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Valero Energy (NYSE: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

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.

Turning back to our third quarter results. Our Non-refining business segments also performed well. Retail nearly maxed last year's record earnings with operating income at $105 million, mostly due to increase fuel volumes. Our Ethanol segment had $47 million of operating income in the third quarter of 2010, which was slightly lower than the third quarter of 2009, but up $12 million from the second quarter of this year due mainly to an increase in Ethanol margin.

In the third quarter, general and administrative expenses, excluding corporate depreciation, were $139 million. Depreciation and amortization expense was $372 million, and net interest expense was $119 million, all in line with our guidance. The effective tax rate on continued operations in the third quarter was 38%.

With respect to our balance sheet at the end of September. Total debt was $8 billion. We ended the quarter with a cash balance of $2.4 billion, and we had nearly $4.2 billion of additional liquidity available. At the end of the third quarter, our debt-to-cap ratio net of cash was 27%.

Regarding cash flows for the quarter, we paid $28 million in dividends. Capital spending was $508 million, which includes $67 million for turnaround and catalyst expenditures. For the year, our capital spending target is $2.3 billion, and for 2011, our preliminary estimate for capital spending is $2.6 billion. This includes a $502 million decrease in regulatory spending being partially offset by a $305 million increase in sustained and reliability spending on projects that should improve our operations, such as coke drum replacement at Port Arthur and FCC maintenance at our McKee refinery. In addition in 2011, we plan to increase spending for economic growth projects by $525 million.

As illustrated in recent investor presentations that are available on our website, we have several large projects that we estimate will provide significant earnings power using a reasonable set of price assumptions. In general, these projects capitalize on our outlook for relatively high crude oil prices and low natural gas prices. For example, the Port Arthur Hydrocracker project, which should be complete near the end of 2012 should generate $485 million of estimated incremental EBITDA and yield an internal rate of return of 21% on an unlevered basis. This is just one example of several economic growth projects in which we will continue investing over the next few years.

Portfolio optimization also remains a strategic priority, and we continue to execute on this. In the third quarter, we announced an agreement to sell the Paulsboro refinery for $360 million, consisting of $180 million in cash and a note for $180 million, plus $275 million in cash for estimated net working capital and inventories. We anticipate closing this transaction in the fourth quarter. The potential sale of the Paulsboro refinery will result in a non-cash, pretax charge of approximately $920 million, and the tax loss will be $155 million.

Also we announced an agreement yesterday to sell our 50% interest in the Cameron Highway Oil Pipeline System for $330 million, which we expect to occur in the fourth quarter. When completed, the disposition will result in a book gain of $56 million and a tax gain of $235 million. This system primarily consists of two crude oil pipelines running from the deep water Gulf of Mexico to the Texas coast. We believe the sale of this non-core asset will realize hidden value for our shareholders.

At Aruba, we are continuing our maintenance activities and plan to have the refinery ready for restart in mid-December. I should note that these activities include many important improvements to the long-term reliability of the refinery, storage terminal and the docks. And in the first quarter of 2011, the Aruba refinery will be able to supply intermediate feedstocks to our Gulf Coast refineries during the planned turnaround.

Now I'll turn it over to Ashley to cover the earnings model assumptions.

Ashley Smith

Okay. Thanks, Mike. For modeling our fourth quarter operation, you should expect the refinery throughput volumes to fall within the following ranges: the Gulf Coast should be at 1.325 million to 1.375 million barrels per day, excluding Aruba; Mid-Continent should be at 410,000 to 420,000 barrels per day; the Northeast should be at 370,000 to 380,000 barrels per day, including Paulsboro; and the West Coast should be at 280,000 to 290,000 barrels per day.

Refinery cash operating expenses are expected to be around $3.80 per barrel, including Paulsboro and the costs at Aruba.

Regarding our Ethanol operations in the fourth quarter, we expect total throughput volumes of 3.3 million gallons per day. And operating expenses should average approximately $0.33 per gallon, which includes $0.03 per gallon for non-cash COGS, such as depreciation and amortization.

With respect to some of the other items for the fourth quarter, we expect general and administrative expense, excluding depreciation, to be around $155 million. Net interest expense should be around $118 million. Total depreciation and amortization expense should be around $380 million. And our effective tax rate should be approximately 40%.

We will now open the call for questions, Brandis.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Doug Terreson [ISI Group].

Douglas Terreson - ISI Group Inc.

Today's press release plus some of your recent commentary suggest that strategic actions may change your geographical footprint, that is to enhance competitiveness for the company. And on this point, I want to see if you can provide some updated insight into your strategic thinking, including any functional or geographical criteria that you deem important when thinking about your strategic outlook?

