Good morning. My name is Angelique, and I will be your conference operator today. At this time, I would like to welcome everyone to the Valero Energy Report first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Smith, you may begin.
Thank you, Angelique. Good morning and welcome to Valero Energy Corporation's first quarter 2010 earnings conference call. With me today are Bill Klesse, our Chairman and CEO; Mike Ciskowski, our CFO; Rich Marcogliese, our COO; Gene Edwards, our Executive Vice President of Corporate Development and Strategic Planning; Joe Gorder, our Executive Vice President of Marketing and Supply; and Kim Bowers, our Executive Vice President and General Counsel. If you have not received the earnings release and would like a copy, you can find one on our website at valero.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 me after the call. Before we get started, I would 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. Now I'll turn the call over to Mike.
Thanks, Ashley, and thank you for joining us today. As noted in the release, we reported a first quarter 2010 loss from continuing operations of $101 million or $0.18 per share. I should note that the $12 million after-tax loss from discontinued operations shown in the financials tables relates to the Delaware City assets that were shut down in the fourth quarter. The first quarter 2010 operating loss was $32 million versus $593 million of operating income in the first quarter of 2009. The decline in operating income was mainly due to lower margins on most of our refined products in all four of our operating regions. Looking at our highest volume region, benchmark Gulf Coast ultra-low sulfur diesel margins versus WTI decreased 41% from $12.61 per barrel in the first quarter of 2009 to $7.49 per barrel in the first quarter of 2010.
While Gulf Coast gasoline margins versus WTI decreased 12% from $8.14 per barrel in the first quarter of 2009 to $7.13 per barrel in the first quarter of 2010. The hardest hit region was the West Coast, where gasoline margins versus WTI fell 45%, and diesel margins versus WTI fell 38% in the first quarter of 2010 when compared to the first quarter of last year. So far in April, margins have improved versus the first quarter in most of our regions. For example, the Gulf Coast ultra-low sulfur diesel margin versus WTI has increased 33% to $9.95 per barrel, while the Gulf Coast gasoline margins versus WTI increased 20% to $8.58 per barrel. On the West Coast, diesel margins versus WTI increased 40% to $11.83 per barrel, while the gasoline margins have remained relatively flat.
Our first quarter 2010 refinery throughput volume averaged 2.1 MMbpd, which is in line with our guidance. However, compared to the first quarter of 2009, volumes were down 254,000 bpd, mainly due to the continued idled status of the Aruba refinery. Our first quarter 2010 results were negatively impacted by downtime at some of our key refineries. We estimate the lost income from the first quarter downtime was just over $200 million. Refinery cash operating expenses in the first quarter of 2010 were $4.41 per barrel, in line with our guidance, but were $0.41 per barrel higher than the first quarter of 2009 results, due mostly to lower throughput volumes.
Looking at our other business segments, retail had a record first quarter, with operating income at $71 million, which is $15 million higher than the first quarter of 2009, primarily due to higher fuel margins in both the U.S. and Canadian operations. Our ethanol segment had $57 million of operating income in the first quarter, which is our second-best quarter since we entered the ethanol business. I should also point out that we purchased three additional plants in the first quarter, taking our total to 10 plants with 1.1 billion gallons per year of capacity. Like our previous acquisitions, these are large plants located in the Corn Belt, and we bought them at deep discounts to replacement costs. Two of the plants were idle, but we have restarted them, and all 10 plants are now operating.
General and administrative expenses, excluding corporate depreciation, were $97 million in the first quarter, which was $40 million lower than the fourth quarter and lower than our guidance due to a favorable insurance settlement of $40 million. For the first quarter, total depreciation and amortization expense was $357 million, which was in line with our guidance. Net interest expense was $127 million, which was higher than our guidance in the fourth quarter of 2009 due to increased interest expense related to our recent debt offering. The effective tax rate benefit on continuing operations in the first quarter was 32%. Regarding cash flows for the first quarter, capital spending was $611 million, which includes $229 million of turnaround in catalyst expenditures. For the year, our capital spending target remains at $2 billion.
