Oct 27, 2009
Executives
Ashley Smith – Vice President Investor Relations Mike Ciskowski – Executive Vice President and Chief Financial Officer Rich Marcogliese – Executive Vice President and Chief Operating Officer Bill Klesse – Chairman, President and Chief Executive Officer Gene Edwards – Executive Vice President, Corporate Development and Strategic Planning
Analysts
Douglas Terreson – ISI Group Mark Flannery – Credit Suisse Roger Read – Natixis Bleichroeder Evan Calio – Morgan Stanley Neil McMahon – Sanford Bernstein Jeff Dietert – Simmons & Company International Mark Gilman – The Benchmark Company Paul Cheng – Barclays Capital Blake Fernandez – Howard Weil Faisel Khan – Citigroup Paul Sankey – Deutsche Bank Securities
Operator
At this time I would like to welcome everyone to the Valero Energy third quarter earnings 2009 conference call. (Operator Instructions).
Mr. Smith, you may begin your conference.
Ashley Smith
Good morning and welcome to Valero Energy Corporation's third quarter 2009 earnings conference call. With me today are Bill Klesse, our Chairman and CEO, Mike Ciskowski, our CFO, and other members of our executive management team.
If you have not received the earnings release and would like a copy, you can find one on our Web site 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 disclaimers 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 law. There are many factors that could cause actual results to differ from our expectations, including those we've described in our SEC filings.
Now, I'll turn the call over to Mike.
Mike Ciskowski
Thanks, Ashley, and thank you for joining us today. As noted in the release we reported a third quarter 2009 net loss of $219 million or $0.39 per share, before the asset impairment pre-tax loss of $417 million.
Including the asset impairment loss, our GAAP result for the third quarter was a net loss of $489 million or $0.87 per share. The asset impairment loss related mainly to the permanent shutdown of the gas supplier complex at our Delaware City refinery which was part of an effort to simplify the refinery's operations, make it more cost efficient and improve its reliability.
The third quarter 2009 operating loss was $579 million versus $1.8 billion of operating income in the third quarter of 2008. Excluding the asset impairment loss from the third quarter of 2009, the operating loss was $162 million, which compares to operating income of $1.6 billion in the third quarter of 2008, excluding the $305 million gain on the sale of the Krotz Springs Refinery and $43 million of asset impairment losses.
The key drivers of the decline in operating income were lower margins on diesel and jet fuel and smaller discounts on our sour crude oil and other feedstocks. For example, looking at the benchmark Gulf Coast margins versus WTI, ultra low sulfur diesel margins decreased to 71% year-over-year.
Comparing the same periods, Maya discounts to WTI decreased 56%. Our third quarter refinery through-put volume averaged to 2.4 million barrels per day, which was in the range of our guidance, but 208,000 barrels per day below the third quarter of 2008.
This decrease in volume was mainly due to lower utilization rates across our refinery system and the planned shutdown of the Aruba refinery throughout the third quarter. With respect to our reported operating costs, I should mentioned that as described in note four to the earnings tables, the asset impairment loss amounts for all periods have been excluded from operating costs in determining operating costs per barrel resulting in an adjustment in the operating cost per barrel previously reported.
This should help clarify inter-period comparisons of our operating results. Refinery cash operating expenses in the third quarter of 2009 were $3.94 per barrel or $0.84 per barrel lower than our third quarter 2008 results due mostly to lower energy costs.
But our focus on other costs has also been successful. Comparing the first nine months of 2008 versus 2009, our refinery cash operating expenses were down more than $700 million.
As previously mentioned, much of this was due to lower energy and natural gas prices, but over $200 million was due to our ongoing efforts to reduce costs. Looking at our other business segments, I want to highlight that retail had an outstanding quarter with the highest ever operating income in a third quarter, at $111 million just beating the $107 million earned in the third quarter of 2008.
This was due mainly to very good performance in both the U.S. and Canada and lower selling expenses.
Retail also set a record for the highest earnings for the first nine months of the year, with $232 million of operating income. Our ethanol segment also had an excellent third quarter, with $49 million of operating income, which is more than double the $22 million reported in the second quarter of the year.
The strong performance was due to all seven plants running nearly to capacity and capturing very good margins. And October margins have continued to be favorable.
General and administrative expenses, excluding corporate depreciation were $167 million in the third quarter. The increases of $44 million versus the second quarter and $32 million versus our guidance were primarily due to a $40 million increase in legal reserves.
For the third quarter, total depreciation and amortization expense was $389 million which was in line with the second quarter and our guidance. Net interest expense was $124 million which was higher than our guidance mainly due to the reduction in capitalized interest on project deferrals and cancellations.
It was also higher than the expense of $82 million in the second quarter, primarily due to a reversal of accrued interest on a sales tax audit that settled in our favor last quarter and lower capitalized interest on the previously-mentioned project deferrals. The effective tax rate was 30% which is in line with our guidance.
As described in note 13 to our Form 10-Q for the period ended June 30, 2009 we are awaiting the decision from the Netherlands Arbitration Institute regarding our dispute of a turnover tax on export sales that the government of Aruba enacted in 2007. If the decision is announced prior to the filing of the Form 10-Q for the period ended September 30, 2009 and if the decision has a material impact on our third quarter 2009 financial results then we will update our earnings release to conform with our Form 10-Q filing.
Regarding cash flows for the third quarter, capital spending was $521 million which includes $52 million of turnaround in catalyst expenditures. For the year, capital spending is projected to be $2.7 billion.