William Klesse

Doug, this is Klesse. Well, what I'm going to say on this, maybe it's a little bit longer than what the question you asked. Valero, we're a refining company. You guys recommend us. Our investors invest in us. They want exposure to the segment. We refine products and commodities. We believe that we can add shareholder value to profitable growth. Expanding our footprint will help us perform more profitably, hence we optimize our system. It also will support our trading efforts in the sense of an asset-backed trading portfolio. Our focus of late is obviously Europe. And since you guys know what assets are for sale, it's obviously the U.K. But Europe is a large market. It is long gasoline, short diesel. We've said in many of our presentations that we've been exporting diesel to Europe. The U.S. is still importing gasoline. At some capacity, we'll have to shut down, but other capacity, we'll survive, and it will prosper. We have one advantage, being large, in the sense that we get to look at our portfolio and we can see the variability among assets. The quality assets that's coming to market in this round of announced assets for sale is much better than what we've seen previously in the Western Europe, U.K. markets. We still expect to see even some more assets come to market, especially as some of the majors are beginning to question the integrated business model that they followed in which you guys have already been questioning whether the integrated business model is the right model going forward. Valero is unique. We're different than all the rest of the independents and that we're very, very large. And so we think there's opportunities, and we've said this for the last several years that we keep looking. And now with the quality assets on the market, yes, we're actively looking at.

Douglas Terreson - ISI Group Inc.

And so that's Europe and not Asia, Bill. Is that the way to think about it?

William Klesse

Yes, it is for today. We are fully aware the growth in the world is Asia. And new refineries are going to be built in Asia because this business is going to keep growing worldwide. But we don't see the opportunity there at this point in time.

Operator

Your next question comes from the line of Edward Westlake from Credit Suisse.

Edward Westlake - Crédit Suisse AG

Just on the debts. I guess last quarter there, the strong results and the debt coming down, the focus was on sort of dividends and buybacks. I guess, you've announced the another $700 million of disposals. Can you give us an idea of what kind of disposal proceeds you're targeting for 2011 and how you're thinking about perhaps the dividend and buyback as that debt level comes down?

Michael Ciskowski

Okay. In 2011, I mean, we do have a $2.6 billion, as I talked about, in capital expenditures. I would not anticipate that, at this point in time, our dividend would be materially changed from the level that it is today as we move into 2011.

Edward Westlake - Crédit Suisse AG

And then a follow-up just on the tax rate, actually. You talked about a 40% tax rate, if I heard you correctly, in Q4. I presume that's related to Paulsboro and book losses and taxes. Maybe just some words on the underlying tax rate that you expect going forward?

Michael Ciskowski

This is Mike. Our 40% guidance there that does not -- what is happening there is we really expect a loss at Aruba due to the restart costs and expenses the we have. That's a little bit larger than what we've occurred in the past. And so that's the tax effect of that very low rate, and so it is causing our overall rate to go up a little bit.

Edward Westlake - Crédit Suisse AG

And so as you look forward and strip that out, the underlying tax rate, you would expect to be...

Michael Ciskowski

It would be more in the 36%, 37% range.

Operator

Your next question comes from the line of Doug Leggate with Bank of America.

Douglas Leggate - BofA Merrill Lynch

Obviously, a pretty strong signal on acquisitions, Bill. A couple of years ago, you issued some equity in anticipation of a deal that didn't go through. Would you anticipate you would need additional equity or you're already in good shape given that situation?

William Klesse

Yes, we did issue equity on an acquisition that we did think was very good, and obviously, you looked and thought it was good, too. But on this right now, we have, as Mike said, $2.4 billion of cash. We just said that we have about $700 million coming in on these asset sales assuming that they close since we expect them to close here in the fourth quarter. So it just depends on what the deals look like. But obviously, we have lots of financial resources here. But as I've said many times in the past, our investment-grade credit rating is very important to us, and we intend to keep that as well.

Douglas Leggate - BofA Merrill Lynch

Could you maybe give us an idea on what your ceiling on debt-to-cap would be, Bill? Where are you comfortable going to on debt-to-cap?

William Klesse

Well, I'm not going to give up the investment tax, the investment credit rating. And so we will manage the entire process.

Douglas Leggate - BofA Merrill Lynch

Just a little bit of color on the dynamics of what's going on in diesel right now. We're seeing some pretty interesting, I guess, relationships with the dollar with Brent on diesel. And I'm just wondering if you could give some color as to how the export market is looking right now, how the exporting dynamics are playing in and really what your prognosis is for diesel in light of a potential weak dollar as we move into 2011?

