Valero Energy Corporation (VLO)

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Valero Energy (VLO)

Q3 2012 Earnings Call

October 30, 2012 11:00 am ET

Executives

Ashley M. Smith - Vice President of Investor Relations

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

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

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

Analysts

Manav Gupta - Morgan Stanley, Research Division

Jeffrey A. Dietert - Simmons & Company International, Research Division

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Kristin Button - Moody's Corporation, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Blake Fernandez - Howard Weil Incorporated, Research Division

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Douglas Terreson - ISI Group Inc., Research Division

Faisel Khan - Citigroup Inc, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Chi Chow - Macquarie Research

Harry Mateer - Barclays Capital, Research Division

Presentation

Operator

Welcome to the Valero Energy Corporation Reports Third Quarter 2012 Earnings Conference Call. My name is Christine, and I'll be your operator for today's call. [Operator Instructions] 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 M. Smith

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 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 S. Ciskowski

Thanks, Ashley, and thank you for joining us today. As noted in the release, we reported third quarter 2012 earnings of $674 million or $1.21 per share. This includes an after-tax noncash asset impairment loss of $341 million or $0.62 per share and after-tax severance expense of $41 million or $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 2 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 U.S. 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 cost for catalysts than energy.

Our retail business reported quarterly operating income of $41 million, which includes a $12 million noncash asset impairment loss, as described in Note E to the financial tables. Retail operating income was $17 million in the U.S. 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 of nearly 900,000 gallons per day compared to the third quarter of 2011.

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