Valero Energy Corporation Q4 2008 Earnings Call Transcript

| About: Valero Energy (VLO)

Valero Energy Corporation (NYSE:VLO)

Q4 2008 Earnings Call

January 27, 2009, 11:00 am ET

Executives

Ashley Smith - Executive Director of Investor Relation

Mike Ciskowski - EVP and CFO

Bill Klesse - CEO

Rich Marcogliese - EVP and COO

Gene Edwards - EVP, Corporate Development and Strategic Planning

Joe Gorder - EVP, Marketing and Supply

Analysts

Mark Flannery - Credit Suisse

Jeff Dietert - Simmons & Co.

Roger Read - Natixis Bleichroeder

Mark Gilman - Benchmark Company

Chi Chow - Tristone Capital

Harry Mateer - Barclays Capital

Blake Fernandez - Howard Weil

Paul Cheng - Barclays Capital

Operator

(Operator Instructions) Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Valero Energy fourth quarter 2008 conference call. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Smith, you may begin your conference.

Ashley Smith - Executive Director of Investor Relation

Thank you, Ashley. Good morning, and welcome to Valero Energy Corporation's fourth quarter 2008 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 to receive a copy, you can find one on our website at valero.com. There are also tables attached to the earnings release that provide additional financial information on our business segment. If you have any questions after reviewing these tables, please feel free to contact investor relations after the call.

Before we get started, I would like to direct your attention to the forward looking statement and 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 security laws. There are also many factors that could cause actual results to differ from expectations including those we described in our filings with the SCC.

Now, I will turn the call over to Mike.

Mike Ciskowski - EVP and CFO

Thanks, Ashley, and thank you for joining us today. As noted in the release, we reported fourth quarter 2008 net income of 732 million or $1.41 per share before the noncash goodwill impairment of 4 billion after taxes. Including the impairment loss, our GAAP result for the fourth quarter was a net loss of 3.3 billion or $6.36 per share. For the full year 2008 we reported net income of 2.9 billion or $5.42 per share excluding the goodwill impairment loss. Including the impairment loss, our GAAP result for 2008 was a net loss of 1.1 billion or $2.16 per share.

As to the noncash goodwill impairment loss, each year we perform our goodwill impairment review in the fourth quarter. As you know, during the fourth quarter of 2008 there were severe destructions in the capital commodities markets that contributed to a significant decline in our stock price. As a result, Valero's equity market capitalization fell significantly below the network value of our equity. This is a key indicator that goodwill was potentially impaired.

In performing our goodwill impairment test each year, we estimate fair value by discounting the estimated future cash flows from our refineries. The market derived discount rates that we used in our analysis this year were very high because of the significant risk premium acquired by our relatively low stock price in the quarter, using higher discount rates results in a lower valuation. When we performed our goodwill impairment test as Christi by current accounting rules, our tests indicated that all of the goodwill was impaired.

Getting back to our results, fourth quarter 2008 operating income, excluding the goodwill impairment loss, was 1.2 billion versus 884 million reported in the fourth quarter of 2007. The increase in operating income was primarily due to higher margins for diesel jet fuel and secondary products such as asphalt and petroleum coke as well as very good field margins in our retail segment. Also contributing to the increase in operating income was the favorable effect from the yearend LIFO increment 327 million or 214 million after taxes.

Some were offsetting the increase in operating income were lower gasoline margins, and lower overall refinery throughput volumes. Fourth quarter throughput volumes averaged 2.6 million barrels per day which was 173 thousand barrels lower than the fourth quarter of 2007. This was primarily due to the reduction in capacity from the sell of the Krontz Springs refinery and lower operating rates due to a lower margin environment for gasoline.

Refinery cash operating expenses were $4.66 per barrel which was slightly higher than our guidance of $4.50 per barrel. This was mainly due to lower overall throughput values. General and administrative expenses excluding corporate appreciation were 138 million. The 31 million decrease from the third quarter and 22 million decrease from our guidance were mainly due to lower incentive based compensation expense.

