Greetings. Welcome to the Valero Energy third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Bhullar, Vice President of Investor Relations. Thank you, sir. You may begin.
Good morning, everyone. Welcome to Valero Energy Corporation's third quarter 2020 earnings conference call. With me today are Joe Gorder, our Chairman and CEO, Lane Riggs, our President and COO, Jason Fraser, our Executive Vice President and CFO, Gary Simmons, our Executive Vice President and Chief Commercial Officer, and several other members of Valero senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.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 our investor relations team after the call. I would now like to direct your attention to the forward-looking statement disclaimer 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 laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. I'll turn the call over to Joe for opening remarks.
Thanks, Homer. Good morning, everyone. The third quarter was another challenging period in which refining margins continued to be pressured by pandemic-imposed restrictions on global economies. These restrictions have limited individual movement and in-person activities across the globe, resulting in lower demand for finished refinery products. This in turn has created less incentive to produce crude oil and has led to narrower crude oil discounts compared to last year. Despite this challenging environment, there were a number of positive developments from the previous quarter as product demand increased with incremental easing of restrictions on businesses and the reopening of some schools. Relative to the second quarter, DOE statistics show that gasoline, diesel, and jet demand improved by 25%, 7%, and 57% respectively, which is in line with the increase in demand that we experienced across our system.
Our wholesale volumes remain steady, moving over 50% of our total light products production. Our gasoline and distillate exports to Latin America and Europe were also robust in the third quarter. We exported 316,000 bpd in the third quarter, which is significantly higher than the 170,000 bpd we exported in the second quarter. We also saw a steady increase in our wholesale volumes into Mexico, where we have been proactively expanding our logistics network for the last several years. In fact, Valero is now one of the largest private fuel importers into Mexico. With the incremental easing of restrictions and higher product demand, our refinery utilization increased from 74% in the second quarter to 80% in the third quarter, and we increased our ethanol plant production as well from 49% - 81% of capacity.
Our low carbon renewable diesel business remains resilient with another quarter of solid performance, realizing a margin of $2.72/ gal and setting a record for sales volumes. In addition, we remain well capitalized. We ended the quarter with over $4 billion of cash and almost $10 billion of total available liquidity. While we expect margins to improve as economies continue to reopen and product inventories come down to normal levels, we opportunistically raised another $2.5 billion of debt at very attractive rates to ensure that we are able to keep our high return projects on track and to honor our commitment to shareholders, even if the current low margin environment persists for longer than currently anticipated. Turning to capital investments, we continue to execute on announced projects that are expected to drive long-term earnings growth.
The St. Charles Alkylation unit, which is designed to convert low-value feedstocks into a premium alkylate product, remains on track to be completed in the fourth quarter. The Diamond Pipeline expansion and the Pembroke Cogen project are expected to be completed in 2021, and the Port Arthur Coker project is expected to be completed in 2023. We're also evaluating a number of other low carbon growth projects that are in the development phase of our gated process. We continue to strengthen our long-term competitive advantage with investments in our renewable diesel business. The Diamond Green Diesel expansion project at St. Charles, which is designed to increase renewable diesel production capacity by 400 million GPY - 675 million GPY , is still expected to be completed in 2021.
Diamond Green Diesel also continues to make progress on the advanced engineering review for a potential new 400 million GPY renewable diesel plant at our Port Arthur, Texas refinery. As we look ahead, we expect to see improvement in margins as product inventories approach the normal five-year range. U.S. gasoline inventory is already in the middle of the five-year range, and although distillate inventory is higher than the five-year range, it's been trending downwards in recent weeks. Diesel demand should continue to improve, supported by winter heating oil demand and harvest season. Fall refinery turnarounds, coupled with recently announced and anticipated closures or conversions of less advantaged refineries, should also further balance supply.
Although there's a lot of uncertainty in the market, we remain steadfast in the execution of our strategy, pursuing excellence in operations, investing in earnings growth with lower volatility, and honoring our commitment to stockholder returns. Our unmatched execution, while being the lowest cost producer and ample liquidity, position us well to manage this pandemic-induced low margin environment and maintain our position of strength as the global economy recovers. Lastly, the guiding principles underpinning our capital allocation strategy remain unchanged. There is absolutely no change in our strategy, which prioritizes our investment-grade ratings, sustaining investments and honoring the dividend. With that, Homer, I'll hand the call back to you.
Thanks, Joe. Before I provide our third quarter financial results summary, I'm pleased to inform you that we recently posted a Sustainability Accounting Standards Board, or SASB report on our website that aligns with the SASB framework for refining and marketing industry standards. As you'll see in our report, we're targeting to reduce and offset greenhouse gas emissions by 63% by 2025 through investments in board-approved projects. The targets will be achieved through absolute emissions reductions through refining efficiencies, offsets via our ethanol and renewable diesel production, and global blending and credits for renewable fuels. This is consistent with our strategy as we continue to leverage our global liquid fuels platform to expand our long-term competitive advantage with investments in economic low carbon projects.
Now turning to our quarterly performance, we incurred a net loss attributable to Valero stockholders of $464 million, or $1.14 per share for the third quarter of 2020 compared to net income of $609 million or $1.48 per share for the third quarter of 2019. The third quarter of 2020 adjusted net loss attributable to Valero stockholders was $472 million or $1.16 per share compared to adjusted net income of $642 million or $1.55 per share for the third quarter of 2019.
