valero energy (vlo) earnings report: q3 2014 conference...

CompanyName:Valero EnergyCorpCompanyTicker:VLOSector:BasicMaterials

Industry:EnergyEventDescription:Q32014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 24

ValeroEnergy(VLO)EarningsReport:Q32014ConferenceCallTranscriptThefollowingValeroEnergyconferencecalltookplaceonNovember4,2014,11:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JohnLocke;ValeroEnergyCorp;ExecutiveDirector-IRJoeGorder;ValeroEnergyCorp;President,CEOGarySimmons;ValeroEnergyCorp;CorporateVP-Crude,Feedstock,Supply&TradingLaneRiggs;ValeroEnergyCorp;SVP-RefiningOperationsAshleySmith;ValeroEnergyCorp;SVP-IR,MarketAnalysis&StrategicPlanningMikeCiskowski;ValeroEnergyCorp;EVP,CFORichLashway;ValeroEnergyCorp;VP-LogisticsOperationsMartinParrish;ValeroEnergyCorp;VP-AlternativeFuels

OtherPart icipants

JeffDietert;Simmons&CompanyInternational;AnalystPaulCheng;BarclaysCapital;AnalystBlakeFernandez;HowardWeilIncorporated;AnalystDougLeggate;BofAMerrillLynch;AnalystBradHeffern;RBCCapitalMarkets;AnalystRyanTodd;DeutscheBank;AnalystRogerRead;WellsFargoSecurities;AnalystPhilGresh;JPMorgan;AnalystMohitBhardwaj;Citigroup;AnalystEvanCalio;MorganStanley;AnalystEdWestlake;CreditSuisse;AnalystSamMargolin;Cowen&Company;AnalystPaulSankey;WolfeResearch;AnalystAllenGood;Morningstar;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

WelcometotheValeroEnergyCorporationreports2014third-quarterearningsresultsconferencecall.MynameisDaniel,andIwillbeyouroperatorfortoday'scall.

(OperatorInstructions).

Pleasenotethatthisconferenceisbeingrecorded.

IwillnowturnthecallovertoMr.JohnLocke.Mr.Locke,youmaybegin.

JohnLocke (ExecutiveDirector-IR):

Thankyou,Daniel.




GoodmorningandwelcometoValeroEnergyCorporation'sthird-quarter2014earningsconferencecall.WithmetodayareJoeGorder,ourCEOandPresident;MikeCiskowski,ourExecutiveVicePresidentandCFO;LaneRiggs,ourExecutiveVicePresidentofRefiningOperations;JayBrowning,ourExecutiveVicePresidentandGeneralCounsel;andseveralothermembersofValero'sseniormanagementteam.

IfyouhavenotreceivedtheearningsreleaseandwouldlikeacopyyoucanfindoneonourWebsiteatValero.com.Alsoattachedtotheearningsrelease,aretablesthatprovideadditionalfinancialinformationonourbusinesssegments.Ifyouhaveanyquestionsafterreviewingthesetables,pleasefeelfreetocontactourinvestorrelationsteamafterthecall.

NowIwouldliketodirectyourattentiontotheforward-lookingstatementdisclaimercontainedinthepressrelease.Insummary,itsaysthatstatementsinthepressreleaseandonthisconferencecallthatstatetheCompany'sormanagement'sexpectationsorpredictionsofthefutureareforward-lookingstatementsintendedtobecoveredbytheSafeHarborprovisionsunderfederalsecuritieslaws.

Therearemanyfactorsthatcouldcauseactualresultstodifferfromourexpectations,includingthosewe'vedescribedinourfilingswiththeSEC.Now,beforewereviewthequarterlyresults,I'dliketohighlightsomeofourstrategicaccomplishmentsinthelastquarter.TheseactionsalignwithourkeystrategiestoreducefeedstockcostsbyimprovingaccesstoNorthAmericancrudesandtogrowourlogisticsinvestmentsandValeroEnergyPartnersLP,oursponsoredlogisticspartnership.

InAugustwesecuredshippingrightsandtheoptiontopurchasea50%interestinPlainsAllAmerican'sDiamondPipeline.Whencompletedinlate2016,that440milepipelinewillconnectourMemphisrefinerytothecrudeoilhubatCushing,Oklahoma.RegardingValeroEnergyPartnersLP,wecompletedourfirstdropfor$154millionincashatthebeginningofthethirdquarter.

WealsocontinuedadvancingourcapabilitytoaccessandprocessadvantagecrudesduringthequarterwiththecommissioningofourrailunloadingfacilityatthePortArthurrefinery.WithitsstartupinSeptember,thisisthethirdcrudebyrailfacilitywe'vecompletedinthepast13months,withtheothertwocompletedfacilitieslocatedatourSt.CharlesandQuebecCityrefineries.

Asmentionedintherelease,wearealsoprogressingonourotherkeyinvestmentsaspartofourstrategy,includingthecompletionofinvestmentstoreceiveadvantagedcrudeatourQuebecrefineryonEnbridge'sLine9Bpipelinereversal.WealsoexpecttocompletehydrocrackerrevampatourMerauxrefinerylaterthisquarter.Nowlookingoutalittlefurther,thetwocrudetoppingunitsatourCorpusChristiandHoustonrefineries,areprogressingasplanned.

Movingontoourquarterlyresults.Asyousawinourearningsreleasewehadastrongquarter.Wereportedthird-quarter2014earningsof$1.1billionor$2pershare.Third-quarter2014operatingincomewas$1.7billionor$1.1billionhigherthanthethirdquarterof2013.Mostoftheincreasewasintherefiningsegment,althoughtheethanolbusinessalsocontributed.

Refiningthroughputmargininthethirdquarterof2014was$11.81perbarrel,anincreaseof$4.05perbarrelversusthethirdquarterof2013.WiderdiscountsonsweetandsourcrudeoilsversusBrentandstrongergasolinemarginsinmostregions,wereslightlyoffsetbyweakerdistillatemarginsversusBrentinmostregionsandahighernaturalgascost.

AlsocontributingtothehigherthroughputmarginwasourQuebecCityrefinery'shigheryear-over-yearconsumptionofNorthAmericanlightcrudeinthethirdquarter.Therefineriesfeedstockdietconsistedof79%NorthAmericangradesinthethirdquarterof2014,whichisupfrom6%inthethirdquarterof2013.

Inaddition,werealizedareductionincrudecostinourMid-ContinentregionwhenwecompletedourconnectiontoapipelineinChildress,Texas.Thisconnectionallowedustoreceiveanincremental40,000to




50,000barrelsperdayofMidlandpricedWTIcrudeoil,primarilyforourMcKeerefinery.

LastlywecontinuetorampupNorthAmericancrudeconsumptioninourGulfCoastregionbyreplacinganadditional100,000barrelsperdayofforeigncrudeinthethirdquarterof2014,versusthethirdquarterof2013.WithsomeofthosevolumesdeliveredtoPortArthurbyournewrailunloadingfacilityImentionedearlier.

Refiningthroughputvolumesaveraged2.8millionbarrelsperdayinthethirdquarterof2014,whichisanincreaseof42,000barrelsperdayversusthethirdquarterof2013.Lessturnaroundactivityandhigherthroughputcapacityutilizationledtotheincreaseinvolumes,whichwassupportedbystrongproductexportsandtheincreasedavailabilityofNorthAmericanlightcrudeontheGulfCoast.Weoperatedourrefineriesat98%throughputcapacityutilizationforthequarter.

