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's third quarter results. A line's been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you, Mr. Ashley Smith. Sir, you may begin.
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 describe in our filings with the SEC. Now I'll turn the call over to Mike.
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. 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 2010, 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 has increased from $5.83 per barrel in October of 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 8% higher than the October 2009 levels. Our third quarter 2010 refinery throughput volume averaged 2.4 MMbpd , which is in line with our guidance. Compared to the third quarter of 2009, volumes were up 136,000 bpd 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 than 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 system-wide 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 pre-tax cost reductions through numerous initiatives and great execution by our employees. We are on pace to reduce pre-tax costs by a total of $185 million in 2010, and our goal for 2011 is an additional $100 million in pre-tax cost reductions. As part of our efforts to reduce costs, we remain committed to improving our operating performance. We set goals and measure our progress using Solomon rankings, which are benchmark surveys across the refining industry that cover key operating categories.
Solomon rankings are by quartiles, 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: non-energy 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 matched last year's record earnings, with operating income at $105 million, mostly due to increased 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 margins.
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 $510 million decrease in regulatory spending, being partially offset by a $305 million increase in sustaining and reliability spending on projects that should improve our operations, such as a 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 valero.com, 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 pre-tax 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 deepwater 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 dock. 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. I will turn it over to Ashley to cover the earnings model assumptions.
Okay. Thanks, Mike. For modeling our fourth quarter operations, you should expect the refinery throughput volumes to fall within the following ranges. The Gulf Coast should be at 1.325 MMbpd- 1.375 MMbpd , excluding Aruba. Mid-Continent should be at 410,000 bpd- 420,000 bpd . The Northeast should be at 370,000 bpd- 380,000 bpd , including Paulsboro. The West Coast should be at 280,000 bpd- 290,000 bpd . Refinery cash operating expenses are expected to be around $3.80 per barrel, including Paulsboro and the cost 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 costs 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.
Ladies and gentlemen, at this time, if you would like to ask a question, it is star one on your telephone keypad. Again, star one. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Doug Terreson.
Morning, guys.
Morning, Doug.
Today's press release, plus some of your recent commentary, suggests that strategic actions may change the geographical footprint, that is, if they enhance competitiveness for the company. On this point, I wanted to see if you'd provide some updated insight into your strategic thinking, including any functional or geographical criteria that you deem important when thinking about your strategic outlook.
Doug, this is Klesse.
Hey, Bill.
What I'm going to say on this maybe is a little longer than what the question you asked. Valero, we're a refining company. You guys recommend us. Our investors invest in us because they want exposure to the segment. Refined products, they're commodities. We believe that we can add shareholder value through profitable growth. Expanding our footprint will help us perform more profitably as 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 how we've been exporting diesel to Europe.
Yeah.
The U.S. is still importing gasoline. Some capacity will have to shut down, but other capacity will survive, and it will prosper. We have one advantage of being large in the sense that we get to look at a 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. market.
Okay.
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, and which you guys have already been questioning whether the integrated business model is the right model going forward.
Right.
Valero is unique. We are different than all the rest of the independents in that we are very, very large. We think there are opportunities, and we have said this for the last several years that we keep looking. Now with the quality assets on the market, yes, we are actively looking at it.
Okay. Is that Europe and not Asia, Bill, is that the way to think about it?
Yes, it is for today.
Okay.
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 do not see the opportunity there at this point in time.
Great. Thanks a lot.
Your next question comes from the line of Edward Westlake from Credit Suisse.
Yeah. Good afternoon. Sorry. Good morning, everyone. Just on the debt, I guess last quarter, the strong results and the debt coming down, the focus was on dividends and buybacks. I guess you've announced 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?
Okay. In 2011, 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.
Okay. Then a follow-up just on the tax rate. Ashley, you talked about a 40% tax rate, if I heard you correctly, in Q4. I presume that is related to Paulsboro and book losses and taxes. Maybe just some words on the underlying tax rate that you expect going forward.
Yeah. This is Mike. On our 40% guidance there. What is happening there is we do expect a loss at Aruba due to the restart costs and expenses that we have that is a little bit larger than what we have incurred in the past. That is tax-e ffected at a very low rate, and so it is causing our overall rate to go up a little bit.
As you look forward and strip that out, the underlying tax rate you would expect to be?
