使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good morning.
I will be your conference operator today.
At this time I would like to welcome everyone to the Valero Energy third quarter earnings 2009 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.
- VP, IR
Thank you.
Good morning and welcome to Valero Energy Corporations third 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 one on our website at Valero.com.
Also attached to the earnings release are tables that provide additional financial information on our business segments.
If you have any questions after reviewing these tables please feel free to contact me 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 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 law.
There are many factors that could cause actual results to differ from our expectations including those we described in our SEC filings.
Now I'll turn the call over to Mike.
- EVP, CFO
Okay, thanks, Ashley and thank you for joining us today.
As noted in the release we reported the third quarter 2009 net loss of $219 million, or $0.39 per share, before the asset impairment pretax loss of $417 million.
Included in the asset impairment loss our GAAP result for the third quarter was a net loss of $489 million or $0.87 per share.
The asset impairment loss related mainly to the permanent shut down of the gasifier complex at our Delaware City refinery which was part of an effort to simplify the refiners operation, make it more cost efficient and improve its reliability.
The third quarter 2009 operating loss was $579 million versus $1.8 billion of operating income in the third quarter of 2008.
Excluding the asset impairment loss from the third quarter of 2009, the operating loss was $162 million which compares to operating income of $1.6 billion in the third quarter of 2008 excluding the $305 million gain on the sale of the Krotz Springs refinery and $43 million of asset impairment losses.
The key drivers of the decline in operating income were lower margins on diesel and jet fuel and smaller discounts on our sour crude oil and other feed stocks.
For example, looking at the benchmark Gulf Coast margins versus WTI ultralow sulphur diesel margins decreased 71% year over year.
Comparing the same periods Maya discounts to WTI decreased 56%.
Our third quarter refinery throughput volume averaged to 2.4 million barrels per day which was in the range of our guidance.
But 208,000 barrels per day below the third quarter of 2008.
This decrease in volume was mainly due to lower utilization rates across our refinery system and the planned shut down at the Aruba about a refinery throughout the third quarter.
With respect to our reported operating costs I should mention that as described in note four to the earnings tables the asset impairment amounts for all periods have been excluded from operating costs in determining operating costs per barrel; resulting in an adjustment to the operating cost per barrel previously reported.
This should help clarify interperiod comparisons of our operating results.
Refinery cash operating expenses in the third quarter of 2009 were $3.94 per barrel or $0.84 per barrel lower than our third quarter 2008 results due most to the lower energy costs but our focus on other costs has also been successful.
Comparing the first nine months of 2008 versus 2009, our refinery cash operating expenses were down more than $700 million.
As previously mentioned, much of this was due to lower energy and natural gas prices but over $200 million was due to our ongoing efforts to reduce costs.
Looking at our other business segments I want to highlight that retail had an outstanding quarter with the highest ever operating income in a third quarter at $111 million just beating the $107 million earned in the third quarter of 2008.
This was due mainly to very good performance in both the US and Canada and lower selling expenses.
Retail also set a report for the highest earnings for the first nine months of a year with $232 million of operating income.
Our ethanol segment also had an excellent third quarter with $49 million of operating income which is more than double the $22 million reported in the second quarter of the year.
The strong performance was due to all seven plants running near to the capacity and capturing very good margins.
In October margins have continued to be favorable.
General and administrative expenses excluding corporate depreciation were $167 million in the third quarter.
The increases of $44 million versus the second quarter and $32 million versus our guidance were primarily due to a $40 million increase in legal reserves.
For the third quarter total depreciation and amortization expense was $389 million which was in line with the second quarter and our guidance.
Net interest expense was $124 million which was higher than our guidance mainly due to the reduction in capitalized interest on project deferrals and cancellations.
It was also higher than the expense of $82 million in the second quarter primarily due to a reversal of accrued interest on a sales tax audit that settled in our favor last quarter and local capitalized interest on the previously mentioned project deferrals.
The effective tax rate was 30% which is in line with our guidance.
As described in note 13 to our Form 10-Q for the period ended June 30, 2009, we are awaiting the decision from the Netherlands Arbitration Institute regarding our dispute of a turnover tax on export sales that the government of Aruba enacted in 2007.
If the decision is announced prior to the filing of the Form 10-Q for the period ended September 30, 2009, and if the decision has a material impact on our third quarter 2009 financial results then we will update our earnings release to conform with our Form 10-Q filing.
Regarding cash flows for the third quarter capital spending was $521 million which includes $52 million of turn around and catalyst expenditures.
For the year, capital spending is projected to be $2.7 billion.
The increase from prior guidance is primarily due to accelerating certain projects into 2009 to take advantage of favorable tax treatment and the acceleration of some turnaround activity which I will discuss in a moment.
For 2010 we continue to expect total capital spending in the range of $2 billion to $2.5 billion.
With respect to our balance sheet at the end of September total debt was $7.4 billion.
We ended the quarter with the cash balance of $1.6 billion we had $4.5 billion of additional liquidity available both similar to last quarter.
At the end of the quarter our debt to cap ratio net of cash was 26.5% which is far below the credit facility covenant that requires a ratio below 60%.
As you can see we continue to have a comfortable cash balance and plenty of liquidity.
However, I think you all would agree that given the loss we incurred this quarter and the expectation of another loss in the fourth quarter we may need to evaluate our dividend to pay out level.
