瓦萊羅能源 (VLO) 2010 Q1 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, would I like to welcome everyone to the Valero Energy first quarter 2010 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

(Operator Instructions).

Thank you.

Mr.

Smith, you may begin.

Thank you, Angelique.

Good morning and welcome to Valero Energy Corporation's first quarter 2010 earnings conference call.

With me today are Bill Klesse, our Chairman and CEO, Mike Ciskowski, our CFO, Rich Marcogliese our COO, Gene Edwards, our Executive Vice President of Corporate Development and Strategic Planning, Joe Gorder, our Executive Vice President of Marketing and Supply and Kim Bowers our Executive Vice President and General Counsel.

If you have not received the earnings release and would like a copy, can you find one on our web site at valero.com.

Also attached to the earnings release on our business segment.

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'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 could cause actual results to differ from our expectations, including those described in our filings with the SE C.

Now I'll turn the call over to Mike.

Thanks, Ashley.

Thank you for joining us today.

As noted in the release, we reported a first quarter 2010 loss from continuing operations of $101 million or $0.18 per share.

The $12 million after-tax loss shown in the financials table relates to the Delaware city assets that were shut down in the fourth quarter.

The first quarter 2010 operating loss was $32 million versus $593 million of operating income in the first quarter of 2009.

The decline in operating income was mainly due to lower margins on most of our refined products in all four of our operating regions.

Looking at our highest volume region, Benchmark Gulf Coast ultralow sulfur diesel margins versus WTI decreased 41% from $12.61 per barrel in the first quarter of 2009 to $7.49 per barrel in the first quarter of 2010.

While gulf coast gasoline margins versus WTI decreased 12% from $8.14 per barrel in the first quarter of 2009 to $7.13 per barrel in the first quarter of 2010.

The hardest hit region was the west coast where gasoline margins versus WTI fell 45% and diesel margins versus WTI fell 38% in the first quarter of 2010 when compared to the first quarter of last year.

So far in April, margins have improved versus the first quarter in most of our regions.

For example, the gulf coast ultralow sulfur diesel margin versus WTI has increased 33% to $9.95 per barrel while the gasoline versus WTI increased to 20% to $8.58 per barrel.

On the west coast, diesel margins versus WTI increased 40% to $11.83 per barrel while the gasoline margins have remained relatively flat.

Our first quarter 2010 refinery throughput volume to 2.1 million barrels per day, which is in line with our guidance.

However, compared to the first quarter of 2009, volumes were down 254,000 barrels per day, mainly due to the continued idled status of the Aruba refinery.

Our first quarter 2010 results were negatively impacted by down time at some of our key refineries.

We estimate the lost income from the first quarter downtime was just over $200 million.

Refinery cash operating expenses were $4.41 per barrel, in line with our guidance but were $0.41 per barrel higher than the first quarter of 2009 results due mostly through lower throughput volumes.

Looking at our other business segments, retail had a record first quarter with operating income at $71 million, which is $15 million higher than the first quarter of 2009 primarily due to higher fuel margins in both the US and the Canadian operations.

Our ethanol segment had $57 million of operating income in the first quarter, which is our second best quarter since we entered the ethanol business.

I should also point out that we purchased three additional plants in the first quarter, taking our total to ten plants with 1.1 billion gallons per year of capacity.

Like our previous acquisitions, these are large plants located in the corn belt, and we bought them at deep discounts to replacement costs.

Two of the plants were idled, but we have restarted them, and all ten plants are now operating.

General and administrative expenses excluding corporate depreciation were $97 million in the first quarter, which was $40 million lower than the fourth quarter and lower than our guidance due to a favorable insurance settlement of $40 million.

For the first quarter, total depreciation and amortization expense was $357 million, which was in line with our guidance.

Net interest expense was 127 million which was higher than our guidance and the fourth quarter of 2009 due to increased interest expense related to our recent debt offering.

Continued operations in the first quarter was 32%.

Regarding cash flows for the first quarter, capital spending was $611 million, which includes $229 million of turn around in catalyst expenditures.