Nowrefiningcashoperatingexpensesinthethirdquarterof2014were$3.81perbarrel,whichis$0.07perbarrelhigherthanthethirdquarterof2013,duemainlytohigherenergycosts.Theethanolsegmentgeneratedrecordearningsof$198millionofoperatingincomeinthethirdquarterof2014versus$113millionofoperatingincomeinthethirdquarterof2013.

Theincreaseinethanolsegmentoperatingincomewasmainlyduetoa$0.27pergallonincreaseingrossmargin,drivenbylowercornpricesonanabundantcornharvestandhigherproductionvolumesfromthestartupofourMountVernon,Indianaplant.Ethanolproductionvolumesaveraged3.6milliongallonsperdayinthethirdquarterof2014.

Generalandadministrativeexpenses,excludingcorporatedepreciation,were$180millioninthethirdquarterof2014.Netinterestexpensewas$98millionandtotaldepreciationandamortizationexpensewas$430million.Theeffectivetaxratewas32.9%.Withrespecttoourbalancesheetatquarterend,totaldebtwas$6.4billionandcashandtemporarycashinvestmentswere$4.2billion,ofwhich$231millionwasheldbyValeroEnergyPartnersLP.

Valero'sdebttocapitalizationratio,netofcash,was10.5%,excludingcashheldbyValeroEnergyPartnersLP.Valerohadapproximately$5.6billionandValeroEnergyPartnershad$300millionavailableliquidityinadditiontocash.Cashflowsinthethirdquarterincluded$622millionofcapitalexpenditures,ofwhich$123millionwasforturnaroundandcatalysts.

Inthethirdquarterweraisedourdividendforasecondtimethisyearwitha10%increase.Wereturned$489millionincashtoourstockholders,whichincluded$145millionindividendpaymentsand$344millioninpurchasesofapproximately7millionsharesofValerocommonstock.Andsubsequenttothethirdquarter,wecontinuedtoreturncashtostockholdersbypurchasinganadditional3millionsharesofcommonstockfor$138million,whichbringsourtotalfor2014to18.4millionsharesfor$937million.

For2014,weareloweringourguidanceforcapitalexpenditures,includingturnaroundsandcatalystsby$100milliontoapproximately$2.9billion.Weexpectstayinbusinesscapitaltoaccountforslightlylessthan50%oftotalspendingwiththeremainderrelatedtogrowthinvestments,primarilyforlogisticsandadvantagedcrudeoilprocessingcapability.

Morethan50%ofValero'sestimatedgrowthinvestmentsin2014areforlogisticsandwebelievemostofthiswillbeeligiblefordrop-downintoValeroEnergyPartnersLP.Nowfor2015capitalexpenditures,includingturnaroundsandcatalysts,weexpecttospendapproximately$2.8billionconsistingofapproximately$1.8billionforstayinbusinesscapitaland$1.3billionforgrowthinvestments.Themajorityofgrowthinvestmentsareallocatedtologisticsandincreasingourcapabilitytoprocessadvantagedcrudes.

Soformodelingourfourth-quarteroperations,weexpectthroughputvolumestofallwithinthefollowingranges:GulfCoastat1.55millionto1.6millionbarrelsperday;Mid-Continentat450,000to470,000barrels




perday;WestCoastat260,000to280,000barrelsperday;andNorthAtlanticat410,000to430,000barrelsperday.

Weexpectrefiningcashoperatingexpensesinthefourthquartertobearound$4perbarrel.Forourethanoloperationsinthefourthquarter,weexpecttotalproductionvolumesof3.7milliongallonsperdayandoperatingexpensesshouldaverage$0.41pergallon,whichincludes$0.04pergallonfornon-cashcostssuchasdepreciationandamortization.

WeexpectG&Aexpense,excludingdepreciation,forthefourthquartertobearound$190millionandnetinterestexpenseshouldbeabout$95million.Totaldepreciationandamortizationexpenseinthefourthquartershouldbeapproximately$425millionandoureffectivetaxrateshouldbearound35%.

SonowIwillturnthecallovertoJoeforafewremarks.

JoeGorder(President,CEO):

Well,thankyouJohn.

Andasyoumayhaveseenlastweek,weannouncedthatBillKlessehaschosentostepdownasChairmanofValeroEnergy'sBoardofDirectorsattheendofthisyear.SoonbehalfofourValeroteam,wejustwanttothankBillforallhe'sdonetomakethisCompanysuccessfuloverhis45yearcareer.AndwewouldreallyliketowishMargieandBillallthebestgoingforward.John?


ThankyouJoe.

SobeforeIturnitovertoQ&A,Ijustwanttoclarifyonthe2015stayinbusinesscapital,itshouldbe$1.5billion--IbelieveIsaid$1.8billion.Sookay.

Daniel,wehaveconcludedouropeningremarks.Inamomentwewillopenthecalltoquestions.Duringthesegmentwerequestthatcallerslimiteachturntotwoquestions.Butcallersmayrejointhequeuewithadditionalquestions.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions).

JeffDietert,Simmons.

Jef f Dietert (Analyst-Simmons&CompanyInternational):

Yes.It'sJeffDietertwithSimmons.Goodmorning.


GoodmorningJeff.


SomyquestionhastodowithsomeofyourcrudefeedstockcostsandspecificallyonewithSaudihavingraisedtheirpricestotheUS.Itappearsthatsomeoftheircrudeswerenotterriblycompetitive.WesawthecrudeimportsforthetotalUSdropfrom1.6millionbarrelsadayinApriltolessthan900,000barrelsadayinSeptember.WhileSaudiwasincreasingpricesduringthatperiodoftime.




Sincethenthey'vehadfourconsecutivemonthsofpricereductions.AndIwaswonderingifyoucouldprovidesomecolorastohowattractivetheSaudicrudeshavebeeninthemarketthroughthespringandsummer?Andwhetherornottheserecentreductionsinpricesmakethemmorecompetitivenow?

GarySimmons (CorporateVP-Crude,Feedstock,Supply&Trading):

JeffthisisGarySimmons.You'reexactlyright,ImeantheSaudibarrelshavegottentowherewefeltliketheywereoncompetitiveversusouralternatives.InthethirdquarterourvolumesfromthetotalMiddleEastweredownconsiderablywherewe'vehistoricallyrun.

We'renowseeingthattheyaremakingpricingmovestobringtheirbarrelsbackandbecompetitiveinthemarket.IwouldsaywiththeirrecentannouncementontheirOSP--they'recompetitiveoratleastwithin$0.50ofours.


Okay.AndsecondlywiththeBrentpricingbeingweakandsomeoftheWestAfricanpricesbeingsoft,haveyouseenthosebarrelspricethemselvesbackintoeitheroftheEastCoastmarketortheGulfcoastmarket?WithsomeofthesoftnessrelativetoLLS,we'veseenthisfall.


Yes.Jeff.TheplacethatwepivotfirstisreallyourQuebecrefinery.AndwedefinitelyasBrentgotweakwesawincentivetostartbysomeWestAfricangradesagainandbackingoutsomeofthegradesthatweweretakingfromtheUSGulfCoast.


Yes.Soboththatsoundslikeincreasesinimportsinamarketwherewe'vegotprettysubstantialdomesticproductiongrowth.Doyouthinkdomesticpriceshavetosoftentobackthoseimportsbackoutofthemarket?


Yes.Andyoucouldkindofseethatinthemarkets.TheBrentgotthatweakaboutthreeorfourweeksago.Westartedtopivotasothersdidandthenwe'vehadthreestraightweekswherecrudeoilinventoriesintheUSbuilt.Soitkindoftellsyouthedifferentialshavetocomebackofftoforcethosebarrelsbackintothemarket.


