瓦萊羅能源 (VLO) 2010 Q3 法說會逐字稿

Good morning.

My name is Brandice and I will be your conference operator today.

At this time, I'd like to welcome everyone to the Valero energy third-quarter results.

(Operator Instructions) Thank you, Mr.

Ashley Smith, you may begin.

Good morning and welcome to Valero Energy Corporation third quarter 2010 earnings conference call.

With me today are Bill Klesse our Chairman and CEO, Michael Ciskowski, our CSO, Richard Marcogliese our COO, Jean 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've not received the earnings release and would like a copy you can find one on our website at www.valero.com.

Also, attached to the earnings release, our tables that provide additional financial information on our business segments.

If you've 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 the conference call state the company's management expectations or predictions for the future are for the defendants intended to be covered by the Safe Harbor Provision under federal security law.

Their many factors that could cause actual results to differ from our expectations including those we described in our filings with the SEC.

I'll turn the call over to Mike.

Thanks Ashley and thank you for joining us today.

As noted in the release, we reported third quarter 2010 income from continuing operations at $292 million or $0.51 per share.

Third quarter 2010 operating income was $571 million versus an operating loss of $230 million in the third quarter of 2009.

The $809 million increase in operating income was mainly due to higher margins for diesel and better discounts for low-quality feedstock combined with higher throughput volumes compared to the third quarter of 2009.

Diesel margins improved significantly versus last year.

If you look at the bench mark the ULSD margin on the Gulf Coast, it increased from $6.97 per barrel in the third quarter of 2009 to $11.69 per barrel in the third quarter of 2010, or a 68% increase.

The sour crude oil discounts also improved during the third quarter.

The Maya heavy sour crude oil discount, WTI, expanded from $5.02 per barrel in the third quarter of 2009, to $8.47 in the third quarter of 2010.

Another way to look at this is as a percentage of WTI.

So the Maya discount increase from 7.4% percent of the WTI in the third quarter of last year to 11.1% of the WTI in the third quarter of '10 which is a 50% improvement year-over-year.

So far in the fourth quarter, benchmark margins have remained relatively strong for this type of year.

For example, the Gulf Coast ULFC margin versus WTI has increased from $5.83 per barrel in October of 2009 to $12.91 per barrel in October of this year, for 121%.

Meanwhile gulf coast gasoline margins versus WTI were strong early in the month, but have moderated recently.

We are continuing to see good sour crude oil discounts with Maya discounts as a percentage of WTI holding fairly steady with the third-quarter levels and/or which 8% higher than October 2009 levels.

Our third quarter of 2010 refinery throughput volume average at 2.4 million barrels per day, which is in line with our guidance.

Compared to the third quarter of 2009, volumes were up 136,000 barrels per day due to higher crude foot at many of our refineries as a result of the better margin environment.

Refinery cash operating expenses in the third quarter of 2010 or $3.76 per barrel which is favorably below our guidance.

Cash operating expenses were higher in the second quarter than in the second quarter primarily due to extra maintenance expense at Aruba, and the Venetian.

If you exclude the $35 million in extra expense for maintenance at Aruba in the third quarter, our system wide sash operating expenses were only $3.60 per barrel in our Gulf Coast cash costs were only $3.36 per barrel.

Our company-wide focus on cost reduction is continuing to yield results.

Since the beginning of 2010, we have achieved approximately $140 million in pre-tax cost reductions for numerous initiatives in great execution by our employees.

We are on pace to reduce pre-tax cost by total of $185 million in 2010, and our goal for 2011 is an additional $100 million in pre-tax cost reduction.

As part of our efforts to reduce costs, we remain committed to improving our operating performance.

We set goals and measure our progress using Salomon ranking, which are benchmarked surveys across the refining industry that cover key operating categories.

Salomon rankings are by quartile with first quartile indicating that you are performing among the top 25 percent in the industry.

We are proud that our refining portfolio has achieved first quartile performance in 2010 in two categories; non-energy cash operating expenses and personnel.

Although we are second quartile in reliability, maintenance expense, and energy efficiency, we are making consistent progress towards first quartile performance.

Turning back to our third-quarter results, our non-refining business segments also performed well.

Retail nearly matched last year's record earnings with operating income at $105 million, mostly due to increased fuel volumes.

Our ethanol segment had 47 million of operating income in the third quarter of 2010, which was slightly lower than the third quarter of 2009, but up $12 million from the second quarter of this year, due mainly two ethanol margins.

In the third quarter general and administrative expenses excluding corporate depreciation were $139 million.

Depreciation and amortization expense was $372 million, and net interest expense was $119 million all in line with our guidance.

The effective tax rate on continued operations in the third quarter was 38%.

With respect to our balance sheet at the end of September, totaled that was $8 billion.

We ended the quarter with cash balance of $2.4 billion, and we had nearly $4.2 billion of additional liquidity available.

At the end of the third-quarter our debt-to-cap ratio net of cash was 27%.

Regarding cash flows for the quarter we paid $28 million in dividends, capital spending was $508 million which includes $67 million for turnaround in catalyst expenditures.