For the fourth quarter total depreciation and amortization expense was 370 million, and interest expense net of capitalized interest was 79 million, both in line with our guidance. The effect of tax rate excluding the goodwill impairment charge was 35%. Regarding cash flows for the quarter, capital spending was 1.1 billion which includes 129 million of turnaround expenditures. For the year, capital expenditures were 3.2 billion which includes 408 billion for turnaround costs.

In the end of fourth quarter, we spend 181 million to purchase 8.4 million shares for our stock which takes our total spending for the year to 955 million for 23 million shares. So for the year, we reduced shares outstanding by 4% and since the end of 2005 by over 21%. We currently have approximately three and a half billion of repurchased authorizations in addition to our ongoing anti-dilution program.

Regarding future uses of cash, our goal is to maintain financial strength. Considering the weak economic outlook, we decided to further reduce our estimates for 2009 capital expenditures and turnaround costs. We now estimate that capital will be 2.7 billion which is down 800 million from our most recent estimate. We made several changes to the capital plan to reduce the 2009 budget.

In addition to cutting many small to medium size discretionary projects at our refineries, we have delayed the St. Charles hydrocracker project, which pushes back the estimated completion date to the fourth quarter of 2012. Also at St. Charles, we have further reduced the scope of our aromatics project yet still plan to meet MSAT II compliance in 2011. Finally, we have delayed the Memphis [FCC] reliability project which pushes the estimated completion date to 2012.

With respect to our balance sheet at the end of December, our total debt was 6.5 billion. In addition to our yearend cash balance of 940 million we had nearly 5 billion of liquidity available at the end of the year. Even with the goodwill impairment loss, we are in good shape from a covenant perspective because our debt to capitalization ratio net of cash was 26.2% at year end. This was well below the bank agreement threshold of 6% and we have no coverage tied ratio covenant.

For turn debt, upcoming maturities are relatively low and consist of 209 million coming due in April of 2009 and only 33 million in 2010. Also in 2009, per terms of the indenture we are required in October to operative purchase a 100 million of our bonds. In summary, our company remains in solid financial shape. To maintain financial strength through a weak economy we will continue to look for ways to reduce spending on capital expenditures, operating costs, and overhead. However, we will presently continue to invest in opportunities that build long-term value for our shareholders.

Now, I will turn it over to Ashley to cover the earnings model assumptions.

Ashley Smith

Thanks, Mike. For modeling our first quarter operations, we should expect the following refinery throughput volumes. Gulf Coast should average between 1.2 to 1.25 million barrels per day. Mid-continent should average between 380 thousand to 390 thousand barrels per day. West Coast should average between 250,000 to 260,000 barrels per day. And Northeast should average in the range of 510,000 to 520,000 barrels per day.

Refinery cash operating expenses are expected to be about $4.80 per barrel, which is higher than the prior quarter primarily due to lower expected throughput volume. With respective towards the other items for the quarter, we anticipate G & A expense to be around 135 million. Net expense should be around 75 million. Total depreciation and amortization expense should be around 390 million. We estimate a 33% defective tax rate.

That concludes our prepared remarks. We will now open the call for questions. Feel free to gather the queue Ashley.

Question & Answer Session

Operator

(Operator Instructions) At this time, if you would like to ask a question please press star and the number one on your telephone key pad. Again, if you want to ask a question at this time please press star and the number one on your telephone key pad. We will pause for just a moment to compile the roster.

Our first question comes from Mark Flannery from Credit Suisse.

Mark Flannery - Credit Suisse

Hi, yes. With this reduced CapEx program that you have can you give us an idea of how close we are to the knuckle now? In other words, could we go down further from here or are we getting close to the levels of must spend and a follow up about that?

Rich Marcogliese

Sure, this is Rich Marcogliese, I expect to make a comment about that Two points for the billion of the year, there is some room to go lower than that. We would say that our absolute minimum capital expenditure budget is in the neighborhood of $1.8 billion, which would capture things like turnaround expenditures which are on average about $500 million a year, and then other safety and regulatory requirements on a regulatory side which still have our program to complete the items in our EPA 114 settlement agreement. So, for the next couple of years we would say 1.8 billion represents the absolute minimum.