Thanksforyourcomments.

Operator:

PaulCheng,Barclays.

PaulCheng(Analyst-BarclaysCapital):

Heyguys.Goodmorning.


Goodmorning,Paul.


Ihaveonerequestandtwoquestions.Therequestisthatitseemsthatsomeofthepartinlossesmayturnouttobeanemerginginvestmentteaminthesector.




Iknowthere'sstillasmallnumber,butitwouldbehelpfulIthinkforyourshareholdersifinyourpressreleasesomewherethatyouputdownwhatistheGPcashflow.AndyourtotalnumberofunitsintheLPandalsothatthetotalLPunit--ImeaneventhoughthatthosenumberscanbefoundinyourVLPdisclosureit'sjusthelpfultobeinonedocument.

Intermsofthequestion,withtheannouncementorthatfromoneofyourcompetitorslastweekintermsoftheirstrategyindrop-downtheyhavesubstantially[theirrate],isthereanykeyormoretransparentstrategyordatathatyoucanputoneintermsofyourVLPdrop-downpaceorthedistributiongrowthforthenextseveralyears?


Yes.No,Paul.That'safairquestion.ThisisJoe.Since--ifwelookatVLP.SincetheIPOwe'vestatedthatwe'regoingtogrowourdistributionsbetween20%and25%ayear.We'reintargettobeinthemiddletothehighendofthatrange.Wejustcompletedadropandadistributionincreaseandwe'reworkingonthenextdrop.

NowVLPislessthanayearold.Wedon'thaveadebtratingyet.We'llbeintheprocessofgettingthatinthenextyearorsoandit'sourintentiontobeinvestmentgrade.WhenyouconsiderthesizeandthepaceofourdropstoVLP,ouroriginalplanwastostartwiththelogisticsassetsthatwouldbemoretraditional.

Andthat'swherewesaidthatwe'vegotthe$800millionofEBITDA.ThatisnotaspecificbusinessunitthatwehavewithinValero.It'sassetsthatareusedtosupporttherestoftheoperationsandsowehaven'thadP&L'sforthem.Thatbeingsaid,thatwecangoinandwecancalculatewhattheEBITDAwouldbeforthoseassetsbasedonmarketratesandthat'swhatwe'vedone.

Nowwhat'scomeuphererecentlyisthisadditionalsetofcasesthatwouldincludedoyouputfuelmarginsandprocessunits,intotheMLP?Sowe'regoingtotakealookateverythingandwe'regoingtoactaccordingly.Obviouslyit'sneverassimpleastakingEBITDA,puttingamultipleonit,andsayingthat'swhatthevalueis.You'vegotalotoftaxeffectsthatneedtobeconsidered.

Theotherthingtheniswiththeuseofproceedscouldtheybeused--Imean,Iexpectthatwe'regoingtousethemtodogrowthprojects.Ortoreturnthecashtotheshareholdersdependingonwhichoptionhasthehighestreturns.

ButoneofthequestionsweaskourselvesisifwedoacceleratethedropsarewegoingtogetsomeofthepartsvaluationincreasedinValero?Becausethat'ssomethingthatalthoughwe'veexecutedtheMLPwehaven'tseenityet.


Yes.ButatleastbasedonwhatTesoroandMPCreactiononthelastseveralweeksthatseemslikethatisstartedcatchingonasanewtheme.


Yes.Weseeittoo,Paul.


Yes.Asecondquestiononthe$2.8billionnextyearbudgetisthatincludinganythinginthemethanolprojects?AndifitisindeedgoingtogoforFID,shouldweassumeitisjustanadd-onorthatyou'regoingtobondandadjustingitsothatyoustillcouldgetthe$2.8billion?




LaneRiggs (SVP-RefiningOperations):

HiPaul.It'sLaneRiggs.The$150millioninthe2015CapExwith$2.8billionisnotapprovedyet.We'reinthephasetwodevelopmentoftheprojectandwe'llhaveanotherreviewandsortofdecidegoornogosomewhereinthesecondquarterof2015.


AndLaneifyoudogoaheadshouldweassumeyou'restillkeep$2.8billionorthatthisisincremental?Inotherwordswillyouadjustyourotherprojectssothatyoudon'tgobeyondthe$2.8billion?


Itisinthe$2.8billion.


YesPaul.The150is--wehavea$150millionasaplaceholderinthat$2.8billionbudget.


Okay.


Ifwedidn'tproceedwiththemethanolplantwewouldn'tspendthat$150millionandwe'dbeat$2.65billion.


Isee.Gotit.Thankyou.

Operator:

BlakeFernandez,HowardWeil.

BlakeFernandez (Analyst-HowardWeilIncorporated):

Goodmorning.Thanks.CongratulationsontherolloverinCapExinto2015.IguessthisiskindofacombinationofahighlevelquestionfromPaulandmaybeatieonfromJeffaswellaswithregardtotheSaudipricing.Itlookslikethelower--thelogisticsspendingisdecreasinglike45%ofthetotaldowntoabout30%ofthegrowthtotal.

AndIguessI'mjustwonderingwiththeSaudi'schangingtheirpricingandIguessI'mjustwonderingisthereachancewheresomeoftheinfrastructureinNorthAmericancrudeinvestmentsthathavebeenmade--wedowegettoapointwheresomeofthatisn'tquiteasnecessary?Doyoustillhavetheflexibilitytoshiftbackandforthtoforeignversusdomesticrunsinyoursystem?


YesaBlake.IwouldsayIthinkwe'vebeenveryselectiveonwhatwe'vechosentoinvestcapitalaroundlogistics.Westillthinkitmakessensebutasyoutalkedaboutwehaven'tdoneanythingtoloseouroptionalitythatwecancontinuetoimporttheforeignbarrels.AndifSaudimakesmoresensetorunthosebarrelswehaven'tlostanyofouroptionalitytobeabletodothat.


Yes,Blake,Garymakesagreatpointhere.Imeanwhatwe'redealingwitharemarketsthatarereally



©2014TheStreet,Inc.AllRightsReserved Page8 of 24

volatile.Andtheopportunitytodayistheopportunitytodayandit' llchangetomorroworthenextday.

Andtheonethingthat'scertainisifyoudon'thavethelogisticsinplacetotakeadvantageoftheopportunitywhenit'sthere,it'sgone.Andsowefeelverygoodabouttheprojectsthatwe'veundertaken.Imean,therailcrudeprojectscanmoveheavysourcrudesin,areverygoodprojectsforusasaretheunloadingfacilitiesthatwe'vegot.OurcommitmentstopipelinesIthinkareverysolidforusgoingforward.

Andthefactthatyou'vegotthepressureonthecrudepricerightnowaffectingtheSaudi'swillingnesstomovebarrelsbackin,attheendofthedayisgoingtobegoodbecausewe'regoingtoseepressureonallofthebarrelsastheytrytofindahomeinarefinerygoingforward.Sowefeelprettygoodaboutwhatwe'vedoneandwhatwe'vegotontheplatetodogoingforward.


Okay.Thanks.Thesecondquestionisonexports.We'veseenrecordhighutilizationlevelsearlierthisyearandyoumentionedproductexportsinyourpressrelease.Forone,canyougiveusacapacitynumberofwhatyourcurrentcapacityis?Andisthatkindofoneofthemaindriversthat'sbeendrivingthishigherutilization?

BecausewhenIlookatmymodelingitseemsliketheearningsin2012wereverycomparablewithwherewe'regoingtolandthisyearandbasicallythatinsinuatesit'snotreallythatmuchmoreincentivefromaneconomicstandpointtorun,soisitsimplyafunctionofadditionalexportcapacity?


