Good day, ladies and gentlemen, and welcome to the Valero Energy Corporation Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. And I would now like to
Good morning. Welcome to Valera Energy Corporation's 2nd quarter 2018 earnings conference call. With me today are Joe Gorder, our Chairman, President and Chief Executive Officer Donna Tietzman, our Executive Vice President and CFO Lane Riggs, our Executive Vice President and COO Jay Browning, our Executive Vice President and General Counsel and several other members of Valero's senior management team. If you have not received the earnings release and would like a copy, you can find 1 on our website at verlejo.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. Now I'd like to direct your attention to the forward looking statement disclaimer contained in the press release, which in summary 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 Joe for opening remarks.
Thanks, John, and good morning, everyone. During the Q2, we operated well and delivered solid financial results despite having turnarounds in our Gulf Coast and North Atlantic regions. We processed near record volumes of light sweet crude and we maximize heavy sour crude runs in our refineries as discounts widened to levels we hadn't seen since 2014. We were positioned to take advantage of these discounts more fully due to our logistics investments, including the Diamond Pipeline, which enabled our Memphis refineries to capture additional margin from running WTI instead of LLS. And with relatively wide discounts for WTI versus Brent, our commitment on Enbridge Line 9B also provided meaningful margin benefits.
Looking ahead, work continues to move forward as planned on the Central Texas pipelines and terminals and the Pasadena products terminal with completion expected in 2019 2020. We expect the Sunrise pipeline expansion to start up in early 2019, which will provide our Mid Continent region with even greater access to cost advantage Permian crude. Turning to our refining investments, the Diamond Green Diesel capacity expansion is nearing completion and start up is scheduled in August. Construction is also progressing on the Houston and St. Charles alkylation units and the Pembroke cogeneration plant.
We expect these projects to be completed in 2019 2020. With regard to cash returns to stockholders, we paid out 51% of our year to date adjusted net cash provided by operating activities and we continue to target an annual payout ratio of between 40% to 50%. Looking ahead, we continue to have an optimistic outlook for the balance of the year. Global economic activity remains healthy and product demand is strong domestically and internationally. Gasoline and distillate export volumes are steady.
Days of supply of light products remain below 5 year averages despite recent high industry refinery utilization rates. And while crude discounts have narrowed recently, the oil market remains well supplied and we expect differentials to widen again as the industry enters turnaround season. And with that, John, I'll hand the call back to you.
Thank you, Joe. For the Q2, net income attributable to Valero stockholders was $845,000,000 or $1.96 per share, compared to $548,000,000 or $1.23 per share in the Q2 of 2017. Q2 2018 adjusted net income attributable to Valero stockholders was $928,000,000 or $2.15 per share. For reconciliations of actual to adjusted amounts, please refer to the financial tables that accompany this release. Operating income for the refining segment in the Q2 of 2018 was $1,400,000,000 compared to $945,000,000 for the Q2 of 2017.
Excluding $21,000,000 of other operating expenses primarily related to costs associated with the fire at the Texas City Refinery in April, adjusted operating income for the Q2 of 2018 was $463,000,000 higher compared to the Q2 of 2017. The increase from 2017 is mostly attributed to higher distillate margins and wider discounts for sour and domestic sweet crudes versus Brent, partly offset by lower gasoline margins. Refining throughput volumes in the Q2 of 20 18 averaged 2,900,000,000 barrels per day and throughput capacity utilization was 93%. Throughput volumes were 121,000 barrels per day lower than the Q2 of 2017 due to maintenance in the U. S.
Gulf Coast and North Atlantic regions. Refining cash operating expenses of $3.67 per barrel were $0.11 per barrel higher than the Q2 of 2017, mainly due to lower throughput in the Q2 of 2018. The ethanol segment generated $43,000,000 of operating income in the Q2 of 2018 compared to $31,000,000 in the Q2 of 2017. The increase from 2017 was primarily due to higher distiller grains prices and stronger production volumes in the Q2 of 2018. Operating income for the VLP segment in the Q2 of 2018 was $83,000,000 compared to $71,000,000 in the Q2 of 2017.
The increase from 2017 was mostly attributed to contributions from the Port Arthur terminal assets and Parkway pipeline, which were acquired in November of 2017. For the Q2 of 2018, general and administrative expenses were $248,000,000 and net interest expense was $124,000,000 Depreciation and amortization expense was $523,000,000 and the effective tax rate was 22%. With respect to our balance sheet at quarter end, total debt was $9,100,000,000 and cash and cash equivalents were $4,500,000,000 of which $100,000,000 was held by VLP. Valero's debt to capitalization ratio net of $2,000,000,000 in cash was 24%.