Third quarter 2020 adjusted results primarily exclude the benefit from an after-tax lower of cost or market or LCM inventory valuation adjustment of approximately $250 million and an after-tax loss of $218 million for an expected LIFO liquidation. For a full reconciliation of actual to adjusted amounts, please refer to the financial tables that accompany the release. The refining segment reported an operating loss of $629 million in the third quarter of 2020 compared to operating income of $1.1 billion in the third quarter of 2019. Excluding the LCM inventory valuation adjustment, the expected LIFO liquidation adjustment and other operating expenses, third quarter 2020 adjusted operating loss for the refining segment was $575 million.
Third quarter 2020 results were impacted by narrow crude oil differentials, lower product demand, and lower prices as a result of the COVID-19 pandemic. Refining throughput volumes averaged 2.5 MMbpd , which was lower than the third quarter of 2019 due to lower product demand. Throughput capacity utilization was 80% in the third quarter of 2020. Refining cash operating expenses of $4.26/bb l were $0.21 /bbl higher than the third quarter of 2019, primarily due to the effect of lower throughput rates. Operating income for the renewable diesel segment was $184 million in the third quarter of 2020 compared to $65 million in the third quarter of 2019.
After adjusting for the retroactive blender's tax credit, adjusted renewable diesel operating income was $123 million for the third quarter of 2019. Renewable diesel sales volumes averaged 870,000 GPD in the third quarter of 2020, an increase of 232,000 GPD Versus the third quarter of 2019 due to the effect of the planned maintenance that occurred during the third quarter of 2019. Operating income for the ethanol segment was $22 million in the third quarter of 2020 compared to a $43 million operating loss in the third quarter of 2019. The third quarter 2020 adjusted operating income for the ethanol segment was $36 million.
Ethanol production volumes averaged 3.8 million GPD in the third quarter of 2020, which was 206,000 GPD lower than the third quarter of 2019. The increase in operating income from the third quarter of 2019 was primarily due to higher margins resulting from lower corn prices. For the third quarter of 2020, G&A expenses were $186 million, and net interest expense was $143 million. Depreciation and amortization expense was $614 million, and the income tax benefit was $337 million in the third quarter of 2020. The effective tax rate was 47%, which was primarily impacted by an expected U.S. federal tax net operating loss that'll be carried back to 2015 when the U.S. federal statutory tax rate was 35%.
Net cash provided by operating activities was $165 million in the third quarter of 2020. Excluding the favorable impact from the change in working capital of $246 million, as well as our joint venture partner's 50% share of Diamond Green Diesel's net cash provided by operating activities, excluding changes in its working capital, adjusted net cash used by operating activities was $177 million. With regard to investing activities, we made $517 million of total capital investments in the third quarter of 2020, of which $205 million was for sustaining the business, including costs for turnarounds, catalysts, and regulatory compliance, and $312 million was for growing the business. Excluding capital investments attributable to our partner's 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $393 million.
Moving to financing activities, we returned $399 million to our stockholders in the third quarter of 2020 through our dividend, resulting in a year-to-date total payout ratio of 165% of adjusted net cash provided by operating activities. With respect to our balance sheet at quarter end, total debt and finance lease obligations were $15.2 billion and cash and cash equivalents were $4 billion. The debt-to-capitalization ratio net of cash and cash equivalents was 36%. At the end of September, we had $5.8 billion of available liquidity excluding cash. Turning to guidance, we expect approximately $2 billion in capital investments attributable to Valero for 2020. About 60% of our capital investments is allocated to sustaining the business and 40% to growth.
We expect our annual capital investments for 2021 to be approximately $2 billion as well. Approximately 40% of our overall growth CapEx for 2020 and 2021 is allocated to expanding our renewable diesel business. For modeling our fourth quarter operations, we expect refining throughput volumes to fall within the following ranges: U.S. Gulf Coast at 1.41 MMbpd - 1.46 MMbpd , U.S. Midcontinent at 385,000 bpd - 405,000 bpd , U.S. West Coast at 230 to 250,000 bpd , and North Atlantic at 400,000 bpd- 420,000 bpd . We expect refining cash operating expenses in the fourth quarter to be approximately $4.35/ bbl. With respect to the renewable diesel segment, we expect sales volumes to be 750,000 GPD in 2020, which reflects planned maintenance in October.
Operating expenses in 2020 should be $0.45 /gal , which includes $0.17 /gal for non-cash costs such as depreciation and amortization. Our ethanol segment is expected to produce a total of 4.2 million GPD in the fourth quarter. Operating expenses should average $0.37 /gal , which includes $0.05 /gal for non-cash costs such as depreciation and amortization. For the fourth quarter, net interest expense should be about $155 million. Total depreciation and amortization expense should be approximately $590 million. For 2020, we expect G&A expenses excluding corporate depreciation to be approximately $775 million, which is $50 million lower than our prior guidance. We expect the RINs expense for the year to be between $400 million and $500 million.
Lastly, as discussed on our last earnings call, due to the impact of beneficial tax provisions in the CARES Act, as well as the COVID-19 pandemic and its impact on our business, we're not providing any guidance on our effective tax rate for 2020. That concludes our opening remarks. Before we open the call to questions, we again respectfully request that callers adhere to our protocol of limiting each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits. This helps us ensure other callers have time to ask their questions.
