Valero Energy Corporation Reports Second Quarter Earnings

Valero Energy Corporation (NYSE: VLO) today reported second quarter 2008 income from continuing operations of $734 million, or $1.37 per share. The company’s income from continuing operations in the second quarter of 2007 was $2.1 billion, or $3.57 per share. For the six months ended June 30, 2008, income from continuing operations was $995 million, or $1.85 per share, compared to the company’s income from continuing operations of $3.2 billion, or $5.28 per share, for the six months ended June 30, 2007. Income from discontinued operations relates to the Lima, Ohio refinery, which the company sold effective July 1, 2007. Second quarter 2008 operating income was $1.2 billion, versus $3.2 billion reported in the second quarter of 2007. The decline in operating income was primarily attributable to lower margins for many of the company’s products in the second quarter of 2008 compared to the same quarter last year. Margins for refined products declined as the cost of crude oil and other feedstocks increased more rapidly than the prices of gasoline and other products, such as asphalt, fuel oils, petroleum coke, and petrochemical feedstocks. For example, benchmark Gulf Coast gasoline margins decreased about $22 per barrel, or 77 percent, from $28.95 per barrel in the second quarter of 2007 to $6.60 per barrel in the second quarter of 2008. Somewhat offsetting these weaker margins were significantly higher margins on distillate products such as diesel and jet fuels, which continued to experience strong global demand, and improved differentials for sour crude oil. Other factors contributing to the decline in operating income include refinery operating expenses, which increased by $148 million from the second quarter of 2007 to the second quarter of 2008, primarily due to higher energy costs for electricity and natural gas. Also, throughput volumes decreased in the same time frame by an average of 48,000 barrels per day in large part due to maintenance and repairs at the Aruba, Port Arthur, and Delaware City refineries. "Despite the difficult environment for margins on gasoline and many secondary products, Valero continued to be profitable,” said Bill Klesse, Valero’s Chairman of the Board and Chief Executive Officer. "Wide differentials for the heavy and sour feedstocks that we can process in our refineries benefited us significantly in the second quarter. "In our refining operations, we’ve made great progress in shifting production to take advantage of the strong market for distillates. From 2008’s first quarter to the second quarter, we increased our distillate production by 110,000 barrels per day while maintaining steady gasoline production. In the same time frame, we increased our use of discounted feedstocks from 66% to 68%, partially due to improved operations at our heavy sour refineries where we completed a major turnaround at Delaware City, finished our coke drum repair at Port Arthur, and repaired the vacuum tower at our Aruba refinery. "Looking at market fundamentals, we expect distillate margins should be strong for the rest of the year and next. However, we expect gasoline margins to continue to be weak and industry utilization rates to decline. We expect secondary products to have a margin recovery, particularly if the price of crude oil stabilizes or falls, as the prices of these products lag changes in the price of crude oil. "Our balance sheet continues to be in excellent shape with $1.6 billion in cash at the end of June. In July, we added further to our cash position with the proceeds from the sale of the Krotz Springs refinery. We continued to return cash to our shareholders in the second quarter by increasing our dividend by 25% and also by purchasing 3.8 million shares of our common stock. In early July, we purchased an additional 2 million shares, and for the year, we have purchased nearly 15 million shares. We continue to review our capital spending very closely and now expect this year’s expenditures to be approximately $3.8 billion, down $700 million from our original estimate. "Concerning asset sales, although we have received preliminary indications of interest from parties regarding our Ardmore and Memphis refineries, we have not yet received a proposal that we believe is in the best interest of our employees and shareholders, so these refineries remain under strategic review. Obviously, gasoline margins have weakened and the availability of financing is clearly lacking as the financial markets continue in turmoil. However, we plan to continue to pursue a potential transaction for Aruba. "We can manage industry challenges, but unfortunately, reckless rhetoric in Washington, D.C. complicates our forward progress. Too many in Congress fail to appreciate our industry’s efficiencies, they won’t acknowledge the excellent jobs we provide, they ignore the taxes we pay, and worst of all, many in Congress are more interested in scoring populist political points than reducing energy costs. To not allow companies to look for oil and gas when there are huge potential reserves in the U.S. is irresponsible. Instead, Congress wants to provide subsidies for inefficient technologies. Instead of solutions, they want to reduce CO2 emissions without regard for the economy. The direction we see Congress moving is not good for consumers, our shareholders, or our country. We will continue to advocate sound policies based on facts and market realities. "As I’ve said before, the refining industry historically has been seasonal, volatile, and cyclical. Even when the industry faces challenges, our employees are committed to excellence in achieving cost efficiencies while continuing to improve our safety, environmental, and reliability performance. To make Valero a more valuable company for the long term, we expect to continue our balanced approach by investing in selected growth projects, improving our operating performance, buying back more stock, and increasing dividends, while maintaining our investment-grade credit rating.” Valero’s senior management will hold a conference call at 11 a.m. ET (10 a.m. CT) today to discuss this earnings release and provide an update on company operations. A live broadcast of the conference call will be available on the company’s website at www.valero.com. Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and 2007 revenues of more than $95 billion. The company owns and operates 16 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.1 million barrels per day, making it the largest refiner in North America. Valero is also one of the nation’s largest retail operators with approximately 5,800 retail and branded wholesale outlets in the United States, Canada and the Caribbean under various brand names including Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon. Please visit www.valero.com for more information. Statements contained in this release 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 of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words "believe,” "expect,” "should,” "estimates,” and other similar expressions identify forward-looking statements. It is important to note that actual results could differ materially from those projected in such forward-looking statements. For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see Valero’s annual reports on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission and on Valero’s website at www.valero.com. VALERO ENERGY CORPORATION AND SUBSIDIARIES EARNINGS RELEASE (Millions of Dollars, Except per Share, per Barrel, and per Gallon Amounts) (Unaudited)                 Three Months Ended Six Months Ended June 30, June 30, 2008 2007 (1) 2008 2007 (1) STATEMENT OF INCOME DATA: Operating Revenues (2) $ 36,640 $ 24,202 $ 64,585 $ 42,957   Costs and Expenses: Cost of Sales 33,673 19,310 59,342 34,820 Refining Operating Expenses 1,133 985 2,247 1,919 Retail Selling Expenses 190 200 378 371 General and Administrative Expenses 117 177 252 322 Depreciation and Amortization Expense 369 337 736 659 Total Costs and Expenses 