Yes.Sowhatwedidinthethirdquarteriswedid90,000barrelsadayofgasolineexportsthatprimarilywenttoMexicoandLatinAmerica.Wedid227,000barrelsofstraightdistillateor240,000barrelsofdiesel,whenyouincludethekerosene.ThedistillateexportswenttoLatinAmericaandEurope.

Westillhavequiteabitofcapacityleftonthegasolineside.Wecanprobablydoabout255,000barrelsaday,around400,000barrelsadayofdistillateexports.Sowestillhavealotofroomtoincreaseourexports,butforusthisisjustanoptimizationthatwedoeveryday,Blake.

It'sjustamatterofwherewecangetthebestnetbackforthebarrels.Sowhenyoulooktodaythedomesticdieselmarketisverystrongandsosomeofourdieselexportshavesloweddownabit.Aswesendthebarrelstothebestnetbackmarket,whichtodaysomeofthedomesticmarkets.


Okay.Thankssomuch.

Operator:

DougLeggate,BankofAmerica.

DougLeggate (Analyst-BofAMerrillLynch):

Thanks.Goodmorningeveryone.GoodmorningJoe.


HelloDoug.


Andbytheway,JoecongratsonyouascendingtotheChairmanshipaswell.It'snicetoseewithallofthe




titles.


Thankyou.


My--you'veseewhatTesorohasdonehererecentlybytalkingaboutafull-serviceMLP.Andobviouslyalotof--there'salotofdifferentstrategiesseemtobegoingonwithinthespaceIguessPhillipsispursuingasimilarkindofthing.

IguessI'mcuriousastolookingoutsideoftherefiningbackyard,sotospeak,howdoyouviewyourMLPvehiclestrategicallyintermsofmaybemovingbeyondjustwhatwewouldassociateasanormalcourseofbusinessintherefining?


I' lltellyouDoug.Wedolookatitasanentitythat'stheretosupportthecorebusinessoperationsofValeroEnergy.Imeanwesetitupwiththatintent.WesetitupasatraditionallogisticsMLP.Itwasgoingtoprimarilyfocusontransportationandterminallingassets.

Obviouslythemarket'schangingherealittlebit.Ifpeoplearemakingdecisionstoputalotofthird-partyassetsin,insomecasesandtoputsomeofthemargin--thefuelsmarginintheassetsalso.Imean,that'ssomethingthatwe'lltakealookatgoingforward.Butourviewofitisaveryattractive,lowcostofcapitalwaytosupportaValero'scorebusiness.


Okay.IappreciateI' lltakesomefollow-upsoff-linebecausethere'sobviouslymultiplepathsyoucangodownwiththatone.ButIguessmyfollow-upquestionisreallytogetyourlatestthinkingonthefuelsmarketgenerally,thegasolinemarketinparticular.

YoustillhaveyourArubaRefinerymothballed.ItlookslikeHovensamighthavefoundabuyerandobviouslythewholecrudecomplexhascomedown.SoI'mjustkindofcuriousastohow--what'syourprognosisfortheAtlanticbasingasolinemarket?Andshouldweexpectthekindofresilienceincracksthatwe'veseeninthelastcoupleofyearsordoyouthinkthere'sanoversupplyriskemergingonthemargins?AndI' llleaveitthere.Thanks.


Thanks,Doug.


SoIguesstwoseparatequestions,Idon'tknowLanedoyouwanttoaddresstheArubaonefirst?


Goaheadonthegasoline.


SooverallIthinkweseegasolinedemandintheAtlanticbasinfairlyflat.AndsoalotofthequestionontheAtlanticbasinisreallygoingtobewhathappensinWesternEuropeanddoyouhaverationalizationoccur,inWesternEurope?Andthat' llprobablybethebigdriverontheoverallsupply/demandbalanceisintheAtlantic




basinmovingforward.


Thatassumesyoudon'thaveacrudeexportscenario,I'mguessing?


Yes.


Okay.AndontheimpactofHovensa,doyouseethatimpactingyourGulfCoastmarketsparticularly?


Hi,Doug.Look.Ithinkthatprojectisgoingtobeabitchallenged.AndImeanifthey'reproducinggasolineit'sgoingtohavetogosomewheresowe'llprobablyseeitinthemarket.ButIwouldstackupthecompetitivepositionofourGulfCoastrefineriesagainstanyrefinerylikethat.


Allright.We[don't]haveasimilarview.ThanksalotJoe.Iappreciatethetime.


Thanks.

Operator:

BradHeffern,RBCCapitalMarkets.

BradHef fern(Analyst-RBCCapitalMarkets):

Goodmorningeveryone.


Goodmorning.


Sogoingbacksortoftoanearlierquestion,hastherebeenanychangeastothedemandthatyouguysareseeinginexportmarketscurrently?


No.IwouldtellyoufromthethirdquartertothefourthquarterwhatIwouldexpectisthatourexportswillprobablybeupalittlebit.Mostofthatwillbeingasolineexportswillincreaseintothefourthquarterdistillateexportsprobablyfairlyflat.Whichistypicalforus--gasolinetypicallytheexportsarealittlestrongerinthefourthquarterandfirstquarterandfalloffoverhereinsummerdrivingseasonhereintheUS.


Okay.Gotyou.AndthenyouhadacompetitivelastweektalkingaboutsortofatightMayamarketontheGulfcoast,Iwaswonderingifyouguyshaveseenthatandhadanydifficultygettingsortoftheheaviercrudesinthedoor?





OurMayavolumesforthethirdquarterwererightatourcontractlevelsandupabout20,000barrelsadaywhatweraninthesecondquarter.


Okay.Thankyou.

Operator:

RyanTodd,DeutscheBank.

RyanTodd(Analyst-DeutscheBank):

Great.Thanks.Goodmorninggentlemen.Acouplequestions.Maybeoneifyoucouldtalkalittlebitaboutcapturerateacross--variousruncaptureratesthatwesawacrosstheportfoliothisquarter.AndIrealizethatfallingcrudepricesprobablyincreasetheprofitabilityofthebottomendofthebarrel.

Butoutsideofthatcanyoutalkaboutmaybeanyotherdriversofstrongprofitabilityandhowsustainablemaybesomeofthosemightbeongoforwardquarters?

AshleySmith(SVP-IR,MarketAnalysis&StrategicPlanning):

Hi,Ryan.ThisisAshleySmith.Yes.Weperformedwell.Wehadverylimitedturnaroundactivityinthequartersootherquartersmightnotbeascomparablewhenwehadmoreturnaroundactivity.Butalotofthecapturerateispartiallyduetoourinvestments--thehydrocrackersarerunningwell.

InfactSt.Charleshydrocrackerisrunningandconsistentlyrunninginexcessivecapacity.Inadditionyousawsometypicalmarketstuffthat'snotintheindicatorsuchasBGOisrelativelycheapinthequarterandthatpaiduswelltoo.


Okaysoprobablysomeobviouslynonrecurringthings,butitmaybeatleastunderlinedthereissomerecurringthingsfromyourpastinvestments?Iguessisthatsafetosay?


Thatisvery--that'sbasicallyit.You'realwaysgoingtohavesomemovementintheitemsthatarenotintheindicator.Butwealsoareseeingbenefitsfromapreviousinvestments,particularlyinthehydrocrackers.


Okay.Thanks.Andthenmaybeonemoreon--andIapologizeifthiswas--Imissedalittlebitofthecall.