For the year our capital spending target is $2.3 billion and for 2011 our preliminary estimate for capital spending was $2.6 billion.

This includes a [$502] million decrease in regulatory spending being partially offset by our $305 million of sustainable and reliability spending on projects that should improve our operations, such as a coke drum replacement at Port Arthur, and SEC maintenance at our McKee Refinery.

In addition in 2011, we plan to increase spending for economic growth projects by $525 million.

As illustrated in recent investor presentations that are available on our website, we have several large projects that we estimate will provide significant earnings power using be a reasonable set of price assumptions.

In general, these projects capitalize on our outlook for relatively high crude oil prices and low natural gas prices.

For example, the Port Arthur Hydrocracker project, which should be complete near the end of 2012, should generate $485 million of estimated incremental EBITDA and yield an internal rate of return of 21% percent on an unlevered basis.

This is just one example of several economic growth projects in which we will continue investing over the next few years.

Portfolio optimization also remains a strategic priority and we continue to execute on this.

In the third quarter we announced an agreement to sell the Paulsboro Refinery for $360 million, consisting of $180 million in cash, and a note for $180 million, plus $275 million in cash for estimated networking capital and inventories.

We anticipate closing this transaction in the fourth quarter.

The potential sale of the Paulsboro Refinery will result in a non-cash pre-tax charge of approximately $920 million, and the tax loss will be $155 million.

Also, we announced an agreement yesterday to sell our 50% interest in the Cameron Highway Oil Pipeline System for $330 million which we expect to occur in the fourth quarter.

When completed, the disposition will result in a book gain of $56 million, and a tax gain of $235 million.

This system primarily consists of two crude oil pipelines running from the deep water Gulf of Mexico to the Texas coast.

We believe the sale of its non-core asset will realize hidden value for our shareholders.

At Aruba, we are continuing our maintenance activities, and plan to have the refinery ready for restart in mid-December.

I should note that these activities include many important improvements to the long-term reliability of the refineries, storage terminal, and the docks.

And in the first quarter of 2011, the Aruba refinery will be able to supply intermediate feedstocks to our Gulf Coast refineries during the planned turnaround.

Now I'll turn it over to Ashley to cover the earnings model assumptions.

Thanks, Mike.

The modeling of our fourth quarter operations, you should expect the refinery throughput volumes to fall within the following ranges.The Gulf Coast should be at 1.325 million barrels to 1.375 million barrels per day excluding Aruba.

Mid-continent should be at 410,000 barrels to 420,000 barrels per day.

The Northeast should be at 370,000 barrels to 380,000 barrels per day, including Paulsboro.

And the West coast should be at 280,000 barrels to 290,000 barrels per day.

Refinery cash operating expenses are expected to be around $3.80 per barrel including Paulsboro, and (inaudible) at Aruba.

Regarding our ethanol operations in the fourth quarter, we expect total throughput volume of 3.3 million gallons per day.

And operating expenses should average approximately $0.33 per gallon, which includes $0.03 per gallon for non-cash (inaudible) such as appreciation and amortization.

With respect to some of the other items in the fourth quarter, we expect general and administrative expense, excluding depreciation, to be around $155 million.

Net interest expense should be around $118 million.

Total depreciation and amortization expense should be around $380 million, and our effective tax rate should be approximately 40%.

We will now open the call for questions, Brandice.

(Operator Instructions) Your first question comes from the line of Doug Terreson.

Good morning, guys.

Good morning, Doug.

Today's press release plus some of your recent commentary suggests that the strategic actions may change the geographical footprint.

That is, if they have competitiveness for the company.

And on this point I wanted to see if you'd provide some updated insight into your strategic thinking, including any functional or geographical that you deem important when you think about your strategic outlook.

What I'm going to say on this maybe is a little longer than the question you have.

Valero, we're a refining company.

You guys recommend us, our investors invest in us, they want exposure to the (inaudible).

Refined products, they're commodities.

We believe that we can add shareholder value to profitable growth.

Expanding our footprint will help us perform more profitably as we optimize our system.

It also will support our trading efforts in the sense of the asset-back trading portfolio.

Our focus of late is obviously here and since you guys know what assets are for sale, it's obviously the UK, but Europe is a large market, it is long gasoline, short diesel, we've said in many of our presentations how we've been exporting diesel to Europe.

The US is still importing gasoline.

Some capacity we'll have to shut down, but other capacity will survive, and it will prosper.

We have one advantage; being large, in the sense that we get to look at a portfolio and we can see the variability among us.

The quality assets that come into market in this round of announced assets for sale is much better than what we've seen previously in the Western Europe/UK market.

We still expect to see even some more assets come to market, especially as some of the majors are beginning to question the integrated business model that we follow, in which you guys have already been questioning whether the integrative business model's the right model going forward.

Valero is unique.

We're different than all the rest of the independents in that we're very very large, and so we think there's opportunities and we've said this for the last several years; that we keep looking and now with the quality assets on the market, we're actively looking at.

Okay, so that's Europe and not Asia, Bill, is that the way to think about it.

It is for today.

