Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Valero Energy Corp (NYSE:VLO)
Q1 2019 Earnings Call
April 25, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Valero Energy Corporation's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) Later, we'll conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference may be recorded.

I would now like to introduce your host for today's conference Mr. Homer Bhullar. Sir, please go ahead.

Homer Bhullar -- Vice President, Investor Relations

Good morning, everyone and welcome to Valero Energy Corporation's first quarter 2019 earnings conference call. With me today are Joe Gorder, our Chairman, President and Chief Executive Officer; Donna Titzman, our Executive Vice President and CFO; Lane Riggs, our Executive Vice President and COO; Jason Fraser, our Executive Vice President and General Counsel; and several other members of Valero's senior management team. If you've 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 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.

Now, I'll turn the call over to Joe for opening remarks.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Thanks, Homer, and good morning, everyone. Our system's flexibility in the team's relentless focus on safety enable us to deliver positive earnings in an otherwise weak margin environment during a period of heavy maintenance. The first quarter presented us with tough market conditions. Differentials on medium and heavy sour crude oils were compressed by a number of factors, including OPEC in Canadian crude production curtailments and Venezuelan sanctions.

We also started the year with gasoline inventories at record high levels in the gasoline crack at historic lows. Despite this challenging backdrop, our premier assets in prior investments that have improved our feedstock and product flexibility enable us to achieve positive earnings and operating cash flow. We demonstrated the flexibility of our system by processing a record volume of 1.4 million barrels per day of North American sweet crude oil as well as a record amount of Canadian heavy crude in the quarter.

The Diamond Pipeline and Line 9B continued to provide cost advantage Cushing and Canadian crudes to the Memphis and the Quebec City refineries respectively. We also continue to maximize product exports into the higher netback markets in Latin America. Our investments that are expected to grow the earnings capability of the company continue to move forward. The Houston alkylation unit and the central Texas pipelines and terminals projects remain on track to be operational in the second and third quarters, respectively.

The Pasadena terminal, St. Charles alkylation unit, and Pembroke cogeneration unit are all on track to be complete in 2020. The Diamond Green Diesel expansion and the Port Arthur Coker were expected to be complete late 2021 and 2022, respectively.

Turning to capital allocation, we continue to adhere to our disciplined framework. Our annual CapEx for both 2019 and 2020 remains at approximately $2.5 billion and you should expect incremental discretionary cash flow to continue to compete with other discretionary uses including cash returns, growth investments and M&A. With respect to cash returns to stockholders, we paid out 55% of adjusted net cash provided by operating activities for the quarter and we continue to target an annual payout ratio between 40% to 50%.

Turning to financing activities. We completed a $1 billion public debt offering in March at a coupon of 4%. With the proceeds being used primarily to redeem $850 million, 6.125% senior notes due in 2020. We also funded the buy-in of VLP with $950 million of cash on hand in the first quarter. Now (inaudible), we remain constructive for the rest of the year. Product fundamentals continue to improve with gasoline and distillate inventories now below their five-year averages. Additionally, product shortages, particularly in Central and South America should continue to support robust exports.

The impending IMO 2020 fuel oil specs should also lead to higher gasoline and distillate cracks along with improvement in the medium and heavy sour crude differentials. Our advantaged footprint with its flexibility to process a wide range of feedstocks and reliably supply quality fuels to consumers here and abroad, coupled with a relentless focus on operations excellence and a demonstrated commitment to stockholders continues to position Valero well for any market environment.

So with that Homer, I'll hand the call back to you.

Homer Bhullar -- Vice President, Investor Relations

Thanks, Joe. For the first quarter of 2019, net income attributable to Valero stockholders was $141 million or $0.34 per share compared to $469 million or $1.09 per share in the first quarter of 2018. First quarter 2018 adjusted net income attributable to Valero stockholders was $431 million or $1 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 first quarter of 2019 was $479 million compared to $811 million for the first quarter of 2018. The decrease from first quarter of 2018 was mainly attributed to significantly weaker gasoline margins and narrower medium and heavy sour crude differentials. Refining throughput volume averaged 2.9 million barrels per day, which was lower than the first quarter of 2018, primarily due to maintenance activities.