We received a federal income tax refund of $923 million, and we spent $260 million to acquire three ethanol plants. The ethanol spending includes $9 million of working capital, so the total cost to acquire these plants comes to $281 million, which includes a $21 million deposit that was paid in the fourth quarter of 2009. We also paid $28 million in dividends in the first quarter. Also during the quarter, we completed a debt offering totaling $1.25 billion and subsequently called $473 million of debt. Including the premium, we spent $294 million in the first quarter to redeem $287 million of debt. In the second quarter, we will pay $190 million to redeem $186 million. These redemptions will result in lower interest expense over the life of the note. With respect to our balance sheet, at the end of March, total debt was $8.4 billion.
We ended the quarter with a cash balance of $1.9 billion, and we had over $4 billion of additional liquidity available. At the end of the quarter, our debt-to-cap ratio, net of cash, was 31%. In summary, our financial health and liquidity remain very good despite the challenging environment we have experienced. We expect to be profitable in April and make money for the full quarter. Our priorities continue to be reducing costs, running our assets safely and reliably, and maintaining our financial strength. We continue to believe that our cost savings initiatives and the strategic actions that we have taken should make the company profitable in 2010, even if we were to experience a low-margin environment in slight 2009. Now I'll turn it over to Ashley to cover the earnings model assumption.
Okay. Thanks, Mike. For modeling our second quarter operations, you should expect refinery throughput volumes to fall within the following ranges: Gulf Coast at 1.275 million to 1.325 MMbpd, Mid-Continent at 380,000 bpd- 390,000 bpd, Northeast at 330,000 bpd- 340,000 bpd, and West Coast at 260,000 bpd- 270,000 bpd. Refinery cash operating expenses are expected to be around $4.15 per barrel, which is lower than last quarter, due mainly to higher expected throughput volumes. Regarding our ethanol operations in the second quarter, we expect total throughput volumes of 3.15 million gallons per day, and operating expenses should average approximately $0.37 per gallon, which includes $0.03 per gallon for non-cash costs such as depreciation and amortization. With respect to some of the other items for the second quarter, we expect G&A expense, excluding depreciation, to be around $135 million.
Net interest expense should be around $120 million, and total depreciation and amortization expense should be around $365 million. Regarding our tax rate, in this margin environment, small changes in assumptions are yielding a very wide range of results for effective tax rates. At this point, we prefer not to provide guidance, which may not be meaningful. We will now open the call for questions, Angelique.
Thank you. As a reminder, to ask a question, please press star, then the number one on your telephone keypad. Again, to ask a question, please press the star key followed by the number one . We will pause for just a moment to compile the Q&A roster. Your first question comes from Doug Terreson of ISI Group.
Good morning, guys.
Good morning, Doug.
Light heavy differentials have widened significantly this year, which should enhance performance for you guys in coming periods. On this point, the spread for light versus Maya seems to have widened more than for some of the other global heavy crude oils. My question is twofold. First, what are you guys seeing that supports widening of this spread? Second, what, if any, implication do you think the difference in spreads between the regional heavy crude oil, such as Maya or maybe Arab Heavy or something? How will sustainability of this improvement mean? Do you think that Maya can continue to trade at record low levels to Arab Heavy or some of the others, and if so, why? Could you just spend a minute on that spread?
Yeah, sure. Doug, this is Joe.
Hey, Joe.
How are you?
Good.
The heavy sour discounts improved for a couple reasons. One, we had Maya length. Two, we had fuel oil length in Singapore. Third, we had a flat market structure. The Maya discounts look pretty good today. We're showing about $10 a barrel when compared to WTI, and that's a little bit distorted. They're actually stronger than that if you compare them to some of the foreign suites, okay? Because we've got the dislocation of WTI. So we had factors that affected the discount and improved it. Today, if you look at that, the primary one that still remains is the fuel oil length. The Maya length has cleaned up a little bit, and the market structure is in carry. Here again, if you compare Maya to a foreign suite, it looks more attractive than it would relative to WTI.
Now, as far as the foreign barrels go, like Arab Heavy, Doug, we're not seeing those barrels over here anymore, and you know that.
Sure.
If I compare Maya to some of the other heavy sours that we do look at running, it's right in the ballpark.
Okay.
All right? Venezuelan grades, some of the Colombian grades, we're not seeing a disjointed relative to those.
Okay, great, Joe. That's a really good explanation. Thanks a lot.
You bet.
Your next question comes from Jeff Dietert of Simmons.