As stated in our last dividend release if industry's conditions do not improve measurably the dividend level will have to be reevaluated.
As to the refining outlook low product margins and narrow sour crude discounts were the key drivers of our third quarter operating loss and although the feedstock discounts have rebounded recently product margins have weak contends and we expect throughput margins for the fourth quarter to be similar to what we experienced in the third quarter.
In addition this margin environment factored into our decision to advance the turnaround activities from the first quarter of 2010 to this quarter at our Wilmington and Delaware City refineries where both refineries will undergo essentially plant wide shut down.
As a result we currently expect a loss in the fourth quarter, at least as large as the third quarter loss excluding special items.
Also in the fourth quarter we expect to report approximately $35 million of special charges for severance costs related to our activities to improve profitability at the Delaware City and Paulsboro refineries.
Our strategy in these conditions remains the same.
We are working to maintain our strong balance sheet and ample liquidity and focusing on matters within our control, our cost structure and optimizing operations.
Bill's quote in the press release clearly show we are taking actions and getting results.
We will continue our systematic approach to improving profitability.
Our efforts to make Valero more competitive means we should capture more earnings as the economy picks up, demand return and margins recover.
And now I will turn it over to Ashley to cover the earnings model assumptions.
- VP, IR
Thanks, Mike.
In case you are modeling our fourth quarter operations you should expect our refinery throughput volumes to fall within the following ranges.
Gulf Coast at 1.15 million to 1.2 million barrels per day.
Mid Continent at 380,000 to 390,000 barrels per day.
Northeast at 430,000 to 440,000 barrels per day.
And West Coast at 230,000 to 240,000 barrels per day.
Refinery cash operating expenses are expected to be around $4.50 per barrel; which is higher than last quarter due mainly to lower throughput volumes combined with effects of higher expected energy prices.
Regarding our ethanol operations in the fourth quarter we expect total throughput volumes of 2.2 million gallons per day and operating expenses should average approximately $0.38 per gallon including $0.03 per gallon for non-cash costs such as depreciation and amortization.
With respect to some of the other items for the fourth quarter, we expect G&A expense excluding depreciation and amortization to be around $135 million.
Net interest expense should be around $110 million.
Total depreciation and amortization expense should be around $390 million we estimate a 30% effective tax rate.
That concludes our prepared remarks.
We will now open the call for questions.
Operator
(Operator Instructions) Your first question comes from the line of Doug Terreson with ISI.
- Analyst
My question has to do with some of Mike's comments on cost and specifically how the operating actions you've taken in the last couple of months are likely to act the operating expenses in incoming quarters or whether you feel we've already seen the majority of this benefit.
And also whether some of the asset reviews you've undertake elsewhere in the system have uncovered significant tubes on the cost siding either operating or SG&A, just any update on the hope for cost improvement over the next couple of quarters would be appreciated.
- EVP, CFO
On a, well, on a year to date basis on the refining OPEX on the 200 million, a big piece of that was due to a lower maintenance expenses which a lot of that is less contractors.
That's our refineries, the salaries, wages and benefits has also been reduced over our refining system by about $50 million that's nine months.
Professional fees and outside services has also been reduced by about $20 million.
A lot of little thing like this that I think Rich and his organization are focusing on to reduce the costs at the refineries.
- Chairman, CEO
Doug, let me add a little more color on to that.
We've initiated a number of improvement activities and I would say bottom line of where we are today we have probably taken $150 million a year of cost out of our system.
And it relates to a number of categories.
We are being a lot closer on prioritization of maintenance work and contractor resources so we are working that aggressively.
We are working noncapital related energy utilization improvements through stewardship and just tighter operations.
We are controlling plant overtime.
And we are also taking a look at our refineries where they are out of line with efficient staffing levels and we are implementing reduction programs as was noted.
As was noted, we are taking out about 150 people from Delaware City and have plans to take out about one positions in Paulsboro.
And those efforts are underway currently.
Through a lot of intense expense focus, self help kind of items I think we feel good about eliminating about $150 million per year in cost.
- Analyst
Okay.
And just to clarify, that's over and above or that's already included in some of the gains you guys have made nonenergy so far?
- Chairman, CEO
Some of that was reflected in Mike's comments but I would say the running rate today is about $150 million per year less.
- Analyst
Thanks a lot, guys.
Operator
Your next question comes from the line of Mark Flannery with Credit Suisse.
- Analyst
Hi, yes, I have two questions.
One I guess the follow up to what Doug was talking about.
Can you go through a little bit more of the specifics that you are doing at Paulsboro apart from eliminating 100 positions?
And is what you're doing there applicable to any other refineries?
In other words should we expect to hear an announcement that this kind of program is rolling out to other plants in the future?
And then I have a quick follow up on ethanol.
- EVP, CFO
What I would say for one on the Paulsboro program in general we benchmark all of our refineries versus first quartile metrics really in every category of performance.
And where we have determined that we are long we have generally implemented reductions.
In the case of Paulsboro it was one of the larger reductions and that's why we have stated that specifically but we are doing this across the board at all of our plants.
We have some of our plants that are already at Q1 levels so any adjustments are more minor in nature.