Throughput capacity utilization was 91% in the first quarter of 2019. Refining cash operating expenses of $4.15 per barrel was $0.32 per barrel higher than the first quarter of 2018, mostly due to maintenance related expenses and lower throughput in the first quarter of 2019.

The ethanol segment generated $3 million of operating income in the first quarter of 2019, compared to $45 million in the first quarter of 2018. The decrease from first quarter of 2018 was primarily due to lower ethanol prices. Ethanol production volumes averaged 4.2 million gallons per day in the first quarter of 2019, an increase of 104,000 gallons per day versus the first quarter of 2018, primarily due to added production from the three ethanol plants acquired in November 2018.

As noted in the earnings release, we are reporting the renewable diesel segment beginning this quarter. The segment generated $49 million of operating income in the first quarter of 2019 compared to $195 million in the first quarter of 2018. Excluding the adjustments shown in the accompanying earnings release tables related to the 2017 blenders tax credit recorded in early 2018, first quarter 2018 adjusted operating income was $35 million. Renewable diesel sales volumes averaged 790,000 gallons per day in the first quarter of 2019, an increase of 419,000 gallons per day versus the first quarter of 2018.

The adjusted operating income and sales volumes increased from the first quarter of 2018, primarily due to the expansion of the Diamond Green Diesel plant in the third quarter of 2018. For the first quarter of 2019, general and administrative expenses were $209 million and net interest expense was $112 million. Depreciation and amortization expense was $551 million and income tax expense was $51 million in the first quarter of 2019.

The effective tax rate was 23%. With respect to our balance sheet at quarter end, total debt was $10.1 billion and cash and cash equivalents were $2.8 billion. Valero's debt to capitalization ratio after giving effect to the redemption of the $815 million senior notes occurring today was 26%. At the end of March, we had $5.4 billion of available liquidity, excluding cash.

We generated $877 million of net cash from operating activities in the first quarter. Excluding the favorable impact from a working capital increase of approximately $130 million, net cash generated was $747 million. With regard to investing activities, we made $726 million of capital investments in the first quarter of 2019, of which $453 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance.

Moving to financing activities, we returned $411 million to our stockholders in the first quarter, $375 million was paid as dividends with the balance used to purchase 414,000 shares of Valero common stock. The total payout ratio was 55% of adjusted net cash provided by operating activities.

As of March 31st, we had approximately $2.2 billion of share repurchase authorization remaining. We continue to expect annual capital investments for both 2019 and 2020 to be approximately $2.5 billion, with approximately 60% allocated to sustaining the business and approximately 40% to growth. Included in that amount, are turnarounds, catalysts and joint venture investments.

For modeling our second quarter operations, we expect refining throughput volumes to fall within the following ranges. U.S. Gulf Coast at 1.72 million barrels per day to 1.77 million barrels per day, U.S. Mid Continent at 425,000 barrels per day to 445,000 barrels per day, U.S. West Coast at 220,000 barrels per day to 240,000 barrels per day and North Atlantic at 450,000 barrels per day to 470,000 barrels per day.

We expect refining cash operating expenses in the second quarter to be approximately $4 per barrel. Our ethanol segment is expected to produce a total of 4.7 million gallons per day in the second quarter. Operating expenses should average $0.38 per gallon, which includes $0.05 per gallon for non-cash costs, such as depreciation and amortization. With respect to the renewable diesel segment, we expect sales volume to be 750,000 gallons per day in 2019. Operating expenses in 2019 should be $0.45 per gallon, which includes $0.16 per gallon for non-cash costs, such as depreciation and amortization.

For 2019, we continue to expect G&A expenses, excluding corporate depreciation to be approximately $840 million. The annual effective tax rate is still estimated at 23%. For the second quarter, net interest expense should be about $115 million and total depreciation and amortization expense should be approximately $560 million.

Lastly, we expect RINs expense for the year to be between $300 million and $400 million, which is approximately $100 million lower than the previous guidance, primarily due to lower RINs prices. 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.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Doug Leggate with Bank of America Merrill Lynch. Your line is now open.