The increase from prior guidance is primarily due to accelerating certain projects into 2009 to take advantage of favorable tax treatment and the acceleration of some turnaround activity which I will discuss in a moment. For 2010 we continue to expect total capital spending in the range of $2 billion to $2.5 billion.
With respect to our balance sheet at the end of September, total debt was $7.4 billion. We ended the quarter with a cash balance of $1.6 billion and we had $4.5 billion of additional liquidity available, both similar to last quarter.
At the end of the quarter, our debt-to-cap ratio, net of cash was 26.5% which is far below the credit facility covenant that requires a ratio below 60%. As you can see, we continue to have a comfortable cash balance and plenty of liquidity.
However, I think you all would agree given the loss we incurred this quarter and the expectation of another loss in the fourth quarter, we may need to evaluate our dividend-to-payout level. As stated in our last dividend release, if industry conditions do not improve measurably, the dividend level will have to be re-evaluated.
As to the refining outlook, low product margins and narrow sour crude discounts were the key drivers of our third quarter operating loss. And although the feedstock discounts had rebounded recently, product margins have weakened so we expect overall throughput margins for the fourth quarter to be similar to what we experienced in the third quarter.
In addition, this margin environment factored into our decision to advance the turnaround activities from the first quarter of 2010 to this quarter at our Wilmington and Delaware City refineries where both refineries will undergo essentially plant-wide shutdowns. As a result, we currently expect a loss in the fourth quarter at least as large as the third quarter loss excluding special items.
Also, in the fourth quarter, we expect to report approximately $35 million of special charges for severance costs related to our activities to improve profitability at the Delaware City and Paulsboro refineries. Our strategy in these conditions remains the same.
We are working to maintain our strong balance sheet and ample liquidity and focusing on matters within our control, our cost of structure and optimizing operations. Bill's quote in the press release clearly shows we're taking action and getting results.
We will continue our systematic approach to improving profitability. Our efforts to make Valero more competitive means we should capture more earnings as the economy picks up, demand return and margins recover.
And now I'll turn it over to Ashley to cover the earnings model assumptions.
Ashley Smith
For modeling our fourth quarter operation, you should expect our refinery throughput volumes to fall within the following ranges, Gulf Coast at 1.15 million to 1.2 million barrels per day, Mid-Continent at 380,000 to 390,000 barrels per day, Northeast at 430,000 to 440,000 barrels per day and West Coast at 230,000 to 240,000 barrels per day. Refinery cash operating expenses are expected to be around $4.50 per barrel which is higher than last quarter due mainly to lower throughput volumes combined with the effect of higher expected energy prices.
Regarding our ethanol operations in the fourth quarter, we expect total throughput volumes of 2.2 million gallons per day and operating expenses should average approximately $0.38 per gallon including $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 G&A expense excluding depreciation and amortization to be around $135 million.
Net interest expense should be around $110 million. Total depreciation and amortization expense should be around $390 million, and we estimate a 30% effective tax rate.
That concludes our prepared remarks. [Latika], we will now open the call for questions.
Operator
(Operator Instructions). Your first question comes from Douglas Terreson – ISI Group.
Douglas Terreson – ISI Group
My question has to do with some of Mike's comment on costs and specifically how the operating actions that you guys have taken in the last couple of months are likely to affect the non-energy component of operating expenses in coming quarters or whether you feel we've already seen the majority of those benefits. And also, whether some of the asset reviews you guys have undertaken elsewhere in the system have uncovered significant opportunities on the cost side either operating or SG&A, and so just any update on the hope for cost improvement over the next couple of quarters would be appreciated.
Mike Ciskowski
Well, on a year-to-date basis on the resigning OpEx on the $200 million, a big piece of that was due to lower maintenance expenses which a lot of that is less contractors at our refineries. The salaries, wages and benefits has also been reduced over our refining system by about $50 million and that's nine months.
Professional fees and outside services has also been reduced by about $20 million, so a lot of little things like this that I think Rich and his organization are focusing on to reduce the cost at the refineries.
Richard Marcogliese
Yes, Doug, let me add a little more color onto that. We've initiated a number of improvement activities and I would say bottom-line where we are today, we've probably taken $150 million a year of cost out of our system and it relates to a number of categories.
We're being a lot closer on prioritization of maintenance work and contractor resources, so we're working that aggressively. We're working non-capital related energy utilization improvements through stewardship and just tighter operations.
We're controlling plant overtime and we are also taking a look at our refineries where they are out of line with efficient staffing levels and we are implementing reduction programs. As was noted, we're taking out about 150 people from Delaware City and have plans to take out about 100 positions in Paulsboro, and those efforts are under way currently.
So though a lot of intense expense focus self-help kind of items, I think we feel good about eliminating about $150 million per year in cost.
Douglas Terreson – ISI Group
And just to clarify, that's over and above or that's already included in some of the gains you guys have made non-energy so far?
Bill Klesse
Yes, some of that was reflected in Mike's comments on [$100 billion]. But I would say the running rate today is about $150 million a year less.
Operator
Your next question comes from Mark Flannery – Credit Suisse.
Mark Flannery – Credit Suisse
I've got two questions. One, I guess a follow-up to what Doug was talking about.
Can you go through a little bit more of the specifics that you're doing at Paulsboro apart from eliminating 100 positions? And is what you're doing there applicable to any other refineries?
In other words, should we expect to hear an announcement that this kind of program is rolling out to other plants in the future? And then, I have a quick follow-up on ethanol.