- Chairman, CEO
We have made revisions at Wilmington refinery we are looking at changes at our Three Rivers refineries So we have the new Solomon benchmarkings that the studies came out.
We have made significant improvements.
We didn't capture when we talked about the $1 billion program.
However what has happened is because of our efforts we haven't increased as much as many of our others relative to EDC and so we've gotten about a $0.5 billion of improvements relative to our competition and now we are basically a tier two refiner in many of these categories where I've mentioned several times in the past we were a tier three or four.
So our group is making progress on all of these.
Other items we continue or have done, we saved $3 million on security guards.
We saved, we consolidated accounts payable.
We are consolidating and in the process of doing work on our IT or IS.
organization which will save us 10 million to $15 million.
We've outsourced medical claim filing which has saved us 10 to $15 million we have numerous items like that and initiatives going on throughout our Company here; to get our costs much better aligned for a more competitive environment.
- Analyst
Thanks, okay.
Maybe I could just ask on ethanol, you made a lot of money in ethanol.
It's a relatively new business for you.
Do you have any idea of why the ethanol margins are so strong right now?
It seems a little counterintuitive to underline demand for gasoline and the rest of it.
Do you expect it to continue through the first quarter or tough luck?
- EVP, CFO
We are seeing demand, this is (inaudible) ethanol demand ramp up.
It's got up to about $2.20 a gallon in the East Coast right now.
I'd say strongly it's just a stronger crude pricing and gasoline leading it up but actually ethanol is up more than gasoline.
When you get the blenders credit it's still profitable to blend.
We are seeing ethanol at about, a little over 80% of the gas in the United States right now.
And then when the RFS ramps up again next year, another, this year I think 685,000 barrels a day next year, it goes to 785,000 barrels a day so things just continued demand for ethanol and we still have a number of plants that are still shut down from the crisis that we were in late last year when we bought the plant.
- Analyst
Thank you very much.
Operator
Your next question comes from the line of Roger Read with Natixis Bleichroeder.
- Analyst
Good morning, Natixis Bleichroeder.
I guess following up on the ethanol question there, obviously runs full out for you in the quarter there's some excess capacity out there what do you all see as the next system for ethanol?
Do you invest more in it?
Do you sit where you are.
What are the options here?
- EVP, CFO
Well, we are looking at some other options right now but obviously with the margins improving a lot of the plants are even in bankruptcy.
Everybody is trying to hang on a little longer to try to ride it out until they get the plants running begin.
The other one I forgot to mention too is Brazilian ethanol is very high, it's like 2.20 per gallon, it's above New York, they are virtually getting no imports into our market in the past few months.
- Chairman, CEO
I think if you're asking us a little more strategically the business has worked out for us very well.
Genes Group that purchased these assets earlier in the year, obviously it's worked out.
And so as we look at the business we feel very strongly that ethanol is going to be part of the fuel mix going forward.
And so we will continue to look for what I've said in the past things that we can add on to this core business.
We have a significant stake.
We can make 50,000 -- 51,000 barrels per day of ethanol.
And I think you'll see us try to do little add on niche plays here along with it.
We've also announce a joint venture with Darling on bio diesel.
, at least a letter of intent, joint venture.
We are working on that and putting a St.
Charles refinery in New Orleans.
So we see all of these alternatives being part of the mix and you'll see us continue to add to this business but
- Analyst
Okay.
Kind of following along there there's a lot of talk here and along the Gulf Coast using I guess it's algae to essentially make ethanol.
Have you done anything or looked at anything significantly along that line?
- EVP, CFO
Yes, we have a partnership in a project there.
It's with (inaudible) and we have some money into that project.
It's a small capital at this point but it's a development project.
Algae has a lot of potential because you can just grow so much per acre of land.
You don't have to have fertile lands to grow it but it has potential but I think it's years away as far as any type of application as far as volume.
- Chairman, CEO
Yields are very high and it can be a CO2 sink.
- Analyst
Okay.
Thank you.
Operator
Your next question comes from the line of Evan Calio with Morgan Stanley.
- Analyst
Good morning, guys.
I had a question whether or not there's any update on potential asset sales?
I mean, you've been clear over time that assets you might be better sellers of and if buying interest is improving as some stories suggest?
And what do you believe would be the primary log jam in selling an asset?
Is it price, lack of buyer, challenging environment, all of the above?
And I have a follow up.
- EVP, Corp. Devel., Strategic Planning
This is Gene again.
It is a buyers market today.
Obviously margins are down.
There's lots of refineries that are available, some that have already been shut down.
It's difficult to fine buyers right now.
A lot of the smaller independent refineries don't have the balance sheet to be too aggressive right now.
You saw Holley made the acquisition I guess, but it's difficult right now to find buyers.
- Analyst
I mean, conversely and beyond the Company's cost savings initiatives, how do you think about or what kind of levels do you think about in terms of any asset rationalization within your portfolio?
- Chairman, CEO
Well, if you're asking are we looking for alternatives the answer is we've announced that we have three refineries that we are clearly looking at strategic alternatives, Aruba, Delaware City and Paulsboro.
And then I think Gene -- and those strategic alternatives would include every option here to improve our performance.
And so we'll look and we'll continue to look at those alternatives.
And Gene gave you a little synopsis of the overall business, so those are the three plants that we are looking at options.
- Analyst
Okay.
Thank you very much.