OncrudeflowsfromCorpustoEasternCanada,Iknowyouguyshavemovedsomecrudethat'sgonearoundtheretotheEastCoastofCanadarefiningsystem.Howmuchhaveyoubeenmovingandhowdoyouexpectthattochangein2015?


Yes.Sowemoved124,000barrelsadayofGulfCoastcrudetoQuebec.Thatdidn'tallmovethroughCorpus.OurprojectatCorpuswillbeonlineandfullyfunctionalfirstquarter--earlyfirstquarter.Sowe'llstartusingourCorpusassetsinthefirstquarter.Butthevolumewemovedwaslargelyoverthird-partylogisticsassetsthatwemovedtoQuebec.





Okay.Andifyoujust--whenyoulookoutto2015dynamicsbothfromtheLine9BeventualstartupandQuebecisthatanumberthatyouthinkyoucangrowsubstantiallyin2015oraretheresomelimitthere?


WellwhenLine9Bstartsup,wewillrunthelessbarrelsfromtheUSGulfCoastthanwhatweraninthethirdquarter.Andwe'llsupplymoreofQuebec'svolumethroughLine9B.


Okay.I' llleaveitthere.Thankyou.

Operator:

RogerRead,WellsFargo.

RogerRead(Analyst-WellsFargoSecurities):

Hi.Goodmorning.


HelloRoger.


IguessjusttopickupalittlebitmoreonsortoftheCapExfor2015andmaybefor2016withthecrudetoppingprojectsandIguessCorpusandinHouston.Andthenmaybewhatthedecisiontimeframeisonthat?

AndI'mthinkingalso,alrightcrudesoftenedupalittlebitandmayseesomeslowdowneventuallyinUSproductionifthathasanyimpactonyourthinking?AndthenwhetherornottherecentdevelopmentsonthecrudeexportssidethinkingoftheDOEorEIAsreportongasolinepricesbeingdrivenbyBrentnotbydomesticpricesassortofashotacrossthemouthforbeinginfavorofexports.Crudeexports.


HiRoger.ThisLane,I' llanswerthequestionsaboutthecrudeunits.They'reapprovedandthey'reunderconstruction,we'rebuildingthem.Andwe'll--rightnowwe'resortofforecastingthatthey'llbecomplete,mechanicallycompleteattheendofnextyear,oroil-inroughlythebeginningofthefirstquarterof2016.Somewhereinthattimeframe.

Intermsoftheprojectbasiseconomics,weassumedthatit[allelseisaparity]Brentandthat'snotwherewearetoday,sothosearestillgoodprojects.Theyhadreturnsaround30%andthatpricingenvironmentsowestillseethosegoodprojectsthatareultimatelyaboutbackingoutourintermediatepurchases.

Againwe'relongconversioncapacitysotodaywehavetogotothemarkettobuyintermediatelargelyfromWestAfricaandtheNorth-Seaandthisjustsortofchangesourfeedstock.Thewaywe'regoingtofeedoursystemandwhatwasthesecondquestion?


RogerYes,couldyourestateyoursecondquestion?





WellitwasjustmorealongthelinesofIwaspointingoutwiththeEIAhavingcomeoutwiththatreportongasolinewhetherthathadanyimpactontheseprojectsoverall.Imeanoriginallytheseweregoingtobeonlinein2015,soIwasjusttryingtofigureoutifyouwere--maybethequestioniswhyaretheynow2016insteadof2015?

Justdelayedonconstruction?Orwasthere--wereyoulookingatitinternallyandsaying,wellifthingschangemaybewedon'twanttogoforward?


No.Theprojectswerealwayssortofinthefourthquarter2015,firstquarter2016.Andit'saboutmechanicalcompletionversusoil-indates.There'snotbeenanydelaywiththem.

We'renothesitantabouttheseprojectsandwe'regoingforwardwiththembecausewe'renotreallyabouttryingtoproducemoregasolineandmorediesel,thiswasabouttryingtofeedoursystemmoreeconomically.Right?Withdomesticoilversusaforeignimportintermediate.


Okay.Andthenasyoulookatthefourthquarterhererelativetothethirdquarter,intermsofwhatwe'veseenincrudedifferentials,howhasitshakenupforyou?Iknowwecanlookatthescreensandmakeourguesses,butareyouseeinganythingsignificantlydifferentintermsoftheGulfCoast,let'scallitthelightheavieshere?


No.Notanythingtoosignificant.OverallwhenyoulookattheLLSmarketandMars,MarscontinuestopricecompetitivewithLLS.AndIthinktheheaviescontinuetopricecompetitivelywithMars.AsyoumoveWestintheGulfyoustarttoseeabiggeradvantagetorunsomeofthelightsweets,butthat'snottoodifferentfromwhatwesawinthethirdquarter.


Okay.Thankyou.

Operator:

PhilipGresh,JPMorgan.

PhilGresh(Analyst-JPMorgan):

Hey.Goodmorning.


GoodmorningPhil.


Yes.Couplequestions.Firstoneisjustonthecashflowforthequarterandjustwhattheworkingcapitalcontributionmight'vebeen?

Iknowtherewasafewsizablenegativesinthefirstquarterforworkingcapital.Wasn'tsureifthatwasareversalofthebigpositiveofthefourthquarteroflastyear,orjustkindofwherewestandworkingcapitalingeneral?Andhowdoyouthinkaboutthatinthefourthquarter?




MikeCiskowski(EVP,CFO):

Okay.Ourchangeincashforthequarterwasanincreaseof$7millionandofthatamountabout$300millionofitwasattributabletoworkingcapital.Sowehadanincreaseinourpayablesreceivablesnet.Sothat'sprimarily--Imeanthat'sgoingtobeatimingissue.Mostlikely.


Andforthefourthquarter?Anythoughtsonwhetherthere'sadditionalcontribution?

MikeCiskowski(EVP,CFO):

TowardstheendoftheyearaswemanagearoundtheLIFOinventorylevels,there'sthepotentialthatwecouldhaveareductioninourworkingcapital.


Okay.Andthenjustwithrespecttothecashflowgenerationprofileingeneral,obviouslyverystrongandJoeyourstockischeaperonafreecashflowyieldthanmostrefiners.

SoI'mjustwonderinghowyou'rethinkingaboutimpactingthatvaluationwhetheritbe--youobviouslytalkedabouttheMLPstructureasanopportunity,butwhetherit'sincreasingbuybacksorameaningfulstepupinthedividendorsomethingelseyoucandotochangethegame?Justcurioushowyou'rethinkingaboutthings.


No.AndPhil,that'sagoodquestion.Whenwelookattheuseofcashwe'vegotsomeverygoodprojectssowe'regoingtocontinuewiththeprojectsthatwehaveunderway.Thesehaveverystrongreturnsandtheymakeasmuchmoreefficient.Andwerealizethatthere'sabalancebetweeninvestmentforgrowthandreturningcashtoshareholders.

NowIthinkouractionsinthethirdquarterandthroughthisyearreallyreflectthisrealization.We'vehadtwodividendincreasesandwe'vehadincreasedsharerepurchases,whilecontinuingwiththegrowthprojectsthatimproveouroverallbusiness.

Andtotheextentthatwehavefreecashflowgoingforwardandtotheextentthattherearen'ttremendouscapitalprojectstousethecashfor,Ithinkyoucouldseeuscontinueonthispath.Andwe'llbecomfortablewithreturningittoshareholders.


Okay.Thanks.I' llturnitover.

Operator:

MohitBhardwaj,Citigroup.