Rich Marcogliese
Well, what I would say for one on the Paulsboro program in general, we benchmark all of our refineries first quartile metrics really in every category of performance. And where we have determined that we are long we have generally implemented reductions.
In the case of Paulsboro, it was one little larger reductions and that's why we've cited that specifically. But we are doing this across the board at all of our plants.
But we do have a number of our plants that are already at Q1 levels and so any adjustments are more minor in nature.
Bill Klesse
We have made revisions at Wilmington refinery and we're looking at changes at our Three Rivers refinery, so we have the new Salomon benchmarking that the studies come out. We have made significant improvements.
We didn't capture when we talked about the billion dollar program. However, what has happened is because of our efforts, we haven't increased as much as many of our others relative to EDC.
And so we've gotten about a half a billion dollars of improvements relative to our competition and now we're basically a Tier II refinery in many of these categories where I've mentioned several times in the past we're a Tier III or IV. So our group has been making progress on all of these.
Other items we continue and have done. We've saved $3 million on security guards.
We consolidated accounts payable. We are consolidating and in the process of doing work in IT, our IS organization, which will save us $10 million to $15 million.
We've outsourced medical claim filing which has saved us $10 million to $15 million, and we have numerous items like that in initiatives going on throughout our company here to get our costs much better aligned for a more competitive environment.
Mark Flannery – Credit Suisse
And maybe I could just ask on ethanol, you've made a lot of money in ethanol. It's a relatively new business for you.
Do you have any idea of why the ethanol margins are so strong right now? It seems a little counterintuitive to underlying demand for gasoline and the rest of it.
Do you expect this to continue through the fourth quarter or soften up?
Gene Edwards
Yes, we're seeing demand. We seeing ethanol demand ramp up.
It's gotten up to about $2.20 a gallon in the East Coast right now. I think partly it's just the stronger crude prices and gasoline leading it up.
But actually ethanol is up more than gasoline. When you get the blender's credit, it's still possible to blend.
We're seeing ethanol in about a little over 80% of the gasoline in the United States right now. And then there's the RFS ramps up again next year, another – this year, I think 685,000 barrels a day and next year goes to 785,000 barrels a day.
So I think there's just continued demand for ethanol and we still have a number of plants that are still shut down from the crisis they were in late last year when we bought the plants.
Operator
Your next question comes from Roger Read – Natixis Bleichroeder.
Roger Read – Natixis Bleichroeder
Kind of following up on the ethanol question there, obviously runs full out for you in the quarter. There's some excess capacity out there.
What do you all see as the next step for ethanol? Do you invest more in it?
Do you just sort of sit where you are? What are the options here?
Gene Edwards
Well, we're looking at some other options right now but obviously with the margins improving – a lot of those plants are even in bankruptcy. Everybody's trying to hang on a little longer to try to ride it out, until they get the plants running again.
The other factor I failed to mention, too, is Brazilian ethanol is very tight. It's like $2.20 a gallon.
It's above New York, so there have virtually been no imports into our market in the past few months.
Bill Klesse
I think if you're asking us a little more strategically, the business has worked out for us very well. Gene's group had purchased these assets earlier in the year.
Obviously, it's worked out. And so as we look at the business, we feel very strongly that ethanol is going to be part of the fuel mix going forward.
And so we'll continue to look for, what I've said in the past, things that we can add on to this core business. We have a significant stake.
We can make 50,000, 51,000 barrels a day of ethanol and I think you'll see us try to do little add-on niche plays here along with it. We've also announced a joint venture with Darling on biodiesel, at least a letter of intent, and we're working on that, to put in at St.
Charles Refinery in New Orleans. And so we see all these alternatives being part of the mix.
And you'll see us to continue to add to this business, but prudently.
Roger Read – Natixis Bleichroeder
And kind of following along there, there's a lot of talk here along the Gulf Coast of using I guess it's algae to essentially make ethanol. Have you done anything or looked at anything significantly along that line?
Gene Edwards
Yes, we have partnership in a project there. It's with Solix and we've got some money into that project.
It's small capital at this point, but it's a development project. Algae has a lot of potential because you can grow so much per acre of land and you don't even have to have fertile land to grow it.
So I think there is a lot of potential. But I do think it's years away as far as any commercial type application as far as big volume.
Bill Klesse
Yields can be very high and it can be a CO2 sink.
Operator
Your next question comes from Evan Calio – Morgan Stanley.
Evan Calio – Morgan Stanley
I had a question whether or not there's any update on potential asset sales? You've been clear over time those assets you might be sellers of and, if buyer interest is improving, as some stories suggest?
I mean – and what do you believe will be the primary logjam in selling an asset? I mean is it price, lack of buyer, challenging environment, all of the above?
And I have a follow-up.
Gene Edwards
This is Gene again. It is a buyer's market today.
Obviously the margin's down. There's lots of refineries that are available, some that have already been shut down.
So it is difficult to find buyers right now. A lot of the smaller independent refineries don't have the balance sheet to be too aggressive right now.
You saw Holly made the acquisition, I guess.
Evan Calio – Morgan Stanley
Yes.
Gene Edwards
But it's difficult right now to find buyers.
Evan Calio – Morgan Stanley
I mean conversely and beyond the company's cost savings initiatives I mean how do you think about or what kind of levels do you think about in terms of any asset rationalization within your portfolio?
Bill Klesse
Well, if you're asking are we looking for alternatives, the answer is we've announced that we have three refineries that we are clearly looking at strategic alternatives, Aruba, Delaware City and Paulsboro. And then I think Gene's – well, and those strategic alternatives would include every option here to improve our performance.
