Valero Energy Corporation (VLO)

VLO 
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Valero Energy Corp. (VLO)

Q3 2009 Earnings Call

October 27, 2009 11:00 am ET

Executives

Ashley Smith – Vice President Investor Relations

Mike Ciskowski – Executive Vice President and Chief Financial Officer

Rich Marcogliese – Executive Vice President and Chief Operating Officer

Bill Klesse – Chairman, President and Chief Executive Officer

Gene Edwards – Executive Vice President, Corporate Development and Strategic Planning

Analysts

Douglas Terreson – ISI Group

Mark Flannery – Credit Suisse

Roger Read – Natixis Bleichroeder

Evan Calio – Morgan Stanley

Neil McMahon – Sanford Bernstein

Jeff Dietert – Simmons & Company International

Mark Gilman – The Benchmark Company

Paul Cheng – Barclays Capital

Blake Fernandez – Howard Weil

Faisel Khan – Citigroup

Paul Sankey – Deutsche Bank Securities

Presentation

Operator

At this time I would like to welcome everyone to the Valero Energy third quarter earnings 2009 conference call. (Operator Instructions). Mr. Smith, you may begin your conference.

Ashley Smith

Good morning and welcome to Valero Energy Corporation's third quarter 2009 earnings conference call. With me today are Bill Klesse, our Chairman and CEO, Mike Ciskowski, our CFO, and other members of our executive management team.

If you have not received the earnings release and would like a copy, you can find one on our Web site at valero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments. If you have any questions after reviewing these tables, please feel free to contact me after the call.

Before we get started, I would like to direct your attention to the forward-looking statement disclaimers 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 law. There are many factors that could cause actual results to differ from our expectations, including those we've described in our SEC filings.

Now, I'll turn the call over to Mike.

Mike Ciskowski

Thanks, Ashley, and thank you for joining us today. As noted in the release we reported a third quarter 2009 net loss of $219 million or $0.39 per share, before the asset impairment pre-tax loss of $417 million. Including the asset impairment loss, our GAAP result for the third quarter was a net loss of $489 million or $0.87 per share.

The asset impairment loss related mainly to the permanent shutdown of the gas supplier complex at our Delaware City refinery which was part of an effort to simplify the refinery's operations, make it more cost efficient and improve its reliability.

The third quarter 2009 operating loss was $579 million versus $1.8 billion of operating income in the third quarter of 2008. Excluding the asset impairment loss from the third quarter of 2009, the operating loss was $162 million, which compares to operating income of $1.6 billion in the third quarter of 2008, excluding the $305 million gain on the sale of the Krotz Springs Refinery and $43 million of asset impairment losses.

The key drivers of the decline in operating income were lower margins on diesel and jet fuel and smaller discounts on our sour crude oil and other feedstocks. For example, looking at the benchmark Gulf Coast margins versus WTI, ultra low sulfur diesel margins decreased to 71% year-over-year. Comparing the same periods, Maya discounts to WTI decreased 56%.

Our third quarter refinery through-put volume averaged to 2.4 million barrels per day, which was in the range of our guidance, but 208,000 barrels per day below the third quarter of 2008. This decrease in volume was mainly due to lower utilization rates across our refinery system and the planned shutdown of the Aruba refinery throughout the third quarter.

With respect to our reported operating costs, I should mentioned that as described in note four to the earnings tables, the asset impairment loss amounts for all periods have been excluded from operating costs in determining operating costs per barrel resulting in an adjustment in the operating cost per barrel previously reported. This should help clarify inter-period comparisons of our operating results.

Refinery cash operating expenses in the third quarter of 2009 were $3.94 per barrel or $0.84 per barrel lower than our third quarter 2008 results due mostly to lower energy costs. But our focus on other costs has also been successful.

Comparing the first nine months of 2008 versus 2009, our refinery cash operating expenses were down more than $700 million. As previously mentioned, much of this was due to lower energy and natural gas prices, but over $200 million was due to our ongoing efforts to reduce costs.

Looking at our other business segments, I want to highlight that retail had an outstanding quarter with the highest ever operating income in a third quarter, at $111 million just beating the $107 million earned in the third quarter of 2008.

This was due mainly to very good performance in both the U.S. and Canada and lower selling expenses. Retail also set a record for the highest earnings for the first nine months of the year, with $232 million of operating income.

Our ethanol segment also had an excellent third quarter, with $49 million of operating income, which is more than double the $22 million reported in the second quarter of the year. The strong performance was due to all seven plants running nearly to capacity and capturing very good margins. And October margins have continued to be favorable.

General and administrative expenses, excluding corporate depreciation were $167 million in the third quarter. The increases of $44 million versus the second quarter and $32 million versus our guidance were primarily due to a $40 million increase in legal reserves.

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