Operator
Your next question comes from there line of Neil McMahon with Sanford Bernstein.
- Analyst
Hi, just a few questions on the macro scene.
Just looking at demand, anything you're seeing at the moment in terms of a recovery in diesel demand, maybe looking outside the seasonal effects, obviously, maybe looking over on the West Coast, are you seeing any pick up there from any container shipments or indeed anywhere in the country?
And, secondly, you started to talk about your hope that light heavy differentials will open up into next year.
Anything that you are seeing that gives you any security that that may happen potentially increase your tank supply?
Thanks.
- VP, IR
Relative to distillates, within the system we aren't seeing any significant change and you see the same stats that we see every week and we haven't seen any material increase there.
Now, the trucking indexes seem to be improving here.
So hopefully we will see increasing demand as we go forward.
Now from an export perspective we moved 125,000 barrels per day average through the third quarter so those volumes continue to be steady.
Although of last we've seen they are closed and so those volumes are declining a bit now.
We have some of that volume turned up so we will continue to move up but we are not seeing anything that I would say makes us change our view that diesel demands is going to be strong when we get economic recovery but for the time being it will continue to be steady.
- Chairman, CEO
And then our Company operated retail, Mike can tell you some of those.
- EVP, CFO
On our third quarter '09 versus third quarter '08 our gasoline volumes are down about 1% but our diesel volumes are up about 5.5%.
If you look at October versus October, the gasoline is about the same but diesel is up 8.8%.
- Analyst
Thank you.
- EVP, CFO
You asked about the light heavy differential also.
Was that correct?
Okay.
Okay.
Well, the markets for sour crude is still in tight supply and I think that we've seen that Opec compliance here of late isn't as strict as it was earlier in the year.
We've also had a flattening of the forward curve for WTI which has brought the front end prices up a bit which has helped increase the discounts and there's been some increasing availability of 3% fuel resulting from uneconomic coker operations and really reduced coker run which all have combined to ease the pressure on the discount.
Operator
Your next question comes from the line of Jeff Dietert with Simmons.
- Analyst
You recognized an asset impairment at Dell city gasifier and on some of your capital projects Could you talk about the process that you go through for evaluating other asset impairments at Aruba or other places and when you expect that to occur?
- Chairman, CEO
Well, we did complete an asset impairment test for all of our refineries in the third quarter and we basically developed a forecast, price forecast and then come up with a cash flows for each of the refineries and then add those cash flows back and compare it to the book value.
And we did do that and did not have any other asset impairments other than what we reflected on the gas fire and other projects in the third quarter.
- Analyst
So that asset impairment was across the entire portfolio?
- Chairman, CEO
Yes, it was -- it was a test, the asset impairment test we did across the entire portfolio.
- Analyst
Okay.
Thank you very much.
Operator
Your next question from the line of Mark Gilman with Benchmark Company.
- Analyst
Thanks, a couple things.
Mark, I think you mentioned a $40 million legal reserve add.
What was that for?
- EVP, CFO
Well, it was related to some litigation that we have outstanding that we just increased the reserve.
- Analyst
Can you be more precise?
- EVP, CFO
We don't really give details on our legal reserves.
- Chairman, CEO
I would tell you, Mark, just to give you some, it's a settlement that we believe we are going to be able to reach pending a Prim core acquisition liability.
And so until we have everything completely final, we went ahead and booked a reserve of $40 million.
- Analyst
Thanks, Bill.
On the Aruba tax, what's the exposure on that should the arbitration go unfavorably?
- EVP, CFO
Okay, on the, I guess on the BBO and then there'sals little bit on dividends withholding, when I say the BBO I mean the turnover tax, that's another name for it, it's about $0.24 per share.
- Analyst
That's combined, Mike?
- EVP, CFO
That is combined.
And we do have, we have that escrowed already, the big chunk of that.
- Chairman, CEO
But not booked.
- EVP, CFO
Not booked, that's right.
$0.24 on earnings.
- Analyst
Okay.
You talked a little bit about acceleration of the capital program for tax purposes.
Is that because of the accelerated deductability of expenditures completed in 2009.
- EVP, CFO
That's correct.
- Analyst
And, Mike, your comments regarding the anticipated fourth quarter loss and its relationship to third quarter, is that inclusive of the severance charges that you mentioned or exclusive?
- EVP, CFO
It would be exclusive.
- Analyst
Just one final one if I could.
At the point that you decided to shut Aruba down was it cash flow positive?
- Chairman, CEO
No.
- EVP, CFO
No, it was not.
Not in the second, third quarter it was not cash flow positive.
- Chairman, CEO
To give you a sense it does move around a limit, [inaudible] in gross margin, so it was clearly not cash positive.
And then on a gross margin, actually in one month it was negative, the next month it was slightly positive, then it went negative again.
But we actually had a negative gross margin in Aruba; having to do with the lack of a sour crude discount because remember it's a coking refinery, it's just like an upgrader, it's really just a coker with some desulfurization.
So we had this negative gross margin.
Then you put on operating expenses on top of it and we had very negative cash flow.
- Analyst
I lied, there is one more.
As you reevaluate the dividend, what criteria are you going to be looking at, guys?
- Chairman, CEO
Well, we, our yield today is over 3%.
