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Valero Energy Fourth Quarter Earnings Call
Author: Staff
Last Update: 7:45 AM EST February 18 2008

The energy firm reported a 51% increase in revenues to $28.7 billion on improved margins in some regions though overall margins for gasoline and secondary products were lower as the prices for those products did not increase in proportion to the cost of inputs. The firm plans to continue with the balanced approach of investing in growth projects, improving operating performance, paying off debt, buying back more stock, and increasing dividends, while maintaining investment-grade credit rating.

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Key questions and answers from the fourth quarter earnings call conducted by Valero Energy Corp. on January 29, 2008.

Doug Leggate (Citigroup): What was the total impact of LIFO effects?

Mike Ciskowski: We had a small LIFO detriment due to some reduced inventories. That was worth only about $20 million in our operating income. We also had an advance payment that we received in regard to the McKee insurance claim worth t $44 million.

Douglas Terreson (Morgan Stanley): Is the reduction in capital expenditures to $4.5 billion all inclusive of number and why did that projection decline?

Rich Marcogliese: That is an all end number on our capital outlook. We are seeing a general situation that as we identify projects we put together implementation timelines. And at times the actual implementation is a little slower than anticipated. But there is nothing consciously being done to slow the expenditures. It's just the actual play out of how the projects are being developed.

Douglas Terreson (Morgan Stanley): What is the progress in the billion dollar income improvement plan?

Mike Ciskowski: That billion dollar program was not ratable in terms of 20% every year for the next five years. It was going to be more back end loaded because it does relate to certain major retrofits that we have got to do to certain of our refineries. But we did not make significant progress in 2007.

In the energy area we are through operational improvements and energy efficiency. We have got to gain of about $50 million on an annual basis, as part of the $1 billion effort. But we did not make the anticipated improvements in operational reliability. And so we can report some positive progress on energy but not in the other areas.

Chi Chow (Tristone Capital): Pertaining the insurance payment in the mid-con, was that a one-time event or are there more payments coming?

Bill Klesse: That was an advance payment. So the total claim was again disclosed is obviously larger than the $44 million advance payment.

Chi Chow (Tristone Capital): What happened in California with buy demand fundamentals out there in the early part of January?

Bill Klesse: In the first half of the year, imports were very high into the West Coast and California's 65% - 70% on the West Coast. As you got into the second half, imports were in line with previous years.

Then they had very high price in California. And so we have seen a decline in gasoline demand in California. We believe the Prius has made some impact in California. So when we added all, we actually believed there was a decline in demand in California last year.

Jeff Dietert (Simmons & Company International): Do you intend to produce summer-grade gasoline early and avoid winter-grade gasoline?

Bill Klesse: There is an incentive and if you are looking at the stocks today and had five gasoline inventories that are 35 million barrels, which is as high as we have seen, it is 3.9 million barrels over the last year. It is just the ability to hold the gasoline.

Jeff Dietert (Simmons & Company International): Give us an update on timing and cost estimates changes to the Port Arthur, St. Charles and Quebec projects?

Mike Ciskowski: The St. Charles project was approved at $1.4 billion. We have not identified any change in the cost outlook associated with that. That project would be targeted for completion some time in 2010. The Port Arthur project proposal is in the final stages of development and that will include an identical gas oil hydrocracker to the one approved for St. Charles.

It will also include a grassroots delayed coker which will be a clone of the project that we built in Texas city in 2003. That project is going to be in the vicinity of $2 billion. We can develop that for Board review before the end of the first quarter, and that project would be set for 2011 implementation.

For the Quebec refinery, we are looking at a combination of a dias faulting unit and gas oil hydrocracker for that refinery. It is much earlier in the developmental phase and current cost assessment is below $2 billion. If we continue to develop it at the pace that we are on it would be more of a 2012 type delivery in the field.

We are also looking at a major project to make a significant move into aromatics production, benzene, toluene and xylene including going all the way into paraxylene production. This is a project that we are looking at for our St. Charles refinery. This is the mobile source air toxics which would be an investment that we are targeting for 2011.

Daniel Vetter (J.P. Morgan): Do you anticipate meeting the targets set forth by the renewed fuel standard?
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Market data: BATS Exchange. Inc.

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