Thank you. We will now be conducting the question-and-answer session. If you would like to ask your question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Phil Gresh with JPMorgan. Please proceed with your question.
Yes. Hi, good morning, everyone.
Good morning, Phil.
Just wanted to start off by asking a bigger picture question around how Valero thinks about capacity management
Obviously recognizing Valero is at the low end of the cost curve. The guidance here for 4 Q and the results of the past few quarters, you've had utilization in your low 80s, roughly. I'm just curious how philosophically you think about managing capacity, whether it's from a temporary perspective or from a permanent perspective. Just what are the decision points you think about? Or is it more just managing, say, secondary units, given the situation with diesel is more challenging than gasoline? Or just any thoughts you'd have would be helpful. Thank you.
All right. Good morning, Phil. This is Lane. I'll start by answering it with on the near term, the way Valero looks at and the way we've been running our system is trying to optimize at a lower utilization and make sure that we Be very selective on the crews we run and making sure we have the molecules where we want them. It's a challenging time to do that. You just got to be very careful. We've seen our ability to flex our refinery yields quite a bit. You can do a lot of that when you're at lower utilizations. We've seen us move gasoline yields roughly 17% and distillate yields up and down 10%, which is a little different than when you're full.
In the near term, you just sort of trying to constantly optimize your operations, obviously, to cash flow here. Longer term, I've sort of spoken about this in earlier calls. When a company or Valero looks at an asset from deciding where it runs or not, it's largely driven by a change in trade flow. What I mean by that is it's either lost a crude advantage or something's changed in its products. It fundamentally changes its sort of, I would say, its gross margin competitiveness. Combined with obviously a big regulatory spend or CapEx. Those are really the things that in terms of what drives, I think, companies and companies like us and other companies consider a refinery closure. When you think about that criteria, where do you see that?
You see that in the U.S., it's on the West Coast and the East Coast, and you've seen companies make those decisions. Certainly, we've always felt like Europe, because think about where Europe is. They're bringing all their crude oil in and they're kind of a lot of their products have to export. That's a tough situation if you don't have a structural advantage on OpEx. That's sort of my answer on that.
Okay, great. That's helpful. The second question would just be around the third quarter results themselves. Obviously, in the prepared remarks, Joe, you talked about tighter crude differentials as a factor that drove the sequential capture rate declines, particularly in the Gulf Coast and MidCon. I was just curious, are there any other, say, one-time factors in the quarter? I'm thinking perhaps multiple hurricanes in the Gulf Coast as one that might have led to a more challenging performance versus what you would maybe have ordinarily thought of.
Good question, Phil. Well, Lane will take a crack at this, then Gary can follow on.
Yeah. You're correct. Our Port Arthur refiner, we had to close for Hurricane Laura. Our ability to really come back up was impeded by the utility provider got really hit hard. It's a regional sort of utility provider, and they had a difficult time providing power. They did a great job recovering, but ultimately, that slowed our ability to bring the refinery back up. We had some volume what we would characterize as volume variance with our Port Arthur refinery.
Yeah. The only thing I'll add is, we pride ourselves, especially in the US Gulf Coast system, on our ability to optimize and really go out and find a lot of these disadvantaged, discounted feedstocks. Those opportunities really just weren't there in the third quarter, and that certainly impacted our Gulf Coast operations.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.
Hey, Joe. In your prepared remarks, you had indicated that the renewable diesel margin for the quarter was about 272. In the last quarter, this number was 222. There was almost a $0.50 increase quarter-over-quarter. When I look at the renewable diesel margin indicator you provide every week, which is very helpful, that was indicating a $0.01 improvement. If you could help us out a little as to how that $0.01 in indicator margin actually translated to over $0.50 in actual capture for the renewable diesel business segment.
Good morning, Manav. Listen, we'll let Martin take a crack at that one.
In the indicator margin, as you said, it's a gross margin, but as a proxy for feedstock, we use the soybean oil price. We're obviously not paying soybean oil price for our feedstocks, for our waste feedstocks. That fluctuates quite a bit, Manav. That's the biggest reason is the actual feedstock versus the soybean oil.
Okay. A quick follow-up is, I'm sure you have already secured the feedstocks for the St. Charles expansion. Again, there are a number of announcements out there. Are you already in the process of securing more feedstock for Port Arthur? If you could help us out there a little.
I think if you back up, there's a lot of announcements out there, and time will tell. If you look back historically, there's always been a lot of announcements, and the announcements came and the projects never came. Will it be different this time? It may be somewhat different. We're just confident in our ability to source waste feedstock going forward. Waste feedstock supplies is tied to global GDP growth, and our partnership with Darling gives us the benefits of vertically integrated access to low cost, low Carbon Intensity feedstocks. We also get the benefit of Darling's experience in the global feedstock markets. Darling also helps us procure feedstocks from other people. We just feel like we have a unique position here, and that's going to allow us to maintain these superior margins versus the competition.
Thank you for taking my questions.
Thank you. Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Morning. I guess a follow-up question on the renewable diesel front. Clearly, the energy transition is a big theme, along with ESG investing, and happy to see the additional disclosures consistent with the SASB framework. Can you talk about how you view your renewable diesel position, as far as the defensibility of your projected returns? How many of these projects that have been recently announced are you factoring in as ones that could come to fruition? Also, on the LCFS prices as well, do you see any risk there?