At the
end of June, we had $5,400,000,000 of available liquidity excluding cash, of which $750,000,000 was available for only VLP. We generated $2,100,000,000 of cash from operating activities in the 2nd quarter. Included in this amount is $581,000,000 benefit from working capital. Excluding working capital, net cash provided by operating activities was approximately $1,500,000,000 Moving to capital investments, which excludes acquisitions, we made $718,000,000 of growth and sustaining investment in the Q2. Included in the $510,000,000 of sustaining expenditures was $270,000,000 for turnaround and catalyst costs.
The balance of capital invested in the quarter was for growth. With regard to financing activities, we returned $672,000,000 to our stock holders in the Q2. Dollars 345,000,000 was paid as dividends with the balance used to purchase 2,800,000 shares of Valero common stock. As of June 30, we had approximately $3,200,000,000 of share repurchase authorization remaining. We completed a $750,000,000 public debt offering in May.
And in June, we repaid $750,000,000 of senior notes due in 2019. We continue to expect 2018 capital investments to total 2,700,000,000 with about $1,700,000,000 allocated to sustaining the business and $1,000,000,000 to growth. Included in the total are turnarounds, catalysts and joint venture investments.
Now for
modeling our Q3 operations, we expect throughput volumes to fall within the following ranges: U. S. Gulf Coast at 1,730,000 to 1,780,000 barrels per day U. S. Mid Continent at 430,000 to 450,000 barrels per day U.
S. West Coast at 270,000 to 290,000 barrels per day, and North Atlantic at 445,000 to 400 and 65,000 barrels per day. We expect refining cash operating expenses in the Q3 to be approximately $4 per barrel. Our Ethanol segment is expected to produce a total of 4,000,000 gallons per day in the Q3. Operating expenses should average $0.38 per gallon, which includes 0.05 dollars per gallon for non cash costs such as depreciation and amortization.
For 2018, we continue to expect the annual effective tax rate to be about 22%. For the Q3, we expect G and A expenses, excluding corporate depreciation, to be approximately $215,000,000 net interest expense is estimated at $110,000,000 and total depreciation and amortization expense should be approximately $515,000,000 Lastly, we continue to expect RINs expense for the year to be between $500,000,000 $600,000,000 That concludes our opening remarks. And before we open the call to questions, we would again respectfully request that our callers adhere to the protocol of limiting each turn in the Q and A to 2 questions. If you have more than 2 questions, please rejoin the queue as time permits as this will help us ensure all callers have time to ask their questions.
And our first question comes from the line of Roger Read with Wells Fargo. Your line is now open.
Thanks. Good morning. How are you all?
Hi, Roger.
I guess, let's dive into the big question that's out there. Q2 was great, Q3 a year ago was really good, Q3 this year maybe doesn't look like it's starting off quite as strong. But if you can kind of walk us through maybe, Joe, how you see the market structure here as we look to the back half of the year, maybe thoughts on turnarounds within the industry, where we are in terms of demand trends and then where you see, call it, crude access at this point given some of the issues out of nearby OPEC countries?
Yes, Roger, that's great. We'll let Gary go ahead and take a whack at these.
Okay, Roger. I think on the diesel side, much like Joe commented in his opening remarks, demand remains very strong, both domestically and to the export markets. Domestically, we're seeing about 125,000 barrels a day of demand growth. So despite the fact that we've had record high refinery utilization and distillate production is above the 5 year average range. We really haven't been able to replenish diesel inventories to pre hurricane type levels.
So we continue to see very low diesel inventories, very strong export demand and very strong domestic demand. So moving forward into the Q3, I think you see some production fall off as we get into turnaround season and refineries come down for turnarounds. And then of course, as you get later in the year, you'd expect to see some improvement in demand as heating oil season kicks in with some colder weather. So to me, I think diesel should even be stronger in the market, but when you look at the fundamentals, I think we're in for a very strong diesel year. On the gasoline side, again, gasoline demand looks good domestically and into the export markets.
Here, with the export markets. Here, with the record high refinery utilization and increase in gasoline production, gasoline production increases are outpacing increases in demand a little bit. So we've been able to replenish gasoline inventories to kind of a pre hurricane type level. As we move forward in the gasoline markets, like diesel, I think you'll see production fall off some with turnaround season. But assuming you don't have some interruption in supply like we saw last year with the hurricanes, I would expect gasoline to follow more seasonal trends.