We're fully aware of the growth in the world in Asia, and new refineries are going to be built in Asia, because this business is going to keep growing worldwide.

But we don't see the opportunity they are at this point in time.

Great.

Thanks a lot.

Your next question comes from the line of Edward Westlake from credit three.

Good morning everyone.

Just on the debts, I guess last quarter there, the strong results and the debt coming down.

The focus was on dividends and buybacks.

I guess you've announced another $700 million of disposals.

Can you give us an idea of what kind of disposal proceeds you're targeting for 2011, and how you're thinking about, perhaps, the dividend and buyback as that debt level comes down?

In 2011, we do have a $2.6 billion as I talked about in capital expenditures.

I would not anticipate at this point in time, our dividend would be materially changed from the level that it is today as we move into 2011.

And a follow-up just on the tax rate, Ashley, you talked about a 40% tax rate, if I heard you correctly, in Q4.

I presume that's related to the losses in Texas may be just some words on the underlying tax rate that you expect going forward.

And this is Mike.

On our 40% guidance there, that does not -- What is happening there is we do expect a loss out of Aruba, due to the restart cost and expenses that we have that's a little bit larger than what we've incurred in the past.

And so that's a tax affected at a very low rate, and so it is causing our overall rate to go up a little bit.

And so as you look forward and strip that out, the underlying tax rate you would expect to be--

It would be more in the 36% to 37% range.

Great, thank you so much.

Your next question comes from the line of Doug Leggate, Bank of America.

Good morning guys.

Good morning, Doug.

A couple things for me.

A bite to the obviously pretty strong signal of acquisitions, Bill, A couple years ago you issued some equity in anticipation of a deal that didn't go through.

Would you anticipate you would need additional equity, or are you already in good shape given that situation, and now have a full lot?

Yes, we did issue equity on an acquisition that we did think was very good and obviously Lug-all thought it was good too.

But, right now we have, as my extent, $2.4 billion in cash, It was just said we have about $700 million coming in on the (inaudible) sales assuming that they close, and we expect that the close here in the fourth quarter.

So just depends on what the deals look like.

But obviously, we have lots of financial resources here, but as I've said many times in the past our investment credit rating is very important to us and we intend to keep that as well.

Could you maybe give us an idea of what you're ceiling on debt-to-cap would be, Bill?

Where are you comfortable going to on debt-to-cap?

I'm not going to give up the investment credit ratings.

And so we will manage the entire process.

Okay.

My follow-up is really -- a little bit of color on the dynamics of what's going on with diesel right now.

We're seeing some pretty interesting relationships with the dollar with brand-to-diesel and I'm just wondering if you could give some color as to how the export market is looking right now, how the export dynamics are playing in on what your prognosis is for diesel in light of a potential weak dollar as you move into 2011.

I'll leave it there.

Doug, this is Joe.

Our diesel exports have continued to be strong, in fact, all of our product experts have been strong.

We've averaged around 165,000 barrels a day of (inaudible) through the quarter, and it looks like it's going to be a similar level going into the fourth quarter.

Gasoline actually picked up in the third quarter, and we're doing about 65,000 barrels a day there, and we expect that to continue also.

So generally, the export markets will continue to be strong.

Going forward what do we think?

Well, you've still got global demand for product, it's growing faster than our U.S.

demand.

We still have some supply issues with Venezuela struggling, Mexico demand continues to achieve their supply, and so they're importing products.

We're seeing more dis.

lit.

going down to Brazil, and their economy has been very strong.

During the second quarter, Brazil imports reached almost 200,000 barrels a day.

And then we expect that they could be importing gasoline at some point in the future.

Then you've got just these little temporary issues like the French strike that took place, which we don't see it having any major impact on the market, I would tell you what we've seen is that it's probably supported a market the New York Harbor markets a little bit and then perhaps longer-term there'll be restocking that takes place as they've depleted some of their reserves.

But, other than that we just don't see much.

That's really where these export markets are.

They been very consistent and I don't think that's going to change.

If I could risk one quick follow up on CapEx.

With polls where they're going you guys have normally talked about $1.5 billion maintenance capital level.

With the asset sales done, what's that number going to look like going forward?

And I will leave it at this time.

I think clearly we're in the $1.3 billion to $1.4 billion and I've given that number to people that have asked me.

If you actually got down, we finish the conversion of the St.

Charles Cap, and we replace our coke drums that we're doing at Port Arthur, and then eventually St.

Charles and Wilmington, when we're done with all of that you'll say in business capital is in the range of $1.3 billion to $1.4 billion.

It's very very close to the company's CD.

Thanks a lot, Bill.

Your next question comes from the line of Paul Sankey with Deutsche bank.

Hi, guys.

You highlighted for the time of year, margins are very strong in certain regions they're actually the highest that we've seen for the past ten years.

I'm assuming that you would say that the single biggest reason for that is the export trend that you just talked about.

Could you provide us any more detail on those exports for your (inaudible)?

You mention the countries, but if you go over the numbers and terms of about how much is going where?

And I thought it was interesting what you said by the way ,there isn't any near-term impact from Europe in the French strike.

But I guess that you would expect that until they can restart importing product.

