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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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This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Valero Energy Corp. (VLO) on January 29, 2008.


Chairman and CEO: Bill Klesse
EVP and CFO: Mike Ciskowski
EVP and COO: Rich Marcogliese
EVP, Marketing and Supply: Joe Gorder
EVP, Corporate Development and Strategic Planning: Gene Edwards
Director of IR: Ashley Smith

Key Investor Issues:

- Operating revenues were up 52% from $18.8 billion in 2006 to $28.7 billion.
- Operating income was $567 million, down 41% from a year ago.
- The firm repurchased 15.4 million shares of common stock for $1 billion.

Full-Year Highlights:

- Income from continuing operations was $4.6 billion or $7.72 per share, down 13% from $5.3 billion, or $8.36 per share in 2006.
- Revenues were up 8.8% to $95 billion.
- The firm returned more than $6 billion to shareholders through $270 million in dividends plus $5.8 billion to purchase over 84 million shares or 14% of outstanding shares at the end of 2006.

Fourth-Quarter Highlights:

Income from continuing operations was $567 million, or $1.02 per share, down 41% from $1.1 billion, or $1.74 per share, in 2006 as refined product margins were lower because the cost of crude oil and other feedstocks increased more than product prices.

- Operating income was $884 million compared to $1.4 billion reported in the comparable period of 2006, with the $540 million reduction due in part to the lower throughput margin per barrel of $9.20, down $1.46 per barrel versus the previous year.
- Margins for gasoline and many of the company''s secondary products were lower as the prices for those products did not increase in proportion to the cost of the inputs.
- Operating income was affected by a $123 million increase in refinery operating expenses which was driven by higher maintenance expense and energy costs.
- The retail group had nearly $250 million in annual operating income due to restructuring activities.

Refinery throughput volumes averaged to 2.8 million barrels per day or 38,000 barrels per day lower sequentially, because of maintenance activities.

- Refinery operating expenses, excluding non-cash costs, were $4.11 per barrel, up 50 cents per barrel due to increased maintenance expense and energy costs and lower throughput volumes.
- Capital spending was $890 million which includes $180 million of turnaround expenditures.
- The firm repurchased 15.4 million shares of common stock costing $1 billion and increased dividend by 50%.
- Operating revenues were up 52% from $18.8 billion in 2006 to $28.7 billion on improved margins in some segments such as Canada.

Total debt at the end of December was $6.9 billion, and the firm ended the quarter with a cash balance of $2.5 billion.

- Debt-to-cap ratio net of cash was 19.2% up 2.5% from the prior period bringing the firm closer to the target ratio of 25%.
- The fire at Aruba refinery resulted from a maintenance repair effort on a control vault which resulted in a leak of a very hot vacuum tower bottles. This fire has shut down the refinery, and partial operations are expected to resume in about two weeks with full operations expected in about three months.

Market Fundamentals:

The firm continues to see wide discounts to WTI for the sour and heavy crude oils and other feedstocks that make up more than 60% of throughput volumes. However, margins for some of the secondary products, such as asphalt, fuel oils, and petrochemical feedstocks, are still weak and will affect benchmark margin realization. On the other hand, diesel margins are expected to remain strong since inventories are well below the levels seen last year and on-road diesel demand remains good.

For gasoline markets, the firm expects a repeat of the normal seasonal pattern in which supplies fall, demand grows, and margins rise toward the summer driving season.

- Similar to previous years, winter-grade gasoline inventories have been building ahead of the industry-wide plant maintenance period that generally begins in late January.
- Due to lower production during maintenance, winter-grade gasoline stocks typically decline before the transition to summer-grade gasoline, which is much more difficult to produce because of tighter specifications.

Another limitation on gasoline production is that the strong diesel margins create an incentive to maximize diesel production over gasoline.

- The combination of these supply constraints with seasonal demand growth will result in stronger gasoline margins this spring and summer.
- In order to optimize the portfolio, the firm has initiated a process to explore strategic alternatives for the Memphis and Krotz Springs refineries, and has retained JPMorgan to assist in that process, while the strategic review of theAruba refinery is ongoing.

First Quarter 2008 Outlook
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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