And once you get through driving season through Labor Day and demand falls off a little bit, you'll see gasoline cracks weaken as we get into the Q4. On your crude question, we continue to see good availability of crudes despite declining production in Venezuela. We continue to get above our contract levels there, seeing good supply from Canada. North American growth continues to exceed expectations. And then we're starting to see more OPEC volume make its way to the United States as well.
Okay. So no problem on the crude side then? No. Okay. And then just a quick follow-up.
Guidance on cash OpEx, if I understood, was $4 a barrel. You've consistently done much better than $4 a barrel. So my question is simply, is there something going on expense wise or is this just closer to budget and if you perform better, you come in lower on a per barrel basis?
Yes. Roger, this is John. Yes, we take a view, right, as of a point in time and sometimes that changes over time. I think as you look at that number probably today, maybe there's, it's come off a little bit from there, but that is what the number is at the time we take the forecast.
Okay. So no major changes in or anything that's changing sequentially, just part of the budgetary approach.
Right. Okay. Thank you.
Thank you. And our next question comes from the line of Manav Gupta with Credit Suisse. Your line is now open.
Hi, guys. My question is you recently made some acquisitions in Peru on the biodiesel side. I'm just trying to understand if you could give us some more color on that acquisition. And would the earnings of that new segment or whatever acquisition you have made go to in the refining segment or the ethanol business?
Okay, good question. Rich, you want to?
Yes, you bet. I'll answer this. So just to be clear, the acquisition here was not a renewable diesel acquisition. There is a idle renewable diesel plant there, but it's been out of service for several years. This was really a wholesale marketing and terminal acquisition.
We've acquired 2 terminals that have in excess of 1,200,000 barrels of storage, 2 truck racks, 2 offshore mooring facilities to offload products. So this is really set up to bring product into the country and not a renewable diesel play.
Yes. It fits in, Manav. It fits into our overall approach to securing shorts essentially in different international markets. So we've got the activities that are taking place with Mexico, having access to the supply chain from the refineries out. And having access to the supply chain from the refineries out.
And this acquisition just fits right into that. Essentially what we bought was a business, an operating business and not a particular asset. So we feel pretty good about it. We also believe it's going to allow us to expand the business around that. We've got a team on the ground obviously right now working this and their focus is, okay, we've got a strong market in Peru, where else are we going to take barrels that pass through this terminal?
Thank you
so much guys for taking my question.
Thank you. And our next question comes from the line of Paul Cheng with Barclays. Your line is now open.
Hey, guys. Good morning.
Good morning.
I think this maybe is for Ming. The Valero has continued to seems like performing better and better in your refining operation. You've been consistently that I think outperformed your full book guidance even like when you have some unplanned outage and all that. And that also seems like while you guys clearly are the leader here, but the industry also doing better. When we're looking at fundamentally, is it good reason other than say the pricing is good, so everyone trying to run hard?
Is there any other reason why that we've been despite more environmental standard when we think that most things in standard will make it more difficult for the industry to maintain high run rate. Is there anything fundamental has shift?
Paul, this is Lane. Could you repeat that just last couple of sentences, please?
No. I'm just trying to understand that. Is it just because the commodity pricing is attractive, so everyone is trying to run hotter, which is understandable. But other than that, is there anything fundamentally that make the industry be able to run the system much better than in the past?
I think in general the industry has experienced through whether it's through our shared clearly been our focus clearly been our focus to do that, and we've improved our operation a great deal over the past 10 years. And we think we'll continue to improve. There's always room for improvement, but it's a focus to be safe and reliable and then obviously environmentally compliant and all things lend themselves to being a much more reliable operation.
Do you think that we have much more room to push on a sustainable basis that could be better than what we have seen? I mean, it has been quite remarkable how well the industry done.
Yeah, I can't I'm not going to speak for the industry. I'll say for Valero, our real focus is to continue to minimize unplanned outages and in particular to try to find ways to minimize our downtime, our turnaround downtime over an entire cycle and make sure that our spend rates during that time is the right amount to achieve that. And that's really where we in terms of going forward, that's where we see the
most of our opportunity. So you don't think
that you max out yet? No.
Texas City, can you give us an update the fire when that is going to be back to normal operation? And also that do you give any color about I think previously talking about the Coker investment?