Sure. I'll take a stab at that. This is Martin. Obviously, we keep track of all the announced projects. We also keep track of all the new policies that are coming and what we expect to come. It's cloudy. I mean, it's nothing but cloudy, and the farther you go out, the cloudier it gets. You're making projections here. If you just, again, step back and look at where we're at, a lot of these projects aren't going to get built. That's just a fact. You've got more policies coming. Right now you've got California, you've got RED II in Europe, the Renewable Energy Directive, and then you've got British Columbia and Ontario. Those are the major markets. Well, in the future, Oregon's ramping up. You're going to have a nationwide clean fuel standard in Canada. Sweden, Norway, Finland are being more aggressive.
Not huge demand there, but a huge percentage of renewable diesel. You've got the state of Washington that keeps moving a few steps forward, a few steps back, and you've got Midwest states and Colorado announcing policies, too. The biggest one, though, is New York, which the preliminary information they put out has a lot of renewable diesel in the plan. We really feel good about the demand. If you look at renewable diesel, just the molecule, right? It's available. It's a drop-in fuel. It's low Carbon Intensity. There's no blend wall. You have to think, too, if you take California, they've hit the brakes a few times when low carbon wasn't available, right? They slowed down the program. If it is available, I would expect these regulators to hit the accelerator.
At the end of the day, all that being said, is there advantage to being a first mover? Yeah, I would think so, and we're the first mover in the U.S., and we feel really good about our position, and we feel really good about what we've laid out to do.
Understood. Joe, related to your statements about the other low carbon growth projects under development, can you give us a flavor of what kind of projects these could pertain to? Are you talking about additional investment in biofuels? Is it hydrogen related in color that you can share there?
Yeah, this is Lane. What we're looking at right now is carbon sequestration projects largely and really trying to tie those to the markets that Martin was talking about. This is where we think that we can make investments and lower our CIs of fuels and make them more competitive for these markets.
Thank you.
Thank you. Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.
Hey, good morning, everyone. Joe, you made it pretty clear from the remarks in the press release and your remarks on the call that there's no change to the capital framework or the dividend policy. I think you said you're prepared even if this COVID weakness goes on for longer than expected. Can you just put a little more color around that? If we see four more quarters of less than minus $1 EPS, do you still see everything as being unchanged, or at what point do you have to reevaluate how you think about things?
Well, Brad, that's a good question. Let me let Jason give you some insights here, and then maybe I'll follow on.
This is Jason. We basically feel we're a long way from rethinking the dividend. At the end of September, y'all saw we had a little over $4 billion in cash and about $5.7 billion of liquidity available under our committed facilities. We saw positive signs in the third quarter. Demand improved, export volumes picked up. We think things are headed in the right direction. It's just a question of how fast. Of course, a vaccine would really accelerate things along. Looking bigger picture, this pandemic is an isolated event, and we're very reluctant to revise our long-term capital allocation framework that's served us well for so many years. With our cash and liquidity position and the way things appear to be headed right now, this time we just don't think adjusting the dividend is a step we're going to need to take.
Let me just add to this. There has been a lot of question out there regarding the dividend. I've been in this job a little over six years now, and we came out with the capital allocation framework and our approach to rewarding shareholders at that time. We have done nothing every step of the way but walk that talk. We've been very clear in our communications, and we've demonstrated our commitment to our owners. We're going to continue to do that.
One needs to decide when they're trying to determine who they're going to listen to and who really understands what's going on. There's going to be a management team that has demonstrated their commitment to their shareholders for six years, or if it's somebody who is taking a position from a basis of very little knowledge, and trying to create opportunities for movement in the equity, that certainly affects our long-term shareholders. Anyway, if I were you, I would encourage everybody to listen to us and listen to our messaging. I think we've been pretty clear about it this time, and I think Jason's answer was exactly right.
Thanks for that. Maybe for Lane or Gary, just on the West Coast, obviously as part of the renewable diesel discussion, we've seen a couple closures out there. I know historically you've thought about that market as sort of being an option value market for Valero. Do you think on the other side of all this COVID stuff that it's potentially a stronger market that's less like option value or how do you see that playing out?
This is Lane. I would say we're always going to manage it by being very careful with what we send out there. We believe ultimately that COVID will pass and gasoline, diesel demand will recover. You've changed the balances out there. In the near term, it's an improved market for us. I don't think strategically, we don't look at like we're going to employ a lot of capital or anything on the West Coast. We're just going to run them well and take advantage of what at least in the near term, looks like a pretty good opportunity.
Okay. Thank you.
Thank you. Our next question comes from Prashant Rao with Citigroup. Please proceed with your question.
Hi. Good morning. Thanks for taking the question. My first one is on the balance sheet. Jason, I wanted to ask a couple of follow-ups here. Given the inventory adjustments, the LIFO liquidation, and the liquidity management you've done, I kind of wanted to focus on balance sheet cash and cash equivalents you need to keep on hand for working cap in the current environment. Is that lower now going forward? I know that we used to think about it as sort of this slightly sub $2 billion bogey for balance sheet cash. Are the needs slightly lower? Does that give you a little room under the collar as we think about managing through the next couple of quarters into the recovery?
We still target to be in that range. No, I think that is still a good assumption.