It is Jeff Dietert with Simmons. Along a similar line, Rich or Joe, could you talk about how the Maya spreads and the resid spreads are impacting your utilization of your coking units? And maybe compare Q4 last year to Q1 this year and where you are now as far as utilization of the cokers.
Yeah, Jeff, this is Rich. We have increased coker runs in general. If you go back to last year, we had our small coker in the Corpus Christi East plant, a two drum coker. It was down for probably six months. Now it is running full. Coker at Texas City running full. Port Arthur crude rates and coker rates have gotten back to traditional maximums. So yeah, we are purchasing crudes to fill coking capacity because it makes economic sense now with the differentials.
Very good. If I remember on the second question, the Paulsboro process, it seems like you have bids in. Should we assume something is relatively imminent there?
Jeff, we are working the process still, and I would tell you that we will make our decision here in the second quarter.
Thank you for your comments.
Your next question comes from Paul [inaudible] of Bank of America.
Actually, it's Doug Leggate. Hi, guys.
Hey, Doug.
A couple of things. On the Northeast, it looked like the capture there was a little better, I guess, than we've seen historically. Can you talk just a little bit about what the absence of Delaware City has meant there in terms of the system? If you could also maybe just frame it in terms of the contribution from Paulsboro. I mean, it was the only region that was profitable this quarter. So I'm just curious as to know how Paulsboro performed with that backup.
Well, on the part about Delaware City, I don't think we necessarily see any impact on that. To go to the heart of your question, we made money in Canada, and we lost money at Paulsboro.
That's what I was driving at. Thanks, Bill. If I could just stay with that. Obviously, there was no mention in the release about the inventory sale coming out of Delaware City. Can you give us some color as to I'm assuming you got the revenues. Was there any contribution in terms of margin from that inventory disposal?
No, in the Northeast or on the inventory liquidation at Delaware City, we had hedged all those barrels, so there's no P&L effect.
Terrific. The last one from me is, Bill, I guess a couple of months back, you were quoted as talking about aiming for something like a $3.50 operating cost on a cash basis. Can you just give some maybe color, some update as to whether that's a number you still like or rather see as a target, and what kind of timeframe and what kind of process you see towards getting there? Thanks.
Well, it's clearly a number I still think is attainable, but when you have lower operating rates in our refining system, you have to adjust for all of that. We continue to make improvements everywhere. We have goals throughout our system. I think some of you know that we took action the fourth quarter last year at Paulsboro, reducing our operating costs there. So we have many projects underway that are addressing our operating costs. We have a target throughout the company of $100 million, but then that's really addressing mostly things that are at corporate. We also have on top of that optimization, molecule management, strategic sourcing, many other initiatives that'll bring it down. But as a goal, if we were operating full rate, we'd like to get our cash operating costs down to the $3.50 area when you have maximum gas in this price range.
But it's hard to say, give you a good number when we have reduced operating rates.
That's terrific. Thanks, Bill. I appreciate your comments.
Your next question comes from Edward Westlake of Credit Suisse.
Yeah. Good morning, and I guess economic recovery picking up, perhaps. How is that changing your thoughts around, you discussed Paulsboro, but Aruba around $2 billion of CapEx, whether you can drive CapEx lower next year or whether you see some other uses for that cash. And perhaps a word on whether ethanol, you're done, whether further acquisitions are perhaps unlikely now or whether you're going to carry on and something around your international thoughts at this stage in terms of international growth, if there are opportunities there. Thank you.
I'll try to remember all of these. Valero sells fuels, and clearly as the economic activity continues to increase, it will help our business. Today in distillates, we're seeing farm demand, railroad demand very strong. Trucking is lacking. On gasoline, unemployment still at this 9.7% or whatever the number is, being this very high number and the high prices are a restraint on gasoline. However, we do see as the economy recovers, the volumes picking up. That part of it, yes, we're optimistic here. We have better margins today. As Joe just said, we have better seller discounts today. We're making money here, as our release says in April, and we expect to be profitable, as Mike said, in the second quarter. I've told everyone that we expect to be profitable for the year.
Looking at our thoughts on Aruba, we still do not have what we would call solid economics to operate Aruba, so we continue to look at our alternatives there. Most likely the alternatives that we tend to be looking at go along the line of processing. We'll make that decision here as to how that plant goes forward, most likely in June. You asked a question about ethanol. We're very pleased with our ethanol business. Gene Edwards and the team have done an excellent job getting us in that business. It's been a solid contributor for us. It's still in the profit. I think some of you know there's a huge blending margin today. Ethanol's economic. We continue to look at opportunities in that business.
