瓦萊羅能源 (VLO) 2012 Q3 法說會逐字稿

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  • Operator

  • Welcome to the Valero Energy Corporation reports third quarter 2012 earnings conference call.

  • At this time all participants are in a listen-only mode.

  • Later we will conduct a question-and-answer session.

  • Please note that this conference is being recorded.

  • I will now turn the call over to Ashley Smith.

  • You may begin.

  • Ashley Smith - VP, IR

  • Hey.

  • Thank you, Christine.

  • And good morning.

  • Welcome to our earnings call.

  • With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Gene Edwards, our Chief Development Officer; Kim Bowers, our Executive Vice President and General Counsel, and several other members of our senior 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 feel free to contact me after the call.

  • Before we begin, I would like to direct your attention to the forward-looking statements 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 we've described in our filings with the SEC.

  • Now I will turn the call over to Mike.

  • Mike Ciskowski - EVP & CFO

  • Thanks, Ashley, and thank you for joining us today.

  • As noted in the release we've reported third quarter 2012 earnings of $674 million or $1.21 per share.

  • This includes an after-tax non-cash asset impairment loss of $341 million or $0.62 per share and after-tax severance expense of $41 million $0.07 per share primarily related to the Aruba Refinery as described in the earnings release financial tables under notes D and E. Excluding these two items, third quarter earnings were $1.1 billion or $1.90 per share.

  • Operating income was $1.3 billion versus operating income of $2 billion in the third quarter of 2011.

  • Excluding the previously mentioned items, third-quarter 2012 operating income was $1.7 billion.

  • The decrease in operating income was mainly due to lower refining margins in the US Gulf Coast, West Coast and Mid-Continent regions.

  • A decline in Retail and Ethanol margins also contributed to the decrease in operating income.

  • These declines were somewhat offset by significantly higher refining margins in the North Atlantic region.

  • Our third quarter refining throughput margin was $3.12 per barrel, which is a slight decrease versus third quarter 2011 of $13.24 per barrel.

  • The decrease in refining throughput margin was mainly due to lower discounts on crude oils and feedstocks and lower margins for other products such as petrochemical feedstocks and propane.

  • However, we saw higher margins for gasoline and diesel in all of our regions.

  • And diesel had the highest margins among our major products.

  • Our third quarter 2012 refining throughput volume averaged 2.6 million barrels per day.

  • That was up 8,000 barrels per day from the third quarter of 2011.

  • The increase in throughput volumes was mainly due to the acquisitions of the Pembroke and Meraux refineries in 2011, which was nearly offset by the lack of throughput at Aruba, hurricane-related downtime and slowdowns at our St.

  • Charles, Memphis and Meraux refineries, and unplanned downtime at our Meraux refinery as a result of the crude unit fire in July.

  • The Meraux refinery restarted its crude unit in mid-October.

  • Excluding the Aruba severance expense, refining cash operating expenses in the third quarter of 2012 were $3.72 per barrel, which was higher than the second quarter of 2012 mainly due to higher energy costs and increased maintenance expense.

  • Operating expense though was lower than guidance due to lower than anticipated costs for catalyst than energy.

  • Our Retail business reported quarterly operating income of $41 million, which includes a $12 million non-cash asset impairment loss as described in note E to the financial tables.

  • Retail operating income was $17 million in the US and $24 million in Canada.

  • The rising crude price environment squeezed retail fuel margins in both regions.

  • Fuel volumes declined slightly compared to third quarter 2011 as weak gasoline demand impacted sales.

  • Our plan to separate our Retail business and unlock value for our shareholders is moving forward.

  • In October we submitted our request to the IRS for a Private Letter ruling on a tax efficient distribution of our Retail business to our shareholders.

  • Later this quarter we expect to file a Registration Statement with the SEC.

  • Given the timing of these events we expect to complete the Retail separation late in the first quarter or early second quarter of 2013.

  • Our Ethanol segment reported a $73 million operating loss in the quarter which was down $180 million from the third quarter of 2011 mainly due to much lower gross margins as high corn prices and excess Ethanol inventories squeezed the margins to very low levels.

  • As a result of the low margins, we reduced our ethanol production to average 2.4 million gallons per day in the third quarter of 2012, a decline at nearly 900,000 gallons per day compared to the third quarter of 2011.

  • In the third quarter general and administrative expenses, excluding corporate depreciation, were $174 million which was in line with our guidance.

  • Depreciation and amortization expense was $402 million and net interest expense was $70 million.

  • The effective tax rate in the third quarter was 46% but excluding the asset impairment losses and the Aruba severance expense, the tax rate was 35%.

  • Regarding cash flows in the third quarter, capital spending was $784 million which includes a $75 million of turnaround and catalyst expenditures.

  • We reduced our capital spending guidance for the full year 2012 to approximately $3.5 billion versus prior guidance of around $3.6 billion.

  • We expect 2013 capital spending to be $2.5 billion.

  • That includes approximately $200 million for our Retail segment.

  • Also in the third quarter we paid $97 million in cash dividends to our shareholders.

  • With respect to our balance sheet at the end of September total debt was $7 billion, cash was $2.5 billion and our debt-to-cap ratio net of cash was 20.6%.

  • At the end of the third quarter we also had nearly $5.7 billion of additional liquidity available.

  • Our key growth projects continue to move closer to start up.

  • This week we expect to begin commissioning activities at our Port Arthur Hydrocracker project and this unit should be operational in December.

  • The St.

  • Charles Hydrocracker project remains on schedule to be fully operational in the second quarter of 2013.

  • On the macro side, we believe that Valero and other US Gulf Coast refiners have several competitive advantages versus other Atlantic basin refiners, including low-cost to natural gas, increasing access to discounted domestic crude oil and larger more complex and reliable refineries.

  • These competitive advantages have enabled us to profitably take market share from less competitive Atlantic basin refiners.

  • This is exemplified by the high utilization rates in PADD 3 refiners and continued solid export demand for US Gulf Coast products.

  • Now I will turn it over to Ashley to cover the earnings models assumptions.

  • Ashley Smith - VP, IR

  • Okay.

  • Thanks, Mike.

  • For modeling our fourth quarter operations you should expect the refinery throughput volumes to fall within the following ranges.

  • The Gulf Coast at 1.45 million to 1.5 million barrels per day, Mid-Continent at 440,000 to 450,000 barrels per day, the West Coast at 275,000 to 285,000 barrels per day and North Atlantic at 320,000 to 330,000 barrels per day, which is lower than third quarter due to a plant-wide [turner] at the Pembroke Refinery during most of October.

  • Refining cash operating expenses in the fourth quarter are expected to be around $3.85 per barrel.

  • Regarding our Ethanol operations in the fourth quarter we expect total throughput volumes of 2.5 million gallons per day and operating expenses should average approximately $0.40 per gallon, which includes $0.05 per gallon for non-cash costs such as depreciation and amortization.

  • Also we expect G&A expense, excluding depreciation, to be around $190 million and net interest expense should be around $70 million.

  • Total depreciation and amortization expense in the fourth quarter should be around $405 million and our effective tax rate in the fourth quarter should be approximately 36%.

  • Okay, Christine, that concludes our opening remarks.

  • We will now open the call for questions.

  • Operator

  • Thank you.

  • (Operator Instructions)

  • Our first question is from Evan Calio of Morgan Stanley.

  • Please go ahead.

  • Unidentified Participant - Analyst

  • Hi.

  • This is [Manoff] for Evan today.

  • I have just a couple of quick questions.

  • One was on the West Coast refining margins.

  • They came in slightly below the indicated margins.

  • Just trying to understand what happened there?

  • Ashley Smith - VP, IR

  • Okay.

  • We really didn't have margin guidance.

  • So I'm not sure what to reconcile for you.