Mark Flannery - Credit Suisse

Great. My semi related follow up is, are you now taking a look at the portfolio and thinking about the long-term future for some of the less good plans? I have heard from others in the industry that they are reviewing their problem children as it were and might be taking some permanent actions by the end of the year. Is that kind of review going on at Valero now?

Bill Klesse

Mark, this is Klesse. It has been going on for several years. We have knocked several plants were under strategic review a year or so ago and we did sell two refineries. This is an ongoing process with us but we do not have any deadline or anything.

Mark Flannery - Credit Suisse

What I am trying to say is if you end up not wanting them and you cannot sell them is closure or terminalization on the table?

Bill Klesse

Well, I take what you said, if you do not want them and you cannot sell them the answer would be yes.

Mark Flannery - Credit Suisse

Yes, thank you very much.

Operator

Our next question comes from Jeff Dietert with Simmons.

Jeff Dietert - Simmons & Co.

Good morning. You highlighted in your earnings release the Texas City maintenance where you have all units down and running your FCCs at 70%-75% utilization, I think you are showing a lot of leadership and discipline in maintaining lower runs. Could you discuss how you think about that? How much of it is based on economics? I know you have sat down reformers because of poor economics versus perhaps inventories or your view of supply and demand balance in a particular region. Could you talk about how you think through and make those decisions on how much volume to run?

Bill Klesse

Well we do forecasting. We look at what we think is happening in individual markets, as you suggest. We of course run our LPs just like everybody. Certainly we look at the market structure and then we make a judgment. The bottom line of your question is there is too much capability to make an estimate in this environment. If the industry does not balance supply with demand, then we will have negative margins again and as we had in December negative margins for the perceivable future, we will have negative margins. We try to balance it and we look in and at our economics when we make those decisions based on looking at the market's pull.

Jeff Dietert - Simmons & Co.

Hopefully, the industry will show the same discipline that you have and it appears they are. Second question for Mike, cash on the balance sheet fell quite a bit this quarter. Could you talk about the decline from the end of the third quarter versus end of the fourth quarter and the impact on cash?

Mike Ciskowski

Sure, Jeff. The end of the fourth quarter cash decreased by 1.8 billion. So if you look at all the various items that we provided in our earnings materials net income depreciation, goodwill, etc. that implied a change in cash to about 150 million. The big difference was the change in working capital and it really was attributable to accounts receivable and accounts payable. So at September 30th when we netted the receivables and payables we showed a payable balance of 3.3 billion. At year end the balance had fallen to one and a half billion. So that is the change of cash of 1.8.

Receivables as a percentage of payables did not change between the two periods but what you had was a fallen commodity price market. Te value of the floats on these payables decreases resulting in the utilization of cash. So when you look at it as a proxy for the commodity prices, WCI averaged 41 bucks in December, it was 104 in September so that is a decrease of about 60%. You take that 60% and apply it to our payable balance at the end of September and you get about a $2 billion change which is very close to the 1.8 that we had. Offsetting that a little bit was from deferred taxes.

Jeff Dietert - Simmons & Co.

Thanks for your time.

Operator

Our next question comes from Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank

Hi,. You mentioned that under the goodwill impairment test that it was really the equity value falling that by extension made the future discount rate you should apply higher. Can you share with us what that discount rate was, that you had to use?

Mike Ciskowski

We increased it about 2%-3% I think, since what we have normally done. So that is what resulted.

Paul Sankey - Deutsche Bank

Ok, so there was an increase in the rate from year to year of about 2%-3% but you will not share with me about the overall level?

Mike Ciskowski

No.

Paul Sankey - Deutsche Bank

Can you make any observations about how it compares to cost of capital and what you think your cost of capital is?

Mike Ciskowski

Yes, it was probably that that is a very similar number. Our cost of capital is probably up about 3% also.

Paul Sankey - Deutsche Bank

You would not share with me your cost of capital?