We've built a strong staff here, and so we feel, one, that ethanol is going to be part of the fuel mix in the U.S., and two, there's still some opportunity out there for us to continue to grow that business.
Capital spending.
Capital spending. Our number this year, our target's about $2 billion. We complete several big projects this year. The scrubber at Benicia and heater furnace that's associated with it. It's very large. We complete MSAT 2 by the end of the year, so that will give us the ability to come in with a lower capital. However, we do have some big turnarounds next year. But having said that, we also have a couple of projects that we are halfway through, and so we are scaling those into our views. So if our profitability continues, as I stated a few minutes ago, and we have the cash, it is our intent to eventually complete our hydrocracker projects at Port Arthur and St. Charles, with the timing being somewhere late 2012 at Port Arthur and somewhere in the late 2013 at St. Charles.
These projects still have very good rates of return, so we're going to work them in.
Thank you.
Your next question comes from Paul Cheng of Barclays Capital.
If I could, a couple questions. First, Mike, can you give me some balance sheet item? What is the working capital, including cash, and long-term debt out of the $8.4 billion? How much is the long-term debt? What is the equity in your balance sheet? What is the market value of inventory in excess of the book?
Okay. Total current assets at the end of March was $11.3 billion. The cash balance was $1.9 billion. Total current liabilities was $8.1 billion. Current maturities
I am sorry, Mike. I could not hear that. What is the current liability?
Yes. The total current liabilities is $8.1 billion.
Okay.
Our current maturities are $635 million. Our net working capital is right at $2 billion.
Okay. Short-term debt is $635?
Well, that's not short. Well, yes, that's right. $635 on our current.
That means that your long-term debt is about $7.8 billion.
Right. That's correct.
And
The market value on our inventory is about $9 billion.
Okay. How about your equity value on the book? Shareholder equity?
Yeah. It's about $14.5 billion.
Okay. I just want to make sure I understand. Your working capital will be $3.2 billion, including cash and everything?
That is correct, if you do not exclude the cash or the current maturities. That is right.
Right. Secondly, Mike, in your first quarter result, is there any trading or hedging gain or loss? Also, do you have any outstanding position for the second quarter for any hedging or trading position currently on?
Okay. The first quarter results are, from our trading activities, was a profit of about $5 million.
I've mentioned in the past that we do participate in the paper markets. We have some positions on, but they're not significant. Frankly, I view them as confidential.
Okay. Bill, you mean that for the second quarter, that is as of right now, the existing one is not a huge amount, whatever you have outstanding?
That's correct.
Bill, since I got you, I think you had mentioned that you could be interested in a share for an European asset. Can you give us any update? Have you further pursued, or where we are in that process, or are you still interested or not?
We are still interested in looking at so many of the assets that are for sale in Western Europe. I think you know there's a whole bunch of them. We will continue to look. However, Valero will be very careful. It is only looking at quality assets. They'll be assets that do not require a lot of capital, and I assure you they will be survivors, and they will be assets that'll generate a rate of return if we do anything.
All right. Very good. Thank you.
Thanks, Paul.
Your next question comes from Mark Gilman of Benchmark Company.
Hi, guys. Good morning. While I fully believe your forecast of profitability, Mike, can you give me an idea where you stand in terms of possible future carryback loss potential as of the end of last year?
I think our current forecast shows that we're going to have a taxable income this year, so we don't expect to have any carrybacks. Do you, [inaudible]?
I would say that there's significant amounts of potential carrybacks if we were to have a tax loss because of the new tax law from last year that allowed a five-year carryback of NOLs. The large portion of our over $900 million income tax receivable were from earlier years, and so we still have a substantial amount if we do actually have the tax loss.
Okay. Has the liquidation of the Delaware City inventories been fully completed?
We still have a little bit to go. I think about $100 million is what my estimate is currently.
Of value.
Of value.
That's left to go, Mike?
That's left to go. That's right.
Slightly over 1 million barrels.