35,482 21,009 62,955 38,091   Operating Income 1,158 3,193 1,630 4,866   Other Income, Net 15 7 35 12   Interest and Debt Expense: Incurred (107) (110) (223) (199) Capitalized 24 27 43 58   Income from Continuing Operations Before Income Tax Expense 1,090 3,117 1,485 4,737   Income Tax Expense 356 1,055 490 1,587   Income from Continuing Operations 734 2,062 995 3,150   Income from Discontinued Operations, Net of Income Taxes (1) - 187 - 243   Net Income $ 734 $ 2,249 $ 995 $ 3,393   Earnings per Common Share: Continuing Operations $ 1.40 $ 3.66 $ 1.88 $ 5.42 Discontinued Operations - 0.33 - 0.42 Total $ 1.40 $ 3.99 $ 1.88 $ 5.84   Weighted Average Common Shares Outstanding (in millions) 526 563 529 581   Earnings per Common Share - Assuming Dilution: Continuing Operations $ 1.37 $ 3.57 $ 1.85 $ 5.28 Discontinued Operations - 0.32 - 0.40 Total $ 1.37 $ 3.89 $ 1.85 $ 5.68   Weighted Average Common Shares Outstanding - Assuming Dilution (in millions)   534 578 537 597   June 30, December 31, 2008 2007 BALANCE SHEET DATA: Cash and Temporary Cash Investments $ 1,644 $ 2,464   Total Debt $ 6,475 $ 6,862 VALERO ENERGY CORPORATION AND SUBSIDIARIES EARNINGS RELEASE (Millions of Dollars, Except per Share, per Barrel, and per Gallon Amounts) (Unaudited)                       Three Months Ended Six Months Ended June 30, June 30, 2008 2007 (1) 2008 2007 (1) Operating Income (Loss) by Business Segment: Refining $ 1,235 $ 3,327 $ 1,803 $ 5,103 Retail: U.S. 25 37 39 61 Canada 24 19 60 48 Total Retail 49 56 99 109 Total Before Corporate 1,284 3,383 1,902 5,212 Corporate (126) (190) (272) (346) Total $ 1,158 $ 3,193 $ 1,630 $ 4,866   Depreciation and Amortization by Business Segment: Refining $ 336 $ 302 $ 667 $ 595 Retail: U.S. 16 16 33 27 Canada 8 6 16 13 Total Retail 24 22 49 40 Total Before Corporate 360 324 716 635 Corporate 9 13 20 24 Total $ 369 $ 337 $ 736 $ 659   Operating Highlights: Refining: Throughput Margin per Barrel $ 10.82 $ 18.14 $ 9.68 $ 15.19   Operating Costs per Barrel: Refining Operating Expenses $ 4.53 $ 3.87 $ 4.61 $ 3.83 Depreciation and Amortization 1.35 1.19 1.37 1.18 Total Operating Costs per Barrel $ 5.88 $ 5.06 $ 5.98 $ 5.01   Throughput Volumes (Mbbls per Day): Feedstocks: Heavy Sour Crude 593 618 587 654 Medium/Light Sour Crude 715 650 685 632 Acidic Sweet Crude 80 86 77 85 Sweet Crude 658 717 643 711 Residuals 253 273 223 259 Other Feedstocks 128 150 144 151 Total Feedstocks 2,427 2,494 2,359 2,492 Blendstocks and Other 319 300 318 278 Total Throughput Volumes 2,746 2,794 2,677 2,770   Yields (Mbbls per Day): Gasolines and Blendstocks 1,232 1,277 1,228 1,263 Distillates 982 913 927 912 Petrochemicals 77 81 77 82 Other Products (3) 446 517 442 513 Total Yields 2,737 2,788 2,674 2,770 VALERO ENERGY CORPORATION AND SUBSIDIARIES EARNINGS RELEASE (Millions of Dollars, Except per Share, per Barrel, and per Gallon Amounts) (Unaudited)                       Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Refining Operating Highlights by Region (4): Gulf Coast: Operating Income $ 1,043 $ 1,935 $ 1,480 $ 3,018   Throughput Volumes (Mbbls per Day) 1,495 1,543 1,437 1,534   Throughput Margin per Barrel $ 13.25 $ 18.52 $ 11.46 $ 15.47   Operating Costs per Barrel: Refining Operating Expenses $ 4.34 $ 3.65 $ 4.52 $ 3.55 Depreciation and Amortization 1.24 1.09 1.28 1.05 Total Operating Costs per Barrel $ 5.58 $ 4.74 $ 5.80 $ 4.60   Mid-Continent (1): Operating Income $ 103 $ 483 $ 218 $ 574   Throughput Volumes (Mbbls per Day) 439 373 426 363   Throughput Margin per Barrel $ 7.85 $ 19.96 $ 8.28 $ 14.81   Operating Costs per Barrel: Refining Operating Expenses $ 3.99 $ 4.42 $ 4.16 $ 4.57 Depreciation and Amortization 1.27 1.34 1.30 1.50 Total Operating Costs per Barrel $ 5.26 $ 5.76 $ 5.46 $ 6.07   Northeast: Operating Income (Loss) $ (35) $ 523 $ (30) $ 812   Throughput Volumes (Mbbls per Day) 527 577 541 575   Throughput Margin per Barrel $ 5.81 $ 14.83 $ 5.91 $ 12.73   Operating Costs per Barrel: Refining Operating Expenses $ 5.06 $ 3.62 $ 4.77 $ 3.69 Depreciation and Amortization 