And so we'll look and we'll continue to look at those alternatives. And Gene gave you a little synopsis of the overall business, so those are the three plants that we're looking at options.
Operator
Your next question comes from Neil McMahon – Sanford Bernstein
Neil McMahon – Sanford Bernstein
Just a few questions on the micro scene, just looking at demand, anything you're seeing, estimate as in terms of recovery in diesel demand, maybe looking outside the seasonal effects. Obviously, maybe looking over on the West Coast seeing any pickup there, from any container shipments or, indeed, anywhere in the country.
And secondly, you started to talk about your hope that light-heavy differentials will open up into next year. Anything that you're seeing that gives you any security that that may happen, potentially increased OPEC supply?
Richard Marcogliese
Well relative to diff lifts, you know, within the system we aren't seeing any significant change and you see the same stats that we see every week and we haven't seen any material increase there. Now, the trucking indexes seem to be improving here.
So hopefully we will see increase in demand as we go forward. Now, from an export perspective, we moved 135,000 barrels a day on average through the third quarter.
So those volumes continue to be steady, although of late, we've seen the [R] closed and so those volumes are declining a bit now. We do have some of that volume termed up so we'll continue to move it, but we're not seeing anything that I would say makes us change our view that diesel demand is going to be a struggle to get economic recovery, but for the time being it will continue to be steady.
Bill Klesse
In our company operated retail, Mike can tell you some of those.
Mike Ciskowski
Yes, on our third quarter '09 versus third quarter '03 our gasoline volumes are down about 1%, but our diesel volumes are up about 5.5%. And if you look at October versus October, the gasoline is about the same.
The diesel's up 8.8%
Richard Marcogliese
And you asked about the light-heavy differential, also; was that correct? Okay.
Well, you know the markets for sour crude are still in tight supply. And I think that we've seen that OPEC compliance here of late isn't as strict as it was earlier in the year.
We've also had a flattening of the forward curve for WTI which has brought the front end prices up a bit which have helped increase the discounts. And then there's been some increasing availability of 3% fuel oil resulting from uneconomic coker operations and really reduced coker runs which all have combined to ease the pressure on the discounts.
Operator
Your next question comes from Jeff Dietert – Simmons & Company International
Jeff Dietert – Simmons & Company International
You recognize an asset impairment at Delaware City gasifier and on some of the capital projects. Could you talk about the process that you go through for evaluating other asset impairments at Aruba or other places and when you expect that to occur?
Bill Klesse
Well we did complete an asset impairment test for all our refineries in the third quarter and we basically developed a price forecast and then come up with cash flows for each of the refineries and add those cash flows back and compare it to the book value. And we did do that and did not have any other asset impairments other than what we reflected on the gasifier and those other projects in the third quarter.
Jeff Dietert – Simmons & Company International
So that asset impairment was across the entire portfolio?
Bill Klesse
Yes, it was. It was a test, the asset impairment test we did across the entire portfolio.
Jeff Dietert – Simmons & Company
Okay, thank you very much.
Operator
Your next question comes from the line of Mark Gillman – The Benchmark Company.
Mark Gilman – The Benchmark Company
Thanks, good morning guys, a couple of things. Mike, I think you mentioned a $40 million legal reserve add, what was that for?
Mike Ciskowski
Well it was related to some litigation that we have outstanding that we've just increased the reserve.
Mark Gilman – The Benchmark Company
Could you be more precise?
Unidentified Corporate Participant
We don't really release details on our legal reserves.
Bill Klesse
I would tell you, Mark, just to give you some it's a settlement that we're believe we're going to be able to reach pending a Premcor acquisition liability and so until we have everything completely final, but we went ahead and booked the reserve of $40 million.
Mark Gillman – The Benchmark Company
On the Aruba tax, what's the exposure on that should the arbitration go unfavorably?
Mike Ciskowski
Okay, on the, I guess on the BBO and then there's also a little bit on dividend withholding. And when I say the BBO I mean the turnover tax, that's kind of another name for it.
It's about $0.24 per share.
Mark Gillman – The Benchmark Company
That's combined, Mike?
Mike Ciskowski
That is combined and we do have, –we have that escrowed already the big chunk of that.
Bill Klesse
But not booked.
Mike Ciskowski
Not booked, that's right, $0.24 on earning.
Mark Gillman – The Benchmark Company
You talked a little bit about acceleration of the capital program for tax purposes. Is that because of the accelerated deductibility of expenditures completed in 2009?
Mike Ciskowski
That's correct.
Mark Gillman – The Benchmark Company
And Mike, your comments regarding the anticipated fourth quarter loss and its relationship to third quarter, is that inclusive of the severance charges that you mentioned, or exclusive?
Mike Ciskowski
It would be exclusive.
Mark Gillman – The Benchmark Company
Okay and just one final one if I could. At the point that you decided to shut Aruba down, was it cash flow positive?
Mike Ciskowski
No, it was not. Not in the second, third quarter it was not cash flow positive.
Bill Klesse
To give you a sense, it does move around a little, and I'm going to deal in gross margin. So it's clearly not cash positive.
And then on a gross margin and actually in one month it was negative, the next month it was slightly positive, then it went negative again. But we actually had a negative gross margin in Aruba having to do with the lack of a sour crude discount because remember, it's a coking refinery – it's just like an up-grader, it's really just a coker with some desulfurization.
So we had this negative gross margin and you put on our operating expenses on top of it and we had very negative cash flow.