Okay. Last one from me. It appears as if there's an unusual seasonal pattern to the reported margins in the Mid-Continent division, where the first quarter in virtually every year that I've looked at seems to be one of the strongest quarters. Is that something you see also, and is there any particular reason you can cite for it?
Well, you had some contango in the market, which helped you to some degree on the Mid-Continent plan.
Even more pronounced lately than early in the first quarter.
Other than that, I don't really see the product margins being that big a premium to the Gulf Coast, just the normal arbitrage.
Mark, even now they're fairly flat. If you look at Gulf Coast versus Mid-Continent, the only difference really that I see is the seven, eight pound versus a nine pound spec.
Yeah, but nothing that tends to repeat itself in the first quarter each year that might be responsible for a much higher degree of margin capture in a first quarter period?
No, we're not aware. We'll have to go backtrack and look at that more.
Okay. Thanks a lot, guys.
Your next question comes from Paul Sankey of Deutsche Bank.
Hi, guys.
Morning.
Bill, you have often taken an industry leadership role, not least in terms of really rallying the industry not to overproduce. I was really wondering in the context of the sale of Delaware City, why you did not simply shutter the refinery once and for all, given that the price you got was pretty low, and I would have thought that the potential long-term benefit of shutting that particular refinery would have outweighed the benefit that you got from the sale.
It is a very fair question, but PBF Energy was willing to pay a price for a terminal as we were looking at it, and then a shutdown refinery that was in our shareholders' interest when we looked at that versus our other options. As we said in some of our releases, we believe we got a very fair value for this for the state it was in. We elected to sell to PBF Energy.
You do understand, I guess you are saying that now they will be a competitor, essentially, in the East Coast view.
Well, I think you have to ask PBF Energy what they are going to do with the refinery.
But when you sold, were you expecting them to run as a refinery? Was your expectation that it would just be a terminal?
We sold it as a shutdown refinery with a terminal.
I've got you. Just a more macro question, if I could. It seems that one of the reasons for the strength that we're seeing in refining margins right now is related to international demand. We know there's been problems in Chile, Mexico, Venezuela, Brazil, maybe. I think Nigeria might be importing gasoline. Could you just talk about Atlantic Basin and even Pacific Basin trade that we're seeing in terms of exports from the U.S.? Thanks.
Paul, we're seeing strong demand for distillates, primarily from South America, but also here just recently from Europe. If you look at what we did in the first quarter, we exported about 80,000 barrels a day on average of distillate. But those numbers were much lower in January and increased through March. If you look at what we're estimating right now for May, we're probably at 185,000 barrels a month. And you cited some of the issues, and we have problems in Chile. Venezuela has refinery problems. Isla is shut down. So you've got draws in that market that are pulling significant volumes. And here again, the arb to Europe is open by about a penny and a half now, and that's been a recent phenomenon. So we're moving barrels that way also.
What do you attribute the European strength to?
I don't know. You?
Well, the refineries have still been cut back. They're not at high utilization rates still.
It's hard to get great data, but we do know that a lot of the distillate that's been on the water has cleaned up and been consumed.
Yeah. Just to be clear, those numbers that you are talking about are Valero numbers, right?
Valero numbers.
That must be a record high, no?
No, actually last summer, we probably did 200,000-220,000 barrels a month or excuse me, a day.
Of distillate?
Yes.
What about the gasoline side? Because that is looking quite good as well.
Yeah. In the first quarter, we did 20 gasoline cargoes, which is high for us.
How big is a cargo?
Yeah, 55,000 barrels a day.
Okay. I've got you. Okay. That's very interesting. I guess we could argue that some of that. To what extent do you think this is sustainable? Obviously, we know the demand side's coming back, but in terms of the outages, Chile obviously is going to come back, I guess, sometime in a matter of months.
Right.
Do you know more about what's going on in Mexico and Venezuela? Is it Brazil?
Mexico had a lot of turnarounds. Venezuela has had refinery operating problems. Isla, of course, had the power outage, and that took a lot of volume out of the market. The Isla refinery produced 85,000 barrels a day of gasoline and 100 a day of diesel fuel. That's not in the marketplace today. They were using that to supply other South American countries. The U.S. Gulf Coast right now is filling the void in production there. Is it sustainable? We understand that perhaps by the end of May, Isla will be back up operating. Chile is going to take a while, I think, to get their production volumes back up. Venezuela itself, I really don't know.