  • Maybe we should -- we could talk about it off-line with a little more clarity on what you want us to reconcile to?

  • Unidentified Participant - Analyst

  • I'm just trying to understand, because you had -- sequentially there was slightly lower, while the gasoline prices were higher in that region.

  • So I'm trying to understand what happened there?

  • Bill Klesse - Chairman, President and CEO

  • Yes.

  • Okay.

  • I guess one would be that we sell branded prices as well as unbranded, and you would be looking at the spot market prices.

  • So as some of the markets were moving, and a lot of that occurred in October, but it did occur some in September, that our average for our gasoline products would be less than the spot market, than what we actually saw.

  • Ashley Smith - VP, IR

  • That's a contributing factor.

  • Also some of our feedstock costs.

  • We've run a lot of EGO out there, even ANS -- some of those prices relative to benchmarks may not have kept up -- so margins were impacted there.

  • But there is no one key driver.

  • Unidentified Participant - Analyst

  • Okay.

  • Bill Klesse - Chairman, President and CEO

  • We would buy gas/oil somewhat on the 70/30 split.

  • So that would raise our gas/oil cost.

  • As Ashley points out.

  • Unidentified Participant - Analyst

  • One more quick question.

  • In the first quarter of next year you have five plants connecting the Permian Basin down to the Gulf Coast, whether it's Permian Express or reversal of Longhorn.

  • So how would your refineries benefit from that?

  • Gene Edwards - EVP & Chief Development Officer

  • Well these are WTI ---- this is Gene Edwards, these are WTI-type crudes, sweet crudes and those pipelines come into the Houston area, so we can run those crudes in our Houston refinery along with the Eagle Ford crude or any other crudes that --- domestic sweet crudes that are in that area.

  • Unidentified Participant - Analyst

  • Okay.

  • Gene Edwards - EVP & Chief Development Officer

  • We could also run some of them out in our Texas City refinery as well.

  • Unidentified Participant - Analyst

  • Thanks, guys.

  • Ashley Smith - VP, IR

  • Okay.

  • Operator

  • Thank you.

  • Our next question comes from Jeff Dietert of Simmons.

  • Please go ahead.

  • Jeff Dietert - Analyst

  • Good morning.

  • Hi.

  • You guys provided some capital spending guidance, 2012 a little bit lower, 2013 maybe a little bit higher than previously discussed.

  • Could you talk about opportunities for growth CapEx, and maybe the major buckets that you see opportunity, infrastructure, flexibility to use more light crudes, and anything else that you might see on the growth CapEx front?

  • Bill Klesse - Chairman, President and CEO

  • While Ashley's looking for some numbers, Jeff.

  • But the guidance that we've given you for 2013 has always been $2 billion to $2.5 billion.

  • And so as far as I'm concerned, we're still within our guidance.

  • We have also pointed out that Retail spending in that number is about $188 million.

  • I think we rounded to $200 million.

  • So as far as I'm concerned we are still within our guidance.

  • Now some, clearly, and I've said this, our St.

  • Charles project is what we've lost about two to three months from our original schedule.

  • So based on what I gave maybe on the last call we're on time with that, but from the original schedule we are behind.

  • So we have some carryover into 2013 from that project, and that's largely this $100 million reduction for this year sliding into next year.

  • But basically I consider us still within our range.

  • And Ashley has some numbers for you.

  • Ashley Smith - VP, IR

  • Yes, Jeff, so next year looks like we will spend between $950 million and $1 billion on strategic projects.

  • It's distributed across several areas, several segments but most of it's in refining and in those strategic buckets there's some crude expansions and some flexibility projects.

  • As Bill mentioned, McKee and Port Arthur, Houston, just small spending across several of those.

  • Looking at projects that might allow us to get some more throughput through those hydrocrackers, the new ones at St.

  • Charles and Port Arthur, plus Meraux.

  • And this -- other various logistics and Biodiesel and Retail and pipelines and terminals, and things like that.

  • Jeff Dietert - Analyst

  • All right, thank you.

  • Secondly, in shifting Aruba towards a terminal, what do you see profitability looking like as a terminal in 2013, and how does that compare to the cost of Aruba in 2012?

  • How do we think about year-on-year change?

  • Bill Klesse - Chairman, President and CEO

  • Well, we've lost over the last several quarters somewhere in the $8 million to $10 million a month in Aruba.

  • And this year we lost over the last year or two in the order of on average around $100 million, $120 million.

  • One year was higher than the other.

  • So we don't usually give that kind of info out, but we've had a loss in Aruba.

  • And we believe that a terminal operation will be a good project for us there.

  • We are still fixing some tanks, fixing the dock, things that we're doing and have been doing.

  • But we expect the business -- it will cash flow for us in '13.

  • With all of the volatility we see in markets, the forward curve, once it gets into Contango and certain products, there's just a lot of opportunity to store.

  • And Aruba has very deep water, you can pull a V right into the dock, so we think it's a good project.

  • Jeff Dietert - Analyst

  • Thanks for your comments.

  • Operator

  • Our next question is from Robert Kessler of TPH.

  • Please go ahead.

  • Robert Kessler - Analyst

  • Hi.

  • Good morning, everyone.

  • I had two questions for you.

  • One is with the near elimination of light crude imports in the Gulf Coast, it begs a question in my mind, and that is ultimately do you see the capability of loading some Gulf Coast located light crude on a ship and moving it up to Quebec City and ultimately processing it there?

  • I know it probably wouldn't work at today's spreads.

  • But what sort of logistics might be involved and what spread, let's say, between LLS and Brent, or whatever benchmark you think is appropriate -- might you need to make that happen?

  • And then the other question is just if you would remind me what your thoughts are on buybacks and when you might see a material program there?

  • Bill Klesse - Chairman, President and CEO

  • On the first question on Quebec, some crude has already moved from the Gulf Coast to Canada, some out of Corpus Christi as well.

  • That is actually where some of the economics work better.

  • Freight cost averages maybe $2.00 a barrel or a little less.

  • So it's all economic-driven compared -- as long as you have their license to export into Canada and some has already moved.

  • And this is something that Valero will do, too, as other companies are looking at.

  • We can run in Quebec somewhere in the -- 85% to 90% of our charge there could all be basic -- basically light sweet crude.

  • And today that is -- even though it's a Canadian refinery it runs imported oil, Algerian CPC, North Sea, West Africa, and it runs all those kind of crudes today.

  • So, for us as we look at it, as the crude continues to come to the Gulf Coast, and we are quite convinced that the original premise we had a year or so ago is actually going to happen.

  • There's going to be lots of light sweet crude on the US Gulf Coast.

  • It's going to be looking for a home.

  • Robert Kessler - Analyst

  • I think some people forget that refinery way up there might stand to benefit from this, and thanks for that information.

  • Can you tell me, do you guys have any kind of market analysis on what you think the eastern coast of Canada, the refineries on the eastern side of Canada, could ultimately take as far as Gulf Coast-based light crude?

  • Bill Klesse - Chairman, President and CEO

  • Well there's four refineries up there, and some run some medium sours as well, Irving.

  • But really you need to look that up.

  • We would have an opinion, but we know better what we can do.

  • And just to be totally -- so that you understand the whole situation, we expect to take lighter crude oil, syncrude and other crudes from the west as well, moving it into Montreal and then getting it up to the Quebec refineries.

  • So, the feedstock slate for our Quebec refinery is going to change.

  • Robert Kessler - Analyst

  • Understood.

  • Thank you.

  • And then buybacks?

  • Bill Klesse - Chairman, President and CEO

  • Well, I've said all along that we think our stock, and actually it's the whole refining industry, but us in particular we're undervalued when you are selling at four times EBITDA.

  • We have these projects coming on that I think separate us from the pack.

  • So that when you -- our two hydrocrackers by the second quarter of next year will be major contributors.