Mark Gillman – The Benchmark Company
Okay, I lied, there is one more. As you re-evaluate the dividend what criteria are you going to be looking at guys?
Bill Klesse
Well we, our yield today is over 3%. We obviously are incurring a loss as we – this quarter and we said we're going to have one in the fourth.
As we look to next year, we believe that the economy has or is bottoming, but employment is going [allowed] coming back. I don't know if it'll get over 10% by the end of the year or not, but it looks that way.
We sell fuels. We sell petrochemical feedstocks.
So we're really looking at how long this recovery's going to take. We look at our cash position.
It's very good. We do have certain capital spending that we have to do.
We're building a scrubber at Benicia. We have [MSAT2] which is benzene removal and these things have to be done by the end of the year.
We have several other opportunities as we look at our overall cash, our debt repayment next year is very low, so that's – I think it's only $36 million counting capitalized lease. There are leases to come due.
So we're just looking at our overall cash position relative to the earnings and then our yield.
Mark Gillman – The Benchmark Company
Can you be any more specific, Bill, in terms of financially oriented metrics?
Mike Ciskowski
You know I don't really think so, Mark. I mean we're just going to be re-evaluating it as we go through the quarter.
Mark Gillman – The Benchmark Company
I mean I guess I'm just kind of wondering with the outlook being what it is and the expectations regarding the 2010 capital picture. If you were going to do it, why didn't you do it already?
Bill Klesse
Well we feel that we're very shareholder-focused. We know that when we think the economy is bottoming, we think our business will improve; it's just at what rate.
And this'll be a management recommendation as we get into January to our board. It's a board decision and we'll bring all the factors to bear.
But we just made this decision to not have done it already and to see what develops here as we complete this year and get into next.
Operator
Your next question comes from the line of Paul Cheng – Barclays Capital.
Paul Cheng – Barclays Capital
Maybe this is for Rich or Gene, in California, are you guys now branding at 5.7% of ethanol or is it already higher than that? And if it's the case, at what level and do you know if California as a whole is a closer to 10% or is really closer to 5.7% at this point?
Mike Ciskowski
It's 5.7% today in California.
Paul Cheng – Barclays Capital
And do you know the industry as a whole in California is pretty close to 5.7%?
Mike Ciskowski
I don't know. Do you know Gene?
Gene Edwards
Well the state has passed new blending rules which take effect in January which permit blending up to 10%. We have implemented projects or they're in progress at both Benicia and Wilmington to prepare for that so I suspect the industry is going to migrate up to that level as we get into next year.
Paul Cheng – Barclays Capital
Bill the diversity and the [pass-through] now that you're under the strategic review and you're also going through some restructuring, cost reduction. In the – after all this initiative on the cost reduction and shut down of some units, how long you need to take it for you to get a reasonable period of observation to decide whether those two ultimately that may need to follow the footprint of Aruba being shut down.
I mean how that process will work?
Bill Klesse
That's a fair question. In Delaware we're going to have to do a turnaround in the cat cracker and that's scheduled to start about mid-month in November and run for almost 60 days.
And so we're going to fix the cat and so the plant will basically be down for nearly two months. During that time we'll see what's going on with our crack spreads.
We'll see what the sour crudes discounts –because remember, we've shut the coker down but the plant tends to be close to a heavy sour refinery more heavy than just the medium sour. So we'll look at it over the next several of months and we're also seeing what other alternatives are out there.
But this takes time and it's also dependent on the crack. As I answered Mark earlier, even in Aruba where we shut down at a gross margin level, it has moved around so that there would have been a contribution in one or two of the months.
Then in the other months it was beneficial to stay down and for the whole quarter it was beneficial to stay down. So we'll see how this develops over the next several months.
Inventories are getting better. If you look at the distillates, if you look at gasoline inventory relative to demand, these items all are looking to us much better.
We get a cold winter in here the distillates will come back, so we're just going to play it out.
Paul Cheng – Barclays Capital
So if that means that as long as that you are running it maybe, cash flow breakeven then the facility is not necessary going to be shut, you will only shut it if you have negative cash flow margin or negative margin?
Bill Klesse
No, we may – I'm not saying we're going to shut it in any case because there's a lot of value there. But if you think historically what shuts down a refinery, you tend to run at a neutral cash margin by adjusting your operating rate at what I'll call a sophisticated refinery.
Aruba tends to be a little different. But in a sophisticated refinery you're balanced to an operating rate and then capital spending becomes the determinant here and if a large capital spending is required going forward that tends to push refineries into a shutdown situation or at least some form of rationalization.
What we have at Delaware City is we've tried to run this gasifier and that has affected the entire reliability of the operation because it produces steam as well as power. And when we've had upsets we've gotten into a steam imbalance which then causes the reliability of the refinery to be a problem.
We get through that we'll see how we look at next spring. We'll have a different operation.
We're going to make 20,000 or so barrels a day in fuel oil out of the facility. And we expect our economics to look a lot better.
Paul Cheng – Barclays Capital
How about Paulsboro?
Bill Klesse
Well, Paulsboro is driven largely by the lube margin as well as its general operation. Valero's invested a lot of money there over the years.
Our people are doing are doing a very fine job on reliability you'd notice that the plant runs very, very well. But lube margins are very depressed and historically lubes have been a significant contributor to that performance.
So again and I know you guys are thinking, well, we're just waiting for the economy and that's not true because we're attacking cost structure. But at the end of the day we sell fuels we sell petrochemicals and in the case of Paulsboro we sell lubes.