They been drawn down in what they had in inventories to this point.

They wouldn't have been able to bring imports in anyway because the ports were closed.

And if I could be generic on the volumes, because again I think Doug Terreson, from the last call, but we'd rather not be specific.

But I can tell you right now our exports are primarily headed to Europe, and in some lower volumes, to South America.

Probably if we wanted to say a 75/25 split, that would be a fair assessment.

We talk about the fact that they may continue going forward.

Last year at this time we had significant amount of inventories being stored on the water.

Those inventories are down today.

And we had a very strong winter in South America, where they pulled volumes.

Winter is coming in the rest of the world.

So just looking at the outlook right now, looks like things are shaped up pretty well, internationally.

for dis.

lit.

to be strong, if you look more domestically, our demand is up from last year, and were seeing data that supports increasing activity.

Truck tonnage is up, rail and port activities increased, and all these serve as leading indicators for industrial growth.

I would say that we certainly think things will stay supported for the time being.

I would've seconded you by saying that given the demand right here, right now, well the improving still looks very weak, it's surprising that we've got such strong Q3 and Q4 margins.

As we can see you're searching for this.

I'll give you a little bit more data.

We've seen very strong German demand, the number of days of diesel looks pretty good in inventory.

Relative to demand, we've got a lot of turnarounds.

Now this is a little data but the last data I've seen, on the Long Beach L.A.

harbors, we're up about 25% August to August.

So as Joe said we've seen some some domestic demand pick up, too.

Now, we would expect some of that to continue, and inflation becomes stocking for the Christmas holidays, or is this actually solid economic growth.

But clearly that was up significantly in August, and then you've seen data which spills over into cars as well that vehicle mile's traveled has actually increased in the United States as well.

So between Germany, between the French, between some of the South American countries, and some domestic activity here, then the turnaround, diesel is continued strong and quite frankly gasoline, cracks are down from where they were a couple weeks ago but there's still not that bad.

Thanks Bill.

Moving on to the work that you're doing on costs.

Can you say more about how important low natural gas prices are for you and your OpEx, and if you could, to whatever extent you can, express more detail on the improved cost performance, particularly with reference to that natural gas?

And I'd also be interested by how you see those as relatively more or less exposed to the low natural gas prices against any other refiner?

Thanks.

I'll let these guys give to you but then in the third quarter I think we consumed basically 22 -- some number here , but anyway, every dollar wound up being worth $0.10 a

Our energy costs on a quarterly basis, our total energy costs, which typically ranges from low 20% to low 30%-something of our refinery operating costs.

The energy portion is sensitive, to (inaudible) natural gas prices about 30% for each dollar change in (inaudible) it's about $35 million bucks quarter.

$35 million to $40 million a quarter.

So depending on how you want to look at it, you can do the math yourself.

That's what our (inaudible) is.

That's great I appreciate it.

I'll leave it there.

Your next question comes from the line of Jeff Peters with Simmons.

Good morning.

You guys have commented on the importance of the credit rating your own negative watch.

Could you highlight what the credit agencies are focused on, and what you can do to alleviate their concerns?

I think they're just focused on the state of the industry in general in the recovery of the economy, and I think their primary concern about those types of things, specific to the company,they're not concerned about anything at this point in time, they affirmed our ratings here but they've left the outlook at negative, and I think that's more indication of the industry.

Are there any metrics in particular that they're focused on keeping you within?

They're more focused on the coverage ratio.

They don't look quite as much at the debt-to-cap and they're more focused on the debt to EBITDA and the interest coverage.

Thank you.

On the second topic I was wondering if you could comment on your expectations for the Keystone Pipeline expansion from Cushing to Port Arthur.

I believe that is tied with your capital investment at Port Arthur and how you see that progressing.

This is Joe.

Obviously the issue with the pipeline has been the government permitting here, and we've seen some encouraging news here over the last week or so.

The State Department has come to the conclusion that Canadian crude is really important to our national energy security, and Hillary Clinton, in a speech just a week or so ago, made the comment that although she's not signed off on the permit for the project, that she's inclined to do so.

And the following day, four of the international labor unions, which are representing a significant number of workers, sent a letter urging the State Department to approve the permit to Keystone.

So, we expect now that some time after the elections, we're going to see that presidential permit getting executed.

It might be as last as the second quarter of '11, but we expect it to happen.

Now that's just about three months later than the original plan, which had (inaudible) been completed by the end of 2012.

Now we're looking probably at quarter two of 2013, and just by way of an update of the status of the project, they've got a hundred percent of the pipe, and the pump stations have been purchased.

60% of the right of way for the entire project has been taking care of, and 75% of the piece from Cushing the Gulf Coast is in place, the labor contract has been signed, The construction contract is being close to being awarded, and so everything is proceeding as we would expect.

Now the lane from Cushing to Port Arthur, which is one that we're interested in, is going to be complete about the second quarter of 2012.

That would bring a certain volume of the heavy sour Canadian into the market for us to be able to run it at Port Arthur in advance of the completion of overall Keystone which again would be second quarter of '13.