For the year, our capital spending target remains at $2 billion.

We received a federal income tax refund of $923 million and we spent $260 million to acquire three ethanol plants.

The ethanol spending includes $9 million of working capital, so the total cost to acquire these plants comes to $281 million, which includes a $21 million deposit that was paid in the fourth quarter of 2009.

We also paid $28 million in dividends in the first quarter.

Also during the quarter, we completed a debt offering totaling $1.25 billion and subsequently called $473 million of debt.

Including the premium, we've spent $294 million in the first quarter to redeem $287 million of debt.

And in the second quarter, we will pay $190 million to redeem $186 million.

These redemptions will result in lower interest expense over the life of the note.

With respect to our balance sheet, at the end of March, total debt was $8.4 billion.

We ended the quarter with a cash balance of $1.9 billion, and we had over $4 billion of additional liquidity available.

And at the end of the quarter, our debt to cap ratio, net of cash, was 31%.

In summary, our financial health and liquidity remain very good despite the challenging environment we have experienced.

We expect to be profitable in April and make money for the full quarter.

Our priorities continue to be reducing costs, running our assets safely and reliably and maintaining our financial strength.

We continue to believe that our cost savings initiatives in the strategic actions that we have taken should make the company profitable in 2010 even if we were to experience a low margin environment like 2009.

So now I'll turn it over to Ashley to cover the earnings model assumption.

Okay.

Thanks, Mike.

For modeling our second quarter operations, you should expect the refinery throughput volumes to fall in the following ranges.

Gulf Coast at 1.275 million to 1.325 million barrels per day.

Mid continent at 380,000 to 390,000 barrels per are day.

Northeast at 330,000 to 340,000 barrels per day.

And west coast at 260,000 to 270,000 barrels per day.

Refinery cash operating expenses are expected to be around $4.15 per barrel, which is lower than last quarter due mainly to higher expected throughput volumes.

Regarding our ethanol operations in the second quarter, we expect total throughput volumes of 3.15 million gallons per day and operating expenses should average approximately $0.37 per gallon, which includes $0.03 per gallon for noncash costs such as depreciation and amortization.

With respect to some of the other items for the second quarter, we expect G&A expense excluding depreciation to be around $135 million, net interest expense should be around $120 million, and total depreciation and amortization expense shoe be around $365 million.

Regarding our tax rate in this margin environment, small changes in assumptions are usually a very wide range in results for effective tax rate.

So at this point, we prefer not to provide guidance which may not be meaningful.

We will now open the call for questions, Angelique.

Thank you.

(Operator Instructions).

We will pause for just a moment to compile the Q & A roster.

Your first question comes from Doug Terreson from ISI Group.

Good morning, guys.

Good morning, Doug.

Differentials have widened which should enhance performance in the coming periods.

On this point, the spread for light seems to have widened than the global heavy crude oils.

So my question's twofold.

What do you guys think supports widening of the spread?

Second, what, if any, indication do you think the difference in spreads between the regional heavy crude oil such as Maya may be heavier or something.

Do you think Maya can continue to trade?

Just spend a minute on this spread?

Yes, sure.

Doug this is Joe.

Hi, Joe.

How are you?

Good.

The heavy star discounts improved for a couple reasons.

One we had mild rink.

Two we had Singapore.

Third, we had a flat market structure.

The Maya discounts looked good today.

We're showing about $10 a barrel when compared to WTI.

That's a little bit distorted.

They're stronger than that if you compare them to some of the foreign sweets because we've got the dislocation of WTI.

So we had factors that affected the discount and improved it.

Now, today if you look at that, the primary outlay, the Maya length is cleaned up a little bit.

In the market structures in carry, here again, if you compare Maya to, foreign sweet, it looks more attractive than it would to WTI.

As far as the foreign barrels go, like Arab heavy, Doug, we're not seeing those barrels over here anymore and you know that.

If I compare Maya to some of the other heavy styles if we do look at running it's right in the ballpark.