And these are all part of the economy.
Paul Cheng – Barclays Capital
Can you remind me, what's the lube production in Paulsboro? And also I think at the time when you guys bought it from Mobil you have signed an off-ticket agreement.
Is that off the agreement already expired?
Bill Klesse
No, the agreement has not and that goes through 2017. And but there are options around the lube operation, in other words, Valero couldn't – can make economic decisions but then under the agreement with ExxonMobil we have to provide certain services for ExxonMobil because they have their operation there across the street from a refinery so you come through the dock.
But historically it's a 10,000 barrel a day business but it's had very good margins. This is a Group I lube and even though there's been plants shut down Group I lube plants shut down, the facts are that the margins over the years have been just excellent.
They were excellent last year and it contributes in the range historically as I tell you it's 30% to 40% of the profitability of the refinery on those Group I lubes. Exxon does not take all of the volume either.
We have a business that sells these lubes to other people.
Paul Cheng – Barclays Capital
Yes I could have – my number of quick balance sheet information, the inventory the market [ladder] in excess of the book by the end of the third quarter, working capital, the long-term debt component of your total debt.
Mike Ciskowski
Our total current assets are about $10.9 billion cash is $1.6 billion so current assets less cash was $9.3 billion. Total current liability is at $7.6 billion, current maturities are only $213 million.
So our current liabilities less maturities is $7.4 billion and our net working capital is $1.9 billion, market values of inventories.
Paul Cheng – Barclays Capital
I thought that you say current asset is 10.9 and current liability is 7.9 so your working capital should be 3?
Mike Ciskowski
Well, I had to reduce the assets by cash and then the current liabilities about the last year current maturities. Then the market value of the inventory is about $7.4 billion, that's about $3.2 in excess of the LIFO value.
Paul Cheng – Barclays Capital
Mike, did you say 3.2 above the book value?
Richard Marcogliese
Yes, and then the long-term debt and capital leases at the end of September is $7.3 billion – or $7.4 billion.
Operator
(Operator Instructions) Your next question comes from the line of Blake Fernandez – Howard Weil.
Blake Fernandez – Howard Weil
My questions have already been answered. But I did want to go back to the comments Joe I believe was making on the crude differentials.
Obviously over the past several weeks I think we've seen just using kind of WTI-Maya Spread move from about $4.00 or $5.00 a barrel up to about $8.00 a barrel. And I was just curious if you could give us some kind of feel for if we're beginning to approach the point where coking economics are getting close to being profitable here?
Gene Edwards
Yes, they are Blake, and Rich can speak to this also. But I guess it's just been in the last couple of weeks that we have – the models have shown the LTs have shown that it is economic to run some of the cokers.
Richard Marcogliese
Yes, it now it's not a signal to fill them all up. We have looked to buy residual fuels on a wholesale level.
We've run them to capacity at our coker at Texas City. And actually Texas City has the best coking economics because it has a lot of hydro-processing capacity.
So we're beginning to see it and we are responding to it but I would say we're still a ways away for filling up all of our coker capacity which is why at Delaware City that large fluid coker will remain down.
Blake Fernandez – Howard Weil
And Rich just to confirm, you take a longer term approach on that or a view three or four month kind of outlook before you begin to aggressively attack it, is that correct?
Richard Marcogliese
Well, I mean we review our economics on a monthly basis for kind of marginal throughput on the Coker's that are remaining in service. Now for something like Delaware City we would take a longer view probably several months to see if we've got the market structure which would support reactivating the unit.
As Bill mentioned this is probably going to be something that we will re-evaluate in the spring.
Gene Edwards
And Blake just to elaborate a little bit, we're buying feeds well in advance and so you've got to be fairly certain that you've got a decent margin before you're going to go buy feeds to fill the cokers.
Richard Marcogliese
And I mean that is a good point on the Delaware City operation in its current configuration, we're running a lighter crude slate. And so a decision to restart the coker we've got to plan probably a month to two months in advance to put the right heavy crudes in front of it.
So it ends up being a bigger decision.
Blake Fernandez – Howard Weil
That's helpful, thanks. The only other one I had, I just wanted to get confirmation.
Bill, is it fair to say that you guys are still evaluating acquisition opportunities internationally with distillate leverage?
Bill Klesse
Absolutely, and on acquisitions we're going to continue to look both internationally as well as here in the U.S. on things that we believe would add value.
Shareholder value would improve our portfolio make us more competitive. But you as I think you've already sense we're going to be very, very conservative and be very confident that we're making the correct decision.
I know some people didn't agree with us but we thought TRN was a good opportunity for Valero and its shareholders and we lost the deal but we thought it was a good opportunity. And if we see something like that come along again we will pursue it.
Operator
Your next question comes from the line Faisel Khan – Citigroup.
Faisel Khan – Citigroup
Just curious with the shutdown of the Aruba and the reduced operating rates in the other facilities, what does that do for your inventory balance? Do you take down inventories and realize some of those barrels?
Gene Edwards
Our inventories haven't been reduced.
Faisel Khan – Citigroup
Is there any way to quantify that? Have you generated cash from those inventories?
Mike Ciskowski
Yes well, through the year I mean we've a – our inventories have gone down about 4 million barrels since the beginning of the year. So we had generated some cash, I would say roughly $500 million through the year on a year-to-date basis and from the inventory reduction.
Faisel Khan – Citigroup
How do you vision that kind of going forward?