Mohit Bhardwaj(Analyst-Citigroup):

Yes.Thanksfortakingmyquestion.Joeifyoucouldjust--ifIcouldjustfollow-uponyourcommentsaboutAtlanticbasin.

IfyoulookatwherethecrudepricesarerightnowanditseemslikethereisexcesscrudesupplyintheAtlanticbasin,whatdoyouthinkitdoesfortherefiningbusinessintheUS?Andhowdoyouthinkproductionmovesorthesupplymovesgoingforward?





Okay.Yes.Let'sletGarySimmonsgiveyouashotatthat.


Verydifficulttosay.IthinkthekeyquestionthereiswhatisthemarginalcostofproductioninNorthAmericaversusotherregionsintheglobe?Andofcoursewe'renotanupstreamCompany,soIdon'treallyknowhowallthatshakesout.

Ithinktheassumptionyou'rekindofmakingwiththequestionisthatascrudepricefallsthattheNorthAmericanproductionfallswiththeflatpricefallandthatmayhappen.ButIreallydon'tknowenoughtobeabletocommentonthat.


Right.Soifyoulookatthirdquarterversusfourthquarteroneofthethingsthatyousaidforthethirdquarterwasthatyouwereutilizingthefrontoftherefiningalotmore.

Sofillingupthe[tires]alittlebitmoreandutilizingthedownstreamunitsalittlebitlessandwheretheVGOpricesareandavailabilityoflightsweetcrude.Butdoyouthinkthatstillthecaseinthefourthquarter?


Lane?


SoI' lltry--I' lltakeashotatit.ThisisLane.Oursignalsinthethirdquarterwereobviouslymaxedoneverythingandtotheextentthatwe're--therewasasignaltorunahighacruderateaspossible,becausewehadpositivecrudemargins.

AndwehavereallygoodconversionunitmarginsbecauseVGOpriceswereinexpensive.Westillseethosesignalsgoingforwardinthefourthquarter.They'renotasstrongastheywereinthethirdquarter,butwestillhavesignalstorunoursystemrelativelyfull.


Right.Andonefinalonefromme.JustontheDiamondPipeline.Sojusttobeclear,youguyshavenotexercisedthe50%optiononthepipelineyet?

Andifyoucouldalsofollow-uponifyoulookatsomeofyourpeersweretalkingaboutdoingastudyoncaplineandyouwerethemainconsumerasfarasMemphisrefineriesconcernedonthecaplinedoesDiamondPipelineoptionalsoallowyoutosortofifthereisareversalforcaplinetoparticipateinthat?


Rich,youwantto--

RichLashway(VP-LogisticsOperations):

Yes.I' lltakeacrackatthat.SotheDiamondPipelineisprogressing.Itisconnected--itwillbeconnectedtothecapline.Sotodaywe're--Memphisisconnectedtothecaplinepipeline.

SowewouldhavedualsupplysourceintotheMemphisrefinerypotentiallyandbeabletotakeadvantageofareversal.ButIthinkthey'rejustundertakingastudyaswespeak,soitmaybesometimebeforethat




actuallybecomesareality.


AsfarastheoptionontheDiamondPipeline,--


Yes.I'msorryImissedthatfirstpart.SoontheoptionwehavenotexercisedtheoptionwehavethatoptionthroughearlyJanuaryof2016tomakethatdecision.


Thankyoufortakingmyquestions.


Sure,Mohit.

Operator:

EvanCalio,MorganStanley.

EvanCalio (Analyst-MorganStanley):

Hey.Goodafternoonguys.


Goodmorning,Evan.


Joe,canyouwalkusthroughthedecisiontoreduce2015CapExsequentiallyfrom2014?Isthata--isthatatop-downdecisiontoraisedistributablecashorafunctionofhigherhurdleratesortheprojectqueue?Andparticularlyasitmayrelatestomidstream?


Asitrelatestomidstream?


Justintotal--it'sdownsequentially,isthatadesiretoincreasedistributablecashfloworafunctionofhowthoseprojectsshookoutinthereviewprocess?


No.It'sthelatter.Evan,westartwithalistofprojects.Andifyoulookatitfromtherefiningperspective,Lanehasaprocessthathegoesthrough--atremendousrigorousreview.AndIthinkthefactthathe'sgotthisrigorousreviewshowsupinthetimingonthemethanolproject.Right?

Thisisabigprojectandwewanttobesurethatwe'vegotthecapitalrightsohe'sgoingthroughthisinaverymethodicalwayjusttobesurewe'reontarget.Weputtogetheralistofperspectiveprojectsandwedothiseveryyear.Andwhatwe'redoingnowis--ourlistofprojectsthatwetalkaboutarethosethatwe'vescrubbedtothepointthatwefeelthatthereisareasonableprobabilitythatwe'regoingtodothem.

Sotheprojectsthatwefeelwecanexecutenextyear,fromeithertherefiningsideorthelogistics,havebeen




includedinthebudget.Wefeelwe'refairlycommittedtothat$2.65billionnumber,the$150millionfromethanoliskindofalet'sseewhatweget.Butitisakindofbottom-upwhatprojectsdowehavetotakealookatandthenwelookatitfromthetopdown.Andsaythesearetheonesthatwewanttoundertakebasedontheirreturnthresholds.

Thereisthoughageneralviewamongthismanagementteamthatwe'dliketotrytoreturnmorecashtoshareholders.Andsohavingacapital--havingourcapitalatthislevelissomethingwe'reverycomfortablewith.Webelieveitcreatesthatpropervaluebetween--orproperbalancebetweencontinuedinvestmenttogrowandoptimizethebusinessandrewardingtheshareholderforhisloyaltytous.


AndjustforclarificationIthinkintheopeningyoustatedthatmidstreamis50%ofthatgrowthCapEx,yetthereleaseis30%whichwouldbesequentiallydown.Isita--whichofthetwoismidstream,asafunctionofgrowth?


No.Ithinkifyoulookat2014versus2015we'vegotsignificantinvestmentforexampleintherailcarsin2014.Thatfallsoff.Wehaven'tintentionallytriedtoreducetheinvestmentsthatwe'remakinginthemidstreamsideofthebusiness.

Okay?Whatwe'vegotisprobablytimingissueshereofdevelopingtheprojectstothepointwherewe'rewillingtoputtheminthecapitalbudget.That'sallwe'redealingwith.


Okay.Soit'saplus$390million--orit's$390millionIpresumeifit'satthe30%figureandthenshouldwe--isthatright?


Hey,Evan.ThisisAsh,yes.You'recorrect.Sowe'regoingfrom2014,itwasover50%,bothcapitalandlogistics.Andit'sbecauseofrailcarsfallingoffit'sjustgoingtobenextyearalittleover30%.Andyou'rerightit'srightaround$400millioninlogistics.


Great.SotheMLPEBITDA[exits]up$70million-ishestimateisthatreasonable?


Itcertainlykeepsgrowing.


Right.Great.Allright.Goodluck.Ilookforwardtoyouranalysisoflargerscopeofdroppableassetsandgoodresultsguys.


Thanksalot.


Thanks,Evan.



©2014TheStreet,Inc.AllRightsReserved Page18 of 24

Operator:

EdWestlake,CreditSuisse.

EdWest lake (Analyst-CreditSuisse):

Hey.Prettysoonwe'rejustgoingtocalltheselogisticsconferencecallsasopposedtorefiningconferencecalls.


WedidnoticethatEd.


Iftheytradehigher,they'lldoit.