It would be more in the 36%-37% range.
Great. Thank you so much.
Yes, sir.
Your next question comes from the line of Doug Leggate with Bank of America.
Thanks. Good morning, guys.
Good morning, Doug.
A couple of things from me. Back to the 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 are you already in good shape given that situation? I have a follow-up.
Yes, we did issue equity on an acquisition that we did think was very good, and obviously, look all thought it was good, too. 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 as we expect them to close here in the fourth quarter. It just depends on what the deals look like. Obviously, we have lots of financial resources here. 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.
Could you maybe give us an idea what your ceiling on debt to cap would be, Bill? Where are you comfortable going to on debt to cap?
I'm not going to give up the investment credit rating, so we will manage the entire process.
All right, great stuff. My follow-up is really just a little bit of color on the dynamics of what's going on with diesel right now. We're seeing some pretty interesting, I guess, relationships with the dollar, with Brent, and with diesel, and I'm just wondering if you could give some color as to how the export market is looking right now, how the export dynamics are playing in, and really what your prognosis is for diesel in light of a potential weak dollar as we move into 2011. I'll leave it there.
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 bbl a day of distillate through the quarter, and it looks like it's going to be at similar levels going into the fourth quarter. Gasoline actually picked up in the third quarter, and we're doing about 65,000 bbl a day there, and we expect that to continue also. Generally, the export markets have continued to be strong. Going forward, what do we think? Well, you still got global demand for products. It's growing faster than our U.S. demand. You still have some supply issues with Venezuela struggling. Mexico demand continues to exceed their supply, and so they're importing products. We're seeing more distillate now going down to Brazil, and their economy has been very strong.
During the second quarter, Brazil imports reached almost 200,000 bbl a day. We expect that they could be importing gasoline here at some point in the future. You've got just these little temporary issues like this French strike that took place, which we don't see it having any major impact on the market. I would tell you, I think what we've seen is that it probably supported the New York Harbor markets a little bit, and then perhaps longer term, there'll be a restocking that takes place as they've depleted some of their reserves. Other than that, we just don't see much. So that's really where these export markets are. They've been very consistent, and I don't think really that's going to change.
Okay. If I could just one quick follow-up unrelated on CapEx. With Paulsboro gone, you guys have normally talked about a sort of $1.5 billion maintenance capital level. With the asset sales done, what is that number going to look like going forward? I will leave it at this time.
Well, I think clearly we are in the $1.3 billion, $1.4 billion, and I have 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 replaced our coke drums that we are doing at Port Arthur and then eventually St. Charles and Wilmington. When we are done with all of that stuff, your staying business capital is in the range of $1.3 billion, $1.4 billion. Very close to the company's DD&A.
Got it. Thanks a lot, Bill.
Your next question comes from the line of Paul Sankey with Deutsche Bank.
Hi, guys. You highlighted that for the time of year, margins are very strong. I think in certain regions, they are actually at the highest that we have seen for the past 10 years. I am assuming that you would say that the single biggest reason for that is the exports trend that you have just talked about. Could you provide us any more detail on those exports, for example, 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. I thought it was interesting what you said, by the way, that there is not any near-term impact from Europe, the French strikes. But I guess that you would not expect that until they can restart importing product.
That is right. They have been drawn down what they had in inventories to this point. They would not have been able to bring imports in anyway because the ports were closed. If I can be generic on the volumes, because again, I think Doug Harrison asked this in the last call, but we would really rather not be specific. But I can tell you right now, our exports are primarily headed to Europe and then some lower volumes to South America. Probably if we wanted to say a 75/25 split, that would be a fair assessment. 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. We had a very strong winter in South America, where they pulled volumes. Winter is coming in the rest of the world. So just looking at the outlook right now, it looks like things are shaped up pretty well internationally for diesel to be strong. If you look more domestically, our demand is up from last year. We're seeing data that supports increasing activity. Truck tonnage is up, rail and port activity has increased, and all these serve as leading indicators for industrial growth. I would say that we certainly think things will stay supported for the time being.
Yeah, I would have seconded you by saying that given that demand right here, right now, although improving, still looks very weak, it's surprising that we've got such strong Q3 and Q4 margins.