Yeah. Clearly, I think as we go forward, one of the things that we did is took advantage of the opportunity in the market today to reassess it. As Lane spoke about earlier, the supply chain has changed. The working capital, the inventory volumes essentially that we need are different than they were in the past. We took the P&L impact this year, but we run our business and we try to target proper operating levels for all of our inventories. That is what guides us. It is not so much, "Gee, we hate to take a LIFO impact or anything like that." It is more, what is the proper operating level for our inventories? And we adjust it to that. We have seen some benefit from the cash side.
Okay. Thank you. I am sorry.
No, you are good. Go ahead.
All right. Sorry, a little bit of static on my end here. I had another question on sort of the macro, specific on products on jet fuel. We're sort of trying to get our arms around what would happen with a slower jet demand recovery. What does that look like for sort of refining margins, and how does the system cope with that if it takes a few more years to get back, let's say, in a bear case scenario, to normal jet fuel demand? Can you maybe help us with some color on what that means for how you run your operations, where you're sort of comfortable with jet fuel recovering too and maybe staying lower for longer? Is it 70% of typical demand or 80% of typical demand? At what level is it really not that much of a headwind?
Sort of a little bit of color on how to think about that and where we can think about any of that stopping pressuring distillate inventory. It's not just in your system, but overall globally.
Yeah. Overall, I think you could see, we had full flexibility to pretty much not yield any jet, and we can blend all of those molecules into ULSD. What it really does is just overall impact on our refinery utilization. The advantage of jet demand improving is that we can start to pull those molecules out and raise utilization along with it. I think overall, we've been very surprised at the rate of recovery in the jet market. From second quarter to third quarter, we saw a 57% increase in demand. So far in the fourth quarter, the airline data is showing a 17% increase in passenger headcount, which is encouraging. To also go along with that, I would say our nominations from the airlines that we're serving are also up.
The other thing you can start to see is that jet is now trading at a rent-adjusted parity to ULSD. I think that's the thing that you would like to see in the market, is jet trading around a rent-adjusted parity to ULSD, which allows us to pull those molecules out of the diesel pool, and you'll start to see that result in higher refinery utilization.
All right. Thanks very much for the time. I'll turn it over.
Take care, Prashant.
Thank you. Our next question comes from Doug Leggate with Bank of America. Please proceed with your question.
Thanks. Good morning, everyone. Morning, Joe.
Morning, Doug.
Let me just say, Joe, first of all, I for one, and I think a lot of people appreciate you being as articulate and direct as you've been about the dividend question, because there's too much irresponsible investment analysis out there. I think you're right, people need to listen to you guys. I appreciate you making that statement. With that, I've got two quick questions. First one is on debt tolerance. Can you just talk about, you've added some debt, obviously, this last quarter. You're positioned with plenty of liquidity, but what do you see as the debt tolerance? Your bonds are trading just fine, it seems. If you needed to, what do you think about the balance sheet here?
Yeah, you're right. The bonds are trading well. We've got a lot of cash given the steps we've taken. We still have our $5.7 billion of untapped liquidity, which we could rely on if we needed to. We don't expect to need any more liquidity, I'm sure there are other things we could do if we needed to. We feel like we're in a pretty good spot.
Yeah, I think, Doug, look, the business, Jason mentioned earlier, I think that, you finance the business when it's attractive to do that. There's no sense of adding any degree of risk to the operation. Getting this debt off, I was very impressed with the rates we got, the demand was very high for the offerings. We remain committed to the investment-grade rating, no question about it. We think there's room if we needed to do something else. There's room to do more. We don't anticipate that we're going to need to do more, but we certainly believe we could if we needed to. Would you agree?
Yeah.
Anyway, I hope that answers that question, Doug.
Yeah, it does. Thank you. My follow-up is really more of a housekeeping issue. Maybe I missed some subtlety in prior calls, I don't know. In your last presentation, you still have the non-discretionary spending at around about $1.5 billion. Your guidance today says, a couple of billion, 2021, and the sustaining capital is 60% of that. That's obviously $1.2 billion. Is that just a low point? Is it sustainable at that level, or has something changed that has reset your sustaining capital? I'll leave it there. Thanks.
Thanks, Doug.
Hi, Doug, this is Lane. I would say that's on the lower side. When we talk about our spends, our sustaining capital, what we're really talking about is over, I don't know, three or four-year cycle. That's roughly the average that we feel like we need to spend. We have heavy turnaround years and lighter turnaround years. You got to remember, in that $1.5 billion is our turnaround activity. I'll leave it at that in terms of our planning.
All right, guys. Thanks so much.
Thank you. Our next question comes from Paul Sankey with Sankey Research. Please proceed with your question.
Hi, good morning, everyone.
Morning, Paul.
Doug kind of hit on what I wanted to hit on. The question really being the extent to which CapEx is flexible. I think you answered very well there. Separately, just give us the latest update, and I know it's a difficult question, on the election, and what do you think are the top risks that you face from the potential outcome, mostly a Biden win? What are the biggest concerns, and do you think overblown concerns about a potential, for example, Democrat sweep? Thank you.
Thanks.
This is Rich Walsh. I'll take a stab at trying to answer this. I think you're right. If you look at this, if you have a Democratic win, directionally they're probably gonna wanna look at higher taxes and probably more regulation. Regardless of who wins, you're coming out of a pandemic here. You've got a first priority, which is high unemployment rate. You're gonna need to stimulate the economy. The focus is gonna be on those kinds of things, and it's really hard to layer on a whole bunch of policies that would smother an effort to recover. I think what you're gonna see is a lot of campaign rhetoric right now, and then you're gonna see a lot of that have to run into the wall of reality once they get through the election.