Okay.

Venezuelan grades, some of the Colombian grades, we're not seeing a disconnect with those.

That's a really good explanation.

Thanks a lot.

You bet.

Your next question comes from Jeff Dietert with Simmons.

Along a similar line, Rich, or Joe, could you talk about how the Maya spreads and the resid spreads are impacting your utilization of your coking units, and maybe compare 4Q last year to 1Q this year and where you are now as far as utilization of the cokers?

Jeff, this is Rich.

We have increased coker runs in general.

If you go to last year, we had our small coker in the Corpus Christi, the three drum coker.

It was down for probably six months, now it is running full, coker at Texas City running full, Port Arthur crude rates and coker rates have gotten back to traditional maximum so, yes, we are purchasing crudes to fill coking capacity because it makes economic sense now with the differentials.

Very good.

If I remember, on the second question, the Paulsboro process, it seems like you've got bids in.

Should we assume something's relatively imminent there?

Jeff, we're working the process still.

I would tell you that we'll make our decision in the second quarter.

Thank you for your comments.

Your next question comes from [Paul Sklerotska] of Banc of America.

Actually it's Doug Leggate.

Hi, Doug.

On the northeast, it looked like the capture rate there was a little better, I guess, than we've seen historically.

Can we talk just a little bit about what the absence of Del City has meant there in terms of the system?

But if you can also maybe just frame it in terms of the contribution from Paulsboro.

It was the only region that was profitable this quarter.

So I'm curious to know how performed with that backdrop?

Well, on the part about Del City, I don't think we necessarily see any impact on that.

To go to the heart of your question, we made money in Canada and we lost money in Paulsboro.

Thanks, Bill.

If I would just stay with that, there was no releasing about the inventory sale coming out of Del City.

Can you give us some color, I'm assuming you got the revenues, was there any contribution in terms of margin from that inventory disposal?

No.

On the inventory liquidation at Del City, we had hedged all those barrels so there's no P&L effect.

Perfect.

Bill, I guess a couple months back you were quoted as talking about aiming for something like a $3.50 operating cost on the count on a cash basis.

Can you just give some maybe color, some update as to whether or not that's the number you still like or whether -- or rather see as a target and what kind of time frame and what kind of process you see towards that getting there?

Thanks.

It's clearly a number I still think is attainable, but when you have lower operating rates in our refining system, you have to adjust for all of that.

We continue to make improvements everywhere.

We have goals throughout our system.

I think some of you know that we took action in the fourth quarter of last year reducing our operating costs there.

So we have many projects underway that are addressing our operating costs.

We have a target throughout the company of $100 million, but then that's really addressing mostly things that are at corporate.

We also have on top of that optimization, molecule management, strategic sourcing, many other initiatives that'll bring it down.

As a goal, if we are operating full rate, we'd like to get our cash operating costs down to the $3.50 area when you have natural gas in this price range.

But it's hard to say give you a good number when you have reduced operating rates.

Terrific.

Thanks, Bill.

Appreciate your comments.

Your next question comes from Edward Westlake with Credit Suisse.

Good morning.

I guess economic recovery is picking up, perhaps.

How is that changing your thoughts about Aruba, around $2 billion of CapEx, whether you can drive Cap Ex lower next year or whether you see other uses for that cash?

And perhaps a word on whether ethanol you're done, whether further acquisitions are perhaps unlikely now, or whether you are going to carry on in something around your international thoughts at this stage in terms of international growth if there are opportunities there?

Thank you.

I'll try to remember all these.

But yes, Valero sells fuels, and clearly as the economic activity continues to increase it will help our business.

Today in distillates, we're seeing farm demand, railroad demand very strong.

Trucking is lacking.

On gasoline, unemployment, still at the 9.7, whatever the number is.

Being a very high number and the high prices are restrained on gasoline.

However, we do see as the economy recovers, the volume's picking up.

So that part of it, yes, we're optimistic here, we have better margins today as Joe just said we have better salary discounts today.