  • They are absolutely the right project for the right time.

  • And so we think our stock is undervalued.

  • But if I go to a ranking of, and this is, I believe, absolutely consistent with what we've said in the past, it's always safety and reliability first.

  • We're improving our reliability around the system and we continue to spend money to do that.

  • Investment grade rating is absolutely key.

  • We have adequate cash to fund this business.

  • And as Mike said in his notes, we ended the quarter with $2.5 billion of cash.

  • We have lots of liquidity, as he also said.

  • We are going to fund our projects through completion here.

  • The Diamond Green Diesel project spills over.

  • And frankly, we will expand both our hydrocrackers pretty much right out of the chute here as we get our permits.

  • We continue to look for excellent investment opportunities.

  • To be honest some of our shareholders want to see the cash and some of our shareholders want us to invest in good projects.

  • So we continue to look for that, but we match that up against the comment I started with that our shares are undervalued.

  • So then we get to returning our cash to the shareholder, we've raised our dividends several times.

  • And I've said that we want to have a yield that's among the highest in our peer group.

  • And we have purchased our stock, we didn't purchase any stock in the third quarter as we've got our Retail separation underway here, and we were building some liquidity.

  • But we bought -- last year we bought 17 million shares and this year we've already bought 6 million shares.

  • So we've actually demonstrated that as well.

  • And so I think that's pretty -- I think we've been very consistent as to what we're doing.

  • Robert Kessler - Analyst

  • Thanks for that.

  • Just a quick follow-up.

  • Anything that precludes you from buying back stock between now and the time of the retail spend?

  • Bill Klesse - Chairman, President and CEO

  • No, there is nothing that does.

  • Robert Kessler - Analyst

  • Got you.

  • Thank you.

  • Operator

  • Our next question is from Doug Leggate from Bank of America.

  • Please go ahead.

  • Doug Leggate - Analyst

  • Thanks.

  • Good morning, fellas.

  • I've got two or three quick ones hopefully.

  • We haven't really seen light/heavy differentials in quite a while.

  • We seem to be seeing them right now, I'm wondering if you can talk a little bit about what you are seeing in the market to cause that?

  • And on the same token if you look at your runs, it looks like you upped your heavy runs this quarter and also your light runs.

  • So a little bit -- maybe some color around how those two things are interacting?

  • And I've got a couple quick follow-ups, please.

  • Gene Edwards - EVP & Chief Development Officer

  • Okay, Doug, this is Gene again.

  • I think what's driving light/heavy -- resid has gotten a little bit weaker compared to where we had been.

  • So resid's running about $16 discount to Brent, so you are seeing all of the crudes follow that, including the Mayans, the heavy sours.

  • Probably more importantly the medium sours.

  • Those have been running in the $7 to $8 range discount to Brent over the last month or so, which is good.

  • And WTS is also cheaper.

  • So, you till all those in there, it's just giving us better discounts on medium and heavy sour crudes.

  • Doug Leggate - Analyst

  • So are meaningfully changing your slate, Gene, to adjust to that?

  • Gene Edwards - EVP & Chief Development Officer

  • Well, we're always optimizing.

  • We run economics every day, cargo by cargo, whether we -- sweets are cheap too.

  • LLS is trading about even to Brent.

  • Remember that Brent is before transportation, so LLS is a big discount to foreign sweet.

  • So we're always optimizing our slate every day because we have a lot of flexibility in the system.

  • So we're just, as I said we're taking advantage of it all.

  • Doug Leggate - Analyst

  • Great stuff.

  • So my follow-ups are really two strategic questions, and I'm going to group them together and see how best you can as much as you are able to answer them.

  • The first one is, I think, Bill, in the past you've talked backwards and forwards about whether California was actually a core region for you going forward, given the regulatory spending.

  • There was a little bit of chatter in the markets a few weeks back that maybe there was some movement in that regard.

  • I wonder if you could comment on that?

  • And in the same vein, Mike and I had the opportunity to talk a little bit about what was going on in the summertime over the MLPs that were being listed in the form of refining, mainly Northern Tier.

  • Maybe we've seen that thing wash out with a fairly substantial multiple uplift for refiner, which I think was a little different than it was early in the summer.

  • So I'm wondering how that may have changed your view around, for example, Ardmore, McKee, some of the high cash flowing assets, and whether that is something you might want to consider down the road?

  • I'll leave it at those two, please.

  • Thanks.

  • Bill Klesse - Chairman, President and CEO

  • Well, Doug, on California, I have said that we continue to look at our options.

  • We work for the shareholder, and we think that the regulatory environment in California is not constructive to the California economy, it's not constructive to the working person, and it is not constructive to our industry.

  • Whether it's AB32, or whatever regulations we are faced with, but in AB32 particularly, the academics and the extremists have hijacked the process.

  • And they've made -- they're coming up with regulations that are totally not workable.

  • So, we look at our options and we continue to look at our options, but on the other hand we do not comment on rumors.

  • On MLPs, our organization is really working on the Retail separation.

  • We would still consolidate -- see there is some financial theory here, in that we borrow -- our borrowing costs are very low, we are not in need of any cash.

  • And so there is a good discussion about this from the Company's perspective as obtaining funds at the lowest cost.

  • However, in acquisitions it's clear that the MLP is an excellent acquisition vehicle, the market clearly likes that approach, and we have some pipelines and terminals that we can contribute to an MLP.

  • So our strategy is to finish our Retail separation.

  • And then as I think Mike probably told you, and we've said in the past, that we are going to look at the MLP.

  • The third part of your question is on the refining, and clearly NTI has traded better here, because initially it did not trade that well.

  • But it is these type of assets, as you know and as the others on the call know, their high cash flow is in fact tied to the WTI LLS or Brent spread.

  • I mean refining is all about location today, and if you're in the right location your cash flows are huge.

  • But there is a forward curve, or a forward expectation, and so you get into a conversation of what you could actually realize doing that today.

  • We think that would not necessarily result in an advantage to our shareholders.

  • Doug Leggate - Analyst

  • That's very clear, Bill.

  • I appreciate the answer.

  • Could I push you a little bit on the pipelines and terminals, because obviously NuStar I guess has all the legacy stuff.

  • What is the appetite and what is the potential scale in terms of current EBITDA that you would associate with those pipelines and terminals?

  • Because I was under the impression you didn't have a whole heck of a lot left

  • Bill Klesse - Chairman, President and CEO

  • Well, we would have somewhere between $50 million and $100 million of EBITDA just dealing straight, like just taking terminals and pipelines.

  • And remember we're partners with Kinder Morgan on the Parkway Pipeline.

  • We have our big pipeline project in Canada, which is just about finished here, and getting ready to start up.

  • So, we have assets in our system, but also we have tankage and other things that are being dropped in MLPs as well.

  • So, we would have -- it would be a small MLP, but it would -- it wouldn't be any smaller I guess than a couple of the others out there.

  • And we would have the opportunity to drop other assets as we go through the future.

  • So, we'll look at it, we've said we were going to look at it, but our focus today is really on the Retail separation, because we do believe that adds significant shareholder value.

  • Doug Leggate - Analyst

  • Terrific, fellas.

  • Thanks for the answers.

  • Bill Klesse - Chairman, President and CEO

  • I might add, we don't think the stock -- our stock reflects that value.

  • Ashley Smith - VP, IR

  • Christine?

  • We are ready for another question.

  • Operator

  • The next question is from Paul Cheng of Barclays.

  • Please go ahead.

  • Paul Cheng - Analyst

  • Hey, guys.

  • Good morning.

  • A number of quick question.

  • Ashley, can you remind me the retail spend of your ethanol facility is going to be included or is going to stay with Valero?

  • Ashley Smith - VP, IR

  • Ethanol segment?

