?
I think you have marked down some LIFO inventory marked down at the end of the year.
Do we have any markup in the quarter?
Rich Marcogliese - COO
No.
It's not a material amount that goes through there.
Paul Cheng - Analyst
It's not a material.
Bill, you were saying that you don't want to disclose too much on the trading side.
Can you give us a rough idea, how much you have made in the quarter?
Bill Klesse - Chairman, CEO
I prefer not to because it's really an ongoing piece of the business for us.
And we think people look at us.
We're obviously so large.
We're in the paper markets all the time.
And we have a bunch of good guys that execute for us.
But it has been a positive benefit to us.
And it's a positive benefit that has continued.
We had some in the fourth quarter, third quarter last year.
I believe the paper markets are a key part of the business the way we do business today.
And so we're very active in those markets.
Paul Cheng - Analyst
Okay.
And Bill, you mentioned that for the M&A, you're looking for potential acquisition.
With the right location, right facility.
Can you elaborate a little bit more in terms of what you would consider as the right location and what you consider as the right kind of facility.
Bill Klesse - Chairman, CEO
We want to -- we're always looking for an asset that's on the water.
We want the ability to trade barrels.
We are firm believers that this is a global business.
The North Atlantic basin, you just look at the basin.
Europe is long gasoline, short diesel.
The US today is long gasoline.
And I can say we're a little long diesel.
Once the economy does recover, we will not be long diesel.
And so it's a natural play for us.
That's why we had our hydrocracker projects at our big refineries so we could make more diesel to service the domestic market as well as the European market.
We like the Atlantic basin trade.
You get draws into South America.
Obviously, Mexico continues to be an importer.
Venezuela is an importer.
Used to be an exporter.
Africa with all the issues that go on in Nigeria is an importer of gasoline.
So you see a lot of things that say to us that having assets that can back you up in your trading business and in north Atlantic is the way to go.
And there's been a lot of companies that have made a lot of money over the years by doing that strategy.
Paul Cheng - Analyst
Despite the market condition may have changed away over the last 12 to 18 months, your overall view of what would qualify as a good location or good asset configuration have not changed.
It's the same.
Bill Klesse - Chairman, CEO
It is not.
We like assets on the water.
We like to have some size.
We've said 150,000 barrels a day or more.
It's really a location game.
We want the ability to upgrade.
We think that's a key part of Valero.
You buy our stock, you're buying a refiner and a capital intensive business.
And we like the ability to try to work on these plants and improve them.
Paul Cheng - Analyst
Bill, if the current market condition extends for the next one to two years, is there any of your facility, if you can't sell, you may be candidate for a permanent (Inaudible)?
We had this question on the last call.
And I think somebody asked me if we can't make money or sell it what do you do with it?
And I said, you shut it down.
And we're in business to make money.
And that's shareholder value.
But today, we don't have any plans like that.
And it's always a big if.
If it continues and if it continues.
We'd like to think that we're going to have an economic recovery here at least by 2010.
And if that happens, our business provides fuels that still fuel economies.
Right, thank you.
Bill Klesse - Chairman, CEO
This is much different from the 1980s.
And I've used that a lot.
Since I lived through the 80s.
But the big difference this time versus then is if you think about the 80s, we had government controls, all kinds of things going on that had put a lot of bias into the business.
This time what's really affected us is yes, it's new construction.
But it's been the disintegration of demand.
And that's been because of economics.
If the economies pick up, I think you'll see our volumes pick up.
Paul Cheng - Analyst
Very good, thank you.
Bill Klesse - Chairman, CEO
Thanks, Paul.
Operator
Our next question comes from the line of Chi Chow with Tristone Capital.
Chi Chow - Analyst
Thanks.
Hi, bill, just continuing on your thoughts there with Paul's question.
I guess you may have answered this already.
I have a broader question.
Your thoughts on the general business model.
You talked at length on excess global capacity that will likely get worse, unknown capital requirements related to carbons, increasing mandates.
Do you feel like long term you need some sort of integration to the upstream?
Or can you survive as an independent refiner long term?
Bill Klesse - Chairman, CEO
Well, I can say we can survive as an independent refiner.
Sure, I'd like to -- let's not be foolish.
I'd like to have oil production.
It's a given.
But we don't.
We're an independent refinery.
I've made my entire career working for an independent refinery.
And at lot of people listen to this call.
And we can compete.
But it's a tough business.
We have to get our costs down.
We have to be lean, mean, and very, very efficient.