The other part of it is, if you just look at Biden and his history, he's not one of these real ideologically driven individuals. He's had a long history of being supportive of manufacturing and supportive of union jobs and those facilities. He's spoken positively also about the renewable industry, so we think that he'll be supportive in that area as well. It's never as bad as they say it's gonna be, and it's never as good as they say it's gonna be. I think there's a lot of institutional and structural reasons why these changes will not be as draconian as some people think. We feel pretty good. We think there's gonna be a demand recovery here as we go through the economy. We don't think that the administration is going to be doing anything that's gonna really materially alter that.
The one thing I think that we see, Paul, is that there is going to be some kind of stimulus package following the election. It doesn't matter which party gets elected. As Rich referred to, they're gonna have to get the economy rolling again. Some would say it is rolling along, but our view is there's gonna be some kind of stimulus package. Any type of stimulus package is going to trigger greater demand for the products that we produce. Although we're watching it carefully, and we're well positioned and organized as a company to deal with whatever comes, I think we're not as pessimistic as many are about the potential outcome for a change of administration.
Great. Thanks. I like the wall of reality concept. Thank you. The follow-up to your reference—
That's where we try to live. Right along that wall.
Joe, the follow-up is, there's a lot of talk about, further to stimulus, about bailout for airlines and stuff. Can you just remind us to what extent you've been helped out by federal government programs, if any? Thank you.
Boy, I'm trying to think.
Yeah. I think there's been a substantial effort here to prop up the airlines and provide them with protections. We think in any of the bills that are coming through, you're likely to see more support for the airline industry. Obviously, supporting them helps reinforce the demand for jets. I think that's where we would think we would benefit from that.
Yeah. I think that's the primary one.
Obviously, your response implies that Valero has not received much.
No. We have not.
Not targeted on us, no.
Yeah. I just wanted to clarify that. Thanks a lot.
No. Thanks, Paul.
Thank you. Our next question comes from the line of Roger Read with Wells Fargo. Please proceed with your question.
Yeah. Hello. Good morning.
Morning, Roger.
A lot of the stuff's been hit. I guess maybe if we could go back and address a little bit the issue with the way the industry is losing money hand over fist at the current environment and that's likely to continue at least a little bit longer. What do you see, even if you don't want to name a particular company or particular unit that would be at risk? I know you've talked about the regions, what are the kind of things that we should pay attention to from the outside that would indicate someone would make the decision to shut a unit, if not absolutely permanently, at least for the foreseeable future? Everybody's losing cash, is it a crude supply change? Is it a demand concern? Is it the high maintenance costs in the very near term have been cited previous times? Just anything else.
I suppose that question's for you, Lane, whoever wants to jump in there.
After the preface of losing money hand over fist, we are going to.
I'm not sure I like that preface. Anyway. Other than I kind of spoke earlier about the change in trade flow, and what I really mean by that is you can really see that in some of those places where maybe product demand is falling, and they don't have a crude advantage. That's obviously a part of it. I talked about regulatory spend. The other spend that can happen to someone is they have a large turnaround. I don't want to say, but it probably is like an FCC sort of base turnaround where you have FCC, coker. Those end up being very large. That might be of companies that maybe have a stretched balance sheet or they're struggling, and you layer on these other issues and based on their location.
That might factor into some of the companies thinking about whether they either just sort of shut part of a refinery down or maybe consider shutting it down altogether.
Yeah. It's already been interesting, will continue to be interesting. I guess one last question, since so much of it has been on the negative front. A lot of stress in the system, a lot of questions about longer-term viability of fuel demand. If you were believing in the long-term success of refining, are there or would you expect any interesting opportunities to come along? Particularly in the areas that you already operate in where you could really get some synergies built in there. Kind of the M&A wish list question, so to speak.
Yeah. Let me just start. We'll see if Rich wants to add anything to this. Certainly, we do believe in the long-term viability of refining. It is totally impractical to think that we would live in a world over certainly, I would guess my lifetime, which I hope is more than two years. Since we're losing money hand over fist. In my lifetime, where we're going to be able to displace fuels, motor fuels, liquid fuels that are produced from fossil fuels. It is part of what is necessary to make the world function that we live in. Anyway, we are believers in the long-term viability of refining. Cleaner fuels will be a part of it. We're obviously making investments to take care of that.
We do believe that our refining business is going to continue to be strong and successful going forward. Rich, anything on the M&A front?
No, there's really nothing to say other than it's hard to justify any kind of an acquisition given that we're preserving cash and we've got a queue of good organic projects that we kind of have pushed back some. We're not buying back shares. In this environment, it's really difficult to see any kind of M&A activity.
Yeah. That's a very good point.
All right. Thank you.
You bet.
Thank you. Our next question comes from Paul Cheng with Scotiabank. Please proceed with your question.
Thank you. Good morning, guys.
Morning, Paul. How are you?
Very good, thank you. Two question. One is for Jason. I think that's relatively straightforward, and one may be a maybe longer term. For Jason, have you received any cash tax refund, given your loss? If you are, what is your expectation that, well, what percentage of, if there's tax loss, we call the tax loss in the next 12 to 18 months, then what percentage you would be able to receive as cash tax refund? Should I also tell you guys my second question, or should I wait until Jason answer that first?
