Valero Energy Corporation (VLO)

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Valero Energy (VLO)

Q3 2010 Earnings Call

October 26, 2010 11:00 am ET

Executives

Joseph Gorder - Executive Vice President of Marketing & Supply

Michael Ciskowski - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Richard Marcogliese - Chief Operating Officer and Executive Vice President

Kimberly Bowers - Executive Vice President and General Counsel

William Klesse - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Ashley Smith - Vice President of Investor Relations

Analysts

Edward Westlake - Crédit Suisse AG

Jeffrey Dietert - Simmons & Company

Douglas Terreson - ISI Group Inc.

Jacques Rousseau - RBC Capital Markets Corporation

Evan Calio - Morgan Stanley

Mark Gilman - The Benchmark Company, LLC

Chi Chow - Tristone Capital

Paul Cheng

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Good morning, my name is Brandis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valero Energy Report Third Quarter 2010 Earnings Conference Call. [Operator Instructions] Mr. Ashley Smith, sir, you may begin.

Ashley Smith

Thank you, Brandis. Good morning, and welcome to Valero Energy Corporation's Third Quarter 2010 Earnings Conference Call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Rich Marcogliese, our COO; Gene Edwards, our Executive Vice President of Corporate Development and Strategic Planning; Joe Gorder, our Executive Vice President of Marketing and Supply; and Kim Bowers, our Executive Vice President and General Counsel.

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

Before we get started, I would like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company'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 described in our filings with the SEC.

Now I'll turn the call over to Mike.

Michael Ciskowski

Thanks, Ashley, and thank you for joining us today. As noted in the release, we reported a third quarter 2010 income from continuing operations of $292 million or $0.51 per share.

Third quarter 2010 operating income was $571 million versus an operating loss of $238 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 feedstocks, combined with higher throughput volumes compared to the third quarter of 2009.

Diesel margins improved significantly versus last year. If you look at the benchmark, 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 discounts to 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 increased from 7.4% of WTI in the third quarter of last year to 11.1% of 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 time of year. For example, the Gulf Coast ULSD margin versus WTI have increased from $5.83 per barrel in October 2009 to $12.91 per barrel in October of this year or 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 are which 8% higher than October 2009 levels.

Our third quarter 2010 refinery throughput volume averaged at 2.4 million barrels a 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 throughput at many of our refineries as a result of the better margin environment.

Refinery cash operating expenses in the third quarter of 2010 were $3.76 per barrel, which is favorably below our guidance. Cash operating expenses were higher then in the second quarter, primarily due to extra maintenance expense at Aruba and the Benicia. If you exclude the $35 million in extra expense for maintenance at Aruba in the third quarter, our systemwide cash operating expenses were only $3.60 per barrel, and 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 pretax cost reduction through numerous initiatives and great execution by our employees. We are on pace to reduce pretax cost by a total of $185 million in 2010, and our goal for 2011 is an additional $100 million in pretax 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 benchmark 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% in the industry. We are proud that our Refining portfolio has achieved first quartile performance in 2010 in two categories: nonenergy cash operating expenses and personnel. Although we are second quartile in the categories of reliability, maintenance expense and energy efficiency, we are making consistent progress towards first quartile performance.

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