Joseph Gorder

All right, Doug. This is Joe. Our diesel exports have continued to be strong. In fact, all of our product exports have been strong. We've averaged around 165,000 barrels a day of diesel [ph] through the quarter. It looks like it's going to be a similar levels going into the fourth quarter. Gasoline actually picked up in the third quarter, and we're doing about 65,000 barrels a day there, and we expect that to continue also. So generally, the export markets have continued to be strong. Going forward, what do we think? Well, yes, you still got global demand for products that's growing faster than our U.S. demand. You still have some supply issue with Venezuela struggling. Mexico demand continues to exceed their supply, and so they're importing products. We're seeing more diesel [ph] now going down to Brazil, and their economy has been very strong. During the second quarter, Brazil imports reached almost 200,000 barrels a day. And then we expect that they could be importing gasoline here at some point in the future. And then you've got just these, well, temporary issues like this French strike that took place, which we don't see it having a major impact on the market. I would tell you, I think what we've seen is that it's probably supported the New York Harbor market a little bit. And then perhaps longer term, there'll be a restocking that takes place as they depleted some of their reserves. But for other than that, we just don't see much. So I mean, that's really where these export markets are, they've been very consistent, and I don't think really that's going to change.

Douglas Leggate - BofA Merrill Lynch

One quick follow-up related on CapEx. With Paulsboro gone, you guys have normally talked about, you said, $1.5 billion maintenance capital level. With the asset sales done, what's that number going to look like going forward?

Michael Ciskowski

Well, I think, clearly, we're in the $1.3 billion, $1.4 billion. And I've given that number to people that have asked me. If you actually got down, we finished the conversion of the St. Charles cat, and we've replaced our coke drums that we're doing at Port Arthur and then eventually at St. Charles in Wilmington. When we're done with all of that stuff, you stay in business caps and all, within the range of $1.3 billion, $1.4 billion, very, very close to the company's DD&A.

Operator

Your next question comes from the line of Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank AG

You highlighted that for this time of year, margins are very strong. I think in certain regions, they're actually at the highs that we've seen for the past 10 years. I'm assuming that you would say that the single, biggest reason for that is the export trend that you've just talked about. Could you provide us any more detail on those experts results in terms of destination? You mentioned the countries. But if you could just go over the numbers in terms of about how much is going where? And I thought it was interesting what you said, by the way, there isn't any near-term impact from Europe, the French strike. But I guess that you wouldn't expect that until they can restart importing product. Do you think if...

Joseph Gorder

That's right. I think they've been drawing down what they had in inventories to this point. They wouldn't be able to bring imports in anyway because the ports were closed. And if I can be generic on the volumes because, again, I think Doug asked this out of curious analysis [ph] from the last call that we'd really rather not be specific, but I can tell you right now that our exports are primarily headed to Europe, and then some lower volumes to South America. Probably, if we were to say a 75-25 split, that would be a fair assessment. And if you look, we talked about the fact that they may continue going forward. Last year at this time, we had significant amount of inventories being stored on the water. Those inventories are down today, and we are very strong here South America where they pull volumes. And winter is coming in the rest of the world. So just looking at the outlook right now, it looks like things have shaped up pretty well internationally for this growth to be strong. If you look more domestically where our demand is up from last year and we're seeing data that supports increasing activity, truck tonnage is up, rail productivity has increased, and all these serve as leading indicators for industrial growth. So I would say that we certainly think things will stay supported for the time being.

Paul Sankey - Deutsche Bank AG

Yes. I mean, I would have seconded you by saying that given the demand right here right now, although improving still looks very weak. It's surprising that we've got such strong Q4 margins, Q3 and Q4 margins.

William Klesse

Paul, we can see you're searching for this, so I'll give you a little more data. We've seen very strong German demand. The number a days of diesel looks pretty good. Inventory relative to demand, we've got a lot of turnarounds. Now this is a little data, but it's the last data I've seen. At our Long Beach, LA harbors, we're up about 25%, August-to-August. So as Joe said, we've seen some domestic demand pickup, too. Now we would expect some of that to continue, so the question becomes are these stocking for the Christmas holidays or these are actually solid economic growth? But clearly, that was up significantly in August. And then you've seen data which spills [ph] over into cars as well, but the data come out with [indiscernible] has actually increased in the United States as well. So between Germany, between the French, between some of the South American countries and some domestic activity here and then the turnarounds, diesel has continued strong. And quite frankly, gasoline cracks, they're down from where they were a couple of weeks ago, but they're still not that bad.

Paul Sankey - Deutsche Bank AG

Moving on to what do you think on cost. Could you say more about how important low natural gas prices are for you and your OpEx? And if you could, to whatever extent you can, split out more detail on the improved cost performance, particularly with reference to that natural gas. And I'd also be interested by how you see those as relatively more or less exposed in the low natural gas prices against any other refinery?

William Klesse

Well, I let these guys answer here. But in the third quarter, I think we consumed basically 22%, 20-some number here. But anyway, every dollar wound up being $0.10 a barrel, right?

Michael Ciskowski

Yes, it's typically, our energy cost on a quarterly basis, our total energy cost which typically ranges from low 20% to low 30-something percent of our refinery operating cost. The energy portion is [indiscernible] the NYMEX, natural gas [indiscernible] products. For each dollar change in NYMEX, it's about $35 million a quarter, $35 million to $40 million a quarter. So I don't know how you want to look at it, you can do the math yourself. But that's what I could put here.

Operator

Your next question comes from the line of Jeff Dietert with Simmons.