  • Paul Cheng - Analyst

  • Yes.

  • Bill Klesse - Chairman, President and CEO

  • Is going to stay with Valero.

  • Ashley Smith - VP, IR

  • That's not part of the planned asset --.

  • Bill Klesse - Chairman, President and CEO

  • The Retail spend in the United States -- the Retail separation in the United States is the Company-operated storage, it's 1,025, and it's the 775 stores, 250 of which we own, and the rest where we control the price, manage the price at the pump in Canada.

  • That is the business that we are separating, including Home Heat and Cardlock in Canada.

  • Paul Cheng - Analyst

  • Perfect.

  • Secondly, if I look at the number, next year CapEx is $2.5 billion, and I think Ashley said that strategic is about in the $950 million to $1 billion and $200 million is for retail.

  • So that means that the remaining sustaining capital is about $1.3 billion for the Refining and Ethanol together.

  • Is that a reasonable proxy as ongoing sustaining in capital or that next year is particular high or particularly low?

  • Bill Klesse - Chairman, President and CEO

  • I've given out in the past with our business, and I would say DD&A runs for us about $1.4 billion.

  • It's going to change a little bit with the hydrocrackers, obviously.

  • It will go up probably $100 million.

  • So, then we have Retail come out.

  • I think that sustaining capital is really in the $1.5 billion, $1.6 billion, and that's the number that I've given to people, $1.5 billion, $1.6 billion, $1.7 billion in all the past.

  • Next year, we are finishing some projects.

  • It might be a little lower next year.

  • Turnarounds, catalysts are $600 million a year for us.

  • So I think this $1.5 billion to $1.7 billion, the numbers we've given in the past are the right numbers.

  • Paul Cheng - Analyst

  • Bill, the $1.5 billion to $1.7 billion, is that including Retail, or not including Retail?

  • Bill Klesse - Chairman, President and CEO

  • Well, sustaining capital, it would include Retail in my conversation.

  • Paul Cheng - Analyst

  • So the Retail sustaining is probably $150 million to $200 million, right?

  • Bill Klesse - Chairman, President and CEO

  • It's very small for Retail as sustaining capital, it's very small.

  • So I think my range of this $1.5 billion to $1.7 billion is a good range for you guys to think of us as sustaining capital for the refining pipeline terminal business that we have.

  • Paul Cheng - Analyst

  • Very good.

  • Mike, on the North Atlantic -- on the sequential margin up about $5 from the second quarter.

  • If I look at the benchmark indicator, whether it's in Europe or in the Northeast market, does not go up by $5.

  • So the question is that, is there any one-off benefit in the North Atlantic we should take into consideration, or that you think is really they are running well and is more like a normal run rate that we can base on going forward?

  • Mike Ciskowski - EVP & CFO

  • Okay, in the North Atlantic, I think that marketing operations performed fairly well during this period, which would have given it a little bit of margin above that.

  • Paul Cheng - Analyst

  • Okay, I see.

  • On my own -- in the press release, you guy mention that you have unplanned downtime both relate to Isaac and the unplanned [rotation] in Meraux.

  • Do you have any kind of cost estimate and opportunity cost estimate we need to [deduce] downtime in the quarter?

  • Mike Ciskowski - EVP & CFO

  • Well, the lost revenue for Meraux, which some spilt into October, but was $53 million.

  • And then it took us about $16 million for the repair.

  • Paul Cheng - Analyst

  • $16 million?

  • Mike Ciskowski - EVP & CFO

  • $16 million for the repair.

  • Now, we did a lot of reliability work while the unit was down.

  • But the lost opportunity was 53 --?

  • Ashley Smith - VP, IR

  • $53 million for the crude and another $13 million just for the hurricane impacts.

  • Mike Ciskowski - EVP & CFO

  • So between the two, okay so it was $66 million between the two events just for Meraux.

  • Paul Cheng - Analyst

  • Just for Meraux.

  • How about the Isaac impact on the other facility?

  • Ashley Smith - VP, IR

  • St.

  • Charles was shut down, and it was about a $34 million impact on gross margin.

  • Bill Klesse - Chairman, President and CEO

  • From the hurricane.

  • Ashley Smith - VP, IR

  • Yes, from the hurricane.

  • Paul Cheng - Analyst

  • Okay, and can you guys share with us some maybe market data about the Retail in your own Retail network, that the gasolines same stores sales in October how's that look?

  • Also, that -- how is the export so far in October comparing to the third quarter?

  • Bill Klesse - Chairman, President and CEO

  • So on the retail store sales in October, how do they look compared to September?

  • Paul Cheng - Analyst

  • No, comparing to the year-ago October, on a same-store year-over-year.

  • Ashley Smith - VP, IR

  • We're running -- we're --.

  • Paul Cheng - Analyst

  • Running flat?

  • Ashley Smith - VP, IR

  • -- to last year.

  • Paul Cheng - Analyst

  • How about export?

  • Bill Klesse - Chairman, President and CEO

  • Export, back to the Refining group, exports right now are about half from the third quarter level for diesel.

  • And that -- in the third quarter exports were down as the [arb] was closed for part of the time.

  • On gasoline, they've been about -- they'll run in the 75,000 barrel a day range.

  • Paul Cheng - Analyst

  • Okay.

  • And for the hydrocracker, Bill, you had delay, as you say that for maybe two or three months.

  • Does that result in any change in your overall cost estimate or just pretty much still about the same?

  • Bill Klesse - Chairman, President and CEO

  • No, it has changed our cost estimate, and again these are numbers -- they are not changed, I think, from where I've seen -- saw you.

  • But at our Port Arthur, we still expect to underrun that project, but at St.

  • Charles we are overrunning the project, and so on total they're on budget, when you add them both together, very close to being on budget.

  • But clearly, the delay at St.

  • Charles is costing us additional money.

  • Now, all I say to you is for Valero, I know Exxon and these guys do big projects, for Valero these are huge projects for us, and our people are managing these pretty doggone well.

  • But we are just a few months behind.

  • Paul Cheng - Analyst

  • Two final question.

  • One, do you have any committed to the Enbridge line 9 reversal to ship barrel, so that you can take it from there, from Montreal up into Quebec City?

  • The second --- yes?

  • Bill Klesse - Chairman, President and CEO

  • Well, the answer is yes, we do, assuming they can get their permits to reverse the pipeline into Montreal.

  • And this was why I added that to the other question earlier.

  • But we would -- we have a commitment to ship on that line, along with Suncor.

  • Paul Cheng - Analyst

  • Bill, can you share with us then, how big is that commitment?

  • Bill Klesse - Chairman, President and CEO

  • Petro-Canada, sorry.

  • Paul Cheng - Analyst

  • Okay.

  • Final one, on the hydrocracker, with the dividend growth, the next dividend increase or reconsideration by the Board, do we need to wait until the hydrocracker, both of them, come on stream, or that even after Port Arthur will come on-stream, you will feel more confident about your cash flow, and will be able to re-look at your regular dividend?

  • Given I think a lot of your long-only accounts, perhaps that may be more in kind that [might] -- regular dividend and the share buyback?

  • Bill Klesse - Chairman, President and CEO

  • Right now on the dividend, management will have a recommendation either to hold it or stay the same, but it is a Board item, and we will go through our forecasts with our Board.

  • Our hydrocrackers, honest, they are not up and running yet.

  • Some of those are, as you properly stated, are significant.

  • And so this will be a Board discussion.

  • Paul Cheng - Analyst

  • Is that discussion going to be, say, have to wait until after both of them come on-stream, or even after one of them come on-stream, that we'll have that discussion already?

  • Bill Klesse - Chairman, President and CEO

  • Paul, I respect your question, and I understand what you are asking, but I'm going to answer you that you are not going to be satisfied.

  • And what I will say is, we as management will have a recommendation for our Board, and we will discuss it at the Board meeting.