Paul, do you mind repeating the question real quick? It was tough to hear you.
Okay. The first question is on the cash tax refund. Are you guys receiving any, given the tax loss and you have tax loss carry forward, maybe back into 2015 when you were making money? If you are receiving cash tax refund from the government, over the next 12 months, let's assume if you are still reporting loss, what percentage of that tax benefit you will actually receive as a cash tax refund?
Okay. The first part of it is the NOL, right? What's the value of the NOL to us next year?
We will get it. Yeah, we expect to get it in second quarter. We expect to receive cash related to the refund.
Right.
Jason, is it always that the second quarter for the previous year?
Yes.
Yes.
In other words, that the 2021 year, if you have a loss, those cash tax refund we will receive in 2022. Any idea—
On the—
Is it 100%, dollar to dollar, or that is a percentage?
No, to be clear, and this is Mark, the tax loss that we're incurring this year, we'll receive the tax refund in April of next year. That has nothing to do with what our results might be in 2021.
I understand. I understand. I'm saying that if you have your, in your book, if you report your tax benefit, let's say for this year, argument sake is $300 million. Is the entire $300 million you expect to receive as cash, or that is only a portion of that?
Well, I'm not sure I really totally understand your question, if you look at the effective tax rate that we're running, that would probably give you a good idea of what the refund would be next year.
Paul, maybe we can—
Okay. You said that Okay. Yeah. My second question is that, Joe and Lane, if we look at the regulatory environment in Europe and in California, in both areas that the government is trying to, or at least that the current law saying that they will ban the sale of the hydrocarbon or the gasoline or even diesel hydrocarbon-based vehicle by 2035 or so. How that impact your outlook or your game plan for the facility in those areas? If also on a long-term way , some of your bigger customers has been talking about energy transition plan. Do you think that that is something Valero need to have a plan?
Okay. We'll take the first part first. You wanna go?
Yeah, I'll take a shot, Paul. As I alluded to earlier, trade flow and regulatory environment can drive some how you think about assets. I think to start with, one thing I would preface is that government's intentions and plans and targets, we live in an aspirational world. There's a tendency to put in markets that are trying to do that or regulators that are trying to do that, there are tendencies to put a goal out there. The feasibility of the goal has a tendency to push the goal out. I don't necessarily think that either California or the U.K. or Europe, that you're gonna have zero fossil fuel gasoline transportation in 2035. Now with that said, there's what they're trying to do. Ultimately, as I said earlier, what are we doing in the West Coast? What we did in Denver?
We're being very careful in the CapEx how we run them. We're very careful in trying to manage the cost of those refineries, whether it's through our routine costs or our turnaround costs. We just said that we're very careful.
Paul, on the question of the future and positioning the company strategically for the future, we continue to work on that. Obviously, I think we've been a leader on several fronts. We were early to get into the ethanol business. Now we're looking at ways to lower the carbon footprint of the ethanol that we produce, and we'll market that into the market seeking and rewarding lower carbon fuels. The renewable diesel business is another example of that. We will continue to evolve the portfolio, based on what the market's calling for and using the strong refining base that we've got as the basis for the cash flow to do this kind of transition.
I think we put out in our documents now what our targets are for carbon reductions over the, between now and 2025 with already, projects that are already approved by the board. We're clearly working this direction. We don't have our heads buried in the sand on that front by any stretch. We'll position Valero to be very successful for a very long time.
Thank you.
You bet.
Thank you. Our next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.
Yeah, thanks. Good morning, guys. Maybe a follow-up on some of the conversations from earlier on the renewable diesel side. You talked about some of the advantages, obviously that the Darling partnership offers on the feedstock side. As you think about your expansions with the one coming in 2021, the possible one for 2024, can you talk a little bit more about how you see those as being positioned on things like how do you compare transport costs in terms of transporting your product to California versus operational costs of running a plant like that in Louisiana or Texas as opposed to California? How do the relative economics, do you see those in terms of competitive positioning?
Sure. This is Martin. Well, we would just flat out say we feel like the Gulf Coast is the best place to be. It's lower capital cost to build. It's lower operating cost. Also when you think about just the logistics, the rail infrastructure getting into the Gulf Coast from where you're going to source the feedstocks is great. The logistics getting out. We don't know where the highest price market's going to be in the future, and it's going to move. Whether we're going to California, Canada, Europe, somewhere else, the Gulf Coast is just tough to beat. We've been at this seven years now, and what we always try to do is to build the advantaged low OpEx and high flexibility plants. What we've learned is that you need to co-locate with a large operating refinery.
It needs to be an operating refinery, and by doing that, it reduces costs. Again, I can't stress the logistics enough that we just have a huge advantage there, and we intend to keep that by being in the Gulf Coast.
Great. Thanks. I appreciate that. Maybe just a follow-up on the macro side on refining. I mean, third quarter differentials were a large headwind. I mean, even more so than in the second quarter, in particular, sweet and sour differentials have been tough. I mean, is there a scenario in which the outlook for sweet sour diffs or crude differentials in general improve meaningfully without a meaningful recovery in oil demand or absolute prices from here? How do you think about diffs as you look forward over the next six to 12 months?