What's the capacity that would be available to Port Arthur on the second quarter of '12 and then for the second quarter of '13 as well?

How do those compare?

The capacity from Cushing to Port Arthur is somewhere around 450,000 barrels a day.

Now, I don't think it will run that kind of rate because your not going to have the supply in Cushing yet at that point in time, to drive the volume.

I really don't have a good answer for you short term.

I would guess maybe 100,000 barrels a day.

When that segment comes on and ultimately going up to that 450,000 mark.

Great, thank you.

Jeff?

You ought to ask Trans-Canada what they think.

Just follow up on it, will you?

Yeah, I will.

Your next question comes from the line of Evan Calio from Morgan Stanley.

Good morning guys.

A lot of my questions have been asked and answered so let me hit on a couple smaller ones.

Any update on a potential TCQ settlement discussions?

I know some of your competitors have settled there with the EPA.

I'd love to hear Bill's views on California Prop.

23.

They came out with the announcement with EPA last Friday.

We're sure reviewing that now, but we are very actively working with TCQ to get our (inaudible) done, and we anticipate that it will happen before the year of the year.

So things are moving while there, discussions are progressing.

And then do you think recent settlement ranges have been an accurate ZIP code for cost, or do you have any estimates that you could share with us there?

At this stage, I don't know that we've seen any additional costs coming with our new flexing process.

The administrative process going through but no capitals to be

On AB 32 and then Prop 23, of course if I said what I really think I would get in trouble.

However the governor Schwarzenegger and the mayor of L.A.

don't seem to have any problems saying what they think.

But for those that don't know, AB 32 is the cap and trade low-carb fuel that reduces it back to 1990-level, to the power where 1/3 has to be renewable.

It is really an anti-fossil fuels law.

It was only 13 pages, but it's more essential (inaudible) to large essential impact.

If we fail to win Prop 23, the cost of the consumer in California is clearly going to go up, and I guess we'll have the opportunity down the road to say we told you so.

And it will all be passed through to the consumer, as the companies aren't going absorb this, or they're going to go out of business or, it makes the playing field unlevel with imports.

The Valero has 1,600 employees in California because people ask me why are we involved?

We employ on average about 900 contracts permanently.

We've invested this year in California about $500 million.

Our investment in California is $3.8 billion.

We pay taxes, we pay property taxes of $27 million.

Sales and use taxes is $20-something million, so obviously we are in California as a good neighbor, and some of the rhetoric is extremely disappointing.

The opposition has been able to characterize this issue as Texas oil companies, we've been flattered as I'm sure Tesoro is, that we're now big oil, we thought we were independent.

We are a dirty company and dirty polluters, yet this is about CO2, it's not about other stuff.

It's CO2.

We opposition talks about the green industry and I'll say to you, "What jobs?" If this continues, the jobs are going to be in Nevada, Arizona, and China.

The building trades in Northern California have unemployment in the range of 30%, those are real jobs for real people.

I'm surprised no one really asked why the Silicon Valley venture capitalists are throwing so much money at this.

They have though been able to shift the debate away from consumer impacts to the issues I just mentioned.

People really don't understand that this is a CO2 regulation bill.

It is the first law and the United States is actually addressing this.

We'll see what happens when people vote on Tuesday.

And for anybody listening to the call, because we have a lot of people on this call, if you're in California and I hope you do vote, for some of the companies that I know that listen to this call, to the ones that have helped us on this issue I appreciate the help.

Although in New York but I don't think that's going to help you though.

No, I don't think that will help.

Although, we get a lot of people listening to this call.

Your next question comes from the line of Mark Gilman from the Benchmark Company.

Good morning.

A couple quickies and a general one.

Was Paulsboro profitable in the third-quarter Mike?

I'm going to answer that.

We gave out data that deals by regions, and we've continued to do that obviously the cracks were better in the third quarter.

You can look at our regional data.

But historically, we don't give out this kind of data.

So we realize that there are a lot of quotes made the other day, but that's not the way that we do it.

I'm going to try another quick one.

Have you reached a definitive decision barring any massive changes in the environment to restart Aruba when the maintenance is completed.?

Same definitive, I suppose, can be a little bit of a relative term.

It is our plan to start up when we finish near the middle to end of December or early in January from a supply-chain perspective it works for us.

We're actually short jet in our system in the way we do our marketing, and we'll also be short cap crack or charge stock or BTO in first quarter because of our turnaround that we've got going at Port Arthur.

So, as long as the markets stay relative to where we are and our perspective stays where it is, yes we're going to start up but I have maintained that the decision will be made as we get closer to when the maintenance is completed.

We wound up having to complete and rebuild a player there that slow down or at least extended our maintenance effort.

Bill, at a more strategic level given your bullish diesel outlook, amongst the slate of potential growth-oriented projects, is any consideration be given to a hydrocracker at Texas City?

Not today.

What we're going to do is finish the two hydrocrackers that we're half done with, and they are extremely large capital projects.

We've given a lot of data out to the market here over the last several presentations, but basically, Port Arthur is $800 million to finish, and St.

Charles is $600 million finish, on top of the other stuff.

And we're going to check those numbers but I think they're right.