Yes.Withthemultiple,arbitrageisprettyobvious.Solet'scarryoninthatvein.SoDiamondPipe,anysortofcolorontheEBITDAthatmightcontributeifyoumoveforwardwiththatplanoroverallinvestmentlevel?


Well,Ithinkwe'vetalkedaboutthecostbeingapproximately$900million.Andwhenyoulookatapropermultipleofaround10timesthatwouldgetyou$90million.And50%ofthatwouldkindofbackyouintoa$45millionofEBITDA.


Great.Andthenanotherstrategy--obviouslyIdon't--youmust'veseentheEPD/Oiltankingacquisition,whichwasasomewhatelevatedmultiple.Andobviouslyassumingthattherewasgoingtobealotofexportgrowthtoobviouslydrivethroughputsanddrivethatmultipledown.SoIlookatyourlogisticsandyourrefiningsysteminTexas.

IlookatwhatPhillips66hasdoneatBeaumontandtheBakkenpipeprojectthat'sassociatedwiththat.IlookatthePermianandtheEagleFordandstillgrowingandIthinktherehastobesomethingtobedone.Sohow--amIoffintermsofthelandscapeoraretherecompetitivebarriersforyoubeingabletocompeteaseffectively?


There's--Imeanthere'scompetitivebarrierstoeverything--right?Butthere'snoreasonthatwecan'tcompeteeffectivelywiththis.AndasImentionedearlierwhenwetalkedaboutthecapital,we'veincludedinthecapitalbudgetprojectsthatwe'rehighlyconfidentwe'regoingtodo.TheoneexceptionisthemethanolplantandI'mnotsayingwewillorwon'tdoit,we'rejuststillintheprocessoflookingatit.

Butwe'vegotalotoflogisticsprojectsrightnowthatRichLashwayandhisteamareintheprocessofdeveloping.They'renotfarenoughalongtoincludeinthecapitalbudget.Buttheywouldbelogisticstypeassetsthatwewouldusetosupporttheexistingrefiningportfolio.Andthere'ssomeofthemthatlooklikethey'reverygoodprojectsbutwe'renotgoingtogetoutinfrontofourselvesandshareinformationonthemuntilwegetitpinneddown.


Okay.AndthenIshouldaskarefiningquestion.Withthatopeningremark--theturnaroundsobviouslywere




prettyhighasyouconnectedupalotofthehydrocrackersanddidalotofreliabilityworkin2012and2013andobviouslystillinthesecondquarter.Andobviouslyit'seasytoseehowgoodyourthroughputswereinthethirdquarter.

AsyoulookoutfromhereImeandoyoufeelthatyouhaveamorereliablerefiningsystemoristherestillmoreworkthatneedstobedonetogetthereliabilitytowhereyouneedittobe?Andmaybeacommentongeneralturnaroundschedulesintonextyear.


HiEd.ThisisLane.SoourlastreallybigreliabilityprojectwedidwaswithMemphisinthesecondquarterandthatwasreplacingthereactor.Andtheonlything--nowwe'reintheprocessofstartingupintheMerauxhydrocracker,whichisagainsortofreconfiguringthatrefinery.

Wedon'treallyhaveanythingquitelikethatgoingforwardinourcapitalplan.It'ssortof--otherthanwe'redoingthesecrudeunits,butthosewon'treallyimpactourthroughputsperse.Soreallyfromheregoingforwardwejusthaveour,whatIwouldsayis,ourregimenofstandardturnaroundexecution.So--


Yes.Soallthingsequalweshouldexpectbettersortofoverallutilizationnextyearandperhapstheyearafterthatperhapsthelastthree-yearrunrate?


Yes.Andwealways,Imeanournumberonefocusoneverythingwedoistotry--wellfirstissafety,butrightbehindthatisreallyreliability.Andwedohave--ourreliabilityspendisactuallyslowing,becausewe'reprettyconfidentthatwehavespenttherightmoneyontherightthingstomaintainahigherreliabilityrateinoursystem.


Veryclear.Thankssomuch.

Operator:

SamMargolin,CowenandCompany.

SamMargolin(Analyst-Cowen&Company):

Hi.Goodmorningeverybody.


Hey,Sam.


Alot'sbeencoveredIguessI' llsticktoethanolifrefiningquestionsareoutoffavor,too.Butthebusinesshasrespondedreallywelltolowercornprices.Obviouslyresultshavebeengettingbetterandbetter.

Juststrategicallydoyouthinkyoucan--itcantolerateanykindofstabilizingbusinesscomponent,atollingagreement,orsomethinglikethatmightmakeiteligibleforadifferentstructure?Oristhisjustnormalvolatilityintheindustrywithareallygoodcorncropthisyear,inyourmind?





Doyouwanttospeaktothemarketaspectofhis?

Mart inParrish(VP-AlternativeFuels):

SureSam.ThisisMartinParrish.Onthemarketaspectwelikewherewe'repositioned.Production'sbeenhighasyoucanseeinventorieshaveonlybuiltlikeonemillionbarrelsintotalfortheyear.

Sowefeelreallygoodwherewe'repositioned.Exportsarehighwethinkmarginsgoingforwardaregoingtobegood.Welikethebusiness.


Asfarasatollingtypedeal,Imean--Samwhatareyouthinkingthere?Isthisaquestionaboutdowewanttomonetizethebusiness?


Yes.Isupposethat.Imeanit'sbeenaprettysteadystreamofabetterandbetterresultsinthesegment.AndsoyoumentionedyoursumofthepartsearlierIwaswonderingifthisfactorsintoitatallnowthat--ifmaybeyouseeearningsgettingmorereliableorvisibleinthesegment?


Wellwe'dliketobelievethey'dstayattheselevelsforeverbutIthink2012itwas--wasn'tit,wouldremindedofjusttherecanbealotofvolatilityinthisbusinesstoo.Andwe'velookedattheethanolplantportfolioandittrades--ifyoulookatcompstherejustaren'tawholebunchofthemfirstofall.Andtheytendtotradeatthesamemultipleastherefiningassetstradeat.

Sothere'sreallynotabigsignificantincentiveforValerotogooutandmonetizetheseandtrytocreateadditionalvalue.AtthesametimeIwouldsaythatwe'reverypleasedwiththeoperationofthebusiness.Martinhasdoneafinejobleadingit.

He'sgotaverystrongteam.Andthecashflowthat'sbeingproducedbytheseassetsistremendous.Andwedolikehavingitaspartofourcorebusinessandwedobelievelong-termthatethanol'sgoingtobefundamentallypartofthefuelmix.Andsohavingthisbusinessaspartofourportfoliomakessense.


Okay.Andthenjusttouchingonthatasafollow-up,theRFSweseemtobealittlebitbehindscheduleonanupdatehere.

Itseemslikeyourthesishasplayedoutbasedonrefiningmarginsthatwinsarekindofbeingpassedthrough.Isthat--doyouseethatasgivingmomentumtoIdon'tknowmaybeamandatereductionoranykindofmovementatall?Ifyou--ifwecangetanyupdatethatwouldbegreat.


Yes.Idon'tknowifwehavealotofinsighthereIthinkwefeellikeit'sgoingtobeaftertheelectionsherebeforewegetthenewRVOandit'ssolateintheyearatthisstagethatwedon'tthinkthatit' llbesubstantiallydifferentfromwherewewerelastyear.


Okay.Great.Sorry.





Itisprettyinterestingthatwe'rehereinNovemberandwedon'tknowwhat2014obligationnumberisyetbut--


Interestingisonewordforit.Yes.Iguess.


Thankyoupal.


Thanksalotguys.Haveagoodone.


Youtoo.