Well, we can see you're searching for this. I'll give you a little more data. We've seen very strong German demand. The number of days of diesel looks pretty good. Inventory relative to demand, we've had a lot of turnarounds. Now, this is a little dated, but it's the last data I've seen. The Long Beach L.A. harbors were up about 25% August to August. So as Joe said, we've seen some domestic demand pick up, too. Now, we would expect some of that to continue. Then the question becomes, is this stocking for the Christmas holidays or is this actually solid economic growth. But clearly, that was up significantly in August. Then you've seen data which spills over into cars as well, that the vehicle miles traveled has actually increased in the United States as well.
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.
Thanks, Bill. Moving on to the work that you're doing on costs, could you say more about how important low natural gas prices are for you and your OpEx? If you could, to whatever extent you can, split out more detail on the improved cost performance, particularly with reference to that natural gas. I'd also be interested by how you see yourselves as relatively more or less exposed to the low natural gas prices against any other refiner. Thanks.
Well, I'll let these guys answer you, but in the third quarter, I think we consumed basically 22 trillion or some number here. Anyway, every dollar wound up being worth $0.10 a barrel, right?
Yeah. Our energy costs-
For the quarter.
Yeah, 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 sensitive to NYMEX natural gas prices. For each dollar change in NYMEX, it's about $35 million a quarter, $35 million- $40 million a quarter. Depending on how you want to look at it, you can do the math yourself. But that's what our sensitivity is.
That's great. I appreciate that. Thanks. I'll leave it there. Thanks, guys.
Your next question comes from the line of Jeff Dietert with Simmons.
Good morning. 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?
Yeah. I think they're just focused on the state of the industry in general and the recovery of the economy. 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've left the outlook at negative. I think that's more an indication of the industry.
Are there any metrics in particular that they're focused on keeping you within?
They're more focused on the coverage ratios. They don't look quite as much at the debt to cap, and they're more focused on the debt to EBITDA and the interest coverage.
Thank you. 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.
Yeah, 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 the conclusion that Canadian crude is really important to our national energy security. Hillary Clinton, in a speech just a week or so ago, made the comment that although she's not signed off on the permit for the project, yet she's inclined to do so. The following day, four of the international labor unions, which are representing a significant number of workers, sent a letter urging the State Department to approve the permit to Keystone. 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 2011, but we expect it to happen.
Now, that puts us about three to six months later than the original plan, which had XL being completed by the end of 2012. Now we're looking probably at quarter two of 2013. Just by way of an update on the status of the project, they've got 100% of the pipe and the pump stations have been purchased. 60% of the right of way for the entire project has been taken care of, and 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. Everything is just proceeding as we would expect. The link from Cushing to Port Arthur, which is 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 Canadians into the market for us to be able to run at Port Arthur in advance of the completion of overall Keystone, which again, would be second quarter of 2013.
What's the capacity that would be available to Port Arthur on the second quarter of 2012 and for the second quarter of 2013 as well? How do those compare?
Jeff, the capacity from Cushing to Port Arthur is somewhere around 450,000 bbl a day. I don't think it will run at that kind of rate because you are 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 a day when that segment comes on and then ultimately going up to that 450 mark.
Great. Thanks for the update, Joe.
Okay. You are welcome. Hey, Jeff?
Yes.
You ought to ask TransCanada what they think. Just follow up on this, will you?
Yeah, I will. Thank you.
Okay, buddy. Thanks.
Your next question comes from the line of Evan Calio from Morgan Stanley.
Morning, guys. How you doing?
Hey, Evan.
Yeah, look, a lot of material questions here have been asked and answered, so let me hit you on a couple smaller ones. Any update on a potential TCEQ settlement discussions? I know some of your competitors have settled there with the EPA, and I would love to hear Bill's views on California Proposition 23.
Do you want to start flex first, I guess? This is Kim.
Hey, Kim.
Flint Hills came out with their announcement with EPA last Friday, and we're assuming that now, but we are very actively working with TCEQ to get our flex permits done, and we anticipate that it'll happen before the end of the year. Things are moving well there, and discussions are progressing with the state.
Mm-hmm. Do you think recent settlement ranges have been an accurate ZIP code for cost? Do you have any estimates that you could share with us there? Range?
At this stage, I don't know that we see any additional cost coming with our deflexing process. The administrative cost of getting it, going through it, but no capital that we've seen.
Got it.