Jeffrey Dietert - Simmons & Company

You guys have commented on the importance of the credit rating. You're on negative watch. Could you highlight what the credit agencies are focused on and what you can do to alleviate their concerns?

William Klesse

Yes. I mean, I think they're just focused on the state of the industry in general and the recovery of the economy. And I think they're primarily concerned about those types of things. Specific to the company, they're not concerned about anything at this point in time. They've affirmed our ratings here recently, but they left the outlook at negative. And I think that's more of an indication of the industry.

Jeffrey Dietert - Simmons & Company

Are there any metrics in particular that they're focused on keeping you within?

William Klesse

They're more focused on the coverage ratio. They don't look like as much at the debt-to-cap, and they're more focused on the debt-to-EBITDA and the interest coverage.

Jeffrey Dietert - Simmons & Company

On a second topic, I was wondering if you could comment on your expectations for the Keystone Pipeline expansion from Cushing to Port Arthur? I believe that is tied with your capital investment at Port Arthur. And how you see that progressing?

Joseph Gorder

Yes, Jeff, this is Joe. Obviously, the issue with the pipeline has been the government permitting here. And we've seen some encouraging news here over the last week or so. The State Department, I think, has come to a conclusion that Canadian crude is really important to our national energy security. Hillary Clinton in a speech just a week or so ago made a comment that although she's not signed off on the permit for the project that she is inclined to do so. And the following day, four of the international labor unions, which are representing a significant number of workers, tell that or urging the State Department to approve the permit to Keystone. So we expect now that sometime after the elections, we're going to see that presidential permit getting executed. It might be as late as the second quarter of '11, but we expect it to happen. Now that was just about three to six players of the original plan, which have [indiscernible] being completed by the end of 2012. Now we're looking probably at quarter 2 of 2013. And just by way of an update on the status of the project, they've got 100% of the pipe into pump stations that have been purchased. 60% of the right of way for the entire project has been taken care of, and the 75% of the piece from Cushing to the Gulf Coast is in place. The labor contracts have been signed. The construction contracts are close to being awarded. And so everything is just proceeding as we would expect. Now the link from Cushing to Port Arthur, which is the one we're interested in is going to be complete about the second quarter of 2012. Now that would bring a certain volume of the heavy sour Canadian into the market for us to be able to run it at Port Arthur in advance of the completion of the overall Keystone, which again would be the second quarter of '13.

Jeffrey Dietert - Simmons & Company

What's the capacity that would be available to Port Arthur in the second quarter of '12 and then for the second quarter of '13 as well? How do those compare?

Joseph Gorder

Jeff, the capacity from Cushing to Port Arthur is somewhere around 450,000 barrels a day. Now I don't think it will run at that kind of rate because you're not going to have the supply in Cushing yet at that point in time to drive the volume. I really don't have a good answer for you short term. I would guess maybe 100,000 a day when that segment comes on that ultimately going up to that 450,000 mark.

Operator

Your next question comes from the line of Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley

Any update on the potential TCEQ settlement discussions? I know some of your competitors have settle there with the EPA. And I'd love to hear Bill's views on California Prop 23.

Kimberly Bowers

This is Kim. But Bill came over there and annnounced with EPA last Friday. And we are still reviewing that now, but we are very actively working with TCEQ [indiscernible], and we anticipate that will happen before the end of the year. So things are moving well there, and discussions are progressing at this stage.

Evan Calio - Morgan Stanley

And Kim, do you think recent settlement arrangements have been becoming the accurate zip code for cost? Or do you have any estimates that you could share with us there? Range?

Kimberly Bowers

At this stage, I don't know that we see any additional costs coming with our new costs [ph] in process. I mean, you administer deposits that is going through it, but no capital will be seen.

William Klesse

On AB32 and then Prop 23, of course, if I said what I really think I'd get into trouble. However, Governor Schwarzenegger and the Mayor of LA, they don't see any problems with APEC. But for those who don't know, AB32 is a cap and trade, low-carbon fuel that reduces it back to 1990 levels [indiscernible] power where 1/3 has to be renewable. It is really an anti-fossil fuel law. It was only 13 pages, but it's more seem to have very large potential impact. If we fail to win Prop 23, the cost to the consumer in California is clearly going to go up. And I guess we'll get the opportunity down the road to say, "We told you so." And it will all be passed through to the consumer as the companies aren't going to able to absorb this or they're going to go out of business or makes the playing field on level with imports. Valero has 1,600 employees in California because people ask us why are we involved. We employ on average about 900 contractors permanently. We've invested this year in California about $500 million. Our investment in California is $3.8 billion. We pay taxes. We pay property taxes of $27 million, sales and use taxes of $20-some million. So obviously, we are in California as a good neighbor, and some of the [indiscernible] are extremely disappointing. The opposition has been able to characterize this issue as Texas oil companies. We've been flattered as I'm sure Tesoro is that we're now a big oil. We thought we're independent. This is about George really [ph] on dirty companies and dirty polluters, yet this is about CO2. It's not about other stuff, it's CO2. We talked about the green -- the opposition talks about the green industry, and I'll say to you what jobs? If this continues, the jobs are going to be in Nevada, Arizona and China. The building trades in Northern California have unemployment in the range of 30%. Those are real jobs for real people. I'm surprised no one really asked why the Silicon Valley and venture capitalists are throwing so much money at this. They have though been able to shift the debate away from the consumer impacts to the issues I just mentioned. People really don't understand that this is a CO2 regulation bill. It is the first law in the United States that's actually addressing this. But we'll see what happens when people vote on Tuesday. And for anybody listening to the call because we have a lot of people on this call, if you're in California, I hope you do vote. And for some of the companies that I know listening to this call, for the ones that are [indiscernible] on this issue, we appreciate your help.