Okay. Final one from me. There was some interesting chatter, I think you referenced it even today, about Iran and Reliance. Is there anything you can add on what might be going on there? It seems that Reliance is now perhaps seeking to send more volumes into the Atlantic Basin. I do not know if you are seeing these show up. Any commentary on that would be interesting, and I will leave it there. Thank you.
Well, we have not seen them show up. I had not heard anything about that, to be quite honest with you. Gene?
Everything I hear is Iran continues to be supplied. Some of their old suppliers may be reducing the volumes, but someone else usually steps in to fill the void. I am not sure that there really has been a whole lot of change in gasoline movements into Iran.
Thank you, guys. Thanks a lot.
Buyers changed.
Sorry. Thanks, guys.
Your next question comes from Blake Fernandez of Howard Weil.
Hi, guys. Thanks for taking my question. I had a question for you on the retail side. The Canadian retail margin seemed exceptionally strong in the quarter. I am just curious if you could point out anything that was occurring during the quarter and if that is continuing to persist into 2Q.
The Canadian margins, you should remember, include home heat. When you look at that number, that's the home heating business, and our margin for home heat is significantly higher than it is for fuel. Then as you go into the second quarter, third quarter, they change as your volume drops for home heat, then going back into the fourth quarter. That's really the main difference you have is the home heat business in the winter. Even though Quebec was warmer this winter than last winter, it's got seasonal effects.
Okay. We should see some drop-off there?
Yeah.
Okay. All right, great.
Based on relevant basis. Right.
Right. Okay, thanks. The second one for you is on, Joe mentioned the dislocation on WTI, presumably stemming from the storage situation that seems to be building again over at Cushing. As I recall, I believe you guys run quite a bit of WTI through your MidCon system. I am just trying to see if you are recognizing a real benefit from that so far this quarter. I think you have already mentioned the contango, but obviously that is blowing out as well. I am assuming that is providing somewhat of a benefit as well.
Yeah, Blake, we do. We will see the benefit of the contango on the domestic crudes. We do run quite a bit of TI at McKee, Ardmore.
Okay, great. Thanks a lot, Joe.
Your next question comes from Jacques Rousseau of RBC.
Morning. Most of my questions have been answered, but I just wanted to follow up on the capital budget. You have talked before on the $2 billion capital budget this year. About $1.85 billion of that is this stay-in-business capital level, and that is expected to move down going forward. If you take Paulsboro and Aruba out of the equation, how low can that $1.85 billion go?
Maybe give him the numbers?
Well, if you look at our DD&A, it comes up to, for the whole company at about $1.4 billion. Our target would clearly be as the regulatory capital comes out of the mix, that we could get this down into the $1.4 billion, $1.5 billion area. Now, that assumes we do not have anything new on the regulatory and that we finish those kind of things. Then we have our turnarounds, reliability investments that could clearly be done in the $1.4 billion, $1.5 billion range.
So $1.4 billion, $1.5 billion total for all the categories of sustaining turnarounds and regulatory?
Yeah. We could get it down to that. That's correct.
Great. Thank you.
Your next question comes from Chi Chow of Macquarie Capital.
Thanks. Good morning. Bill, you mentioned earlier that you are looking to resume the hydrocracker projects at Port Arthur and St. Charles. What's the remaining spending you have at each plant?
In Port Arthur for the whole project, about $900 million. At St. Charles, about $600 million. When you look at the economics on the increment, saying that the first part is already sunk, even if you took into some tax effect into consideration, the return is still in the high 20s. If you look at the entire project, which is largely driven in a way by very low natural gas prices, then equate to hydrogen, then equate to liquids, the projects are in the high teens. Since we, in a way, have invested roughly 50% in these projects, at some point it would be our intent to finish them. But we're going to manage that with our available cash flow.
I guess, can you comment on your outlook then on the distillate market going forward? I'm assuming you have a positive outlook if you're going to go forward with the projects.
Well, of course, I have a positive outlook. But yeah, right now it's trucking that's lagging. If you take the data, 65% or so of U.S. distillate demand is on-road diesel. I mentioned already that the farming is strong at the moment and railroads have been strong, and clearly the shipping industry is trying to be more efficient. But I'm assuming that the U.S. economy will eventually recover and that we'll see that going. Distillates in the world, though, are going to grow between two, three times at the rate of gasoline. Joe spoke about our export capabilities. As you know, these hydrocrackers are our plants that we have export capability. They also, at Port Arthur, will allow a very high cetane product to be produced. So when we look at the world, we believe we can export from the U.S. Gulf Coast or service domestically.