You can't afford some of the luxuries that the integrated majors can have.
You just can't afford them.
And that's why we're so focused on executing things.
We've been reorganizing many of our departments here in a very systematic approach.
To give you an example, we just completed our planning and economics group did a complete reorganization.
And we took costs out of our system.
And we continue to do that and we're going to continue to push it.
But you have to be lean, mean, and very efficient and move quickly.
That's the only way the business model can work in a highly competitive environment.
Chi Chow - Analyst
Are you looking at possible JV opportunities with upstream players?
Bill Klesse - Chairman, CEO
No.
Go ahead.
Chi Chow - Analyst
The other question I had was it seems like the capital requirements upcoming in the next few years or maybe the next decade, you've got a lot of nonprofit type capital you need to spend, especially, on legislative-type items.
How concerned are you on the longer term returns in this business?
Bill Klesse - Chairman, CEO
I think that's a fair approach.
That's how it always is.
If you remember the Clean Air Act in the 1970s and then in the 1990s when it was amended.
We had all that capital.
Rich made the comment.
I'm against the scrubber we're putting in at Benicia.
.
The scrubber itself is $450 million.
That has no return.
And the MSAT2, which is the benzene that Rich mentioned.
We'll spend 530 million the way we're approaching it.
We're going to make a benzene product out of this, so there is some economics in there.
But you are exactly right.
And I have some other examples of this type of thing.
If you look at our business model and you go back for 30 years in the refining business, we make around a cost of capital rate of return.
But this is our business.
If you look at our business model and you go back for thirty years in our refining business, we make around a cost of capital rate of return.
I know all the theories about how we destroy value and other things.
If you actually look at all the data, you can make a cost to capital rate of return.
You're not going to hear from Valero that the golden age of refining is around the corner again.
We're down to the business that we as a management team know it.
And that is to slug it out.
And that's what we're doing.
But we will provide a good opportunity.
Things happen.
We'll have some better years, and we'll have some years that aren't quite as good.
Last year for Valero -- and everybody said it was going to be a terrible year -- we made over $5 a share and $2.5 billion of profit.
The reason we reported a loss is we wrote off $4 billion of goodwill with no tax effect which gave us the $2.00 a share loss.
We had a good year last year.
And this year, we beat our first quarter from last year.
And I think gasoline is going to surprise.
We have very low prices for gasoline on a relative basis.
And it does give you an opportunity to get around.
So our business adds value.
And as long as we add value, we're part of
Chi Chow - Analyst
Okay.
And one final question, you bring up California.
They just adopted the low carbon fuel standards.
Does the scrubber at Benicia get you to those requirements?
How much more do you think you need to put into California to meet the state requirements?
Mike Ciskowski - CFO
First on the scrubber, that is an air quality requirement to reduce sulfur emissions.
So that is separate and apart from the low carbon fuel standard.
Bill Klesse - Chairman, CEO
On the low carbon fuel, I think we need to look at the detail.
There's a movement for low carbon fuels, but they have several provisions where they're talking about some of this land use and trying to go all the way back with taking land say out of pasture and putting it into corn and trying to calculate this.
I think this is a far bigger issue that's going to be a lot more politics involved.
So the devil is in the details on this one.
Kim Bowers - EVP
It's a much longer term picture.
It's a 20/20 reduction.
You add 10% by 20/20.
There's still a lot of work to be done and evaluations to be done.
Paul Cheng - Analyst
Okay.
Great.
Thanks for your thoughts, Bill.
I appreciate it.
Operator
Our next question comes from the like of Blake Fernandez with Howard Weil.
Howard Weil - Analyst
Good morning.
I know it's getting late in the call.
I will just ask my two questions very briefly if I could.
The first is on the tax rate.
It came in well below what we were expecting.
I was wondering if you could provide colors on the key drivers there.
And secondly, essentially, on the refinery utilization process, just trying to understand how that's managed.
Based on a short term rate of return.
In other words, a $9.00 or $10.00 Gulf Coast crack generates a significant rate of return.
Does that prompt you to increase your utilization?
Or are you taking a longer term approach in trying to manage the inventory.
Bill Klesse - Chairman, CEO
First, on the tax rate, we were lower than guidance due to on a proportional basis Aruba and Canada made a greater percentage of the income.
They've got no taxes in Aruba.
We came in lower on our tax rate.
Howard Weil - Analyst
Okay.
Mike Ciskowski - CFO
The refining utilization -- We look at our utilization on an ongoing basis.