On AB 32 and then Proposition 23, of course, if I said what I really think, I would get in trouble. However, Governor Schwarzenegger and the mayor of L.A. don't seem to have any problem saying what they think. For those that don't know, AB 32, the cap and trade low-carbon fuel, reduces it back to 1990 levels. It's a power where one-third has to be renewable. It is really an anti-fossil fuels law. It was only 13 pages, but it's morphed into a very large potential impact. If we fail to win Proposition 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.
It will all be passed through to the consumer as the companies aren't going to be able to absorb this, or they're going to go out of business, or it makes the playing field unlevel with imports. Valero has 1,600 employees in California because people ask me 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. Obviously, we are in California as a good neighbor, and some of the rhetoric is 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 big oil. We thought we were independent.
This is about we are dirty companies and dirty polluters, yet this is about CO2. It's not about other stuff. It's CO2. 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. We'll see what happens when people vote on Tuesday.
For anybody listening to the call because there's a lot of people on this call, if you're in California, I hope you do vote. For some of the companies that I know listen to this call, for the ones that have helped us on this issue, we appreciate the help.
That's great. I'll vote in New York. I don't know if that's going to help you, though.
No, I don't think that'll help. But we get a lot of people listening to this call.
Mm-hmm. Good show. Thanks.
Your next question comes from line of Mark Gilman from The Benchmark Company.
Good morning, guys. A couple quickies and then a general one. Was Paulsboro profitable in the third quarter, Mike?
I'm going to answer that. We give out data that deals by regions, and we've continued to do that. Obviously, the cracks were better in the third quarter. You can look at our regional data. But historically, we don't give out this kind of data. We realize that there were a lot of quotes made the other day, but that's not the way we do it.
Okay, let me try another quick one. Bill, have you reached a definitive decision barring any massive changes in the environment to restart Aruba when the maintenance is completed?
Saying definitive, I suppose, can be a little bit of a relative term. It is our plan to start up when we finish near the 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 cracker charge stock or VGO in the first quarter because of our turnarounds that we've got going at Port Arthur. As long as the markets stay relative to where we are and our perspective stays where it is, yes, we're going to start up. But I have maintained that decision will be made as we get closer to when the maintenance is completed.
We wound up having to complete a rebuild of flare there or replace a flare that slowed down or at least extended our maintenance effort.
Hey, Bill, at a more strategic level, given your bullish diesel outlook, amongst the slate of potential growth-oriented projects, is any consideration being given to a hydrocracker at Texas City?
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. Basically, Port Arthur, I think, is $800 million to finish, and St. Charles is $600 million to finish on top of the other stuff. We're going to check those numbers, but I think they're right. Our plan here at the moment is to finish those projects.
Yeah.
We've also added a couple of hydrogen plants that have excellent economics. Go ahead, Rich.
Yeah, Mark, let me just add a couple of other comments. We actually installed a mild 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 Hydroprocessing capability today. 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.
Yeah, we go ahead and hydrocrack the LCGO.
All right.
I just comment because Aruba gets a lot of conversation. Let me just go back to that and just mention, this is a decent asset with good potential, good people. They'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 a, and I'm going to say a business-friendly relationship there. Looking at some of the policies, we got the question on the flex permits earlier. If you look at some of the policies that happen in the U.S. today, maybe Aruba is even more business-friendly than in the U.S. So, we think there's value there, and we're positioning ourselves to try to pursue it.
Last one for me. In Mid-Continent, margins were quite a bit stronger than what we were looking for. I was wondering, did the crude slate change appreciably? Particularly, did you run any more WTI in that region than had been the case previously?
I don't think it changed appreciably, Mark. We ran as much WTI as we could. Mark, one other factor in April of this year, we completed the revamp on the Memphis cat cracker. To the extent we had better realizations in the third quarter, we had better operating performance at the Memphis plant.
Okay, guys. Thanks a lot.
You're welcome.
Your next question comes from the line of Paul Cheng with Barclays Capital.
Hey, guys.
Morning, Paul.
Hi, good morning. Several quick questions. Mike, can you tell me that some balance sheet item, what is the market value of your inventory in excess of book, and what is the working capital, including the cash?
Yeah, the market value in excess of our LIFO is $4.9 billion. Current assets, about $11.9 billion. Current liabilities, about $8.2 billion. Our net working capital there is $3.7 billion.
