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    Low Margins Dent Valero's Net Income

    Retail margins were strong, but wholesale margins sank as refineries lowered throughput.

    SAN ANTONIO -- Strong retail gasoline margins, higher margins for distillate products such as diesel and jet fuels, and increased margins for secondary products such as asphalt and petroleum coke, helped Valero Energy Corp. realize an operating income increase for its fourth quarter 2008.

    Valero reported fourth quarter net income of $732 million, excluding a non-cash loss from the impairment of goodwill, or intangible assets, of $4.1 billion. This compares to fourth quarter 2007 net income of $567 million. Including the impairment loss, the company reported a fourth quarter 2008 net loss of $3.3 billion. The company reported a fourth quarter 2008 operating loss of $2.9 billion. Excluding the goodwill impairment loss, fourth quarter 2008 operating income was $1.2 billion compared to $884 million for the fourth quarter of 2007.

    "Despite very low gasoline margins in the fourth quarter, we reported solid operating results that showed the competitiveness of our operations," Bill Klesse, Valero chairman and CEO, said in a statement. "Our complex refineries benefited from favorable discounts on feedstocks, and our retail network had a record quarter when its margins improved as crude oil prices declined. Regarding the goodwill write-down, investors should understand that this non-cash charge does not affect the cash flow generation from our assets or Valero’s competitive position within the refining industry."

    Partially offsetting the increase in operating income were lower wholesale gasoline margins and lower overall refinery throughput volumes.

    For the year ended Dec. 31, 2008, the company reported a net loss of $1.1 billion. Excluding the goodwill impairment loss, however, full-year 2008 net income was $2.9 billion, falling from 2007 income from continuing operations of $4.6 billion.

    "Looking at market conditions for the coming year, the sluggish economy is clearly a headwind against demand growth for refined products," Klesse said. "To help stabilize margins, refiners must continue to use discipline in matching production with demand. At Valero, we are managing our run rates according to market demand."

    Valero shut down its entire Texas City refinery instead of running portions of it during scheduled maintenance this quarter. At its Corpus Christi East Plant, the company shut down the fluid catalytic cracking unit, which primarily produces gasoline.

    "Across our system, the average utilization rate at our fluid catalytic cracking units is currently in the range of 70 percent to 75 percent of capacity." Klesse said. "In this environment of economic weakness, staying competitive is essential to our investors." He added, "Fortunately, we have a strong financial position with ample liquidity and an investment-grade credit rating. We remain focused on prudently executing our growth projects, while reducing operating expenses and overhead costs."

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