We obviously are incurring a loss as this quarter and we said we are going to have one in the fourth.
As we look to next year, we believe that the economy has or is bottoming but employment is going to lag coming back.
I don't know if it will get over 10% by the end of the year or not but it looks that way.
We sell fuels.
We sell petrochemical feedstock.
So we are really looking at how long this recovery is going to take.
We look at our cash position.
It's very good.
We do have certain capital spending that we have to do.
We are building a scrubber up in Asia.
We have MSAT2 which is benzene removal and these things have to be done by the end of the year.
We have several other opportunities as we look at our overall cash.
Our debt repayment next year is very low so that's, I think it's only $36 million; counting capitalized leases or leases that come due.
We are just looking at our overall cash position relative to the earnings and then our yield.
- Analyst
Can you be any more specific Bill in terms of financially oriented metrics?
- Chairman, CEO
I don't really think so, Mark, we are just going to be reevaluating it as we go through the quarter.
- Analyst
I'm just kind of wondering with the outlook being what it is and the expectations regarding the 2010 capital picture, if you were going to do it why didn't you do it already?
- Chairman, CEO
Well, we feel that we are very shareholder focused.
We know that while we think the economy is bottoming, we think our business will improve, it's just at what rate.
And this will be a management recommendation as we get into January to our board and it's a board decision and we'll bring all the factors to bear.
But we just made this decision to not have done it already and to see what develops here as we complete this year and get into next.
- Analyst
Okay.
Guys, thanks very much.
Operator
Your next question comes from the line of Paul Cheng with Barclays Capital.
- Analyst
Maybe this is for Rich or Gene, in California are you guys now branding at 5.7% of ethanol or is it already higher than that and if it is at what level and do you know if California as a whole is closer to10% or is really closer to 5.7% at this point.
- EVP, COO
It's 5.7 today.
- Analyst
And do you know the industry as a whole in California is pretty close to 5.7.
- EVP, COO
I don't know, do you know, Gene?
- EVP, Corp. Devel., Strategic Planning
Well, the state has passed new blending rules which take effect in January which permit blending up to 10%.
We have implemented projects or they are in progress at both Venesia and Wilmington to prepare for that.
I'd suspect the industry is going to migrate up to that level as we get into next year.
- Analyst
And, Bill, directly to you end, the cost building, now that you are under the strategic review and also going through some restructuring cost reduction, in the -- in after all the initiatives on the cost reductions and shut down of some units how long do you need to take for you to get a reasonable period of observation to decide whether those two ultimate many that they need to follow the footprint of Aruba being shut down?
How will that process work?
- Chairman, CEO
That's a fair question.
In Delaware we are going to have to do a turnaround on the cat cracker and that's scheduled to start about mid month in November; and run for almost 60 days.
And so we are going to fix the cat.
And so the plant will basically be down for nearly two months.
During that time we will see what's going on with our crack spreads.
We'll see what the sour crude discounts -- because, remember, even -- we shut the coker down but the plant tends to be close to a heavy sour refinery more heavy than just a medium sour.
So we'll look at it over the next several months and we are also seeing what other alternatives are out there.
But this takes time and it's also dependent on the crack.
As I answered Mark earlier, even in Aruba where we shut down at a gross margin level, it has moved around so that there would have been a contribution in one or two of the months where in the other months it was beneficial to stay down and for the whole quarter it was beneficial to stay down.
So we'll see how this develops over the next several months.
Inventories are getting better.
If you look at the distillates, if you look at gasoline inventories relative to demand, these items all are looking to us much better.
We get a cold winter in here, the distillates will come back.
So we are just going to play it out.
- Analyst
So if that means that ethanol is that you are running at maybe cash flow break even then the facility is not necessarily going to be shut, it will only shut it if you have negative cash flow margin or negative margin?
- Chairman, CEO
No, we may -- I'm not saying we are going to shut it in any case because there is a lot of value there.
But if you think historically what shuts down a refinery, you tend to run at a neutral cash margin by adjusting your operating rate.
And what I will call a sophisticated refinery.
Aruba tends to be a little different.
But in a sophisticated refinery you're balanced through operating rate and then capital spending becomes the determinant here.
And if large capital spending is required going forward that tends to push refineries into a shut down situation or at least some form of rationalization.
What we have at Delaware City is we tried to run this gasifier and that has affected the entire reliability of the operation.
Because it produces steam as well as power and when we've had upsets we've gotten into a steam imbalance, which then causes the reliable of the to be a problem.
With low gas prices there's really little incentive to try to run this Coke gasifier and that's why we elected to shut it down.
We made a judgment that we are going to have relatively low natural gas prices for several years and that was the decision.
So as we get this cat cracker fixed because it's a turnaround that we just moved up but it's a turnaround, we get through that, we will see how we look at next spring.
We'll have a different operation.
We are going to make 20,000 or so barrels per day in fuel oil out of the facility.
And we expect our economics to look a lot better.
- Analyst
How about Paulsboro?
- Chairman, CEO
Well, Paulsboro is driven largely about the lube margin as well as its general operation.
Valero has invested a lot of money there over the years.
Our people are doing a very fine job on reliability.
You've noticed that the plant runs very, very well.
But lube margins are very depressed.
And if historically it's -- lubes have been a significant contributor to that performance.