Yeah, we're optimistic still in the world about diesel and distillates.
Great, thanks. Second question on ethanol. Valero is in an interesting position of straddling the fence, really, as one of the largest refiners and ethanol producers here in the U.S. Just wondering, what is your stance on increasing the blending limits of ethanol above 10%?
Okay. Well, I'm going to speak then from Valero. I know you guys know that our chairman is the NPRA, and they have a different position. We think that ethanol, from Valero's perspective, is going to be part of the fuel mix. Actually, today, it is economic even at $3.50 corn. The U.S. farmer has demonstrated, and even though people talk about food to fuel, the U.S. farmer has demonstrated an ability to grow more corn, increasing yields. We think that ethanol is viable in the fuel mix, and so our position then is that it should be increased. Then we'll have the discussion about cars and which cars can take the fuel and all of that, but it is economic. Then you also have other issues that we get involved in on this issue. National security, things along those lines.
Just from a logistics and you mentioned the liability standpoint of the older vehicles. Do you think it's really feasible to really push much more in beyond 10% over the next, I don't know, five years or so?
Sure, we do, and you'll have to have proper labeling at the pumps.
Okay, great. Thanks for your thoughts, Bill. Appreciate it.
Once again, to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Alexander Inkster of Sanford Bernstein.
Good morning, guys. Just one question, actually. Going back to Delaware City, given the strength of East Coast margins in the last quarter, I'm just curious if you can give us some guidance as to whether Delaware City would've been profitable in the current environment.
Alex, this is Ashley. When we've shut it, however, our belief, because of the operating costs and just the environment at that refinery, it still wouldn't have been worth running, even if we could've run it.
If you look at that plant, it has one of our lowest liquid volume yields, which is an issue in this high crude price environment.
Okay, thank you.
Your next question comes from Ann Kohler of Caris & Company.
Morning. A couple of questions. First, on the ethanol, I know that you gave a throughput expectation or production of 3.15 million gallons for the quarter. It was my understanding that you were going to be basically ramping up productions of some of the other plants that you'd purchased earlier, so the production numbers would be higher in the second half of the year. Do you have any guidance as regards to that?
3.15 already represents the new plants at pretty much full capacity.
And the older plants as well?
Yes, they are all running at capacity or slightly above, and pretty much all 10 plants right now, and that is reflected in the 3.15.
Okay, great. My final question is, given the environment, I know that over the last couple of years, there are a number of plants that you have also looked at placing on the market beyond Aruba and Paulsboro. Given the current environment, are you still basically looking at that opportunity, or are you going to wait for a better margin environment, or are you happy with your current portfolio?
We are focusing on Aruba and Paulsboro. We assume that we will close our transaction with PBF here in May. Right now, that's where our focus is. However, we have a portfolio of plants, and they are all not equally performing. That's why we have many initiatives on throughout our system here. Our focus is on the two that you mentioned.
Might that focus shift some of those refineries then shift up once you get those two plants settled, those transactions completed?
Ann, it wouldn't shift because we're trying to improve our portfolio every single day. We will make judgments as to those assets as we go forward.
Great. Thank you.
Your next question comes from Daniel Burke of Johnson Rice.
Yes, good morning.
Good morning.
I wanted to revisit one of the drivers mentioned for the wider light heavy spread, the length in the fuel oil market. Address the outlook there. Can that continue, or will Far East turn around begin to cut into that length as you look forward into Q2?
I think we expect it to continue. The fuel oil market is long in Singapore. It is also long now in the U.S. Gulf Coast. It could clean up with some time, but in the periods that we are looking at right now, we expect it to continue.
Yeah, if you look at U.S. inventories of resid right now, they are 8 million barrels higher than last year, which is a pretty sizable number. A lot of it is because U.S. demand is still very weak because of very low natural gas prices. So not much resid being consumed here. We have been importing resid at higher levels than we were last year as well, which is because Singapore is full. Europe is long resid all the time, so the barrels have to come here since Singapore is already full. So it looks like it will take a while for the resid to clean up, I think. So I think we are going to see this continue for the next few months at least.