We're making money here as our release says in April and we expect to be profitable as Mike said in the second quarter.

Then I've told everyone that we expect to be profitable for the year.

Looking at our thoughts on Aruba, we still do not have what we would call solid economics to operate Aruba.

So we continue to look at our alternatives there.

Most likely the alternatives that we tend to be looking at go along the line of processing.

We'll make that decision here as to how that plant goes forward, most likely in June.

You asked the question about ethanol.

We're very pleased with our ethenol business.

Gene Edwards and the team have done an excellent job getting our business.

It's been a solid contributor for us.

It's still in the profit.

I think some of you know there's a huge blending margin today.

Ethanol's economic.

We continue to look at opportunities in our business.

We built a strong staff here.

So we feel, one, that ethanol's going to be part of the fuel mix in the United States.

Two, there's still opportunity out there for us to continue to grow that business.

Capital spending.

Capital spending.

Our number this year, our target's about $2 billion.

We complete several big projects this year, the scrubber at Venetia and the heater furnace that's associated with it is very large.

We complete MSAT-2 by the end of the year.

So that we give us the ability to come in with a lower capital, however, we do have some big turn arounds next year.

Having said that, we also have a couple of projects we are halfway through.

So we are scaling those into our view, so if our profitability continues, as I stated a few minutes ago, and we have the cash it is our intent to complete the projects at Port Arthur and St.

Charles with the timing being somewhere late 2012 at Port Arthur and somewhere in the late 2013 of St.

Charles.

These projects have very good rates of return so we're going to work them in.

Thank you.

Your next question comes from Paul Cheng of Barclays Capital.

I heard a couple questions.

First, Mike, can you give me some item.

What is the working capital including cash?

And long term debt, of the $8.4 how much is the long-term debt?

Was it the equity in your bondship?

And what is the market inventory in excess of the bulk?

Okay.

Total current assets at the end of March was $11.3 billion, the cash balance was $1.9 billion.

Total current liabilities was $8.1 billion.

Current maturity --

I'm sorry, Mike, I couldn't hear that.

What was the current liability?

The current liabilities is $8.1 billion.

Okay.

And in the current maturities are $635 million.

So net working capital is right at $2 billion.

Short term debt is 635.

Well, it's not a short -- yes that's right.

635 --

That means that your long-term debt is $7.8 billion?

Right.

That's correct.

The market value on our inventory is about $9 billion.

Okay.

How about your shareholder equity?

That's about 14.5 billion.

Okay.

Just wanted to make sure I understand so the working capitals, your working capital would be $3.2 billion including cash and everything?

That's correct.

If you do not exclude the cash or the current maturities that's right.

Secondly, that money in your first quarter, is there any trading or hedging or loss.

Also, do you have any outstanding position for the second quarter for any hatching or trading position currently on?

The first quarter results are we had -- from a trading activity was a profit of about $5 million.

I've mentioned in the past that we do participate in the paper markets.

We have some positions on but they're not significant, and frankly, I view them as confidential.

So billion means that for the second quarter that is as of right now the existing one is not a huge amount whatever you have outstanding?

That's correct.

Bill, seems like, I think you had mentioned that you could be interested in share of European asset.

Can you give us any update?

Have you further pursued that process or still interest or not?

We are still interested in looking at so many of the assets that are for sale in western Europe.

I think you know there's a whole bunch of them.

We will continue to look, however, Valero will be very careful.

It is only looking at quality assets.

That will be assets that do not require a lot of capital, and I assure you there will be survivors and they will be assets that will generate a rate of return if we do anything.

Very good.

Thank you.

Your next question comes from Mark Gilman of Benchmark Company.

Good morning, while I fully believe your forecast of profitability, Mike, can you give me an idea where you stand in terms of possible future carryback loss potential as of the end of last year?

The current forecast shows that we're going to have a taxable income, you know, this year so we don't expect to have any carryback.