So again and I know you guys are just thinking, well, we are just weighting for the economy and that's not true because we are attacking our cost structure but at the end of the day we sell fuels, we sell petrochemicals and in the case of Paulsboro we sell lubes and these are all part of the economy.
So.
- Analyst
Can you remind me what's the lube production in Paulsboro and also I think at the time when you guys bought it from mobile you have signed an off take agreement, is that off take agreement already expired?
- Chairman, CEO
No, the agreement has not and that goes through 2017.
And, but there are options around the lube operation.
In other words, Valero can make economic decisions but then under the agreement with Exxon Mobil we have to provide certain services for Exxon Mobil because they have their operations there across the Street from the refinery.
So you come through the docks.
But historically it's a 10,000 barrel a day business but it's had very good margins.
It's a group one lube and even though there's been plant shut down group one lube plant shut down the facts are that the margins over the years have been just excellent.
They were excellent last year.
And it contributes in the range historically, I can tell you it's 30 -- 30% to 40% of the profitability of the refinery on those group one lubes.
Exxon does not take all of the volume either.
We have a business that sells these lubes to other people.
- Analyst
If I could have -- my number of a quick balance sheet information, inventory the market level in excess of the (inaudible) by the end of the third quarter, working capital, the long-term debt component of your total debt.
- EVP, CFO
Okay.
Our total current assets are about $10.9 billion.
Cash is 1.6.
So current assets less cash was 9.3.
Total current liabilities is $7.6 billion.
Current maturities are only 213 million.
So our current liabilities less maturities is 7.4 and our networking capital is $1.9 billion.
Market value of inventories--.
- Analyst
I thought that you said current north is 10.9 and current liabilities is 7.9 so your working capital it should be 3, right?
- EVP, CFO
I have reduced the assets by cash and then the current liabilities but less your current maturities.
Okay?
Then the market value of the inventory is about $7.4 billion.
That's about 3.2 in excess of the LIFO value.
I'm sorry, Paul?
- Analyst
You said 3.2 above the book value?
- EVP, CFO
Yes.
And then the long-term debt and capital leases at the end of September is 7.3, or 7.4 billion.
- Analyst
Perfect.
Thank you.
- EVP, CFO
Okay.
Operator
(Operator Instructions) Your next question comes from the line of Blake Fernandez with Howard Weil.
- Analyst
My questions have already been answered but I did want to go back to the comments that Joe was making on the crude differentials.
Obviously the past several weeks I think we have seen using WTI Maya spread move from about 4 to $5 a barrel up to about $8 per barrel and I was just curious if you could give us a feel for if we are beginning to reach the point where coking economics are getting close to being profitable here?
- Chairman, CEO
Yes, they are, Blake, and Rich can speak to this also but I guess it's just been in the last couple of weeks that we have, the models have shown, the LP versus shown that it is economic to run some of the cokers.
- EVP, COO
Now, it's not a signal to fill them all up.
We have looked to buy residual fuels on a wholesale level.
We've run them to capacity at our coker at Texas City and actually Texas City has the best coking economics bass it has a lot of hydro processing capacity.
We are beginning to see it and we are responding to it but I would say we are still away a ways for filling up our coker capacity which is why at Delaware City that large fluid coker will remain down.
- Analyst
Rich, just to confirm you take a longer term approach on that or review a three or four-month kind of outlook before you begin to aggressively attack it, is that correct?
- EVP, COO
Well, we review our economics on a monthly basis for kind of marginal throughput on the cokers that are remaining in service.
Now for something like Delaware City we would take a longer view, probably several months to see if we've got the market structure which would support reactivating the unit.
As Bill mentioned this is probably going to be something that we will reevaluate in the spring.
- Analyst
Okay.
- Chairman, CEO
And, Blake, just to look rate a little bit, we are buying feeds well in advance.
And so you have got to be fairly certain you have a decent margin before you are going to go buy feed to fill the Cokers.
- EVP, COO
That is a good point on the Delaware City operation and its current configuration we are running a lighter crude slate.
The decision to restart the coker we have got to plan probably a month to two months in advance to put the right heavy crudes in front of it.
So it ends up being a bigger decision.
- Analyst
That's helpful thanks.
The only other one I had I wanted to get confirmation, Bill, is it fair to say that you guys are still evaluating acquisition opportunities internationally with distillate leverage.
- Chairman, CEO
Absolutely.
On acquisition we are going to continue to look both internationally as well as here in the US on things that we believe would ad value, shareholder value, would improve our portfolio, make us more competitive.
But as I think you've already sensed we are going to be very, very conservative here and be very confident that we are making the correct decision.
I know some people didn't agree with us but we thought TRN was a good opportunity for Valero and its shareholders and we lost the deal.
But we thought it was a good opportunity and if we see something like that come along again, we will pursue it.
- Analyst
Great.
Okay.
Thanks a lot, guys.
Operator
Next question, Faisel Chan with Citigroup.
- Analyst
Good morning.
With the shut down of Aruba and the reduced operating rates at the other facilities what does that do for your inventory balance?
Do you take down inventories and realize some of those barrels?
- EVP, Corp. Devel., Strategic Planning
Our inventories have been reduced.
- Analyst
Is there any way to quantify that?
Have you generated cash from those inventories.