And we have the planning economics group, which Bill mentioned earlier, that runs the LP models, and we're continuously adjusting based on what the market does.
So we look at the whole picture.
We look at utilization rates in the context of economics but the economics of course are affected by the inventory values.
And then cash requirements.
So it all gets balanced.
But bottom line is, it's a dynamic process that goes on all the time.
Bill Klesse - Chairman, CEO
Let me give you a little more.
We do basically -- we've got almost like a three-month look when you think about it.
We do a monthly business plan.
We'll call it an operations plan that gets coordinated through all the groups, gets done before the end of the month.
We make price calls just like you would make price calls.
And we'll put a hurdle rate in there on margin.
And depending on seasonality, other factors and some judgment, that hurdle rate can move around.
Howard Weil - Analyst
Thanks a lot for the color.
Operator
Our next question comes from the line of Faisel Khan with Citigroup.
Faisel Khan - Analyst
Good afternoon.
One question on the ethanol acquisition.
Do you expect that acquisition to be accretive to earnings this year?
Or how do you expect them to be going forward?
Gene Edwards - EVP
Based on current pricing -- this is Gene Edwards -- ethanol is about $1.66 on the East Coast and corn under $3.80 a bushel.
The plants are cashable and positive right now.
But we really think the real upside is probably 2010 when the RFS kicks up another 90,000 barrels a day or so.
It is really going to tighten supply and demand even further.
And that's the assumptions we use when buying the plants.
We figured this year would probably be more or less cash flow neutral and slightly positive.
A lot of plants are still down.
But our plants are in managed locations, you know the corn belt, which can allow them to be cash flow positive, when others in the industry are still struggling.
Faisel Khan - Analyst
On a GAAP basis are you saying it will be neutral.
Or will it be a loss?
Gene Edwards - EVP
I think it's going to be a neutral.
Bill Klesse - Chairman, CEO
Break even for us.
Faisel Khan - Analyst
Got you.
And then in your prepared remarks, you talked about the narrowing sour differentials versus last year.
What you expect going forward for the rest of this year given the OPEC cuts need to be in full effect.
Mike Ciskowski - CFO
You know the factors.
We have the OPEC cut.
The weakness in the front month TI.
And we got relatively tight fuel on markets, which have effected the heavy tar discounts.
So I think our view going forward would be until demand grows, we'll see discounts stay in this general range.
Nothing is expected to change unless we get demand back, which of course would stimulate the runs.
It would pull sweet crude as being stored the price there.
And then we would get a discount back.
Faisel Khan - Analyst
Fair enough.
Thank you for the color.
Appreciate it.
Operator
Our next question comes from the line of Jacques Rousseau with Back Bay Research.
Jacques Rousseau - Analyst
Most of my questions have been answered.
Just wanted to try one more.
Do you have any idea of the gasoline demand for April at your thousand stores as how it's comparing to last year?
Ashley Smith - IR
I think it's pretty much flat in April.
I believe the demand is pretty much flat for much of the first quarter.
Jacques Rousseau - Analyst
From the first quarter or from April 2008?
Ashley Smith - IR
I'm comparing it to the first quarter.
Jacques Rousseau - Analyst
Do you have any color versus a year ago?
Ashley Smith - IR
I don't have that for April of 2008.
Jacques Rousseau - Analyst
Okay.
Thank you.
Ashley Smith - IR
Okay.
Operator
Our next question comes from the line of Mark Gilman Benchmark Company.
Mark Gilman - Analyst
Hi, guys.
Real quickly, how much natural gas do you consume system wide?
Bill Klesse - Chairman, CEO
400 now.
Go ahead.
Gene Edwards - EVP
It's -- when we back cast our into our energy consumption, it's around 400,000 in BTUs per day of natural gas sensitivity.
But that includes all energy.
Not just the natural gas.
Most of our energy, the power, all that stuff is powered by natural gas.
And it's sensitive to that.
As well as hydrogen and steam.
It's driven off natural gas prices.
Bill Klesse - Chairman, CEO
Thanks, Ed.
Gene Edwards - EVP
Sure.
Operator
Okay.
And we have no further questions.
Mr.Smith, do you have any closing remarks?
Ashley Smith - IR
We appreciate shareholders listening to our call.
If you have any questions, call investors relations or check with the website.
Thank you.
Operator
This concludes today's Valero Energy Corp's first quarter 2009 earnings conference call.
You may now disconnect.