Evan Calio - Morgan Stanley

How about New York? I don't know if that's going to help you though.

William Klesse

No, I don't think that will help, but we get a lot of people listening to this call.

Operator

Your next question comes from the line of Mark Gilman from The Benchmark Company.

Mark Gilman - The Benchmark Company, LLC

Was Paulsboro profitable in the third quarter, Mike?

William Klesse

I'm going to answer that. We give out data that deals by regions, and we continue to do that. Obviously, the cracks were better in the second quarter. You can look at our regional data. But historically, we don't give out this kind of data. So we realize that there were a lot of quotes made the other day, but that's not the way we do it.

Mark Gilman - The Benchmark Company, LLC

Bill, have you reached a definitive decision barring any massive changes in the environment to restart Aruba when the maintenance is completed?

William Klesse

Same definitive, I suppose, can be a little bit of relative term. It is our plan to start up when we finish middle to end of December or early in January. From a supply chain perspective, it works for us. We're actually short jet in our system here, the way we do our marketing. And we'll also be short cat crack charge stock or VTO [ph] in the first quarter because of our turnarounds we've got going at Port Arthur. So as long as the markets stay relative to where we are, and our perspectives stays where it is, yes, we're going to start up. And I have maintained that decision will be made as we get closer to when the maintenance is completed. We'll wound up [ph] having to complete a rebuild a player there, replace the player that slowed down or at least extended our maintenance effort.

Mark Gilman - The Benchmark Company, LLC

Bill, at a more strategic level, given your bullish diesel outlook, amongst the slate of potential growth-oriented projects, is there any consideration being given to a hydrocracker in Texas City?

William Klesse

It has been, not today. What we're going to do is finish the two hydrocrackers that we're half done with, and they are extremely large-capital projects. We've given a lot of data out to the market here over the last several presentations. But basically, Port Arthur, I think, is $800 million to finish and St. Charles is $600 million to finish on top of the other stuff. And we're going to check those numbers, but I think they're right. And so we are playing here [indiscernible] just to finish those projects. We've also added a couple of hydrogen plants that have excellent economics. Go ahead, Rick.

Richard Marcogliese

Mark, let me just say a couple of other comments. We actually installed or mount hydrocracker in our Houston refinery in 2007, which actually serves both Texas City and Houston. In addition, Texas City already has on the ground one of our largest gas/oil hydrotreaters in the system. So it actually has very good hydro processing capability today. And so that's why we don't have an investment targeted there in a way we've already made the investment for both Houston and Texas City.

William Klesse

Yes, we saw that in hydrocrack field in [indiscernible]. I just comment because Aruba gets a lot of conversation, so let me just go back there. And you just mentioned, this is a decent asset with good potential, good people. We've got a good harbor, great logistics. The business environment under the current Prime Minister is much better. I think they found out tourism isn't something that you can always count on. It's much better. We have -- and I'm going to say a business-friendly relationship there. And looking at some of the policies, we got a question on the flex permits earlier. But if you look at some of the policies that happened in the United States today, maybe Aruba is even more business-friendly than in the United States. So we think there is value there, and we're positioning ourselves to target Brazil.

Mark Gilman - The Benchmark Company, LLC

Mid-Continent margins were quite a bit stronger than what we were looking for. I was wondering, did the crude slate changed appreciatively, particularly are there any more WTI in that region than the case previously?

Michael Ciskowski

I don't think it changed appreciably, Mark. I mean, we ran as much WTI as we could.

Joseph Gorder

Mark, one other factor. In April this year, we completed the revamp on the Memphis cat cracker. So to the extent we had better realizations in the third quarter, we had better operating performance at the Memphis plant.

Operator

Your next question comes from the line of Paul Cheng with Barclays Capital.

Paul Cheng

Mike, can you tell me that some balance sheet items, what is market value of your inventory in excess of LIFO? And what is the working capital, including the cash?

Michael Ciskowski

The market value in excess of our LIFO is $4.9 billion. Current assets, about $11.9 billion. Current liabilities, about $8.2 billion, and our net working capital there is $3.7 billion.