That is including the cash, right?
Yes, it is.
Okay. Mike, is there any hedging gain or loss or trading gain or loss in the quarter?
We had about $16 million in profits in the quarter.
$16 million?
Yes, sir.
Okay. That is smart. This is for Rich. Rich, can you share with us what the spring 2011 turnaround schedule may look like?
Sure. 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 2011. We will have a plant-wide turnaround at Benicia Refinery. That will be in January, be about 36 days. We will have a very large turnaround in Port Arthur, where we will take down the large crude train and the coker. This turnaround will last 55 days or more, and it is basically set on the project to replace all six coke drums. We also have a very large cat cracker revamp at St. Charles. This will be in the February-March timeframe. It will be 55 days or longer, where we are actually gutting and rebuilding about half of this millisecond cat cracker and going to convert it to more or less a conventional riser resid FCC.
We have the Ardmore plant-wide turnaround in March. That will be 40 days long. We have a hydrocracker turnaround at McKee in March, 24 days in duration.
Perfect. A final one maybe is 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?
We have some logistics assets, but they are not material like the Cameron Highway system. Well, the main difference with Cameron Highway is we have pipelines, we have gathering systems. We have an interest in a 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, so that is why we took action.
Mm-hmm. Bill, since you talked about Aruba, is there any update about the potential sales or any negotiation that you can share at this point?
I would not. There is no update. We're focusing on exactly what I answered for Mark earlier.
Okay. Very good. Thank you.
Your next question comes from the line of Blake Fernandez with Howard Weil.
Good morning, guys. Thanks for taking my question. Bill, you've been pretty candid about your stance on the macro environment, and I'm just curious, with the new CapEx budget going into next year, including some growth spending, would you characterize that as a more constructive outlook on the macro, or is that really just a function of capital being deployed on the balance sheet, which isn't contributing and the idea of just going ahead and pushing that forward and finishing up those projects?
No, I think we believe 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 Energy sells fuel. I think if you look at our a t least our 2009 data, 81% of our output is gasoline, diesel, or jet. We're fuel. We need people back to work. We need people driving their cars and trucks moving and people flying. We see the economic recovery happening. It's just very slow. We think our margins will be good next year. We think we'll have a better year than we've had this year.
This year, considering, it's worked out reasonably well. With that in mind, we believe that. Now, on the hydrocrackers, if you look at the world, diesel fuel's growing at least two times faster than gasoline's growing. It's already a 25 MMbpd business in the world versus gasoline in the 22 MMbpd or 23 MMbpd . We've mentioned that from U.S. Gulf Coast, we believe we can export. These hydrocrackers-- Let me add one other point.
You can see that the distillate crack today is at least twice the gasoline crack. It may be almost three times the gasoline crack that we're talking about. It clearly has advantages to make on-road spec or ultra-low sulfur 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. In a hydrocracker, you convert natural gas to hydrogen, then you put the hydrogen in the hydrocracker. We get a liquid volume gain of about 25%-30%. In a way, it's a gas-to-liquids operation. We see these projects as good value-added projects for our shareholder. We're already basically halfway into them, all the equipment's sitting at the sites. We think it is in our shareholders' interest to finish these.
Between the economy getting better, selling fuel, diesel, taking natural gas, we think they're the kind of projects, and we think we were right on. We just weren't anticipating the collapse in 2008.
No, that is perfect. Thanks, Bill, for that. That ties in with my second question. There has been some recent announcements on the build-out of compressed natural gas to fuel the trucking fleet with natural gas. I am just curious, for one, have you looked at any of that for your retail sites? Secondly, does that cause you any concern on potential distillate demand growth into the future as far as that eating into that growth?
We have not looked at that for our retail sites. Would it be of concern? It is not a concern in the foreseeable or in the near term. 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. We will have to see how that develops. Then you almost get into the fixed-based operation where trucking, it needs to come back to a place where you can refuel because to build the infrastructure in the marketplace is going to take a lot longer.
Sure. Thanks so much.
There is an economic driver there, I am sure.
Right. Okay. Thank you.
Our next question comes from the line of Chi Chow with Macquarie Capital. Hello, Mr.-
Chi? Chi?
Sorry. Yeah, sorry. Can you hear me?