Mike Ciskowski

Well, there are all different kinds of ways to compute that. The cost of debt- the capital markets are pretty volatile. There are several different ways to do it. Generally, we have said our cost of capital is around 10% and I would think in this environment it would be a little more to there.

Paul Sankey - Deutsche Bank

Yes, I have got you. Essentially, the trigger for the impairment was the higher discount rate. It was not any trailing measure that you would have used for margins to test the impairment?

Mike Ciskowski

That is correct, Paul.

Paul Sankey - Deutsche Bank

Ok. If I switch to a little market question here. Distillate markets remain very interesting; that has held up well. Can you talk about the usual components? The demand side has seen some very scary DRE numbers but on the demand side but it seems the cracks still hold up better than you would have expected; might be to do with exports. Anything you can share with us?

Gene Edwards

Paul, this is Gene. What we are saying on the demand side of heating obviously up front over the weather we are having strictly in January. Although the tank per station fuels demand is down as indicator box of the index on rail and trucking. That is the export from Europe continues to be-

Paul Sankey - Deutsche Bank

Can you hang some numbers on those various components for me?

Gene Edwards

Specifically about export value?

Paul Sankey - Deutsche Bank

Well, for a start, heating, how much do you think that is up? Transport, how much do you think that is down? Any detail on exports would be great.

Gene Edwards

I do not have exact numbers on heating holders percentages. Last January was very warm though. This January has been very cold and it indicates- that number too is down about 5%. I think transportation is down around 10%, offsetting-

Joe Gorder

Actually one of the industry consultants said transportation is down 10%.

Paul Sankey - Deutsche Bank

Great, so-

Joe Gorder

Paul, this is Joe. The export market is- remains pretty strong. Last year I think we averaged somewhere around 125,000 barrels a day. It looks like that is going to continue. We are actually exporting at higher value now. The arms are still open to Western Europe and to the Med and so we see significant demand and good activity.

Paul Sankey - Deutsche Bank

And, Latin America?

Joe Gorder

Latin America is less of our activity right now. We are sending a lot more to Europe.

Paul Sankey - Deutsche Bank

Interesting, one final one, which is a wild card. Do you know how much COT you produce?

Joe Gorder

Yes, 38 million metric tons- we will get you the right number but it is somewhere around what I am saying here.

Paul Sankey - Deutsche Bank

38 million metric tons per-

Joe Gorder

Call us back to make sure you have the right number.

Paul Sankey - Deutsche Bank

Brilliant. Thanks. I will leave it there.

Operator

Our next question comes from Eric Mielke with Merrill Lynch.

Eric Mielke - Merrill Lynch

Hi, there. I just have a simple front up question. Just on the markers we had in the beginning of January over the last couple of the weeks. We have seen some extreme relative pricing of crudes particularly for WTI which is always the benchmark we find in margins that most people look at. Can you tell me a little bit about how you are able to capture those margins and how we should be thinking about your operations in that sort of environment?

Bill Klesse

You know, the high inventories are particularly [Cushing] is really exaggerated the steepness in the market, which you know is come off for a long period for the last several days and is now about three bucks. In addition to that you got OPEC cutting and it is compressing the (inaudible) discounts relative to TI because TI is so cheap.

Now, you know, the question is will these cuts out pace the reduction in demand and go on forward. If not we are going to see produced oil continue to go into tankage and that is going to continue to keep us in a contango market structure and it could in fact exaggerate those markets going forward.

That being said, as it specifically relates to us, we do capture the contango on TI barrels. It is really our domestic market. We do not capture the contango on our international barrels because international oils do not take the market structure into effect in their pricing. So when we look at our particular situation, then you really have to net the two. Right now we believe that when you do net the two that it is a push to slightly positive forms.

Eric Mielke - Merrill Lynch

Ok, great, thanks.

Operator

Our next question comes from Roger Read with Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

Hey, good morning. As you look at these turnarounds it seems like we are extending the length of them and certainly the depth of them, the full shut downs of the plans. What impact does that have in terms of your spending? Is that increasing it, decreasing it?