Paul Cheng

That's just including the cash, right?

Michael Ciskowski

Yes, it is.

Paul Cheng

And my understanding, [indiscernible] thinking a loss or trading gain or loss in the quarter?

Michael Ciskowski

We have about $16 million in profits in the quarter.

Paul Cheng

$16 million.

Michael Ciskowski

Yes, sir.

Paul Cheng

And this is for Rich. Rich, can you share with us what is the spring 2011 turnaround schedule may look like?

Richard Marcogliese

Sure. And we issued a press release on this, but let me add a little color to it. We have a very heavy turnaround workload planned for the first quarter of '11. We'll have a plant-like turnaround at the Benicia refinery, that will be in January. It would be about 36 days. We'll have a very large turnaround in Port Arthur. We'll take down a large cruise train and the coker. This turnaround will last 55 days or more, and it is basically set on the project to replace all six cokers. We also have a very large cat cracker revamp at St. Charles. This will be in the February, March time frame. It will be 55 days or longer where we are actually gutting and rebuilding about half of this, and all the second cat cracker are going to converted to more or less conventional riser FCC. We have a yard, more plant-wide turnaround in March. That would be 40 days long. And then we have a hydrocracker turnaround at McKee in March, 24 days in duration.

Paul Cheng

And then a final one maybe for Mike. In addition to the Cameron Highway Pipeline that you guys sold. Is there any additional pipeline asset that is sitting on your portfolio?

Michael Ciskowski

We have some logistics assets, but they're not material like the Cameron Highway System.

William Klesse

Well, the main difference with Cameron Highway is we have pipelines. We have gathering systems. We have an interest in the pipeline between McKee and El Paso. There are several assets down in the Port Arthur area. But the Cameron Highway Pipeline was not a strategic asset to us. And it was clearly worth more to an MLP. So we have a non-strategic asset worth more to the MLP and so that's why we took action.

Paul Cheng

And since you talked about Aruba, is there any update about the potential sales or any negotiation that you can share at this point?

William Klesse

There is no update. We're focusing on exactly what I answered for Mark earlier.

Operator

Your next question is from the line of Blake Fernandez with Howard Weil.

Blake Fernandez - Howard Weil Incorporated

Bill, you've been pretty candid about you're kind of stance on the macroenvironment. And I'm just curious, with the new CapEx budget going into next year, including some growth in spending, would you characterize that as kind of a more kind of constructive outlook on the macro? Or is that really just a function of capital being deployed on the balance sheet, which is contributing in the idea of just going ahead and pushing that forward and finishing up those projects?

William Klesse

No, I think next year is going to be better than this year. We still believe and I'm told all the time, we're having an economic recovery. Valero sells fuel. I think if you look at least our 2009 data, 81% of our output is gasoline, diesel and jet. So we're fuel, and so we need people back to work. We need people driving their cars and trucks moving and people flying. So we see the economic recovery happening, it's just slow. So we think our margins will be good next year. We think we'll have a better year than we've had this year. And this year, considering it's worked out reasonably well. So with that in mind, we believe that. Now on the hydrocrackers, if you look at the world, diesel fuel is growing at least 2x faster than gasoline's growing. It's already a 25 million barrel a day business in the world versus gasoline in the 22 million or 23 million barrels a day. We've mentioned that of the U.S. Gulf Coast, we believe we can export. And these hydrocrackers, well, let me add one other point, you can see that the diesel [ph] crack today is at least twice the gasoline crack. It may be almost 3x the gasoline crack in the Gulf Coast. So it's clearly advantageous to make our growth spec relatively [indiscernible] for diesel. That part said, we also believe, as Mike said in his speaker notes, that natural gas prices are going to stay low for the foreseeable future. And in a hydrocracker, you convert a natural gas to hydrogen and you put the hydrogen in a hydrocracker, we get a liquid volume gain of about 30%, 25% to 30%. So in a way, it's a gas-to-liquids operation. So we see these projects as good value-added projects for our shareholder. We already are basically halfway into them. All the equipment sitting at the site. So we think it is on our shareholders' interest to finish these. So between the economy getting better, selling fuel, diesel, thinking natural gas, we think they're the kind of projects that we think we were right on. We just weren't anticipating the collapse in 2008.

Blake Fernandez - Howard Weil Incorporated

There's been some recent announcements on the build-out of like compressed natural gas to fuel the trucking fleet with natural gas. And I'm just curious for, one, have you looked at any of that for your retail sites? And secondly, does that cause you any concern on potential [indiscernible] demand growth into the future as far as that aiding into that growth?

William Klesse

We have not looked at that for our retail sites. Would be a concern? It's not a concern in the near term. But we did say, I just said, we see natural gas at very low numbers relative to much, much higher oil prices, so there is an economic incentive there. But we'll have to see how that develops, and then you almost get into the fixed-base operation where trucking, it needs to come back to a place where you can refuel because to build the infrastructure in the marketplace, it's going to take no lot longer. There is an economic driver there, I'm sure.

