Valero Energy Corporation (VLO)

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Valero Energy (VLO)

Q1 2011 Earnings Call

April 26, 2011 11:00 am ET


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

Joseph Gorder - Chief Commercial Officer and Executive Vice President of Marketing & Supply

S. Edwards - Chief Development Officer and Executive Vice President of Corporate Development & Strategic Planning

Kimberly Bowers - Executive Vice President and General Counsel

Lane Riggs - Senior Vice President of Refining Operations

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

Ashley Smith - Vice President of Investor Relations


Edward Westlake - Crédit Suisse AG

Jeffrey Dietert - Simmons & Company

Jacques Rousseau - RBC Capital Markets, LLC

Mark Gilman - The Benchmark Company, LLC

Paul Cheng

Faisel Khan - Citigroup Inc

Sam Margolin - Dahlman Rose & Company, LLC

Jeffrey Dietert - Simmons & Company International

Douglas Leggate - BofA Merrill Lynch

Doug Terreson - ISI Group Inc.

Ann Kohler - CRT Capital Group LLC

Chi Chow - Macquarie Research

Blake Fernandez - Howard Weil Incorporated



Welcome to the Valero Energy Corporation First Quarter 2011 Earnings Release Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Ashley Smith, Vice President, Investor Relations. Mr. Smith, you may begin.

Ashley Smith

Okay, thank you, John. And good morning and welcome to Valero Energy Corporation's First Quarter 2011 Earnings Conference Call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO, Gene Edwards, our Chief Development Officer, Joe Gorder, our Chief Commercial Officer; Kim Bowers, our Executive Vice President and General Counsel; and Jean Bernier, our Executive Vice President for Corporate Communications, Information Services and Supply Chain Management.

If you have not received the earnings release and would like a copy, you can find 1 on our website at Also attached 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 first quarter 2011 income from continuing operations of $104 million or $0.18 per share. This number includes an after-tax loss of $352 million or $0.61 per share on derivative contracts related to forward sales of refined products. These contracts were closed and realized in the first quarter of 2011.

Excluding that item, our first quarter earnings would have been $0.79 per share.

I should note that the loss from discontinued operations shown in the financial tables relates to the Delaware City refinery site and the Paulsboro refinery which were sold in 2010.

As reported, first quarter 2011 operating income was $244 million, excluding the $542 million pretax loss related to the forward sales.

First quarter 2011 operating income was $786 million versus operating income of $4 million in the first quarter of 2010.

Since the loss on the forward sales was reported in cost of sales, our throughput margins were reduced by $2.86 per barrel across our system. Excluding this item, first quarter throughput margins were $9.91 per barrel, which is an increase of $3.93 per barrel over the first quarter 2010 margins and the highest first quarter margin since 2007.

The increase in throughput margins was due to higher diesel and jet fuel margins plus wider discounts for heavy-sour crudes on the Gulf Coast and light-sweet crude in the Mid-Continent.

I want to highlight that on Page 5 of the earnings release tables, we are showing market prices in terms of Louisiana light-sweet crude oils or LLS. We think LLS is a better indicator of prices for light-sweet crude oils that are waterborne and can move efficiently to key refining markets, especially on the U.S. Gulf Coast. This became important in the first quarter when WTI began to trade significantly below other light-sweet crude oils, such as LLS and Brent, to significant growth in production and also inventories of crude oils at Cushing.

1 of the key drivers of our year-over-year gain in throughput margins was in diesel margins. For example, Gulf Coast ULSD margin per barrel versus LLS increased $6.76 or 99% from $6.83 in the first quarter of 2010 to $13.59 in the first quarter of 2011.

Looking at the Gulf Coast gasoline versus LLS, margins per barrel fell from $6.46 in the first quarter of '10 to $3.82 in the first quarter of '11. However, in the second quarter, gasoline margins have rebounded to an April average of around $8 per barrel or $4 higher than the first quarter.

The other key driver for a margin gain over last year was crude oil discounts. The Maya heavy-sour crude oil discounts versus LLS increased $6.11 from $9.57 in the first quarter of '10 to $15.68 per barrel in the first quarter of '11.

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