So our plan here at the moment is to finish those projects.

We've also added a couple of hydrogen plants that have excellent economic -- .

But go

Let me hit a couple of other comments.

We actually installed a mild hydrocracker in our Houston refinery in 2007, which actually serves both Texas City and Houston.

In addition, Texas City already has, on the ground, one of our largest gasoline hydrotreaters in the system, so, it actually has very good hydro- processing capabilities today.

That's why we don't have an investment targeted there.

In a way, we've already made the investment, for both Houston and Texas City.

Yeah, we go ahead and hydrocrack the (inaudible- multiple speakers) I just comment because Aruba gets a lot of conversation we really just go back to that and just mention, this is a deepened asset with good potential.

Good people, we've got a good harbor, great logistics, that basis environment under the current prime minister is much better, I think they found out tourism isn't something that you can always count on.

It's much better.

We have a, I'm going to say, business-friendly relationship, there, and looking at some of the policies we've got that question on the flex permits earlier, but if you look at some of the policies that happened in the United States today, maybe Aruba's even more business-friendly than in the United States.

So we think there is value there, and we're positioning ourselves to try to pursue it.

Last one for me, in mid-cont and margins were quite a bit stronger than what we were looking for.

Did the crude slate change appreciably, particularly, did you run any more WTI in that region and head been the case previously?

I don't think it changed the appreciably, Mark.

We ran as much WTI as we could.

Mark one other factor in April of this year we completed the revamp on the Memphis cat cracker.

So to the extent that we had better realizations in the third quarter, we had better operating performance at the Memphis plant.

Thanks a lot guys.

Your next question comes from the line of Paul Cheng with Barclays Capital.

Hey guys.

Several quick questions can you tell me what is the market value of your inventory in excess of (inaudible) and what is the working capital including the cash?

The market value in excess is $4.9 billion.

Current assets about $11.9 billion current liabilities about $8.2 billion and our networking capital there is $3.7 billion.

That is including the cash right?

And Mike your standing gain or loss or trading gain or loss in the quarter?

We had about $16 million in profits in the quarter.

This is for Rich.

Rich, can you share with us what is the spring 2011 turnaround schedule may look like?

We issued a press release on this, but let me add a little color to it.

We have a very heavy turnaround workload planned for first quarter of '11.

We'll have the plant wide turnaround at Venetia refinery.

That will be in January.

In about 36 days.

We'll have a very large turnaround in Port Arthur where we take down the large crude train and the coker.

This turnaround will last 55 days or more and it is basically set on the project to replace all six coke drums.

We also have a very large cat cracker revamped in St.

Charles.

This will be in the February/March time frame.

It will be 55 days or longer, where we are actually gutting and rebuilding about half of this, I know the second cat cracker, are going to convert it to more or less, a conventional riser resid FCC.

We have Yardmore planned wide turnaround in March that will be 40 days long and then we have a hydrocracker turnaround in McKee in March, 24 days in duration.

And then a final one maybe it's for Mike.

In addition to the Cameron Highway Pipeline that you guys sold (inaudible), additional pipeline asset that is sitting on your portfolio?

We have some logistic facts, but they're not material, like the Cameron Highway Systems.

The main difference with Cameron Highway is, we were pipelines, we have gathering systems, we have an interest in the pipeline between McKee and El Paso.

There's several assets down in the Port Arthur area.

But the Cameron Highway pipeline was not a strategic asset to us.

And it was clearly worth more to an MLP, so we have a non- strategic asset worth more than the MLP, so that's where we took action.

It seems you talk about Aruba, is there any update about the potential sales or any negotiation that you can share at this point?

Varies and hard to say.

We're focusing on exactly what I answered for Mark earlier.

Thank you.

Your next question comes from the line of Blake Fernandez with Howard Weil.

Thanks for taking my questions.

Bill you been pretty candid about your stance on the macro environment, and I'm just curious with the new CapEx budget going into next year including some growth of spending, would you characterize that as a more constructive outlook on the macro, or is that really just a function of capital being deployed on the balance sheet which isn't contributing, and the idea of just going ahead and pushing that forward and finishing up those projects?

I think we believe next year is going to be better than this year.

We still believe and I'm told all the time were having an economic recovery Valero sells fuel.

If you look at our at least our 2009 data, 81% percent of our output -- output as gasoline diesel or jet, the word "fuel".

So we need people back to work.

We need people driving their cars and trucks moving and people flying.

So we see the economic recovery happening it's just very slow.

So we think our margins will be good next year.

We think we'll have a better year than we've head this year, and this year considering, has worked out reasonably well.

So with that in mind we believe that.

Now on the hydrocrackers, if you look at the world, diesel fuel is growing at least two times faster than gasoline's growing.

Its already 25 million barrel-a-day business in the world versus gasoline in the 22 million or 23 million barrels a day.

We've mentioned that the U.S.

Gulf Coast we believe we can export and if hydrocrackers, if we add one other point, you can see that the diesel crack today is at least twice the gasoline crack, maybe almost three times.

(inaudible- background noise) So it's really advantageous to make our road spec or alter (inaudible) sell for diesel.