But I don't --

I would say that there's significant amounts of potential carryback if we were to have a tax loss because of the new tax laws from last year that allow a five-year carryback NOL, the large portion of our over $900 million income tax receivables were from earlier years.

So we still have substantial amounts if we do have the tax laws.

Has the liquidation of the Del City inventories been fully completed?

We still have a little bit to go.

I think that about $100 million is what my estimate is.

Of value.

Of value.

That's left to go, Mike?

That's left to go, that's right.

Slightly over a million barrels.

Okay.

Last one for me.

It appears as if there's an unusual seasonal pattern to the reported margins in the mid-continent division where the first quarter in virtually every year that I've looked at seems to be one of the strongest quarters.

Is that something you see also, and is there any particular reason you can cite for it?

You have the Contango in the market which helped you on the mid-continent plans been more pronounced lately than earlier in the first quarter.

I don't see the product margins being that big of premiums in the gulf coast.

Just the normal arbitrage.

Mark, even now, they're fairly flat if you look at gulf coast versus mid-continent.

The only difference I see is the 7, 8 pounds versus 9 pounds.

But nothing that tends to repeat itself on the first quarter each year that might be responsible for a much higher degree of margin capture in a first quarter period.

No, we're not aware.

We'll have to go backtrack and look at that some more.

Thanks a lot, guys.

Your next question comes from Paul Sankey of Deutsche Bank.

Thanks.

Bill, you've often taken an industry leadership role, not least in terms of really rallying the industry, not to overproduce, I was wondering in the context of Delaware City why you didn't simply shutter the refinery once and for all given that the price you got was pretty low and I would have thought the potential welcome-term benefits of shutting that particular refinery would have outweighed the benefit you got from the sale.

It's a very fair question.

But PBF was willing to pay a price for a terminal as we were looking at it and then a shutdown refinery that was in our shareholders' interest.

When we looked at that versus our other options.

So as we said in some of our releases that we believe we got a very fair value for this for the state it was in.

So we elected to sell to PBF.

I guess you're saying now there will be a competitor on the east coast?

I think you have to ask PBF what they're going to do with the refinery.

When you told, was your expectation that it was going to be a terminal?

We sold it as a shutdown refinery with a terminal.

Just a more macro question if I could.

It seems one of the reasons for the strengths that we're seeing in refining margins right now is related to international demand.

We noticed the problem in Chile, Mexico, Venezuela, Brazil, I think Nigeria might be importing gasoline.

Could you just talk about Atlantic basin and Pacific basin and trades in terms of exports from the US?

Thanks.

We're seeing, strong demand primarily from South America, but also here just recently from Europe.

If you look at the first quarter, we exported about 80,000 barrels a day on average of distillate, but those numbers were much lower in January and increased through March.

If you look at what we're estimating right now for May, we're probably at 185,000 barrels a month.

You cited some of the issues.

We have problems in Chile.

We have Venezuela has refinery problems.

Isla is shut down.

So you've got draws in that market that are pulling significant volumes.

Here again, the arm to Europe is open by about a penny and a half now.

That's been a recent phenomenon.

So we're moving barrels, also.

What do you attribute the European strengths to?

I don't know.

Do you?

The refiners have still been cut back.

Not in high utilization rates.

It's hard to get great data.

We do know a lot of the distillate that's been on the water has been cleaned up and consumed.

Just to be clear, those numbers you're talking about are Valero numbers, right?

Valero numbers.

That must be a record high, right?

No.

Last summer we did 200 to 220,000 barrels a day.

Of distillate?

Yes.

What about gasoline?

In the fist quarter we did 20 gasoline cargoes which is high for us.

How big's the cargo?

55,000 barrels a day.

I've got you.

That's very interesting.

To what extent do you think this is sustainable?

Obviously, we know the demand side is coming back, but in terms of the outages, Chile obviously is going to come back in a matter of months.

Right.

Do you know what's going on in Mexico and Venezuela?

Mexico had a lot of turn around.

Venezuela has had refinery operating problems.

Isla had the power outage.

That took a lot of fire out of the market.