- EVP, Corp. Devel., Strategic Planning
I mean through the year our inventories have gone down about 4 million barrels since the beginning of the year.
So we have generated some cash.
I would say roughly $500 million through the year on a year to date basis and from an inventory reduction.
- Analyst
Do you envision that kind of -- how do you envision that going forward?
- EVP, Corp. Devel., Strategic Planning
Well, we are evaluating that as we speak.
I mean, we've got several refineries that are in, I mean, we've got several refineries that are reduced rates and so we are ascertaining what our inventory requirements will at year end.
- Analyst
Going back to one of the tax questions I know you've accelerated some of your CapEx to take advantage of those tax benefits.
I'm just trying to rationalize how that works in a year where you are basically generating a GAAP loss.
How do you benefit those tax credits, do you carry those forward?
- EVP, CFO
Yes, well, what happens is we will have a tax carry back so we'll get a refund from the 2007 tax return.
- Analyst
Okay.
Have you calculate what that benefit would be?
- EVP, CFO
We are still in the process of determining all of our tax write offs and so it's hard to really, I can't give you a real solid number today.
- Analyst
Okay.
Got you.
In terms of CapEx for next year can you remind use we are at in the planning phase and where you might be for next year?
- Chairman, CEO
Well, the guidance Mike gave as you between 2 billion to $2.5 billion but clearly as we look at this market if it doesn't come back for us as we're anticipated we are going to continue to work that down.
But as I said earlier we have a very large scrubber project which is spending next year is going to be almost 400 some odd mill at the Venetian refinery which has to be done by the end of '10, and went MSAT2 which is benzene removal which is largely about $350 million of spending for next year.
So we have those, and that has to be done by the end of the year.
So we have two projects here that have to finish next year that are going to total around 700 million, $800 million.
That's barely, and once -- and if '10 is done then those are gone but we have to get those two done.
So where our guidance is 2 to 2.5 at this point.
- Analyst
If you do find a transaction or an asset that you guys like that you think would fit well into the portfolio how would you envision financing that?
- Chairman, CEO
Well, I'd like to say we'll wait and see what it looks like and the size.
So it just, we are going to maintain though if this is what you're asking, we are going to maintain our balance sheet in this environment.
And we are an investment grade rating and we are going to stay that way.
- Analyst
Thanks for the time.
I appreciate it.
Operator
Next question comes from the line of Paul Sankey with Deutsche Bank.
- Analyst
The -- don't know about the cash if I could, Bill, if I look at your cash flow from operations as taken to be net income plus D&A I've got about $117 million for the quarter.
And CapEx of 521 including turnarounds, dividends of 84, I get a negative cash burn of about $434 million.
You just told us that your inventory drawdown for the entire year was 500.
I was thinking that it was going to be an Aruba working capital shift but given that your debt didn't change or in fact went down for the quarter I was wondering what I was missing in terms of I guess-working capital item?
- Chairman, CEO
I mean if you look just at the third quarter, the items that we've provided, you listed most of them but we also had the asset impairment add back and so when you some all those three items applies a cash reduction of about $280 million.
And when you look at what we haven't provided for you is deferred tax and so we had a negative deferred tax of 177, and then a source of funds of working capital of about 450.
And when you net those two numbers that's a change of, that's a source of funds of $280 million.
And so most of the working capital change was due to a decrease in our net receivables payables position.
- Analyst
So how would that flow through to Q4 and if we kept the same margins which we guess are saying based on your guidance of Q4 basically saying that we expect the margins to be similar in Q4 to what we saw in Q3 if I was to try and get to a normalized cash flow from operations and a spending number how could you help me do that for the other stuff that we have going on here?
- Chairman, CEO
Well, it's hard to project the working capital changes due to just on the receivables payables because they can move around from quarter to quarter a little bit but I mean we typically I mean in a flat crude environment you won't see a lot of change from quarter to quarter in our receivables, payables, number.
I mean inventory we haven't forecasted a decreases in inventories and an additional decrease at this point but we are evaluating that and so there may be a little bit sources.
We don't typically forecast huge increases or decreases in our working capital requirements.
- Analyst
Fair enough.
But can you -- I guess it might be too much to ask but the change in Aruba I guess was the big element here that was a big plus that would be unsustainable, right?
- Chairman, CEO
I think if you're asking as a general statement if we maintain we move these projects forward so we have the turn around going on at Wilmington and Delaware City so it's fair to say we are going to consume some cash during the fourth quarter unless we take other actions with our inventories.
We are only operating on the foundries and low 80% range.
So as Mike was saying we still have opportunities here to get our inventories in better balance relative to our operating rates.
But as everything else is held constant we are going to pull down some cash here in the fourth quarter.
- Analyst
I understand, Bill, on the CapEx you put forward projects, obviously the natural expectation would be the amount that you pulled to forward would come out next year I think all driving towards that idea that seems to be the logical way of looking at it that we reduce next year CapEx by the amount that you pulled forward into Q4?
- Chairman, CEO
You can do that but I'm also giving you guidance of 2 billion to $2.5 billion.
But your point is correct where we moved the Wilmington turnaround clearly up into this year, (inaudible) cost for next year.
- Analyst
I guess that probably doesn't bear mentioning but I would say what I'm thinking is that you're not adding any projects for next year, right?