Yes.
Hey, Bill, I do not mean to open a can of worms further on this, but on Proposition 23, it certainly looks like the recent polls indicate that the measure is not going to pass. In that scenario, how does Valero respond to the cap and trade provisions and the low carbon fuel provisions of AB 32? How do you see the situation playing out in the state?
Well, I am not going to concede the first point until Tuesday night. We will let the voters vote. Then to the second part, we are in business in California, and it will just continue. We will see what the actual regs look like, and then we will take actions around them.
How concerned are you, and can you meet the low carbon fuel specs as they are laid out right now going forward?
I do not know about that.
Well, to a certain extent, some of that is substitution with electric. It is more of a fuel mix question than it actually would be refinery production.
I guess we cannot really answer you very well here because Rich gave you, w e do not have the rules or regulations or how it is all going to work. In a way, the low carbon fuels is an electric car mandate. Okay, so we just have to let this play out, Chi. I guess we are not giving you a good answer because we do not have one.
Okay. Okay, that is fine. Maybe one final question on the ethanol side. How do you view the current situation with the ethanol subsidies and the import tariff renewals?
Well, first of all, I guess our ethanol margins have improved a lot from the second quarter to the third, and we are even seeing further improvements going into the fourth quarter. Even though corn prices are up, they are up to about $5.60 a bushel, ethanol prices have moved up even faster. Seems to be good demand. Ethanol is not, so I'll buy gas lead by about $0.35 a gallon so with a $0. 45 blender's credit.
It is still profitable to blend by about $0.10 a gallon. We are seeing our margins do quite well with the bans up. As far as the E15, I do not think that is going to have any short-term impact at all because of the warranty situation, the fact it is only good for 2007 and newer cars, it is a problem with retail to offer multiple grades. I think E10 is going to be the predominant fuel over the near term. As far as the import tariff, $0.64 a gallon, I think it is irrelevant. We are seeing no imports today. Brazilian ethanol is actually more expensive than U.S. ethanol, even without the import tariff. It is a non-factor. If anything, we are seeing exports of ethanol, mainly into Canada and some into Europe, because the U.S. is really the lowest ethanol prices around.
All in all, I think the business is doing good just on economics alone. The subsidy is not really a factor today because there is blending economics, and the tariff is not a factor because Brazilian ethanol being more expensive than U.S.
Hey, Gene, do you think that situation carries forward? That both of those are going to be non-factors?
Well, at some point, if Brazilian ethanol were to get real cheap, where they expanded their capacity more than their local demand, yeah, potentially it could come here, but I do not see that happening over the near term. Their demand keeps going up faster than their supply does. I do not see that changing over the near to intermediate term. Long term, who knows? As far as the subsidy, most of this year, ethanol is actually cheaper than gasoline, so the subsidy was really not a factor today. It allows the blender to capture some of the fact that ethanol is selling above gasoline. It goes back and forth, though.
I think the fact the mandate keeps ratcheting higher says that ethanol plants will have to run and have to have margins to run. I always emphasize the fact our plants, being in the corn belt, not only we don't have railing costs to get the corn to the market, we actually buy our corn. Our average corn cost right now is about $0.30 per bushel under CBOT, which gives us about $0.11 under CBOT right there. If you look at some of these destination plants that have to actually rail from the Chicago area or the Midwest to destinations, they're paying above CBOT. I feel like we have at least a $0.20 a gallon margin advantage over the incremental plants. I think that we've got a very low cost basis in our plants. We have a good competitive advantage on location and investment cost.
Okay, great. Thanks, Gene. Appreciate that.
Sure.
Your next question comes from the line of Faisel Khan with Citi.
Hey, guys. Good morning.
Morning, Faisel.
Just one quick question. Of the capital projects that you guys have out to 2013, I know you only have half of the capital remaining on the new hydrocrackers, basically. Are those capital costs basically locked in? Is there any chance or any risk that those costs are going to be higher? For that matter, maybe is there any benefit that it could be lower?
Well, the costs are locked in on the major equipment. As Bill mentioned before, a lot of the major equipment is actually laying on the ground, so it is 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 the construction market is that conditions are favorable. It is likely that they will come in at lower cost than when we originally anticipated the construction when there was a lot of demand for field construction services. We are not locked in yet, but we would say that going forward, conditions are favorable relative to what we have got budgeted.