The Isla refinery produced 85,000 barrels a day of gasoline and 100 a day of diesel fuel.

That's not in the marketplace today.

They were using that to supply other South American countries.

So the US gulf coast right now is filling the void in production there.

Is it sustainable?

We understand perhaps bit end of May it will be back up operating.

Chile is going to take a while to get production volume back up.

Venezuela itself, I really don't know.

Final one for me there was some interesting chatter I think you referenced even today about Iran and Reliance.

Is there anything you can add on what might be going on there?

It seems that Reliance is seeking to send more volumes into the Atlantic basin.

I don't know if you see me show up.

I'll leave it there.

Thank you.

We haven't seen them show up.

And I hadn't heard anything about them to be quite honest with you.

Everything I hear is Iran continues to be supplies.

Some of our old suppliers someone else steps in to fill the void.

I'm not sure there's been a whole lot of changes.

Thank you guys.

Thanks.

Your next question comes from Blake Fernandez of Howard Weil.

The Canadian retail margins seemed exceptionally strong in the quarter.

I'm just curious if you could point out anything that was occurring during the quarter and if that's continuing to persist into 2Q?

The Canadian margins include home heat.

So when you look at their number, that's the home heating business.

Our margin is significantly higher than it is for fuel.

So then as you go into the second quarter, third quarter, the change as the volume drops then going back into the fourth quarter.

So that's really the main difference.

There's a home heat business in the winter.

So even though Quebec was warmer this winter than last winter there's still that seasonal effect.

Okay.

Should see dropoff there?

On a relative basis.

The second one for you Joe mentioned the dislocation on WTI, presumably stemming from the storage situation that seems to be building again over at Cushing.

As I recall, I believe you guys run quite a bit of WTI through your mid-con system, and I'm just trying to see if you're recognizing a real benefit from that so far this quarter?

And I think you already mentioned the contango, but obviously that's blowing out as well, I'm assuming that's providing somewhat of a benefit as well.

Yes, Blake, we do.

We see the benefit of the contango on the domestic crudes.

We do run quite a bit of TI into McKee, Ardmore.

Thanks a lot, Joe.

Your next question comes from [Franklin Russo with RBC].

Morning.

Most of my questions have been answered, but I just wanted to follow up on the capital budget.

You've talked before on the $2 billion capital budget this year, about 1.85 of that is kind of this day in business capital level and that's expected to move down going forward.

If you take Paulsboro and Aruba out of the equation, how low can that 1.85 go?

Well, if you look at our DD&A, it comes up about $1.4 billion.

So our target would clearly be as a regulatory capital comes out of the mix that we could get this down into the 1.4, 1.5 area.

That assumes we don't have anything new on the regulatory and that we finished those kinds of things.

Then we have our turn arounds, reliability, investments that could clearly be done in the 1.4, 1.5 range.

So 1.4, 1.5 total for all of the categories of sustaining turn arounds and regulatory?

Yes.

We could get it down to that.

That's correct.

Great.

Thank you.

Your next question comes from Chi Chow of Macquarie Capital.

Good morning.

Bill, you mentioned earlier that you were looking to resume the hydrocracker projects at Port Arthur and St.

Charles.

What's the remaining spending you have at each plant?

Port Arthur, for the whole project, about $900 million.

At St.

Charles about $600 million.

And when you look at the economics on the increment, saying that the fist part is already sunk, even if you took in to some tax effect into consideration, the return is still in the high 20s.

If you look at the entire project, which is largely driven in a way by very low natural gas prices that equate the hydrogen that the liquids, the process is in the high teens.

So since we in a way have invested roughly 50% in these projects, at some point it would be our intent to finish it.

We're going to manage that with our available cash flow.

What's the -- I guess, can you comment on your outlook on the distillate market going forward?

Of course I have a positive outlook, but yes, right now it's trucking that's lagging.

If you take the data, 65% or so of US distillate demand is on-road diesel, I mentioned already that the farming is strong at the moment and railroads have been strong.