So on the SEC question, the Texas City, the SECs came back from turnaround, pulls back to normal operation. The alkylation unit, we currently believe will sort of be mechanically restored at the end of August. So we'll resume full operation in the alkylation in early September. With respect to the coker, we're just still working through the permitting process with all the stakeholders. We have to ultimately have an operating permit, a construction operating permit to position to make the final FID decision.
I mean, we that's just the way our gating process works. So that's where we are.
Okay. Thank you.
Thank you. And our next question comes from the line of Doug Leggate with Bank of America. Your line is now open.
Thanks. Good morning, everybody. Thanks for taking my questions. Good morning, Joe. Good morning, Doug.
Joe, you clearly are throwing off a great deal of cash and obviously we continue to admire the discipline in which you're returning cash to shareholders. So my question is kind 2 edged on that topic and it is why is 40% to 50% the right number and given the substantial EBITDA you still hold at the parent company level, what's your latest thoughts on dropdown timing on the from an MLP standpoint? And I've got a macro follow-up, please.
Okay. Good questions. Donna, you want to talk about the
Sure. On the capital allocation perspective, we just believe that 40% to 50% is the right balance between returning to the shareholder via cash in the dividend and share buybacks, but also preserving some cash back as a parent to reinvest in the company, that being in the form of sustaining capital, but also growth opportunities and acquisition opportunities.
So just to be clear, I guess on the MLP question, if you did do additional drop downs, what would be the priority for the use of that cash? And I guess what I'm really getting at is the balance between the dividend and the buyback. Do you see that changing at some point? Because obviously, a lot of your rerating has been driven by, I think, anyway, the move towards been more of a yield stock within the S and P. I'm just wondering if you could see a little bit more of a pivot by towards the dividend away from the buyback.
And I do still have a macro follow-up,
please. Yes. Doug, I mean, good question. On the drop downs, I mean, the reality is that Valero receiving cash back via drop downs just hasn't materialized the way we all expected it to and that's because the capital markets just aren't there for MLP equities today. I think MLP debt is okay.
But essentially what's the way it's working out is Valero is the financier for VLP. And so as far as the cash perspective goes, there is no windfall of cash to be achieved for Valero by dropping down assets to VLP. It's just it's the way the market is today. Will the market be this way in 6 months? I don't know, okay.
But that's the way it is today. So there's not a big windfall of cash, I would say, to be had because of a drop down opportunity. We continue to look at the balance between the share repurchases and the dividend. And our basic view is let's get the dividend up to where we're paying out towards the high end of the peer group, so that we're competitive there. And then we use the share repurchases as a flywheel.
The 40% to 50% range we give you is essentially our target. And to the extent that free cash flows exceed our expectations, we've used that flywheel then to go ahead and repurchase additional shares. And I think we're very comfortable with that and that's probably what we'll continue to do going forward. But rest assured that the dividend is something we talk about regularly. We are absolutely 100% committed to it.
And whenever we make changes to it, we want to be sure that we're able to deal with it in good times and in bad times.
I appreciate the extended answer and obviously the arbitrage has closed some. So hopefully a quick follow-up, Joe, I just wanted to close out the macro comments. It's an IMO question, I'm afraid, but there's obviously a great deal of uncertainty on how this is going to play out. I just wanted to get your updated perspectives because it seems that bunker fuel associations and others around the world are starting to talk about what the real challenges are going to be of meeting the Oneonetwenty date and particularly the pivot back towards scrubber options amongst other things. The example has been cited is the delay of the water balance rules that was pushed out 2 years because the industry was not ready.
And I'm just curious if you've got a perspective as to how confident you are that things are going to transpire as optimistically, let's say, as some in the market are currently talking about. I'll leave it there. Thanks.
Doug, that's good. And we'll let Jason talk a little bit about IMO.
But yes, we've seen the same thing you have with a lot of discussion about how practical to be implemented whether the timelines right. But at least our view now is we expect it to be implemented and enforced internationally according to their timeline they put out without any big disruptions. They definitely hadn't made any indications of backing off at this time. And if anything, they're working to put in place more effective enforcement mechanisms like looking at whether you lose your insurance if you don't if you violate the provisions or also potentially prohibiting vessels without scrubbers from transporting the higher sulfur material.
But it is a big change.
ExxonMobil, Jason suggested it might not be a bad idea to be the last man standing from a high sulfur fuel oil standpoint. Do you concur with that?
Gary, would you like to mention that?
Yes, I don't know. We don't make a lot of high sulfur fuel oil and I don't really see it that way. I think you're going to see a lot of people as you get closer to 2020 to liquidate what inventory of high sulfur fuel that they have.