That part said, we also believe as Mike said in the speaker notes, that natural gas prices are going to stay low for the foreseeable future.

And in a hydrocracker, you convert natural gas to hydrogen, then you put the hydrogen in the hydrocracker, we get a liquid volume gain of about 25% to 30%.

So in a way, it's a gas to liquids operation.

So we see these projects as good value added products for our shareholders.

We're already basically halfway into them.

All the equipment 's sitting at the site so we think it is in our shareholders' interest to finish these.

So between the economy getting better, selling fuel, diesel, taking natural gas, we think there the kind of projects we think we were right on, we just weren't anticipating the collapse of 2008.

That's perfect thanks Bill, there's been some recent announcements on the buildout of compressed natural gas, to fuel the trucking fleet with natural gas, and I'm just curious for one, have you looked at any of that for your retail sites, and secondly, does that cause you any concert on potential, just demand growth into the future as far as that (inaudible) demand of that growth?

We have not looked at that for our retail site.

Would it be of concern, it's not concerning the foreseeable or in the near term.

We do say we see natural gas at very low numbers relative to much much higher oil prices.

So there is an economic incentive there.

I will have to see how that develops, and then you almost get into the space operation where trucking needs to come back to a place where you can refuel, because to build infrastructure in the marketplace is going to take a lot longer.

There is a economic driver there I'm sure.

Okay thank you.

Your next question comes from the line up Chi Chow with Macquarie capital.

Bill, I don't mean to open a can of worms further on this, but Prop 23, it looks like the recent polls indicate that the measure is not going to pass.

In that scenario, how does Valero respond to the cap and trade provisions and the low carbon fuel provisions of AB 32, and how do you see the situation playing out in the states?

I'm not going to concede the first part until Tuesday night.

So we'll let the voters vote.

For the second part, were in business in California and it'll just continue.

And we'll see what the actual ranks look like and then will take actions to around them.

How concerned are you, and can you meet the low carbon fuel specs as they're laid out right now, going forward?

Well, to a certain extent, some of that is substitution, with electric.

It's more of a fuel mix question than it would actually be a refinery production.

I guess we can't answer you very well.

Rich gave you -- We don't have the rules and regulations of how it's all going to work.

In a way the low carbon fuel is an electric car mandate.

So we just have to let this play out I guess.

We're not giving you a good answer because we don't have one.

Okay.

Maybe one final question on the ethanol side, how do you see the current situation with the ethanol subsidies and the import tariff renewal?

First of all, our ethanol margins have improved a lot from the second quarter to the third and we're even seen further improvements going into the fourth quarter.

Even though corn prices are up to about $5.60 a bushel, that's what all prices have moved up even faster.

It would be good demand.

Ethanol's now still above gasoline by about $0.35 a gallon so with $0.45 credit it's still probable to invite $0.10 a gallon.

So, we're seeing our margins do quite well.

The demand's up and as far as the D 15, I don't think that's going to have any short-term impact at all because the warranty situation, the fact that it's only good for 2007, in newer cars, it's kind of a problem with retail to offer multiple grades so I think E 10's going to be predominant fuel over the near-term.

As far as the import tariff, $0.54 a gallon, I think it's irrelevant.

We're seeing no imports today.

Brazilian ethanol is actually more expensive than US ethanol, even without the import tariff, so, it's kind of a non-factor.

If anything, we're seeing exports of ethanol mainly into Canada and some into Europe because the U.S.

is really the lowest ethanol prices around.

So all in all I think the business is doing good just on economic alone, the subsidies's not really a factor today (inaudible) blending economics and the tariff's not a factor because Brazilian ethanol will be more expensive in the US.

Do you think that situation carries forward?

That both of those are going to be non-factors?

At some point, if Brazilian ethanol were to get real cheap where they expand their capacity more than their local demand, potentially, it could come here, but I don't see that happening over the near term.

Their demand keep going up faster than their supply to us.

So I don't see that change in over the year to intermediate term/long term.

Who knows?

As far as the the subsidy, most of this year ethanol was actually cheaper than gasoline, so the subsidy was really not a factor today.

It allows the blender to capture about gasoline, it goes back and forth though.

I think the fact that the mandate keeps rising higher says that ethanol plants will have to run; it will have margins to run.

Our plants, being in the corn belt, not only do we not have railing costs to get into the core of the market, we actually buy our corn about $0.30 per bushel.

Which gives us about $0.11 under (inaudible).

And if you look at these destination plans that have to actually rail from the Chicago area to the midwest, to the destinations, they're paying above (inaudible).

I feel like we have at least a $0.20-gallon margin advantage over the incremental plants.

I think that we got a very low cost basis in our plan.

I'm location and cost.

Okay great thanks, Gene.

Your next question comes from the line of Faisel Kahn with Citi.

Good morning.

Just one quick question of the capital projects that you guys have out until 2013, I know you only have half of the capital remaining on the new hydrocrackers.

Are those capital cost basically locked in?

Is there any chance a risk that those costs are to be higher or for that matter, is there any benefit that it could be lower?