Clearly, the shipping industry is trying to be more efficient, but I'm assuming that the US economy will eventually recover, and that that will see that going.

Distillates in the world, though, are going to grow between two, three times at the rate of gasoline.

And Joe spoke about our expert capability.

As you know, these hydrocrackers are plants that have expert capability.

They also at Port Arthur will allow a very high product to be produced.

So when we look at the world, we believe we can export from the US gulf coast or service domestically.

So yes, we're optimistic, still in the world about diesel and distillates.

Second question on ethanol.

Valero's in an interesting position of straddling the fence as one of the largest refiners and ethanol producers here in the US.

Just wondering what is your stance above 10%?

Okay.

Well, I'm going to speak then from Valero.

I know you guys know our Chairman and they have a different position.

We think that ethanol from Valero's perspective is going to be part of the fuel mix.

Actually today, it is economic even at $3.50 corn.

The US farmer has demonstrated, and even though people talk about food to fuel, the US farmer has demonstrated an ability to grow more corn increasing yields and so we think that ethanol is viable in the fuel mix.

So our position then is that it should be increased.

Then we'll have the discussion about cars and which cars can take the fuel and all that.

But it is economics.

Then you also have other issues that we get involved in on this issue.

National security, things along those lines.

Just from the logistics and you mentioned the liability standpoint of the older vehicles.

Do you think it's really feasible to push much more in beyond 10% over the next, I don't know, five years or so?

Sure we do.

You'll have to have proper labeling at the pumps.

Okay.

Great.

Thanks for your thoughts, Bill.

Appreciate it.

(Operator Instructions).

Your next question comes from [Alexander Inkler] with Sanford Bernstein.

Given the strength of east coast margins in the last quarter, I'm just curious if you can give us guidance as to whether Delaware City would have been profitable in the current environment?

Alex, this is Ashley.

When we've shut it, however, our belief because of the operating costs and environment at the refinery, it still wouldn't have been worth running even if we couldn't have run it.

If you look at that plant it has one of our lowest liquid volume yields, which, you know, is an issue in this high crude price environment.

Okay.

Thank you.

Your next question comes from Ann Kohler of Caris and Company.

Good morning.

First on the ethanol, I know you gave a throughput expectation or production of 3.15 million gallons for the quarter.

It's my understanding that you were going to be basically ramping up production for some of the plants purchased earlier so the production numbers would be higher in the second half of the year.

Do you have any guidance as regards to that?

Represents the new plants at pretty much full capacity.

And the older plants as well?

Yes.

They're all running at capacity or lightly above in all accounts right now.

And that's reflected in the 3.15.

Great.

Given the environment, I know that over the last couple of years, there's, you know, there are a number of plants, if you have also looked at placing on the market beyond Aruba and Paulsboro, given the current environment, I mean, are you still basically looking at that opportunity or are you going to wait for better margin environment or are you happy with your current portfolio?

We are focusing on Aruba and Paulsboro.

We assume that we will close our transaction here in May.

So right now that's where our focus is.

However, we have a portfolio plant and they are all not likely performed.

That's why we have many initiatives throughout our system here.

But focus is on the two that you mentioned.

By that focus shift, some of those refineries shift once you get those two plants settled, transactions completed?

We're trying to improve our portfolio every, single day, but we will make judgment as to those assets as we go forward.

Great.

Thank you.

Sir, your next question comes from Daniel Burke of Johnson Rice.

Good morning.

I wonder if you could revise it one of the drivers, the length of the fuel market.

Can that continue or will far east turn arounds begin to cut into that length as you look into more into Q2?

I think we expect it to continue.

I mean, the fuel oil market is long in Singapore.

It's also long in the US gulf coast.

It could clean up in time but in the periods we're looking at right now, we expect it to continue.

If you look at US inventories right now, they're 8 million barrels higher than last year.

A lot of it is because US demand's still very week because of very low natural gas prices.

So not much being consumed here.

We've been importing at higher levels.

We were last year as well.