Mike Ciskowski
Well, we're evaluating that as we speak. I mean we're looking – we've got several refineries that are in reduced rates and so we're ascertaining what our inventory requirements will be at year end.
Faisel Khan – Citigroup
Going back to one of the tax questions, I know you've accelerated some of your CapEx to take advantage of some of those tax benefits and just kind of rationalize how that works in a year where you're basically generating a GAAP loss? How do you benefit from those tax credits if you carry those forward?
Mike Ciskowski
Yes, well what happens is we will have a tax carry back, so we'll get a refund from the 2007 tax return.
Faisel Khan – Citigroup
Okay. Have you guys calculated what that benefit could be?
Mike Ciskowski
We're still in the process of determining all of our tax write offs and so it's hard to really – I mean, I can't give you a real solid number today.
Faisel Khan – Citigroup
Okay, got you. In terms of CapEx for next year, can you remind us where we're at in the planning phase and where you might be for next year?
Bill Klesse
Well our guidance Mike gave you is between $2 million to $2.5 billion. But clearly as we look at this market if it doesn't come back for us as we're anticipating, we're going to continue to work that down.
But as I said earlier, we have a very large scrubber project, which is – spending next year is going to be almost $400 and some odd million at the Benicia refinery, which has to be done by the end of '10. And we have [MSAT2], which is benzene removal, which is largely about $350 million of spending for next year.
So we have those and that has to be done by the end of the year. So we have two projects here that have to finish next year that are going to total around $700 million to $800 million.
That's barely – and once end of '10 is one, then those are gone but we have to get those two done, so where our guidance is, 2 to 2.5 at this point.
Faisel Khan – Citigroup
And then if you do find a transaction or an asset that you guys like as you – that you believe would fit well into the portfolio, how would you envision financing that?
Bill Klesse
Well I'd like to say we'll wait and see what it looks like and the size and so it just – we're going to maintain though if this what you're asking, we are going to maintain our balance sheet in this environment. And we're investment grade rating and we're going to stay that way.
Operator
The next question comes from the line of Paul Sankey – Deutsche Bank Securities
Paul Sankey – Deutsche Bank Securities
Going on about the cash if I could, Bill. If I look at your cash flow from operations as taken to be net income plus DB&A, I've got about $170 million for the quarter.
And then CapEx of 521 including turnaround, dividends of 84, I get a negative cash burn of about $434 million. You just told us that your inventory drawdown for the entire year was at 500.
I was thinking that it was going to be an Aruba working capital shift but given that your debt didn't change or in fact went down for the quarter, I was wondering what I was missing in terms of I guess the working capital item?
Mike Ciskowski
Yes, I mean if you look just at the third quarter, the items that we've provided, you listed most of them but we also had the asset impairment add back. And so when you sum all those three items, it implies a cash reduction of about $280 million.
And when you look at what we haven't provided for you is deferred tax and so we had a negative deferred tax of 177 and then a source of funds at working capital of about 450. And when you net those two numbers, that's a change of – that's a source of funds of $280 million and so most of the working capital change was due to a decrease in our net receivables-payables position.
Paul Sankey – Deutsche Bank Securities
And how would that flow through to Q4 and if we kept the same margins, which we're kind of – I guess we're saying based on your guidance for Q4, basically saying that we expect the margins to be similar in Q4 to what we saw in Q3. If I was to try and get to a normalized cash flow from operations and a spending number, how could you help me do that allowing for the other stuff we've got going on here?
Mike Ciskowski
Well it's hard to project the working capital changes due to – from the receivables-payables because they can move around from quarter to quarter a little bit. But I mean we typically – I mean in a flat crude environment you won't see a lot of change from quarter to quarter in our receivables-payables number.
I mean, inventory, we haven't forecasted the decrease in inventories and the additional decrease at this point but we are evaluating that. And so there may be a little bit sourced but we don't typically forecast huge increases or decreases in our working capital requirement.
Paul Sankey – Deutsche Bank Securities
Fair enough but can you – I guess it might be too much to ask but the change in Aruba I guess is the big element here that was a big plus that would be unsustainable, right?
Bill Klesse
Well I think if you're asking as a general statement, if we maintain – if we move these projects forward, so we have the turnarounds going on at Wilmington and Delaware City, so it's fair to say we're going to consume some cash during the fourth quarter unless we take other actions with our inventories. And we're only operating on refineries in the low 80% range.
So as Mike was saying, we still have opportunity here to get our inventories in better balance relative to our operating rates. But if everything else is held constant, we're going to pull down some cash here in the fourth quarter.
Paul Sankey – Deutsche Bank Securities
I understand, Bill. And then on the CapEx, you've pulled four projects.
Obviously the natural expectation would be that the amount that you've pulled forward would come out of next year. I think we've all been kind of driving towards that idea.
That seems to be the logical way to look at it right, that we should just reduce what we are previously seeing for next year's CapEx by the amount that you've pulled forward into Q4.
Bill Klesse
Well, you can do that but I'm also giving you guidance of $2 billion to $2.5 billion.
Paul Sankey – Deutsche Bank Securities
Right well I'm – I guess –
Bill Klesse
But your point is correct, where we've moved the Wilmington turnaround clearly up into this year, right, it's an avoided cost for next year.
Paul Sankey – Deutsche Bank Securities
Yes, I mean I guess –
Bill Klesse
Per this year.
Paul Sankey – Deutsche Bank Securities
And it probably doesn't bear making but I'll say what I was thinking is just that you're not adding any projects for next year, right?