  • We want a dividend that we can sustain, and we also want a dividend that's going to yield, as I said, among the highest among our peers.

  • And we'll look at that, as well as my other comment, where we think our stock is undervalued.

  • So I am just going to say to you that it's a Board item, and it will be discussed.

  • Paul Cheng - Analyst

  • Thank you.

  • Operator

  • Our next question is from Blake Fernandez of Howard Weil.

  • Please go ahead.

  • Blake Fernandez - Analyst

  • Good morning, folks, I had two questions for you.

  • One was on the Retail, if I understood correctly you were previously evaluating either a spend or a sale.

  • It sounds like, if I'm reading correctly, you've eliminated the sale option and now are just simply pursuing the spend, is that correct?

  • Bill Klesse - Chairman, President and CEO

  • That is not correct.

  • We are pursuing a separation, but our Board has only authorized us to do the analysis around this.

  • I know we used the words that things are moving forward, but we do not even have Board approval for a separation.

  • We have Board approval to look at this, and we all realize that there is a shareholder value accretion that we have spoken about.

  • But we are going through here to make sure that we maximize shareholder value, and at the same time treat the business and our people correctly as well.

  • Blake Fernandez - Analyst

  • Got it.

  • Okay.

  • And the second was on M&A.

  • I guess it's a two-fold question.

  • One, obviously Murphy seems to be a little bit more aggressive in exiting the R&M business, and it's always been, I guess, envisioned that Valero is a natural buyer of Milford Haven.

  • Just curious if you have any thoughts there?

  • And then secondly, just from a broader M&A standpoint, now that Texas City is off the market, Alliance has been removed, it seems like most of the major assets have been plucked off at this point.

  • I'm just curious, Valero, who -- you've been historically fairly active on the acquisition front; is it fair to think that we move away from that, and more just to a free cash flow generator?

  • Thanks.

  • Bill Klesse - Chairman, President and CEO

  • Well, there's a lot of issues there, Blake.

  • As far as specific assets, whether it's Murphy, Milford Haven, or other things that are in the market, we tend to look at these acquisitions, are they going to integrate with our system?

  • That's why we like the Meraux as it integrated with St.

  • Charles, and frankly, our other Gulf Coast plants.

  • We're of the mind in the US that demand is not going to grow certainly for gasoline, maybe there's some bounce if people get back to work, but long-term gasoline's not growing.

  • Diesel will have some growth, but it still hasn't recovered from the Great Recession, and it will be years before it does.

  • So whatever we tend to look at, we are looking at, in a way, the Atlantic Basin, and being able to be a stronger competitor in the export business.

  • So all the things that we look at, we want to be able to say at the end of the day that we've been able to integrate this, and actually are lowering the cost from the womb to the tomb.

  • So we continue to look, and at least our experience here would be that other assets will come to the market, because the refining industry is going to continue to consolidate in the United States and Western Europe.

  • There's just no doubt in my mind about that.

  • So we will continue to look, so I would not say that we are not an active player, but we are after things that make us more competitive as we have to deal in the export market.

  • Blake Fernandez - Analyst

  • Okay, thanks a lot, appreciate it.

  • Operator

  • Our next question is from Roger Read of Wells Fargo.

  • Roger Read - Analyst

  • Good morning.

  • Ashley Smith - VP, IR

  • Good morning, Roger.

  • Roger Read - Analyst

  • Just to follow-up a little bit on the export, and talk a little bit about global capacity you see on the horizon in '13.

  • If I understood correctly 75,000 barrels a day of gasoline in Q3, I didn't catch the distillate number, but what do you see is the capability to grow that in '13?

  • And then what are you going to be pushing against, in terms of identified global growth that you -- that may be pushing back, could impact margins, et cetera?

  • Bill Klesse - Chairman, President and CEO

  • Well, our exports in the third quarter were about 118 on diesel, just so you have it -- 118,000 barrels a day.

  • That was actually down from where we have been averaging, which is somewhere -- just on average, 175,000 barrels a day.

  • Now in -- our industry then has been exporting 1 million barrels a day of diesel, and somewhere in the 400,000 to 500,000 barrels -- 300,000 to 500,000 barrels a day of gasoline.

  • So Valero is somewhere in the range of 20% or so of the export business, in that range.

  • Now, there is capacity that comes into the market, refining capacity is being built.

  • Also, the world demand is going up.

  • We still expect for next year, because you were talking about '13, that the world will increase, we think, maybe 1 million to 1.2 million barrels a day of consumption, so it can absorb some of this additional capacity.

  • The US is the most economic place here; low natural gas costs, some discounts or at least parity with world prices for sweet crude, and then we're also --- have very fine operating people.

  • So we think we can compete in the business, and the business to grow -- grows.

  • It doesn't change my statement, though, that I've made in the past, and that is Western Europe is long-refining for sure, and without exports the United States is long-refining for sure.

  • So things will continue to rationalize in those markets going forward, but we think we can compete, one, as a company, and two, as an industry, and the markets continue to grow.

  • The third thing I would add to that conversation is, all the Brazilian refineries that you read so much about, they are late, and they are costing them a lot more.

  • One is getting done here, but the others are -- they're going to spend huge amount of money if they actually proceed with them.

  • The Venezuelan refineries are in disarray, and certainly the debate continues as to what Mexico does, and the facts are the Mexican economy is growing, and the Brazilian economy is growing.

  • So for companies like us located on the Gulf Coast, we think we can get into these markets and be doggone competitive.

  • And Europe continues to be systemically short diesel, on an annual basis.

  • Roger Read - Analyst

  • Okay, so as a follow-up to that, where do you think your export volumes can go next year?

  • Obviously, you have the hydrocrackers coming online, which are going to grow volumes for you.

  • Nobody I think believes the US is going to be in a robust growth mode next year, so I mean the exports are very much the outlet.

  • Where are you in terms of actual quayside capacity and ability to roll this out?

  • Bill Klesse - Chairman, President and CEO

  • That's a very fair question.

  • As a general statement, because [Multivo] will eventually be back as well, and so Europe will basically take somewhere around half of our diesel exports, and the rest of the diesel exports are going to the Caribbean and other places.

  • On gasoline, primarily Mexico, Colombia, Brazil, and you may see a cargo or two go over to West Africa.

  • Our Quebec refinery, just as a little side note, has been able to export diesel into New York Harbor.

  • So -- but clearly, it's the same places as they continue to grow.

  • Reaching out further, they would all be ad hoc.

  • But remember, the Gulf Coast market is an extremely liquid market.

  • Roger Read - Analyst

  • Absolutely.

  • Okay, and then my last question for you, on ethanol, obviously a really tough quarter.

  • Looking at the volumes you ran in the third quarter, and what you are indicating as reasonable volumes for the fourth quarter, what changes, if anything, versus the fairly significant loss we saw in the third quarter as we look at the fourth?

  • I mean, if volumes are going to be slightly higher, is that an indication that there is a little bit better margin story here than what we've been seeing?

  • Gene Edwards - EVP & Chief Development Officer

  • This is Gene again.

  • We got good margins in probably five of our plants.

  • We have two plants that are basically down, we're keeping the enzymes active, so we will start up a couple days a month on those, but there's two of them down and there's three plants that are cut back.

  • So we're running 2.4 million, 2.5 million gallons a day of capacity of about 3.6 million, so were running probably about -- right at two-thirds utilization.

  • So we see margins improve, we had the big loss in third quarter, we're about break-even on an EBITDA basis now at the plants, on a consolidated basis, but still not nearly as good as it was last year in the fourth quarter.

  • And inventories are still basic 17.3 million barrels, which up are about 1.5 million barrels from last year, so until we work that off, I don't see that you're going to get a big pop in margins, but we did draw about 220,000 barrels per day last week, so if we keep drawing at that pace, in a month or two we can clean some of this up.