Great. Thanks a lot, guys.
Your next question comes from line with Lasan Johong with RBC.
Morning. Just one quick follow-up on AB 32. I had seen a quote attributed to Valero of a potential cost of $177 million a year if AB 32 is enacted, and obviously, as you said, there is a lot of uncertainty at this point. I was just curious what type of assumptions you are thinking in terms of potential costs for carbon credits.
This is Kim again. It is really hard to give a meaningful estimate at this point in time. The biggest piece of the regulation, the cap and trade rules are not out yet, and that for us clearly has the most potential for expense there. Our stationary CO2 emissions from our refineries there is about 3.75 million tons per year. The impact of that in even a $20 credit cost is $75 million a year right there. The carbon fee itself just to regulate us is $4 million-$5 million a year. Those are the kind of numbers that we have. Other than working with knowing what we have with our CO2 emissions and what we report, until those, the cap and trade piece is really issued and we can evaluate it, we are not in a very good position to give a meaningful estimate.
Okay. Thank you.
Again, if you would like to ask a question, it is star one on your telephone keypad. Again, star one. Your next question comes from the line of Edward Westlake with Credit Suisse.
Hey, thanks for taking a follow-up. Just on the $100 million of costs, is that inclusive or exclusive of the savings you get, which you have disclosed for things like FCC revamps at Memphis and St. Charles? Then just how are you thinking about pension liabilities given that we are now in an interest rate environment? I know you have given disclosure of the sensitivity to a 25 basis point move in interest rates.
Well, the $100 million is really broken down between in-house here at corporate and then out in the field. We are not counting the benefits from revamping the MSCC or anything. It is more in items, for instance, strategic sourcing areas.
Energy.
Go ahead.
Well, I can add a little color to that. First of all, let me precede it by saying we are Solomon-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 costs will come in $70 million lower than the equivalent at 2009 controllable costs. It is a combination of focused energy stewardship programs 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. Then an overall focus on plant reliability, fewer pump repairs, leak elimination, more reliable plant operations.
So it is a number of things. Again, value-added ex energy just in the refining system is about $70 million this year.
We have a very rigorous program here. We let the accounting department keep track of it for us, and we vet these, 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. We will save somewhere between $1 million to $2 million just on our printing, copying, and paper costs here in this company, and we will realize that next year. So that is how this stuff adds up. On your second question, Mike is going to answer you.
Yeah, on the pension, it does appear. It depends on where interest rates are at the end of the year, obviously. But they are lower than what the interest discount factor was last year. So it does appear our PBO is going to be going up at the end of this year. We have contributed $54 million so far this year to fund our DB plan, and we expect to make another $100 million contribution here by the end of the year.
Thank you.
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.
Good. Very clear. Thank you.
Your next question comes from the line of Mark Gilman with The Benchmark Company.
Just a quick one if I could. Have you given an indication on working capital release on the Paulsboro sale?
$275 million is our estimate at this time.
Okay, thanks, Mike. And earnings on swaps. I saw a wire story, $25 million-$30 million. Is that reasonably accurate? And where does it show up in the financials?
That is reasonably accurate. It shows up in other income, interest and other income.
Thanks, Mike.
Your next question comes from the line of Doug Leggate with Bank of America.
Thanks for taking the follow-up, guys.
Sure, Doug.
Bill, on the acquisitions, I just wanted to ask a strategic question. Are you thinking of European or U.K. refinery as an export asset? Or are you actually interested in domestic retail assets as well, given obviously the growth in that area? I am just curious as to what exactly you have got in mind.
It is both. Some of the assets we are looking at obviously service the local market, and then a couple of the others are geared more to exports. Obviously, one of the packages has some retail assets with it. If that is what happens, we would be in that business. We are refiners, we are marketers, and this fits us. We are not locked into having to market in the United States. If you will remember, we market quite extensively in eastern Canada.
Bill, just to be clear, there are five major refineries for sale. Are we talking about a single refinery deal, or could you be looking at multiple assets?
Multiple assets.
Great. Thank you.
There are no further remarks. Do you have any closing remarks, Mr. Smith?
Yes. Thank you, Brandis. Just want to thank everyone for listening to today's call, and if you have any other questions, feel free to contact me in investor relations. Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.