The cluster locked in on the major equipment, as Bill mentioned before.

A lot of that major equipment is actually laying on the ground, so it's bought and paid for.

We are in the process of bidding out inside the battery limit construction.

What I would tell you about that is our assessment of construction and market is that conditions are favorable.

It's likely that they will come in at lower cost than when we originally anticipated the construction when there was a lot of demand for field construction services.

So we are not locked in yet, but we will say going forward, conditions are favorable relative to what we've got budgeted.

Great thanks a lot guys.

Your next question comes from the line of Jacques Rousseau with RBS.

[RBC]

Good morning, just one quick follow-up on AB 32, I had seen a quote attributed to Valero of the $177 million a year if AB 32 is enacted, and obviously as you said there is a lot of uncertainty at this point.

I was just curious what type of assumption you're thinking in terms of potential costs for carbon credits.

This it Kim again.

It is really hard to give a (inaudible) last minute at this point in time.

The biggest piece of regulation of cap and trade are not out yet, and that clearly has the most potential for expense, there.

Our stationary CO2 forces CO2 emissions from our requirements are about 3.75 million tonnes per year.

You factor that in even like a $20 credit costs that $75 million a year right there.

The (inaudible) itself is to regulate us is $4 million to $5 million a year.

So those are the kinds of numbers that we have other than working with knowing what we have with our CO2 emissions and report, until those, the cap and trade piece is really an issue and we can evaluate it.

We're not in a very good position to give any information.

Thank you.

Your next question comes from the line of Edward Westlake with Credit Suisse.

Thanks for taking a follow-up.

On the hundred million dollars of costs.

Is that inclusive or exclusive of the savings you get which you disclosed for things like FCC revamps at Memphis and St.

Charles?

And then just hurry thinking about pension liabilities and given that we're now in interest rate environment?

I know you've given disclosure of the sensitivity toward a 25 basis point move in interest rates.

A hundred million dollars is really broken down between in-house here at corporate, and then out in the field, and we're not counting the benefits from revamping the MSDC or anything.

It's more in items for instance, strategic sourcing areas --

I can add a little color to that.

First of all, let me precede by saying we are Salomon driven on our performance metrics, and we benchmark our operation, we participate in the industry surveys every two years, but we track these things a monthly basis.

We would not include project benefits in this hundred million dollar reduction goal.

It would be more forward operating cost reductions.

For example, we think in the refining system, 2010 cost will come in $70 million lower than the equivalent to 2009 at control costs.

It's a combination of focused energy stewardship programs to support efficiency.

Personnel headcount reduction, overtime eduction, contractor reduction, more efficient use of outside services, chemicals and catalyst cost reduction which refers to the strategic sourcing group that Bill mentioned.

Overall focus on plant reliability, pure pump repairs, leak elimination, more reliable Plant operations, so it is a number of things and again, value added ex- energy just in the refining system, is about $70 million this year.

We have a very rigorous program here.

We let the accounting department keeps track of it for us and we do it.

I know some of you guys laughed a little bit on some of the items, but this is a detailed business.

And we will say somewhere between $1 million to $2 million just in our printing and copying and paper costs here in this company.

We will realize that next year.

So that's how this stuff adds up.

On your second question makes an answer that.

On the pension.

It does appear.

It depends on where interest rates are at the end of the year.

But they are lower than what the discount factor was last year.

So it does appear our PBO is going to be going up.

At the end of this year.

We have contributed $54 million so far this year to our obligation to fund our GB plan, and we expect to make another $100 million contribution here by the end the year.

Thank you.

Will still be underfunded, I would remind you that we were totally funded at the end of 2007, and this management team, if I go through the end of the year, will have contributed $750 million to our pension fund over the last four years.

Good work thank you.

Your next question comes from the line of Mark Gilman with Benchmark Company.

Just a quick one if I could.

Have you given any indication on working capital release on the Paulsboro sale?.

$275 million is our estimate at this time.

Okay thanks Mike.

Earnings on shops.

I saw a wire story $25 million to $30 million is that reasonably accurate and where does it show up in the financials?

That is reasonably accurate.

it shows up in other income.

Interest and other income.

Thanks Mike.

Your next question comes from the line of Doug Leggate with Bank of America.

Thanks for taking a follow-up guys.

Bill, on the acquisition, I just wanted to ask a strategic question.

Are you thinking of European or UK refinery as an export asset, or are you actually interested in domestic retail assets as well, given the growth in the area?

I'm just curious as to what exactly you have in mind.

It's both.

Some of the assets were looking at obviously start at the local market and then a couple of the others are geared more to exports.

Obviously, one of the packages has some retail assets with it.

And if that's what happens, we'd be in business.

But we're refiners.

We're marketers.

And this fits us.

And we're not locked in to having to market in the United States.

If you'll remember, we market quite extensively in eastern Canada.

Just to be clear, there was five major refineries for sale.

Are we talking about single refinery deal or could you be looking at multiple assets?

Multiple assets.

Great, thank you.

There are no for the remarks.

Just want to thank everyone for listening to today's call and if you have any other questions, feel free to contact me in Investor Relations.

Thank you.