  • So it just depends on demand.

  • Imports have been the big factor.

  • We had a lot of imports from Brazil recently; they've announced they're going to go from 20% of their gasoline pool to 25%, so I think you'll see some of these imports slow down a little bit, and plus they are at end of their harvest season for sugar, so I think that should diminish.

  • So I think the market will continue to clean itself up, it is just taking longer than it normally has.

  • Bill Klesse - Chairman, President and CEO

  • And for us, corn prices have stabilized; where they were moving around so much, they've kind of stabilized here at the $7.40 a bushel area.

  • Roger Read - Analyst

  • Okay.

  • And just a little follow-up on that, how quickly can you react within your ethanol plants to those market conditions changing?

  • Are you as agile as in refining it's literally a daily basis change, or -- any help along those lines on your flexibility?

  • Gene Edwards - EVP & Chief Development Officer

  • Yes, it's pretty quick, because you could -- if the margins were to improve next week, we can source more forward.

  • The plants that are running can obviously just start increasing right away, and then the other two plants that have been down, we have been doing these monthly refreshes to keep the enzymes active, so you can get them started up on short notice.

  • What we'll probably decide going into the winter, though, you know, when you get colder weather there, with the plants down that's a big problem because there's a lot water in the system, so we'll probably have to make a decision in the next month or so where we go into try to start-up during the winter, or just leave those two plants down throughout the rest of the winter.

  • We'll be watching the market closely, and we'll get some (technical difficulty) on that.

  • Roger Read - Analyst

  • Okay, thanks.

  • Operator

  • Our next question is from Rakesh Advani of Credit Suisse.

  • Please go ahead.

  • Ed Westlake - Analyst

  • Hi there, it's Ed Westlake, actually.

  • Thanks for my question this morning.

  • So you mentioned an interesting number, which is $2.00 to get crude from, I guess, the Gulf up to your Canadian facilities.

  • That seems low for Jones Act ship.

  • Is there something funny going on?

  • And maybe talk to how much crude you could move with the existing shipping that's available on that route?

  • And then I have a follow-on question, thanks.

  • Bill Klesse - Chairman, President and CEO

  • Well, Ed, I'm surprised with you on the Jones Act ship.

  • Canada is not the United States; it's still part of the British Commonwealth though.

  • Ed Westlake - Analyst

  • Right, indeed.

  • And my wife is Canadian, so I should know that.

  • So effectively, you could use just regular shipping, and that's why it's so cheap.

  • Would you have a number, if you had to ship crude up to -- do you think, if the industry had to ship crude up to the East Coast?

  • Bill Klesse - Chairman, President and CEO

  • Well, sure I'd be -- it's three times, very, very expensive -- go ahead, you got a number?

  • Gene Edwards - EVP & Chief Development Officer

  • Philips has announced -- it's been in the press that they're shipping barrels up to their Bayway refinery, and I think they got a deal for $4.50 a barrel.

  • Ed Westlake - Analyst

  • Right, that's helpful.

  • Thanks.

  • And then the follow-on question is around the advantage position you have even in the Gulf, I think around 900,000 barrels a day capacity in Texas.

  • Obviously with Eagle Ford and the Permian growing quickly, those refineries are kind of in the line of fire of that crude growth, whereas it probably costs a little bit more, and there may be some bottlenecks to get it crude over to the Louisiana refineries.

  • Do you have any sort of numbers for us that could help, in terms of quantifying how much a dollar a barrel advantage you'd have in West Texas?

  • Bill Klesse - Chairman, President and CEO

  • Well, I would say to you, Ed, and Gene and I will try to answer you, it's probably a buck -- once you put it on the ship, you've got to load -- you have all these costs to get it on ship.

  • So if you are sending sweet crude oil, let's say, from Corpus Christi to Meraux, I would say you'd have at least $1.00 at Corpus.

  • Gene Edwards - EVP & Chief Development Officer

  • Yes, I think it's more like $2.00.

  • Bill Klesse - Chairman, President and CEO

  • All right.

  • Gene Edwards - EVP & Chief Development Officer

  • And furthermore, Houston and Corpus are probably going to be at somewhat parity, and what's going to clear the Houston to St.

  • James market is going to be the Soho line, which is going to be -- their quoted tariff is $2 a barrel on that.

  • So I think you've got at least $1.00 a barrel to Houston, and probably $2.00 to Corpus Christi, kind of a minimum.

  • And then as you get up to McKee, obviously these numbers get even more discounted because of the -- you have to clear the seaway pipeline tariff, or the Longhorn reversal, or any type of tariffs to -- as an added advantage for McKee, and Ardmore.

  • Ed Westlake - Analyst

  • Yes, so generally you'd say that West Texas, about a $2.00 discount to LLS in Louisiana, and then maybe some additional advantages for being initial off-takers for some of the crude providers from the Permian and Eagle Ford?

  • Bill Klesse - Chairman, President and CEO

  • Now, we want to be clear on this.

  • Once you get it to the water, Gene was speaking.

  • If you have crude in West Texas, you have that tariff to get it to Houston or Cushing, and then Cushing to Houston, so then that tariff on these pipelines being built.

  • I thought we were answering your question as moving it on the Gulf Coast.

  • You have it already in Eagle Ford, at Corpus Christi, or you have a crude in Houston, and those were the numbers Gene was giving you.

  • If you're talking about Midland or Cushing, you have to incur that tariff as well.

  • Ed Westlake - Analyst

  • Yes.

  • No, I was just talking about moving stuff along the Gulf, so it's been very helpful.

  • Bill Klesse - Chairman, President and CEO

  • Okay.

  • Good enough, Ed.

  • Gene Edwards - EVP & Chief Development Officer

  • All of that -- we were talking with out crude traders about that.

  • Taking crude from Corpus to Louisiana by US flag is about -- at $2.00 a barrel is about the same as a foreign flag into Canada at $2.00 a barrel.

  • It's kind of amazing.

  • Ed Westlake - Analyst

  • Okay, thanks very much for your help, guys.

  • Bill Klesse - Chairman, President and CEO

  • All right, take care, Ed.

  • Operator

  • Our next question is from Doug Terreson of ISI.

  • Please go ahead.

  • Doug Terreson - Analyst

  • Congratulations on great results, everybody.

  • Bill Klesse - Chairman, President and CEO

  • Thanks, Doug

  • Doug Terreson - Analyst

  • Bill, the delivered cost advantage for US exporters is pretty clear, but just to clarify something you said a minute ago.

  • Did you say that your exports were a little weaker recently?

  • And if I heard that correctly, were there regional markets that were taking less product and why, or was it something else?

  • Bill Klesse - Chairman, President and CEO

  • In the third quarter, our distillate exports were down from the second and down from what we expect in the fourth, and that had to do with the arb, it had to do with inventories, there was just a lot of reasons.

  • Gene Edwards - EVP & Chief Development Officer

  • Also the hurricane outage on the Gulf Coast.

  • Bill Klesse - Chairman, President and CEO

  • And Gene's right, we had the hurricane on the Gulf Coast as well, and that is actually -- and what happened is the domestic markets were very strong, so the arb wasn't open.

  • Doug Terreson - Analyst

  • Sure.

  • Bill Klesse - Chairman, President and CEO

  • And, you know, we run on economics.

  • Doug Terreson - Analyst

  • High-quality problem.

  • And then also in California, you've been very consistent over the years with your views on the regulatory regime, and when you make your strategic assessment on your positions out there, is it the compliance cost for the new standards in '13 or '15 that represent the greatest concern, or is it something more broad?

  • And either way, is there an order of magnitude that you can give us, as it relates to cost structure, that would be likely related to the new regulations in California?