Operator:

PaulSankey,WolfeResearch.

PaulSankey(Analyst-WolfeResearch):

Hi.Goodmorningeveryone.


HeyPaul.


We'vecoveredalotofgroundherewithgettingtothepointsoftheethanolMLP.Iwon'taskafollow-uponthatone.Couldwejustsortofbringitalltogetherabit.

Joe--whatconcernsmeisIthinkwewerehopingforquiteasignificantstepdowninCapExnextyear.AndwhatI'mlisteningtoisthatyou'recompetinginanmaturemarketbutyou'restillspendingonthesenumbersaboutdoubleyourmaintenanceorstayinbusinessCapEx.WiththeremainderbeingobviouslygrowthCapEx.Can'twegettoaplacewhereyouaremuchmoreaggressiveaboutcashreturntoshareholdersasthekindofapredominantaim?

Iheargoodstuffaboutyoupotentiallynotdoingthemethanolprojectbutatthesametimethereseemstobeapotentialforlogisticsspendtostepup.AndasIsaytomethisisaCapExnumber,whichiskindofflatnextyearwiththisyearwhereaswewerehopingforsomethingthatwasquiteabitlower.Thanks.


Yes.AndokayPaulandIknowthishasbeenyourperspective.Whenwelookatthecapital--okay?You'vegot$1.4billion--$1.5billionthatweneedtospendontheassetstomaintainthem,thewaywewanttomaintainthem.We'vegotthecrudeunitprojectswhichhave25%plusratesofreturnandthey'renotputtinganymorejuiceinthemarketperse.They'reoptimizationprojects.

We'vegottheopportunitytodropathighermultiples,logisticsassets.We'regoingtocontinuetoinvestinthose.Ifyouextractthemethanolplant,the$150millionplaceholderfromthe$2.8billion--we'reat$2.65billion,thatiswellbelowthe$3billionthatweforecastedthisyear.Andwedon'tarbitrarilyselectprojectstoundertakewithoutlookingatthealternativeuseforthecash.




Andsoifwe'redecidingtodoacapitalprojectIthinkwe'reverycomfortablemakingourdayincourtandsharingwhatthereturnsaregoingtolooklikeonthisandwhyit'sabetteralternativetousthanrepurchasingshares,forexample.SoIdothinkthatthismanagementteamhasreducedthecapitalspend.

Ithinkifwelookatitgoingforwardwiththerigorwehaveintheprocessandthethresholdswe'resettingforacceptanceofprojects,we'regoingtoseethiscontinuetobeatthislevel.Itmaycontinuetodecline.ButIdon'twanttonotdoprojectsthatimprovetheoperationofthebusinessthathavegoodreturnswhenthey'reavailabletous.


Yes.Iunderstandthat.Iguesstheconcernisreallywhatyou'resayingisthat--youhavetoseeEuropeanrefineriesshutdown,inordertomakeroomforsomeofthisstuff.Andthat'sjustaconcernwehavethatthere'stoomuchcapitalgoingintothebusinessoverallthat'skindofdependentonthecompetitiveenvironmentmovinginyourfavor.


Okay.


Paul,keepmindourprojectsaredesignedprincipallytoreducefeedstockcosts.Andifwehavecheapercrudewe'regoingtoshutdown--Imeanthat'sgoingtoforceexcesscapacityinEuropetoshutdown.Sowewillbecomemorecompetitive.


Great.Andjustmyfinalpartofthisiswhatdoyouthinkacompetitivereturntoshareholdersis?You'vegotacouplepercentyield,canyoujusttalkalittlebitmoreaboutthat,Joe?AndI' llleaveitthere.Thanks


I'msorry,PaulrealquickthoughareyoutalkingaboutatVLPorareyoutalkingaboutValeroEnergy?


WellyesjustforexampleifIownaValerosharehowdoyouthink--whatdoyouthinkofasbeingagoodreturnstheshareholderintermsofyousayingthatyou'rerespectfulofcashreturnstoshareholders?


Fromacashperspectiveorjusttotal?


Yes.Total'sfine.Imeanpeopleobviouslypreferaregulardividend,butIunderstandthatthevolatilityofthebusinessmakesthatatoughcommitment.


Yes.Okay.Ithinkwhatwewouldsayiswehaveacostofcapital.Okay?We'vegotacostofcapitalouttherewhichdictatesourassessmentofwhereweareinprojects.Andthenyou'vegotareturnoncapitalemployedthatwe'rehopingtohavebeinthis--wehaven'tsetthetargetperse,but10%range,12%range.

Andapieceofthatiscertainlygoingtobethedividendthatsharerepurchaseaspectofit.Butwerecognize




thatwe'vegotaneedtoexceedcostofcapitalonourprojects.Andonourbusiness.


Understood.Thankyouverymuch,Joe.

Operator:

AllenGood,Morningstar.

AllenGood(Analyst-Morningstar):

GoodmorningeveryoneI' llbebriefaswe'regettingherelate.SuncorCEOmadesomecommentslastweekaboutshippingCanadianheavytoEuropeanddowntheUSAtlanticCoastandmaybeeventotheGulfCoast.

Doyouseethatisaviablealternativelong-termtogetgreaterheavy--CanadianheavyvolumestotheGulfCoast?AndcouldthatevenbeapotentiallyasourceofopportunityforPembrokeatsomepoint?


Yes.SoofcourseforusIthinkwefeellikethere'sbetteroptionstogetCanadianheavytotheUSGulfCoastthantakingittotheEastCoastandaround.

Butabsentofanyofthoseopportunitiesmovingforward,wedefinitelyseethatit'sanoptiontogetadditionalheavysupplytotheGulf.AndwealsoseethatthereisanopportunitytomovetheCanadianbarrelstoPembrokeaswell.


Great.ThanksandthencouldyoujustgiveusanupdateontheprojectsyouhaveeitherunderwayorsortofontheplannedstagestoincreasecompetitivenessofCaliforniaandgetsomediscountcrudeoutthere?Andthenjustyourlatestthoughtsonyourassetsoutthereaswell.


Yes.Allen,thisisLane,Iwouldalso--wearestillworkingonthattheBeniciarailproject.OurcommentperiodontheEIRisover.TheCityisansweringallthequestionsandwesortofexpectthattobefinishedinDecember.Wethinkpermitswillgetissuedinthefirstquarter.

Sothat'sreally--intermsofthestrategiccapitalthatwehavespendingontheWestCoast,that'sprettymuchit.Everythingelsewe'rebeingverycarefulinourspendontheWestCoast.BecausewehaveobviouslyagreatopportunitiesinourGulfCoastandourMid-ContinentandourNortheasternassets.Sowe'reverycareful.Werunaverytightshipoutthereandthat'ssortofhowwe'remanagingtheWestCoast.


Andthenfromofstrategicperspective,wethinkit'sgreattohavegoodassetswithstrongmanagementteamsouttherethatprovideustheoptiontotakeadvantageofthestrongmarginenvironmentsthatyoucanhavefromtimetotimeoutthere.


Great.Thanks.Iappreciateit.

Operator:




Wehavenofurtherquestionsatthistime.


That'sokay.Iwasjustgoingtosayweappreciateeveryonecallinginandlisteningtothecalltoday.Ifyouhaveadditionalquestionsordidn'tgetachancetoaskyourquestion,pleasecontactourinvestorrelationsdepartment.


Thankyou.

Operator:

Okay.Thankyoutomyspeakersandthankyouladiesandgentlemen.Thisconcludestoday'sconference.Thankyouforparticipating.Youmaynowdisconnect.

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