Great. Thanks. The only other one I had is a follow-up. Did you actually have on hand the number for the cash proceeds generated from, I guess, most specifically, the Delaware City inventory liquidation in the first quarter? Just wanted to get a look at the underlying net working capital bill that looks to have occurred in Q1.
Okay, yeah. It was $365 million was the liquidation in the first quarter. Then, as we mentioned earlier, we have about another $100 million to go.
Great. I appreciate that. Thank you, guys.
Your next question is a follow-up from the line of Paul [inaudible] of Bank of America.
I'm still Doug, I'm afraid. Sorry for the follow-up, guys.
Hey, Doug.
Just a couple of clarification points, please. On Aruba, I guess looking at your operating cost guidance, are you assuming that Aruba is basically you still have some costs down there? What should we think about the implications for the second half of the year there?
We do have costs down there presently at Aruba. It is roughly about $22 million per quarter in DD&A. We had in the first quarter, we had about 20 of cash operating expenses. So the total was about $38 million loss at Aruba. We did have some margin there in our marine and terminaling business.
Okay. Your guidance for the second quarter, the OpEx guidance that Ashley gave, I am assuming that Aruba is still in there. I guess it is until June. What should we think about what happens beyond that?
That number would continue most likely through the third quarter.
Okay. The only other one I have is just going back to light, heavy differentials. The Keystone pipeline fill, how do you see things playing out there when that is done in terms of how it might impact your ability to access Western Canadian, for example?
Clearly, it is going to be beneficial to us to have the Keystone pipeline in place. The timing of it, they are line filling right now, the part that goes down to Steele City and then connects into Patoka and Wood River. The Cushing connection will be in early 2011, I believe. The next segment that is going to be worked on is the segment that runs from Cushing down to the U.S. Gulf Coast, and our thoughts are that we may be able to get volume on that before the entire bullet line is complete at the end of 2012 or the beginning of 2013. In addition to the Canadian crude, it will be beneficial to us longer term, though. We have got the increases in the Colombian production. We got Brazilian heavy sweet coming into the market.
Of course, we got the Canadian, and then we got the medium sour production increases that we are going to see out of Iraq. As we look at the market for the medium sours and the heavy sours going forward, we tend to be fairly optimistic.
All right, great. Thanks a lot.
Your next question is from Mark Gilman of Benchmark Company.
Just an update on the Quebec FCC.
The Quebec FCC is back in service. It was down for a total of 67 days. It came up on April 11th.
Okay. Is there any tax due on the sale to PBF?
No, I don't think so.
No.
No tax on that, Mike?
It will be very small.
It'll be a very small amount. We do have a small gain on this proposed, the way the transaction is currently proposed, contemplated.
Okay. Last one. How much Maya did you run in the first quarter, and how does that compare to what you are doing now?
Ran a little over 200,000 barrels a day of Maya in the first quarter. Joe, for now?
Same, about 225, actually.
Great. Thanks, guys.
Your next question comes from Paul Cheng of Barclays Capital.
Hey, Bill. Just want to ask a follow-up on the ethanol. If the EPA, let's say, next week give a waiver to increase the ethanol blending from 10% to 15%, but the auto industry will not give any guarantee on their vehicle to change it accordingly. Will you or will Valero as a company, if the economy is there, will be willing to blend up to 15%, or that you will say there's too much of the legal liability and you don't want to take that chance, so you will wait until the auto industry gives the guarantee before you blend? I'm just trying to understand which one will be the hurdle. Hello?
However, we are well aware of the experience with MTBE, where it was authorized, and there was no defective product liability. We'll have to just wait and see what the rules look like. We'll see what the autos really do, and then we'll see. That's why I was answering Chi earlier. There's going to have to be an awful lot of labeling involved if in fact it does become or does enter the market.
So in other words, that means even if the EPA changed the regulation tomorrow, that you at least at from Valero's standpoint, that you guys would take a little bit of the more cautious wait and see attitude.
That is absolutely true. We will be extremely cautious.
Okay. Will do. Thank you.
There are no further questions at this time. Mr. Smith, are there any closing remarks?
I just want to thank everyone for listening to today's call. If you have any other questions, feel free to contact me and the investor relations department. Thank you.
This does conclude the call.