Thank you. And our next question comes from the line of Phil Gresh with JPMorgan. Your line is now open.
Yes. Hi, good morning.
Good morning, Phil. Good morning.
The first question is just thinking ahead here with all the growth in U. S. Light sweet crude production coming and obviously we have the Permian bottlenecks, but those will be resolved. So all those barrels are going to be pointing towards the U. S.
Gulf Coast and probably on the Houston side where you have a prime position. So how do you think about how that plays out? What might happen to discounts on the Gulf Coast and the export capabilities of the system today and where they're going?
Yes, Bill, this is Gary. I think overall, it looks like most people are focused to tie a pipeline project with a dock project, which allows the barrels to get to the water. I think you'll still have an advantage by being able to buy the barrels inland and buy the barrels on the Gulf Coast before they make their way to the water. But it looks like people are investing in logistics all the way to the water, not just to the Gulf.
So do you have a specific long term view on like a Brent Houston spread? What's reasonable based on transport?
Yes. So I think we look at it that it costs anywhere from $0.50 to $2 to get the barrel on the water and then you have some transit costs to get the barrel actually to a market. And so that puts MEH to Brent spread somewhere in the $2 to $2.50 type range.
Got it. Okay. And then just a little bit of a follow-up to a prior question just on the heavy side. We have seen some tightening of like the LLS, Maya, LLS, Mars spread. So I'm just curious how you see that playing out for the rest of the year.
You made the comments about the Middle East barrels coming back. So do you see a re widening of that spread as we move into call it
the Q4?
So I think I'll start with the heavy sour. So far the Maya formula has has really been impacted by the widespread and Brent TI and the volatility in that Brent TI spread. I think where we could get some relief on the heavy sour sour discounts is our view is as you move into the 3rd Q4 and you see some turnaround activity in the Mid Continent, you'll see some Cushing inventories begin to build, which will allow the Brent TI spread to widen out. And as that does, the Maya formula would again be impacted. And so you could see the heavy sour discounts widen out some.
Overall, I think to get big relief and see significant discounts in medium or heavy, you do need to get the OPEC production back on. And so how fast the OPEC production ramps up will certainly have a big impact on those quality discounts.
Anything specifically on the mediums?
No, I don't you know today you look and pretty much all the crude grades are trading at their quality adjusted breakeven values. And so I think that holds until you see the OPEC barrels come back to the Gulf and then you could see those discounts widen back out. Today, at least the barrels we're taking from OPEC to Saudi barrels we're taking are going to the West Coast. And so we haven't seen an incentive to reintroduce those barrels into the Gulf. But as they link their way back to the Gulf, then I think you start to see the medium sours widen back out.
Okay. Thank you.
Thank you. And our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Your line is now open.
Hey, good morning, everyone.
Good morning, Matthew.
Maybe to stick on this heavy sour theme. I think Joe in your opening comments you talked about how you maximize heavy sour crude runs in the quarter. If I look at the data, your Gulf Coast system ran approximately 36% heavy plus resid in Q2. And then if we look way, way back to 2,006, you ran approximately 51% heavy crude plus resid. I appreciate the system makeup has changed a little bit with Aruba and the crude toppers.
But
if you
saw an environment with wider heavy dips over the next couple of years, could you run more incremental heavies through your Gulf Coast system?
Hey, Matt, this is Lane. So I think one of the things you mentioned accurately is our portfolio is a little bit different than
used to be. In particular, we
have the 2 topping units that run sweet. And then also because of the clear margin that we've had on crude and the clear like what Gary alluded to the answer in the last question was that you sort of have all the grades are on a quality basis equivalent. So it's really just been max crude rating. So to the extent that refinery gets leverage from that particular crude diet, it will maximize it. If you had it where heavy sour was very, very disconnected and that was clearly the winner way over the other 2, then we would run more heavy.
We just may not run as much crude.
Okay, sounds good. And then, also want to circle back to the comment on how Line 9B from Enbridge provided some margin upside. Just keeping in mind that Quebec had the big turnaround in the quarter. If you look at the EIA data, it seems to indicate that somebody is shipping WCS on Line 9B then tinkering it down and selling it to the Gulf Coast refineries. Is that a source of upside for Valero here?
It would be, but we didn't ship any heavy and actually shipping heavy for us would be an issue because mainline, the Enbridge mainline is prorated. And so actually being able to nominate heavy and ship it through Line 9B would be very difficult for us to do.
Sounds good. Thank you.