Operator

Your next question comes from the line of Chi Chow with Macquarie Capital.

Chi Chow - Tristone Capital

Bill, I don't mean to open the can of worms for you on this, but on Prop 23, it certainly looks like the recent polls indicate that the measure is not going to pass. So in that scenario, how does Valero respond to the cap and trade provisions and the low carbon fuel provisions of AB32? And how do you see the situation playing out in the state?

William Klesse

Well, I'm not going to see the price point [ph] until Tuesday night. And so unless the voters vote -- but then as to the second part, we're in business in California, it'll just continue. And we'll see what the actual regs look like, and then we'll take actions around them.

Chi Chow - Tristone Capital

How concerned are you? And can you meet the low carbon fuel specs as they are laid out right now going forward?

Richard Marcogliese

Well, I mean, to a certain extent, some of that is substitution with electric. I mean, it's more of a fuel mix question than it actually would be a refinery production.

William Klesse

I guess, we can't really answer you very well here. Rich gave you -- we don't have the rules or regulations or how it's all going to work. I mean, in a way, the low carbon fuels is an electric car mandate, okay. So I mean, we just have to let this play out, Chi. I guess, we're not giving you good answer because we don't have one.

Chi Chow - Tristone Capital

Maybe one final question on the Ethanol side. How do you view the current situation of the Ethanol subsidies and the import tariff renewals?

Richard Marcogliese

First of all, I guess, our Ethanol margins improved a lot from the second quarter to the third, and we even seen further improvements going to the fourth quarter. And even though corn prices are up, they're up to about $5.60 a bushel, ethanol prices, they've been even faster. It's been good demand. Ethanol is now selling above gasoline by about $0.35 a gallon. So with the $0.45 blender's credit, it's still possible to win by about $0.10 a gallon. So we're seeing our margins do quite well. The demand is up. And as far as the be E15, I don't think that's going to have any short-term impact at all because the warranty situation, and that is really good for 2007, newer cars, it's kind of a problem. Retail has offered multiple grades. So I think E10 is going to be the predominant fuel over the near term. As far as the import tariff, $6.25 a gallon, I think it's irrelevant. We're seeing no imports today. Brazilian ethanol is actually more expensive than U.S. ethanol even without the import tariff, so it's kind of a nonfactor. If anything we're seeing, this export of ethanol, may be into Canada, some into Europe because the U.S. is really the lowest ethanol prices around. So all in all, I think the business is doing good just on economic alone. The subsidy is not really a factor today, so there is blending economic, and the tariff is not a factor because of Brazilian ethanol being more expensive than U.S.

Chi Chow - Tristone Capital

And do you think that situation carries forward, that if, again, both of those, you mean, nonfactors?

Richard Marcogliese

Well, at some point, if Brazilian ethanol were to get really cheap or they expand their capacity more than their local demand. Yes, potentially, it could come here. But I don't see that happening over the near-term. Their demand keeps going up faster than their supply to us. So I don't see that changing over the near to intermediate term, long term. As far as the subsidy, most of this year, yes, ethanol is actually cheaper than gasoline. So the subsidy is really not a factor today. It allows the blender to capture some of the tax that ethanol is selling above gasoline. It goes back and forth. So I think the fact that mandate is actually higher so the ethanol plants will have to run and have to have margins to run. It always emphasize the fact that our plans, given the corn bill, we don't have drilling cost to get the corn bill market. We actually buy our corn, our actual corn caps right now is about $30.50 per bushel under the seedbox, which gives us about $0.11 under the seedbox right there. And if you look at some of these destination plants, they have to actually rail the seed from Chicago area or the Midwest to destinations. They're paying above the boxes. I feel like we have at least $0.20 a gallon margin advantage over the ethanol plant. So I think that we've got a very low cost base in our plants. We are taking advantage on location and the costs.

Operator

Your next question comes from the line of Faisel Khan with Citi.

Faisel Khan - Citigroup Inc

Of the capital projects that you guys have out to 2013, I know you said you only have the capital remaining on the new hydrocrackers basically. But are those capital costs basically lock in? Is there any chance or any risk that those costs are going to be higher? Or I mean, is there any benefit that it could be lower?

Richard Marcogliese

Well, the costs are locked in on the major equipment. As Bill mentioned, before '11, major equipment is actually laying on the ground, so it's bought and paid for. We are in the process of bidding out inside the battery limit construction. What I would tell you about that is our assessment of construction market is that conditions are favorable. It's likely that they will come in at lower costs than one we originally anticipated the construction when there's a lot of demand for fuel construction services. So we are not locked in yet, but we would say that going forward, conditions are favorable relative to what we've got.

Operator

Your next question comes from the line of Jacques Rousseau with RBC.