Bill Klesse

Well, I would say for the year, if that is the 2009 impact, directionally the changes that we have made have moved some turnarounds out of 2009 into 2010, so 2009 will come in lower than we originally anticipated.

From an execution point of view, you do not really slow down the execution because you want to be efficient in what you spend, from a maintenance point of view. I would say duration of turnarounds really do not change because it is efficient execution that we are looking for, but as in the case in Texas City, we have units that are controllably taken down, and we will do very little maintenance on those, so that is just a matter of capacity and economic management.

Roger Reed -Natixis Bleichroeder

Simply an opportunity cost or opportunity benefit of not running in terms of what goes down on the turnarounds this time.

Bill Klesse

That is right, the evaluation that we made, because in this turnaround in Texas City we are taking down a large gas oil hydrotreater that makes sweet cat [thede] We had to evaluate should we purchase sweet cat [thede] in order to turn it into gasoline it just was not an economic proposition for us.

Roger Reed -Natixis Bleichroeder

Unrelated to my prior question but somewhat related to the prior question, as you look at the OPEC cuts that have been going on out there, have you seen beyond, as you look at the differentials, have you seen any issues with sourcing any particular type of crude, or is there plenty available as the market would tell us with the supposed crude stored out in the ocean and all that?

Bill Klesse

We have not had any trouble with physical supply, but we have seen the effects of the cuts in OPEC, the Saudis have cut us back, last we read about 250,000 a day of their oil, and I think in March we are going to run somewhere around 190,000. We have also been cut by the Kuwaitis by about 10%. We are backfilling those volumes with crudes like (inaudible) and Kirkuk and we are just running more Iraqi oil.

To answer your question on output supply, it has not been an issue, but we are sourcing it differently.

Roger Reed -Natixis Bleichroeder

Share repurchase, obviously some still remains on the authorization, obviously you are watching CapEx, do you think share repos continue a least to the extent to keep the share count flat this year, or is that something that we should consider more or less off the table until things look better?

Bill Klesse

Today the issue of course is cash and liquidity, bouncy string, so we know what our dilution would be from our (inaudible) programs, and we will look at it but I am not committing anything.

Roger Reed - Natixis Bleichroeder

Thank you

Operator

Our next question comes from the line of Mark Gilman with the Benchmark Company.

Mark Gilman - Benchmark Company

Good morning. Mike, Bill, can you tell us, at the 2.7 billion level, is that program sized on the basis of it being finds flow neutral on the 2009 environment that you are envisioning?

Bill Klesse

The answer would be no, it is sized because we are going to take delivery of our hydrocracker reactors at these two plants that were ordered in 2006, we are going to get them, or at least some of them, into the plants and put them on the foundation. We are going to complete that amount of work and then we are going to stop. We have a couple of other projects that we are doing the same thing, and we are getting them to a point that is a good engineering practice point, and that is what we are doing on those big jobs because we believe they are very good jobs for this company in the long run.

Today, as all of us, we are looking at what is going on all around us, and even though we are really strong here, we are going to keep our powder dry.

Mark Gilman - Benchmark Company

Bill, I can infer from that that the budget is set on the basis of the assumption of being a slight net cash draw down or net incremental order?

Bill Klesse

We would say today, and will just deal with consensus earnings forecast that yes, when you consider dividends, capital, we have some debt repayment that Mike mentioned, looking at all of that the answer would be yes.

Mark Gilman - Benchmark Company

What was the level of economically related through-put curtailments in the fourth quarter and implicit in Ashley’s guidance for 1Q?

Bill Klesse

Mark, we are going to have to get that after the call. I do not have the breakdown between economic decisions versus maintenance.

Mark Gilman - Benchmark Company

Let me try another, Bill you will appreciate this, one of the prior questions dealt with the contango issue in TI and the extent of capture, it would seem, at least if my recollection is correct that midcontinent there is typically a significant benefit associated with the crude roll in the contango gets anywhere near as deep as it was, yet in this period the margins midcontinent were quite a bit weaker, at least than what we thought was going to be the case. What am I missing?