This is Gary. Certainly, we saw very, very narrow crude quality differentials in the third quarter. Some of that, a lot of the balancing in the market came from OPEC production. We got some OPEC production back in August. Additionally, you had the storms that affected the Gulf of Mexico medium sour production. Getting some of that production online has helped. You've seen the ASCI differential move out a little bit wider so far in the fourth quarter. Mars tended to follow it. We believe what really needs to happen is as global oil demand continues to improve, a greater percentage of that will be incrementally filled from OPEC production sour barrels. You'll have more of a gradual recovery in the following differentials that go along with that.
Thanks, Gary.
Thanks, Ryan.
Thank you. Our next question comes from Jason Gabelman with Cowen. Please proceed with your question.
Hey, good morning. How's everyone doing?
Good.
I wanted to ask about the investment grade rating, and kind of the metrics that are critical for determining that. Debt to cap is over 30%, so I'm assuming that's not what's really driving the conversation between Valero and the credit rating companies. When we're trying to assess kind of your targets for the balance sheet, what are the right credit metrics to kind of look at outside of debt to cap?
Yeah, this is Jason. I can talk a little bit about that. As you know, our investment grade rating is a key top priority for us, we've discussed this with the rating agencies. We have excellent liquidity, which is really one of their most key factors for them. They also rate through the cycle for the long term, right? They're not just looking at the next six months and 12 months, they clearly recognize our strengths longer term, if you read their reports, talk about our excellent facility, top operators. I don't think there's any concerns on their part with us being investment grade. Also the way we structured our debt, you'll notice at least our most recent offering, the big one, was biased towards the shorter term, and we did that intentionally.
We had a lot of maturities in 2023, 2024, 2025, 2027, and we have the ability to call the $575 million tranche of three-year floaters as early as next fall. We did that to give us the flexibility to deleverage more quickly if the circumstances arise. The ratios we look at, each agency looks at all the ratios, but they have their own pet ones or ones that they highlight the most, or versions of debt to EBITDA and retained cash flow, and those type of things. Then net cash flow. I mean, net debt to cap. They look at kind of the same things, but we don't think we're at all at risk for investment-grade rating. We did get put on negative outlook when we did this last offering of rating.
I could tell you a little bit at least about the way I think they were thinking about that. Each of them does their own analysis and has their own separate view, we really think that outlook change was mainly driven by the change in expectations for the timing of the recovery versus the assumptions that were made when they last looked at us back in April. The view in April was that this would be a one to two quarter event with pretty full earnings recovery in the fourth quarter. That's what we were looking at. I think that was their view, too. That was before the summer infection spikes hit and things clearly are going to take more than getting back to absolute normal in the fourth quarter.
We really think that view that there's going to be delayed recovery along with our new debt, that'll all lead to a longer period with elevated credit ratios. That's really what the negative outlook reflects. They look out the next 12 months and are you going to have higher ratios than what they like in your regular baseline? The answer is yes. That is true, it doesn't affect their view of us as an investment-grade credit longer term.
Great. That's really clear. They're thinking about a recovery when they're assessing the rating in 2022-ish?
Yes.
They're earlier than that, aren't they?
That's right. I think, I can't remember exactly. They stated in their reports, one of them is thinking second half of next year, and they admit that they think Valero thinks it's going to happen more quickly. The other one I don't think was as clear. They think the next 12, 18 months, generally.
Okay, great. I wanted to ask a follow-up on Lane's comment on carbon sequestration, which I think you mentioned was one of the low carbon investment opportunities. What's the economic case for that? Is that driven by the U.S. tax credits offered or is there something else driving the potential to generate return from investing in that? On that topic, I'm surprised that hydrogen wasn't mentioned, just given that there is a lot of interest globally in investing in the hydrogen value chain and refineries produce a lot of hydrogen already. Just wondering, any thoughts on that? Thanks.
Well, this is Lane. I'll answer it, and I'm sure some other people might want to as well. When we're looking at these projects, our first filter, our first way we think about them from developing them is does it improve our Carbon Intensity into an LCFS market? Because that's where we see the higher value for carbon, and we can get the biggest bang for our buck. We stress test it with the U.S. tax credit and try to understand what that looks like as well. That's how we're developing and looking at these types of projects. On the hydrogen, we're starting to look at some of those things.
Again, we're looking at it in the context of some of our existing hydrogen plants, and their technology, and do we have the ability to obviously get the carbon dioxide out of those streams to lower their intensity. Not so much trying to make hydrogen for fuel cells.
Yeah, there's a lot of things like that you take a look at, but at the end of the day, the economics just don't work. Like the 45Q tax credit is a key one when you're looking at sequestration going forward, where it's just today, it looks like you can earn a return on some of these projects into an LCFS market, as Lane said. Barring that, a lot of these projects just don't have economics. That's why it's interesting to talk about it, and it's like the topic du jour. Are they feasible or not? That's one of the things that we look at, and we're certainly not prepared to announce any steps in that direction at this point.
Great. Thanks for the comments.
You bet. Thanks, Jason.
Thank you. We have reached the end of our question-and-answer session, I'd like to pass the floor back over to Mr. Bhullar for any additional closing comments.
Great. Thank you, and thank you, everyone, for joining us. Appreciate everyone's questions. Unfortunately, we're out of time, so if you have any follow-up questions, feel free to reach out to the IR team. Thanks again.
Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.