  • Bill Klesse - Chairman, President and CEO

  • Well, it's an excellent question.

  • Actually this AB32, so the cap and trade program that's starting now, and the low carbon fuels that tend to restrict which types of crudes you can run, these programs are all starting.

  • So the basic issue on low profitability in the West Coast has actually been crude sourcing, so do people have an advantaged crude source; and secondly, we still have over 10% unemployment in California.

  • California is two-thirds of the PADD, so when you start to look at this, demand is down, and there's too much refining capacity.

  • So you see this, Doug, and as the others on the call see, when there's an operating issue in California, the market quickly balances and margins improve, and then when everybody is back and running, we all tend to run down to cost -- to cash costs, and that is what -- as you would imagine, that is what happens.

  • But my concern, and the concern of Valero, and our management team here, is longer-term, the policies that are being discussed, the way they're talking about implementing them is bad, as I said earlier, for people, for business, and certainly for our industry.

  • So that's a longer-term concern.

  • The shorter-term is really just basic supply and demand, in a very sluggish economy in the West Coast.

  • Doug Terreson - Analyst

  • Okay.

  • Okay, those are all good answers, thanks a lot.

  • Operator

  • Our next question is from Faisel Khan of Citigroup.

  • Please go ahead.

  • Faisel Khan - Analyst

  • Thanks, good morning.

  • Just a quick question on the Eastern -- the Northeast market.

  • We saw pretty wide basis differentials in the Northeast this last quarter, and just trying to figure out exactly how much product you guys are pushing into the Northeast?

  • You talked about the arb closing, but I wonder if you could elaborate a little more in terms of how much gasoline you were pushing into the Northeast to take advantage of that wide basis differential that we saw?

  • Bill Klesse - Chairman, President and CEO

  • I don't think we would have that number.

  • Remember, we tend to sell in the Gulf Coast markets and into the Southeast.

  • And then Canada services its local market, and has been able -- as I said a few minutes ago, put some barrels into New York Harbor, but we are not per se pushing anything domestically into the East Coast.

  • Now from Pembroke, we export to the US East Coast, and I don't think I know that number.

  • Gene Edwards - EVP & Chief Development Officer

  • The only thing I'd add, we do sell to other people that ship on the Colonial pipeline, and they may be taking our barrels to the East Coast, but it's after we've already relinquished control.

  • Faisel Khan - Analyst

  • Okay, so you're selling the barrels at the Gulf Coast, and somebody else is moving those barrels farther north, and taking advantage of that differential to some degree?

  • Bill Klesse - Chairman, President and CEO

  • They have pipeline -- stakes at the pipeline, so I guess that's right.

  • Now we would've gotten advantage of it for Pembroke.

  • Faisel Khan - Analyst

  • Okay, understood.

  • Bill Klesse - Chairman, President and CEO

  • All right?

  • Faisel Khan - Analyst

  • Thank you.

  • Operator

  • Our next question is from Paul Sankey of Deutsche Bank.

  • Please go ahead.

  • Paul Sankey - Analyst

  • Hi, everyone.

  • Apologies for being a little bit out of the loop here, I'm phoning from downtown Manhattan.

  • Bill, on the hydrocrackers, the -- when will be the first quarter for each hydrocracker of complete uptime, if you want -- when we do now expect them to be running at full operations?

  • Bill Klesse - Chairman, President and CEO

  • Port Arthur, full quarter would be the first quarter of '13.

  • Paul Sankey - Analyst

  • So that would be a full quarter?

  • Bill Klesse - Chairman, President and CEO

  • Full quarter.

  • We expect to be up in December.

  • And at St.

  • Charles, to answer your question, the first full quarter might be the third quarter, but we expect to be up in April.

  • Okay?

  • But I'm answering your question.

  • Paul Sankey - Analyst

  • Right --

  • Bill Klesse - Chairman, President and CEO

  • Full quarter, it will be the third quarter, St.

  • Charles.

  • Paul Sankey - Analyst

  • Right, and -- sorry.

  • Bill Klesse - Chairman, President and CEO

  • Now if things go a little better, we could have the second quarter, but as I said, and I don't know when you joined the call, these are very large projects for us, and we're getting them done, and we're getting them done safely.

  • Paul Sankey - Analyst

  • Yes.

  • And you've been pretty clear with the guidance on what they will make, based on some fairly conservative assumptions.

  • Could you just remind what those would if the guidance still remains the same, what your expectation for let's say the quarter or your annual earnings will be for each unit, for each project?

  • And then if you could also roll that forward if possible into what they would be making in the current environment, that would be great.

  • Bill Klesse - Chairman, President and CEO

  • Ashley may have some numbers, but we typically have been giving you guides, we give you all the assumptions in our appendix of our presentations, but it's about $1 billion worth of EBITDA.

  • And we give you all of the assumptions, and you can see it -- what, we have a case I think that was $1.2 billion, we had another one, and I don't know what it would be today, but it's $1 billion of EBITDA, and we think they're going to contribute over $1.00 a share to our earnings.

  • Remember, it's natural gas to hydrogen, to distillates, primarily, and we have a good distillate crack as well.

  • Paul Sankey - Analyst

  • So obviously, the main thing is just to get them running.

  • Again, I --

  • Bill Klesse - Chairman, President and CEO

  • On that, we all agree, but we're going to do it in a very orderly manner here.

  • Paul Sankey - Analyst

  • Surely.

  • Forgive me, you increased your CapEx guidance for next year?

  • I know that's a bit of a Mickey Mouse question, but could you just confirm what went on with CapEx numbers?

  • I don't have full access to information here.

  • Bill Klesse - Chairman, President and CEO

  • Paul, it -- my opinion is, and I got the question earlier, we did not increase our guidance.

  • I've said all along $2 billion to $2.5 billion.

  • Paul Sankey - Analyst

  • Right.

  • Bill Klesse - Chairman, President and CEO

  • All we're doing here is saying we're at $2.5 billion.

  • In that $2.5 billion is $188 million that has to do with Retail.

  • Assuming that we proceed with the separation of Retail, and Mike -- we are saying if that all happens, it's a second quarter event -- late first quarter, early second quarter, then that amount of the capital would come down prorata here for spending.

  • Paul Sankey - Analyst

  • Then you've kicked -- I was listening to the call, so you've kicked around some numbers for what we could assume -- I know it's early, but for 2014, assuming that you are going to basically pursue a strategy now more oriented towards capital limitation, and more towards cash return to shareholders?

  • Bill Klesse - Chairman, President and CEO

  • Well, I would say that in 2013, we have given you the guidance, and it's been consistent with what we've been saying here for the last six months.

  • We have said that we want to have a dividend yield that is among the highest with our peer group, but I'm not giving any guidance for 2014.

  • Paul Sankey - Analyst

  • Okay.

  • Just an observation, this Sandy I think is going to have a pretty significant demand impact.

  • If you can imagine, there is no traffic lights right now on Manhattan, which obviously conjures up a nightmarish image, but at the same time there's so few cars around that it's actually more or less safe to drive.

  • But I guess, again, you've made some observations on your best guess of what the impact will be, right?

  • Bill Klesse - Chairman, President and CEO

  • Well, I don't think we would know any more than you.

  • You are very astute.

  • Obviously, the refineries either shut down or reduce significantly.

  • But the facts are, demand is going to be way off as well, and so I don't think we can -- we would have any better insight at this point than you do.

  • Obviously, demand is off, as well as the refineries.

  • I will say this, at least reading some of the commentary, and this is good for people and everything, that some of the refineries did not incur any damage.

  • Paul Sankey - Analyst

  • Yes, I mean what I would think is that because the -- PADD 1 is essentially import-dependent from other places, that the demand impact is more important than the supply impact, which doesn't seem that bad.

  • Bill Klesse - Chairman, President and CEO

  • That's correct.