Bill Klesse

We have the number for you here; 9.5 million in the fourth quarter was the bet to the complex roll.

Unidentified Company Representative

Mark, from an operational point of view in the mid-continent we also had a cat-feed hydrotreater and cat-cracker outage in the Ardmore refinery, so that undoubtedly impacted the margins in that region.

Mark Gilman - Benchmark Company

Thank you, do you have any update on discussions with the government in Aruba regarding the expiration of the tax holiday?

Bill Klesse

As of now the tax holiday is going to expire at the end of ’10, so I am the one that is doing this now and I talk to the government of Aruba often.

Mark Gilman - Benchmark Company

Nothing to update us on, Bill?

Bill Klesse

Nothing I can update you on.

Mark Gilman - Benchmark Company

Just one or two quick ones more, regarding the goodwill impairment, can you give us any idea as to the margin outlook that was implicit in your analysis and the determination, qualitative, quantitative, however you want look at it?

Mike Ciskowski

We come up with a price based off of looking at historical prices through the cycle, so we have some good years and we have some bad years, but I cannot give you the exact…

Mark Gilman - Benchmark Company

So a mid-cycle type condition, Mike?

Mike Ciskowski

I would characterize that we have good years and bad years, yes.

Mark Gilman - Benchmark Company

The station count went up fairly significantly, as did average through-put volumes in the US, it would almost appear as if you did a retail acquisition that I either overlooked, missed, or you had not previously indicated. Did I miss something there?

Bill Klesse

We did acquire late, in fourth quarter of last year an Albertsons chain, it was about 70 sites.

Mark Gilman - Benchmark Company

I thought that was third quarter of this year?

Bill Klesse

Whenever we did it, we acquired Albertsons and that would be why our station count is up, so if you look at the average for the quarter you have one number, and you have a different number for the average for the year. Where we are today closing the year is at 1005 stations, but it is because of the Albertsons acquisition, and we do have some sites that we are selling in that acquisition, but we are going to be around 1000 store company operated store chain.

What is the number?

Mike Ciskowski

It is 1010.

Bill Klesse

1010 was the year end store count.

Mark Gilman - Benchmark Company

Thank you guys, I appreciate the help.

Bill Klesse

Mark, I want to tell you one more thing, on Aruba, they start their election process in the end of February, early March, so I do not look for any resolution until they go through their elections.

Mark Gilman - Benchmark Company

Thank you Bill.

Operator

(Operator instructions). Our next question comes from the line of Chi Chow with Tristone Capital.

Chi Chow - Tristone Capital

Thank you, it looks like the northeast system, the margins there have done very well the last couple of quarters, have there been any operational changes in that region that has driven those results?

Bill Klesse

I’m sorry, Chi, you said the margins, in the northeast, which direction?

Chi Chow - Tristone Capital

It looks like they have done very well in the last two quarters, so I am just wondering if there has been any operational changes that have driven that.

Bill Klesse

You are not talking about retail, you are talking about refining?

Chi Chow - Tristone Capital

Refining, yes.

Bill Klesse

I will tell you, just as a general statement, our Quebec refinery has excellent results, and also our Paulsboro refinery has also done very well. We make lubes at Paulsboro, and they have been doing much better, so that would be the Paulsboro refinery has done better, and that would be the major thing I would say that swung for us here. Quebec, our Canadian guys had a great operation.

Chi Chow - Tristone Capital

Is it more distillate driven up in Quebec?

Bill Klesse

It is more distillate driven; remember the yield structure up there is clearly skewed towards distillates. The refinery, if you think about it, has a relatively small cracker, on a relative basis.

Mike Ciskowski

What I would add to that is we did a crude expansion project in Quebec earlier in the year which we are actually using instead of running higher crude rates volumetrically we have changed the crude mix. We are running more discounted heavier sweet crude in Quebec and that has had a significant impact.

Chi Chow - Tristone Capital

What sort of crudes have you switched to up there?