Because of Singapore's goal, Europe's long resid all the time, so the barrels have to come here and already full.

So it'll take a while for the resid to clean up.

I think we're going to see this continue for the next few months at least.

Great.

Thanks.

The only other one I had as follow-up, did you have on hand the number for cash proceeds generated for most specifically the Del City inventory liquidation?

Just want to get a look at the net working capital that looks to occur in Q1.

It was $365 million was the liquidation in the first quarter.

Then as we mentioned earlier, we have about another $100 million to go.

Great.

I appreciate that.

Thank you, guys.

Your next question is a follow-up from the line of Paul Sklerotska with Banc of America.

Still Doug, I'm afraid.

Sorry for the follow-up, guys.

Just a couple of clarification points, please.

On Aruba, looking at your cost guidance, are you assuming that Aruba you still have costs down there?

What should we think about the implications for the second half of the year there?

We do have costs presently at Aruba.

It's roughly about $22 million per quarter in DD&A.

Then we had in the first quarter, about 20 of cash operating expenses.

So the total was about $38 million loss at Aruba.

We did have some margin there in our Marine and terminalling business.

Okay.

And your guidance for the second quarter, the Op Ex guidance that Ashley gave, I'm assuming that Aruba's still in there, I guess, until June?

What happens beyond that?

That number would continue most likely through the third quarter.

Just going back to light heavy differentials, the Keystone pipeline fill, how do you see things playing out there when that's done in terms of how it might impact your ability to access western Canadian for example?

Clearly it's going to be beneficial to us to have a Keystone pipeline in place.

The timing of it, their line filling right now, the part that goes down to Steel City and then connects into Patoka and Wood River, the Cushing connection will be in early 2011, I believe and the next segment that runs from Cushing down to the Gulf Coast.

And our thoughts are that we may be able to get volume on that, but before the entire bullet line is complete at the end of 2012 or beginning of 2013, in addition to the Canadian crude that will be beneficial to us longer term, we've got the increases in the Colombian production.

We've got Brazilian heavy sweet coming into the market.

We've got the Canadian, and then we've got the medium sour production coming out of Iraq.

So as we look at the market for the medium sours and heavy sours going forward, we tend to be fairly optimistic.

Great.

Thanks a lot.

Your next question is from Mark Gilman of Benchmark Company.

Can you give us an update on the Quebec FCC?

The Quebec FCC is back in service.

The market was down for a total of 67 days.

It came up on April 11th.

Was there any tax due on the sale to PBF?

No.

No.

No tax on that, Mike?

It'll be a very small amount, we do have a small gain on this proposed -- the way the transaction is currently proposed, contemplated.

Okay.

How much mileage did you run in the first quarter and how does that compare to right now.

Ran about 200,000 barrels per day at Maya in the first quarter and Joe, for now?

Same.

225 actually.

Great.

Thanks, guys.

Your next question comes from Paul Cheng of Barclays Capital.

Just want to as a follow up on the ethanol.

If the EPA give a waiver to increase the ethanol branding from 10 to 15% but the auto industry would not give any guarantee on their vehicle to change it accordingly, will you or will Valero as a company, if the economy have there and willing to brand up to 15% or you would say there's too much off off the legal liability and wait until the auto industry gives your guarantee.

Just trying to understand which one would be the hurdle.

Hello?

However, we are well aware of the experience with MTBE where it was authorized and there was no defective product liability.

So we'll have to just wait and see what the rules look like.

We'll see what the autos really do, and then we'll see.

That's why I was answering Chi earlier, there is going to have to be an awful lot of labeling involved if in fact it does become, or does enter the market.

Even if the EPA changed the regulation tomorrow that you guys would take me rather than the more cautious wait and see attitude.

That is extremely true, we would be extremely cautious.

Thank you.

There are no further questions at this time.

Mr.

Smith, are there any closing remarks?

I just want to thank everyone for listening to today's call.

If you have any other questions, feel free to contact me in the investor relations department.

Thank you.

This does conclude the conference.

You may now disconnect.