Bill Klesse
Not today, although I will tell you hydrogen, you do not not want to be generating hydrogen from reformers in this world that we're looking at, so we are looking at some small hydrogen plants at some of our refineries because obviously it's a very, very attractive to generate hydrogen from natural gas. And we view those as relatively low risk projects.
But and so these are things you'd expect us to be doing as this world has changed so much. But as a general statement, we are going to attempt to reduce our capital spending.
Paul Sankey – Deutsche Bank Securities
Great and if I could just have one more follow-up, which might be too much to ask in terms of any of us getting a good answer, but how does the dollar and the weakness of the dollar affect you guys, Bill, at the highest level? Thanks.
Bill Klesse
Well, I'd let Mike answer on the currency transactions but you guys would appreciate better than we can figure out how it's affecting crude oil price. But Mike can tell you on the company though.
Mike Ciskowski
Yes, well and most of our stuff is in U.S. dollars, so it hasn't affected that much.
We do have a little bit of Canadian foreign exchange risk that we do hedge but it's not material.
Paul Sankey -Deutsche Bank Securities
And I guess you might think that some imports of product are kept out by a weak dollar but the net damage done by the higher crude price is probably – I mean, a weaker dollar is probably worse for you guys on balance.
Gene Edwards
Yes, I would think – we truly believe that the weak dollar is driving the crude price up. It's one of the factors.
Paul Sankey – Deutsche Bank Securities
Yes and then the weak demand environment, that then drives margins down. So if we could get a situation where the dollar's strengthened, we could see a widening of margins.
Bill Klesse
We certainly like that idea.
Operator
The next question comes from the line of Mark Gilman – The Benchmark Company
Mark Gilman – The Benchmark Company
Hey, Mike, is the book value at Del City at September 30 after the impairment? Am I guessing you had about $1.6 billion, $1.7 billion, is that right?
Mike Ciskowski
That's good. It's 1.65, that's after the impairment.
Mark Gilman – The Benchmark Company
Given your comments regarding the inventory picture, isn't it reasonable to assume that there will be a potentially sizable LIFO benefit, which will record in 4Q even if you don't reduce further from current levels?
Mike Ciskowski
Actually from a book perspective, we'll have a decrement there and it will be a loss.
Mark Gilman – The Benchmark Company
Can you put some specifics on that, Mike?
Mike Ciskowski
Well, I mean I don't have the exact number. We're evaluating different operating plans.
Our LIFO barrels are down –were down at the end of September about 4 million barrels from our LIFO base. And so it's a complicated calculation determining what the book loss is because it depends on which products are down, but we are evaluating that at this particular time.
But it looks like we will have a decrement that will result in a loss.
Mark Gilman – The Benchmark Company
So that becomes part of the year-end balance sheet picture then?
Mike Ciskowski
Yes, that's correct.
Mark Gilman – The Benchmark Company
Bill, you just made a comment regarding you don't want to use reformers to generate hydrogen. I understand what you're saying in terms of natural gas, but isn't it correct that hydrogen's basically a by-product of the reforming process?
Bill Klesse
Well, it is but it depends on the severity. Today octane you just don't need octane.
If you think about ethanol, it's got such high octane the world has changed dramatically here in the need for octane. So as you increase your severity in a reformer because you want octane you make hydrogen.
So now if you're in a situation, for instance, Delaware City, we do – we have a small hydrogen plant?
Mike Ciskowski
Yes.
Bill Klesse
We have a small hydrogen plant there but we need additional hydrogen at Delaware City so we have to run the reformers at higher severity to make hydrogen so you're exactly right, Mark. In historical perspective hydrogen's a by-product of reforming but when you have to make hydrogen on purpose at these plants the cost numbers are phenomenal and if you think about our Quebec operation, which has no hydrogen plant and generates hydrogen from its reforming.
At the McKee refinery there's no hydrogen plant. You generate hydrogen from reforming and you go through.
There's a couple other situations. You, as all our competitors – so this isn't going to be rocket science to anybody and all of the guys listening on the phone they know the same thing we know that today reforming has changed tremendously and if you're having on-purpose hydrogen it is costing you a lot when you have $80 crude oil versus $4 to $5 natural gas.
Mark Gilman – The Benchmark Company
Okay, Bill, I follow now. Just one other one, going back to your comments regarding he 2010 capital program, are there other elements of that 2.0 to 2.5 that would be considered non-discretionary over and above the scrubber and the [MSAT]?
Richard Marcogliese
Sure, I meant this will be just a general comment. Turnarounds and catalyst workload is anywhere between $500 million and $600 million on an annual basis and you don't have a lot of discretion on that.
You have some discretion on timing, but that represents what the average is. I think environmental capital for the reasons Bill mentioned, [MSAT2] we also have flare gas recovery.
We have got NOX control investments to do. That is going to be of the order of about $600 million on an annual basis, on a running rate.
Safety projects will be on the order of $100 million so when we actually look at how low could this number go in the next couple of years it doesn't get much below $1.8 billion.
Mike Ciskowski
And Mark, I just did want to add, clarify one thing, you did talk about – we talked a little bit about the decrement and the cases that we've ran and the impact on the balance sheet, but the cases that we've ran will not result in a material change to our balance sheet as that would increase our debt-to-cap in a big way. So it's not material from that perspective.
Operator
There are no further questions at this time.
Ashley Smith
Thank you for listening to our call. If you have any questions feel free to call the Investor Relations department here at Valero.
Thank you.
Operator
This does conclude today's conference call. You may now disconnect.