Mike Ciskowski

West African, we added that into the mix.

Chi Chow - Tristone Capital

I also noted that the off-costs in the Northeast were a bit higher in the fourth quarter. Any reason for that?

Bill Klesse

I would say that relates to the crude unit turnaround that we had in Delaware City that was one factor; crude unit was down for about 35 days. In addition, the coke-gasification was down for much of the fourth quarter.

Chi Chow - Tristone Capital

You talked about some crude changes in Quebec, some of the sweet crude changes with the Middle East rates, have there been any other meaningful changes in the crude slate throughout the system other than those?

Bill Klesse

No Chi, if you just look at it, we ran more heavy sour in the quarter, but there has been no fundamental change.

Chi Chow - Tristone Capital

Thank you.

Operator

Your next question comes from the line of Harry Mateer of Barclays Capital.

Harry Mateer - Barclays Capital

If the debt markets are open to you later in 2009, would you consider issuing any debt to refinance that ’09 maturity and maybe build up some cash or are you committed to definitely paying down that maturity with cash?

Bill Klesse

We may access the debt market. We have authorization to do so and we may do that.

Harry Mateer - Barclays Capital

Would the intention be for refinancing or refinancing and a combination of also CapEx needs?

Bill Klesse

The answer would be yes.

Harry Mateer - Barclays Capital

Thank you.

Operator

Our next question comes from the line of Blake Fernandez with Howard Weil.

Blake Fernandez - Howard Weil

Good morning, my question is surrounding the cost structure, obviously we have Ashley’s guidance, for 1Q a bit of an uptick, my question is as we progress throughout the year, are there any opportunities to lower costs other than the pure natural gas cost component?

Bill Klesse

You are speaking in the refineries?

Blake Fernandez - Howard Weil

Correct.

Mike Ciskowsi

We are conducting a review now of whether we can accelerate any cost efficiencies in the refineries. As an example, we employ about 5000 contractors per day on continuing maintenance and operation support, that number is ip over the last few years so we are brginnng to question whether we can implemtn any contractor efficincies and if we were successful in doing that of the order of 10% that would be a significant impact on cost production on the order of about $50 million per year. We are looking at that right now.

We are also taking a look at the side of our organizations in rlations to this reduced capital expenditure profile, with the intent of trying to positin our organizations for the wrk load that we really anticipate.

Blake Fernandez - Howard Weil

Great, thank you.

Operator

(Operator instructions). Our next question comes from the line of Paul Cheng with Barclays Capital.

Paul Cheng - Barclays Capital

A number of quick questions, do you, when you are looking at Aruba, I think at one point after petrol (inaudible) that you are still looking at trying to sell it to other companies, I think one rumor is oil. At this point, should we assume that there is nothing going on that within this year do you think is going to consummate on that? If not, and assuming you do not get the tax holiday extension in 2010, without that, based on the current configuration, is this a [ripo] entity?

Bill Klesse

The first question is, we have said that Aruba is a plant that we are looking for strategiv alternatives, so it continues. Whether you can expect it or not remains to be seen, and at the end of the day it will have to do with values, I’m sure.

Whether the plant is a viable operation after the tax holiday ends, and there are many more issues than just the tax holiday here by the way, but that remains to be seen.

Paul Cheng - Barclays Capital

You are not 100% sure of that, because we do know that in addition to the tax holiday that labor (inaudible) and everything has been an issue over there.

Bill Klesse

You are asking me if I am 100% sure?

Paul Cheng - Barclays Capital

No, I’m just saying that based on what you can see, if you believe that is a facility you would be willing, if you cannot sell it you would be willing to make additional investment to make them [viable] or do you think that you would be able to want them as it is and be okay?

Bill Klesse

I’m going to ask you Paul, and you are not going to like the answer, it just depends.

Paul Cheng - Barclays Capital

That is fair. Acquisition, maybe it is very far off, but if a recent opportunity comes and [oil] is pretty cheap at this point, and you guys remain despite that the situation looks pretty bad, but you guys remain one of the strongest, is that something that you guys mind, or that you think that given the uncertainty you really should not be too aggressive on that front?