- Chairman, CEO
Not today although I will tell you hydrogen, we do not want to be generating hydrogen from reformers in this world that we are looking at.
So we are looking at some small hydrogen plants at some of our refineries.
Because obviously it's very, very attractive to generate hydrogen from natural gas.
And we view those as relatively low risk projects.
But and so these are things you'd expect us to be doing as this world has changed so much.
But as a general statement we are going to attempt to reduce our capital spending.
- Analyst
Great.
If I could just have one more follow up which might be too much to ask in terms of any of us getting a good answer but how does the dollar and the weakness of the dollar affect you guys, Bill, at the highest level?
- Chairman, CEO
I'd have Mike answer on the currency transactions but you guys would appreciate better than we can figure it out how it's affecting crude oil price.
But Mike can tell you on the Company.
- EVP, CFO
Yes, well, and most of our stuff is in US dollars so it hasn't affected that much.
We do have a little bit of Canadian foreign exchange risk that we do hedge but it's not material.
- Analyst
And I guess you might think that some imports of products are kept out by a weak dollar but the net damage done by the higher crude prices is probably, I mean a weaker dollar is probably worse for you guys on balance?
- EVP, CFO
Yes, I would think.
We truly believe that the weak dollars is driving the crude price up, four of the factors,.
- Analyst
And in a weak demand environment that then drives margins down so if we could get a situation where the dollar strengthened we could see a widening of margins?
- Chairman, CEO
We certainly like that idea.
- Analyst
Okay.
Guys, thank a lot.
Operator
Your next question comes from the line of Mark Gilman with Benchmark Company.
- Analyst
Hi, Mike, is the book value at Del City at September 30, after the impairment, am I guessing at about 1.6 billion, $1.7 billion, is that right?
- EVP, CFO
It's good, that's 1.65, that's after the impairment.
- Analyst
Given your comments regarding the inventory picture isn't it reasonable to assume that there will be a potentially sizeable LIFO inventory benefit which you'll record in Q4 even if you don't reduce further from current levels?
- EVP, CFO
Actually we are -- from a book perspective we will have a decrement there and it will be a loss.
- Analyst
Can you put some specifics on that, Mike?
- EVP, CFO
Well, I mean I don't have the exact number.
We are evaluating different operating plans.
Our LIFO barrels are, were down at the end of September about 4 million barrels from our LIFO base.
And so it's a complicated calculation in determining what the book loss is because it depends on which products are down but we are evaluating that at this particular time.
But it look like we will have a decrement that will result in a loss.
- Analyst
So that becomes part of the year end balance sheet picture, then?
- EVP, CFO
Yes, that's correct.
- Analyst
Okay.
Bill, you just made a comment regarding you don't want to use reforms to generate hydrogen.
I understand what you are saying in terms of natural gas but isn't it correct that hydrogen is basically a byproduct of the reforming process?
- Chairman, CEO
Well, it is but it depends on the severity.
Today octane you just don't need octane.
If you think about ethanol has such high octane, the world has changed dramatically here in the need for octane.
As you increase your severity in the reformer because you want octane you make hydrogen.
Now if you are in a situation, for instance, Delaware City, we do, we have small hydrogen plant, we have a small hydrogen plant there but we need additional hydrogen at Delaware City so we have to run the reformers at higher severity to make hydrogen.
So you're exactly right, Mark, in a historical perspective hydrogen is a byproduct of reforming but when you have to make hydrogen on purpose at these plants the cost numbers are phenomenal and if you think about our Quebec operation which has no hydrogen plant and generates hydrogen from its reforming, at the McKey refinery there's no hydrogen plant, you generates hydrogen from reforming and you go through, there's a couple other situations, you as all our competitors so this isn't going to be rocket science to anybody, all the guys listening on the phone they know the same thing we know that today reforming has changed tremendously and if you're having on purpose hydrogen it is costing you a lot when you have $80 crude oil versus 4 to $5 natural gas.
- Analyst
Okay.
I follow now.
Just one other one.
Going back to your comments regarding the 2010 capital program, are there other elements of that 2.0 to 2.5 that would be considered nondiscretionary over and above the scrubber and the MCAT?
- EVP, COO
Sure.
I mean, this will be just a general comment.
Turnaround and catalyst workload is anywhere between 500 million and 600 million on an annual basis.
You don't have a lot of discretion on that.
You have some discretion on timing.
That represent what the average is.
I think environmental capital for the reasons Bill mentioned, MSAT2, we also have flare gas recovery, we have got NOX control investments to do.
That is going to be of the order of about 600 million on an annual basis on a running rate.
Safety projects will be on the order of 100 million.
So when we actually look at how low could this number go over the next couple of years, it doesn't get much below 1.8 billion.
- Analyst
Rich, thanks very much.
- EVP, CFO
Mike, I might ad, I want to clarify one thing we talked a little bit about the decrement and the cases that we've ran and the impact on the balance sheet but the cases that we've ran will not result in a material change to our balance sheet,that would increase our debt to cap in a big way so it's not material from that perspective.
- Analyst
Thanks, Mike.
- EVP, CFO
Yes.
Operator
There are no further questions at this time.
- VP, IR
Thank you for listening to our call.
If you have any questions please feel free to call the Investor Relations here at Valero.
Thank you.
Operator
This does conclude today's conference call.
You may now disconnect.