1.49 1.25 1.45 1.24 Total Operating Costs per Barrel $ 6.55 $ 4.87 $ 6.22 $ 4.93   West Coast: Operating Income $ 124 $ 386 $ 135 $ 699   Throughput Volumes (Mbbls per Day) 285 301 273 298   Throughput Margin per Barrel $ 11.92 $ 20.35 $ 9.99 $ 18.97   Operating Costs per Barrel: Refining Operating Expenses $ 5.41 $ 4.81 $ 5.48 $ 4.60 Depreciation and Amortization 1.73 1.42 1.80 1.41 Total Operating Costs per Barrel $ 7.14 $ 6.23 $ 7.28 $ 6.01 VALERO ENERGY CORPORATION AND SUBSIDIARIES EARNINGS RELEASE (Millions of Dollars, Except per Share, per Barrel, and per Gallon Amounts) (Unaudited)                     Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Retail - U.S.: Company-Operated Fuel Sites (Average) 949 958 949 961 Fuel Volumes (Gallons per Day per Site) 5,104 5,006 5,023 4,994 Fuel Margin per Gallon $ 0.129 $ 0.202 $ 0.121 $ 0.163 Merchandise Sales $ 282 $ 269 $ 527 $ 502 Merchandise Margin (Percentage of Sales) 29.8% 29.8% 30.1% 29.9% Margin on Miscellaneous Sales $ 22 $ 24 $ 50 $ 49 Selling Expenses $ 121 $ 139 $ 241 $ 252   Retail - Canada: Fuel Volumes (Thousand Gallons per Day) 3,103 3,144 3,191 3,257 Fuel Margin per Gallon $ 0.270 $ 0.222 $ 0.286 $ 0.234 Merchandise Sales $ 54 $ 47 $ 100 $ 84 Merchandise Margin (Percentage of Sales) 28.6% 28.3% 28.5% 28.8% Margin on Miscellaneous Sales $ 10 $ 9 $ 19 $ 18 Selling Expenses $ 69 $ 61 $ 137 $ 119   Average Market Reference Prices and Differentials (Dollars per Barrel): Feedstocks (at U.S. Gulf Coast, except as Noted): West Texas Intermediate (WTI) Crude Oil $ 123.98 $ 64.89 $ 110.96 $ 61.45 WTI Less Sour Crude Oil (5) $ 5.70 $ 3.08 $ 5.77 $ 4.50 WTI Less Mars Crude Oil $ 6.96 $ 2.70 $ 6.97 $ 3.81 WTI Less Alaska North Slope (ANS) Crude Oil (U.S. West Coast) $ 0.19 $ (0.86) $ 0.75 $ 0.72 WTI Less Maya Crude Oil $ 20.99 $ 9.60 $ 18.90 $ 11.11   Products: U.S. Gulf Coast: Conventional 87 Gasoline Less WTI $ 6.60 $ 28.95 $ 5.42 $ 19.58 No. 2 Fuel Oil Less WTI $ 23.03 $ 14.95 $ 19.11 $ 12.38 Ultra-Low-Sulfur Diesel Less WTI $ 28.85 $ 22.26 $ 24.61 $ 19.81 Propylene Less WTI $ (6.77) $ 16.67 $ (3.77) $ 16.44 U.S. Mid-Continent: Conventional 87 Gasoline Less WTI $ 5.89 $ 34.09 $ 5.43 $ 23.11 Low-Sulfur Diesel Less WTI $ 28.84 $ 25.61 $ 24.88 $ 22.97 U.S. Northeast: Conventional 87 Gasoline Less WTI $ 4.34 $ 26.15 $ 3.70 $ 19.08 No. 2 Fuel Oil Less WTI $ 24.94 $ 15.41 $ 21.35 $ 13.38 Lube Oils Less WTI $ 33.65 $ 53.25 $ 32.97 $ 58.53 U.S. West Coast: CARBOB 87 Gasoline Less ANS $ 16.27 $ 37.36 $ 13.32 $ 33.67 CARB Diesel Less ANS $ 31.02 $ 26.16 $ 26.14 $ 26.35 VALERO ENERGY CORPORATION AND SUBSIDIARIES EARNINGS RELEASE (Millions of Dollars, Except per Share, per Barrel, and per Gallon Amounts) (Unaudited)     (1) Effective July 1, 2007, Valero Energy Corporation sold its Lima Refinery to Husky Refining Company, a wholly owned subsidiary of Husky Energy Inc. The results of operations of the Lima Refinery prior to its sale are reported as discontinued operations in the Statement of Income Data for the three and six months ended June 30, 2007, and all refining operating highlights, both consolidated and for the Mid-Continent region, presented in this earnings release exclude the Lima Refinery.   (2) Includes excise taxes on sales by Valero's U.S. retail system of $204 million and $203 million for the three months ended June 30, 2008 and 2007, respectively, and $398 million and $399 million for the six months ended June 30, 2008 and 2007, respectively.   (3) Primarily includes gas oils, No. 6 fuel oil, petroleum coke, and asphalt.   (4) The regions reflected herein contain the following refineries: Gulf Coast- Corpus Christi East, Corpus Christi West, Texas City, Houston, Three Rivers, Krotz Springs, St. Charles, Aruba, and Port Arthur Refineries; Mid-Continent- McKee, Ardmore, and Memphis Refineries; Northeast- Quebec City, Paulsboro, and Delaware City Refineries; and West Coast- Benicia and Wilmington Refineries.   (5) The market reference differential for sour crude oil is based on 50% Arab Medium and 50% Arab Light posted prices.