Bill Klesse

We will not be too aggressive on that front, but we will look at some of these plants that are coming on the market. We are a refinery, you buy our stock because we are a refining and marketing company and this is our business and as these plants come along we are going to take a look at them, and we’ll see if we get the strategic fit and the value that we say it is a good investment for our shareholders.

Paul Cheng - Barclays Capital

Can we assume that you would be using your share but not the cash if you go into, or is that not necessarily a requirement?

Bill Klesse

It depends on the size of the deal, I think in this environment liquidity and blanace sheet strength are absolutely imperitive, so if we found the right kind of deal we are going to finance it the right way to keep that, and keep our investment grade rate.

Paul Cheng - Barclays Capital

I think this is for Gene or maybe for Rich, the [Meyer] discount have come down quite dramatically and the only down to maybe $5 or $6 at this point. Oftentimes, you have been able to scour and find some similar quality grade with a much bigger discount, is that an opportunity you have been able to fund at this point, or when looking at that, [Meyer], its price is reasonable, and the current market conditions is this the discount that we are getting?

Joe Gorder

Paul, this is Joe. You are absolutely right, the mine discount has compressed materially, a week ago it was at parody with WTI and with the flattening of the curve and the increase in the TI pricing for us, now we have got a $5 discount today. Through that period, for the last several months we have continued to find alternative heavy sours and we are running crudes like Kestia and Maray and Napo and M100s, which continue to price at about nine to 10 off.

Paul Cheng - Barclays Capital

So you have been able to get the quality on those that is pretty similar to [Meyer]?

Joe Gorder

Yes.

Paul Cheng -Barclays Capital

Thank you

Operator

Our next question is a follow-up question from the line of Mark Gilman with The Benchmark Company.

Mark Gilman - Benchmark Company

Just a way of clarification, Mike, when you were talking about changes in the capital program, I think that you make some reference to the aromatics project at St. Charles, which, frankly, I thought you had shelved previously and yet you talking in terms of there being a compliance element to it. Could you clarify what you said there?

Rich Marcogliese

We have talked about that previously and we have it was with the objective of recovering aromatics and producing paraxylene to get into a new business for Valero. When we talked in the prior quarter it was the paraxylene project and we made a decision to defer. The examination that we have made in this quarter is we have taken a look at aromatics extraction as it relates to the need to comply with the MSAT II regulations, this is mobile source air toxics, it requires getting benzene down to less than 0.6% in gasoline. We had made an evaluation of whether we would install new aromatics extraction facilities in St. Charles, as was part of the original plan. We have made the decision to defer that and we will take advantage of capacity that is available in existing extractors in Corpus Christi. That is the change that we have made this quarter compared to last quarter.

Mark Gilman - Benchmark Company

Thank you Rich, could you also clarify, you were going a little bit too quickly, the adjustment that has been made in the Memphis program?

Rich Marcogliese

The Memphis program has one of our cat-crackers that has the poorest reliability, we have put together an extensive revamp project for that, it was originally slated for implementation this year, we made a decision to defer it to 2010, we have now made a decision to push it out to 2012.

Mark Gilman - Benchmark Company

The Canadian retail generated a lot less than operating profit than I would have thought, is there something else that impacted that? Maybe FIFO or inventory considerations, or exchange rate considerations, the numbers were way below anything we thought might be realistic given retail heating oil margins.

Rich Marcogliese

We do not believe so.

Mark Gilman - Benchmark Company

Nothing you can think of?

Rich Marcogliese

No, business has been good there.

Mark Gilman - Benchmark Company

Thank you.

Operator

At this time there are no further questions in queue, I will now turn the conference call back over to Mr. Smith.

Ashley Smith

Thank you Ashley, and to all of the listeners to the call thank you for listening. If you have any questions please feel free to contact our investor relations department. Thank you.

Operator

This concludes today’s Valero Energy fourth quarter 2008 earnings conference call. You may now disconnect.

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