  • Paul Sankey - Analyst

  • Thanks for taking the question, guys, thank you.

  • Ashley Smith - VP, IR

  • Sure.

  • Bill Klesse - Chairman, President and CEO

  • And Paul reminds me, for all of you on the call here, with this Hurricane Sandy, we thank you all for calling in, and we hope you didn't incur any damage, or your loved ones or families.

  • We hope everything is okay, as you get your power back and everything else that goes with these.

  • Operator

  • Our next question is from Chi Chow of Macquarie Capital.

  • Please go ahead.

  • Chi Chow - Analyst

  • Great, thank you.

  • Back on the Retail separation, Bill, in the event of a spinoff to shareholders, does Valero intend to retain any interested that new Retail entity?

  • Bill Klesse - Chairman, President and CEO

  • We are working all options, as you would expect us to.

  • If we did, it would be in the financing vein, but we are today looking at cases of complete separation.

  • But we have financing options.

  • Chi Chow - Analyst

  • Okay.

  • I guess there's some chatter from the credit agencies, when you made the announcement on possible changes to the ratings for Valero, with the separation of Retail; are you concerned about that at all?

  • Have you had further discussions with the agencies?

  • Can you talk a little bit about that?

  • Bill Klesse - Chairman, President and CEO

  • Sure.

  • Yes, one of the agencies did have some concern, and as we get our case solidified here, we'll go in and visit with them, and show them our numbers.

  • And we ended the quarter with $2.5 billion of cash, and so I think we are very strong financially.

  • Our that net debt to cap is 20%.

  • But we're going to go in there, and we'll show them our numbers, and we will have the discussion that you would expect us to have.

  • Chi Chow - Analyst

  • Okay.

  • In the event of any changes, does that change your position on buybacks going forward?

  • Bill Klesse - Chairman, President and CEO

  • Well, I don't know the answer to the first question, so -- but we think our stock is undervalued.

  • But I've also consistently, and Mike has said this as well, and Ashley, we believe with our size and the way we deal with our suppliers, that having an investment-grade debt rating is extremely important to our business.

  • Chi Chow - Analyst

  • All right, okay, thanks for that.

  • And then on your comments on the growth CapEx, you mentioned you've got some projects that are looking at increasing crude throughput capacity.

  • Do you have any details on the specific plans and incremental capacities you are contemplating?

  • Bill Klesse - Chairman, President and CEO

  • No, but as you would -- these would only be in situations where we are out of balance with feedstocks, so that we -- for instance, at Corpus Christi, when you look at our capacity relative to -- our conversion capacity relative to our crude capacity, it is out of balance.

  • And yet now we're in a world where there is a lot more crude oil production coming at us locally that's advantaged; instead of buying imported feedstocks, we need to be looking at generating our own feedstocks.

  • So we have quite a study going on, for instance, at Corpus Christi and our Houston refinery, where at the Houston refinery we have a very large cap cracker, and yet we don't have a lot of crude capacity.

  • So these are the things that tie to our whole strategy statement that I spoke about earlier, where we look at things that continue to, in essence, lower our overall cost to produce from the womb to the tomb, and those are the kind of things we're looking at.

  • Now at McKee, we talked about it for about two years, we're getting closer to getting some of these permits, but we've said we wanted to expand McKee, and that's been out there, I think you guys are tired of hearing me talk about it, but as soon as we have -- we have broken the project into two pieces.

  • There is an energy project, but there is a crude expansion piece, and we do not have the permit for the crude expansion piece, it's turned into perpetuity.

  • Chi Chow - Analyst

  • Yes, that does make a lot of sense.

  • Okay.

  • Thanks for the comments, Bill.

  • Ashley Smith - VP, IR

  • Christine, we are ready for another question.

  • Operator

  • Our next question is from Harry Mateer of Barclays.

  • Please go ahead.

  • Harry Mateer - Analyst

  • Hi, guys.

  • It sounds like you think your financial leverage is at an appropriate level, so do you see scope for further debt reduction?

  • And I guess related to that, how should we be thinking about -- I guess it's $480 million of maturities in the first half of next year?

  • Is that -- are you thinking that's a use of cash, or more likely to be refinanced?

  • Bill Klesse - Chairman, President and CEO

  • No, we -- our plan today would be to take out the $480 million.

  • Mike, $180 million is in January?

  • Mike Ciskowski - EVP & CFO

  • Right.

  • $300 million in June.

  • Bill Klesse - Chairman, President and CEO

  • $300 million in June/July, and our plan today is to take it out.

  • That will take our debt down -- our long-term debt down to $6.5 billion.

  • And yes, we will be very strong financially, but that is our plan for that specific item.

  • Then you asked general debt, we do not have any other debt that we find economic to call or to redeem, and then in 2014 we only have $200 million of debt that is due.

  • So in our particular case, we do not have debt that we can go out and retire economically.

  • We do $480 million, and '14 we do the $200 million, but that is where we are.

  • Harry Mateer - Analyst

  • Got it.

  • Thanks very much.

  • Operator

  • Our next question is a follow-up from Doug Leggate of Bank of America.

  • Please go ahead.

  • Doug Leggate - Analyst

  • Sorry guys for the follow-up.

  • It's a very quick one, Bill.

  • I wanted to come back to AB32, I know it's a bit of a thorn in your side, but in the event that you have to incur meaningful capital expenditure, at what point would you have to start implementing those projects?

  • In other words, how early before 2020 does this actually become an issue for spending?

  • If you could quantify it, that would be really appreciated.

  • Bill Klesse - Chairman, President and CEO

  • Okay, I'm going to answer you Doug that -- we are all whispering here.

  • There is no capital per se.

  • Now, part of the regulation is one-third of your power cost is going to come from renewables, and -- in 2020.

  • And our costs in California today for power is $0.12 per kilowatt, and that is like three times the cost at McKee.

  • And as you go to this renewables, and this would be at Wilmington, so LA, as you go toward this direction, our power costs will increase more because renewables are not economic.

  • And so we have some options to generate our own power, and are looking at that project.

  • But as a philosophy, right now Valero is very reluctant to spend any capital in California.

  • The other piece of this, to give you the whole nine yards, we generate hydrogen at our Benecia refinery, and the facts are we could build another hydrogen plant there, that would be $200 million to $300 million, and would reduce our carbon footprint.

  • But again, I would say those are out in the future here, because quite frankly these rules aren't even set yet, and at least some people in California at least -- are now starting to talk about the financial impact this is going to have in the state on everybody.

  • So I think some of it remains to be seen.

  • But generally speaking, there are no capital -- there are expenditures, if you have to start paying for tailpipe carbon, and certainly our stationary source.

  • And I don't mind saying, I think the last number we have, our California stationary source is like 3.7 million metric tons a year, so you can start figuring out those kind of numbers as well.

  • And all it's going to do is we're going to pass it through.

  • Doug Leggate - Analyst

  • Got it.

  • That's really helpful, Bill, thanks.

  • Bill Klesse - Chairman, President and CEO

  • Yes.

  • Operator

  • We have no further questions at this time, so I will now turn the call back over to Ashley Smith.

  • Bill Klesse - Chairman, President and CEO

  • So let me just say to everybody, because we know that a lot of you on the East Coast had issues, so thank you for making an effort to join our call, and as I said earlier, we hope you have not incurred too much damage to your home, or any of your friends or relatives.

  • Ashley Smith - VP, IR

  • Yes, thanks, Bill.

  • Yes, we wish all you guys in the Northeast just a safe and speedy recovery back to your normal situation, and thank you for listening to the call.

  • If you have any questions or follow-up, just call the IR Department.

  • Thank you very much.

  • Operator

  • Thank you, ladies and gentlemen.

  • This concludes today's conference.

  • Thank you for participating.

  • You may now disconnect.