Jacques Rousseau - RBC Capital Markets Corporation

Just one quick follow-up on AB32. I had seen a quote attributed to Valero of a potential cost of $177 million a year if AB32 is enacted. And obviously, as you've said, there's a lot of uncertainty at this point. But I was just curious, what type of assumptions you're thinking in terms of potential costs for carbon credits?

Kimberly Bowers

This is Kim. Again, it is really hard to get a meaningful estimate at this point in time. But the regulation, the cap and trade rules are not out yet, and that for us clearly has the potential for expense there. Our stationary Tier II [indiscernible] refineries, about 3.75 million tons per year. If you factor that in, you have like a $20 credit costs, that's $75 million a year right there. The carbon fee itself just to regulate us is $45 million a year. So those are the kind of numbers that we have. But other than working with normal, we have [indiscernible] emissions in our report until those, the cap and trade fuel facility [ph] issue and evaluate it. We're not in very good position to give out a meaningful estimate.

Operator

[Operator Instructions] Your next question comes from the line of Edward Westlake with Credit Suisse.

Edward Westlake - Crédit Suisse AG

Just on the $100 million of costs. is that inclusive or exclusive of the savings you get, which you've disclosed for things like SEC revamps in Memphis and St. Charles? And then just how you're thinking about pension liabilities given that we're now in an interest rate environment. I know you've given disclosure of the sensitivity to a 25-basis-point move in interest rates.

William Klesse

Well, the $100 million is really broken down between in-house here at corporate and then out in the field. We're not counting the benefit from revamping the MSTC or anything. It's more in items, for instance, strategic sourcing areas...

Richard Marcogliese

Locally, yes, I can add a little color to that. First of all, let me precede it by saying we are Salomon-driven on our performance metrics, and we benchmark our operation. We participate in the industry surveys every two years, but we track these things on a monthly basis. We would not include project benefits in this $100 million reduction goal. It would be more toward operating cost reduction. For example, we think in the refining system, 2010 cost will come in $70 million lower than the equivalent at 2009 controllable costs. It's a combination of focused energy stewardship program to support efficiency. Personnel headcount reduction, overtime reduction, contractor reduction, more efficient use of outside services, chemicals and catalyst cost reduction, which refers to the strategic sourcing group that Bill mentioned, and then, an overall focus on plot very on the order liability. Fewer pump repairs, we deliver nation, more reliable plant operations so it's a number of things and again, value added just in the refinery system is about $70 million this year.

William Klesse

And we have a never rigorous program here. We let the accounting department keeps track of it for us and with that big and we do it. I know some of you guys kind of laugh a little bit on some of the items, but this is a detailed business. And we will save somewhere between $1 million to $2 million just on our printing, copying and paper costs here in this company, and we'll realize that next year. So I mean that stuff adds up. On your second question, Mike is going to answer.

Michael Ciskowski

On the pension, it does appear -- I mean, it depends on where interest rates are in the year obviously, but they are lower than the, what, the interest discount factor was last year. So it does appear PBO [ph] is going up at the end of this year. We have contributed $54 million so far this year, too, against to fund our DB plan. And we expect to make another $100 million contribution here by the end of the year.

William Klesse

We'll still be underfunded. I would remind you that we were totally funded at the end of 2007. And this management team, if I go through the end of the year, will have contributed $750 million to our pension fund over the last four years.

Operator

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

Mark Gilman - The Benchmark Company, LLC

Did you give an indication on working capital release on the Paulsboro sale?

Michael Ciskowski

$275 million is our estimate at this time.

Mark Gilman - The Benchmark Company, LLC

And earnings on shops, I saw a wire story, $25 million, $30 million, is that reasonably accurate? And where does it show up in the financials?

Michael Ciskowski

That is reasonably accurate. It shows up in other income, interest and other income.

Operator

Your next question comes from the line of Doug Leggate with Bank of America.

Douglas Leggate - BofA Merrill Lynch

On the acquisitions, I just want to ask a strategic question. Are you thinking of European or U.K. refinery as an export asset or you're actually interested in domestic retail assets as well given, obviously, the growth in that area? I'm just curious as to what exactly you got in mind?

William Klesse

It's both. Some of the assets we're looking at, obviously, serves the local market, and a couple of others are geared more to exports. Obviously, one of the packages has some retail assets with it. And if that's what happens, we'd be in that business. But we're refiners. We are marketers, and this fits us. And we're not marketing or having to market in the United States. If you'll remember, we market quite extensively in Eastern Canada.

Douglas Leggate - BofA Merrill Lynch

So just to be clear, those five major refineries for sale, are we talking about single-refinery deal or could you be looking at multiple assets?

William Klesse

Multiple assets.

Operator

And there are no further remarks. Do you have any closing remarks, Mr. Smith?

Ashley Smith

Yes. Thank you, Brandis. I just want thank everyone for listening to today's call. If you have any questions, feel free to contact me at Investor Relations department. Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This does concludes today's conference. You may now disconnect.

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