Thank you. And our next question comes from the line of Craig Shere with Tuohy Brothers. Your line is now open.
Good morning.
Good morning, Craig.
Just wanted to expand on Doug's cash question and I think Donna's comment that you appropriately want to retain some powder dry for potential acquisitions and obviously growth projects. But the growth projects have been pretty stable, maybe about $1,000,000,000 annually. And think that you all have commented in the past the M and A market is not especially cheap. And cash flow certainly look to be increasing second half over first on sequentially lower maintenance CapEx, prospects for improving cracks. And then of course, there's the outlook for IMO 2020 coming up.
So my question is,
is there a logical limit,
an absolute limit to
the size of the cash over time?
So historically, and I'll let Donna tail onto this however she would like. But historically, we have said that we are going to stick to our capital allocation framework, which we have for 4 years now. We'll continue to do it going forward. But a component of that really has been the commitment also to not build significant cash positions. And if you look at it, I would tell you and John, you can tell me I'm wrong, but I think we've been between $4,000,000,000 $5,000,000,000 of cash now for a number of quarters in a row.
When we we set the target of 40 to 50% on the payout ratio, we've consistently raised the dividend. So our commitment to the shareholders on an absolute basis has gone up. And we'll continue to look at that going forward. But we're going to stick to this. We're not going to continue we're not going to allow ourselves to run the cash balances way up.
We think it's fair to our investors that if we are building cash, we're going to deploy it and when it makes sense to deploy it to them versus investing it in projects within the business, we're going to do that. Now, Lane and the team continue to develop projects. We executed on some acquisitions this quarter, which chewed up some cash. So it's not all committed to share repurchases. We are using it to continue to grow the earnings capability of the business.
But I think we're generally comfortable with the way we've been allocating it thus far.
I guess I guess my question is and I understand the cash balance has been relatively under control in recent quarters. But I guess if there's a breakout as many people kind of envision for the industry in coming quarters, the next couple of years, how you might respond to that?
Well, I think that our expectation would be that over the next bunch of quarters, we are going to see, and certainly as we get closer to 2020, we should see significant increases in our free cash flow as a result of the IMO 2020. And we're going to maintain our commitment to our capital allocation framework through that process. Now does that mean higher dividends? Could well be. Does it mean additional share repurchases?
Could well be. We don't want to abort our disciplined process to executing capital projects, okay. Lane and the team have done an outstanding job over the last several years of really getting their arms around this and being sure that we knew what a project was going to cost and what we expected the returns to be before we made the commitments to it. To the extent you try to accelerate that, you potentially degrade that process and we really would prefer not to do that. So if we're abundant, if we have an abundance of cash, acquisitions may look better, share repurchases will still be certainly probably a big part of our use of cash and potential dividend increases.
Great. I appreciate the color.
You bet.
Thank you. And our next question comes from the line of Peter Low with Redburn. Your line is now open.
Hi, thanks for taking my question. I just have one on the Texas City outage. So I think in the release, you kind of break out the exceptional expense. But what was actually kind of the impact on earnings in terms of kind of the lost opportunity from that outage during the quarter?
So, hey, this is Lane. So our lost opportunity due to the outage during the Q2 was 150,000,000
Okay, that's great. Thank you very much.
Thank you. And our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Your line is now open.
Hey, just one quick follow-up here. So you have a couple of projects around expanding your alkylation capacity. And I was hoping you could just provide an update on where you stand regarding the EBITDA contribution potential from those projects. It looks like octane spreads have widened a little bit year over year, although we're nowhere near where we were, say, back in 2015. So in general, do you expect that the Tier 3 would reduce octane supply and that maybe rising fuel economy standards would increase octane demand?
Just any comments on that would be great.
Hey, Phil, Matt, this is Lane. You sort of answered the question, I believe. The Houston alky, we're still going to start up in the first half of next year. Our strategic view on that is that octane will get more valuable as we go forward via Tier 3 destroying octane and then obviously the fuel economy standards. And then really it's just so this increasing wide arbitrage between NGL and gasoline or transportation fuel.
So we still feel good about those. Our FID EBITDA at the time was $105,000,000 I don't we're not going to that's just that's the number. We're not going to provide any other color with respect to a sort of a forward market or even a prompt market view on that.
Okay. Thank you.
Thank you. And that does conclude today's Q and A session. And I'd like to return the call to Mr. John Locke for any closing remarks.
Okay. Thanks, Sandra. We appreciate everybody joining us today. And please contact me, the IR team, if you have additional questions. Thank you.