Clay -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, guys. This is Clay (ph) on for Doug. Thanks for taking my question. I've got one and a follow-up. I really want to talk about the gasoline rally recently. When you had to deconstruct the recent move higher, seasonality and constraints, that played a big role and both of these are non-discretionary. And what I think the market is worried about and why the rally has stalled, is that the potential for industry utilization to ramp up and kill the crack. So what I'm hoping that you could speak to and help us understand or maybe some of the factors that could keep this from happening in particular, I'm looking at the inland spreads and the quality spreads on the water. And because of this, I think I have a hard time believing that there is the incentive to max run. And maybe we got a glimpse of this on your fourth quarter where throughput was within guidance and not ahead, which has been the case recently. And I guess, if this point is true then maybe this rally has a bit more durability than people think?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Gary, do you want to?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes, sure. Well, I can tell you it's a lot more fun talking about gasoline in April than it was in January and we certainly feel good about the gasoline market. When we talked in January, as you mentioned, we were looking at a year-over-year overhang of 18 million barrels of gasoline. Since that time, since February, we've seen refinery utilization average 87%, now gasoline inventory is 11 million barrels below where it was last year at this time.

In addition to that, you're heading into a portion of the year where we would expect seasonal demand trends to follow where we'd see a pickup in demand as you head into driving season. In addition to that, you should see yield fall off some, as we're transitioning to summer grade gasoline, you have less butane in the pool. So I think through driving season, we feel very good about the gasoline situation. As you get into the fourth quarter, we would expect that you will see some normal seasonal patterns there as well, and you begin to build inventory.

I think this year, we do feel like there is an opportunity on gasoline that we haven't seen before, because of the IMO 2020 bunker spec change. Our view is that low-sulfur feedstocks are currently going to SECs will be priced against their low-sulfur fuel oil blend value alternative and that ability to swing the low-sulfur feedstocks out of the SECs and into the low-sulfur fuel oil market will be supportive to the cracks longer term, as it results in lower SEC utilization and lower gasoline production. But you know when it comes to gasoline, or all aspects of the business, we manage for the long-term. There's certainly a lot of moving parts here, but we feel like we're very well positioned, global demand remains healthy. Valero is the lowest cost producer and we're a strategically located export product globally, especially to the markets in Central and South America, so we feel pretty good about it.

Clay -- Bank of America Merrill Lynch -- Analyst

Got it. And just as a follow-up. Looking at the screen today, in gasoline cracks and diesel crack seems to have finally converged. What does this mean for your yield skew this summer? Do you still have these signals to remain in max diesel mode?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Okay. So we're swinging -- we have swung the heavy cat naphtha into gasoline.

Homer Bhullar -- Vice President, Investor Relations

Thanks, Clay.

Operator

Our next question comes from the line of Prashant Rao with Citigroup. Your line is now open.

Prashant Rao -- Citigroup -- Analyst

Good morning. Thanks for taking the question. I just wanted to talk about the crude side. Joe, you mentioned the strong -- taking strong advantage of Canadian crudes on the heavy side. And here, we're also seeing Maya starting to just kind of a bit more so. I wanted two parts to this question. One I wanted to know, kind of a check on how much Canadian you're running in the quarter and what your thoughts are going forward? And then two, any thoughts on the recent sort of reversion in discounting on Maya and how that might play out as we go through the year?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Yeah, Prashant, good questions. Gary, you and Lane want to...?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yeah. So we did just under 190,000 barrels a day of heavy Canadian, 49,000 of that was crude by rail that we delivered to Port Arthur with the remainder being pipeline delivered barrels. We would expect those volumes to continue in that range. Actually ramp up a little bit, especially with the Venezuelan barrels off of the market. On the Maya formula, there's not a lot of help in terms of additional medium and heavy sour supply coming on to the market. But where we see the opportunity for the quality dips to improve is really heavy -- high sulfur fuel oil moving weaker. And we came off the highs where we were trading at 96% of Brent. Earlier this week we were down to 89% of Brent. And our expectation is as you move closer to that IMO 2020 fuel spec change, that high sulfur fuel oil would continue to get weaker and that will help the quality discounts more weaker as well.

Prashant Rao -- Citigroup -- Analyst

All right, thank you. Appreciate that. And then a follow-up, I guess since you've -- staying on feedstock side, then maybe switching over to Diamond Green Diesel. I was looking at what kind of underlying profitability -- (technical difficulty) looks like feedstock costs there being able to get not only profitable even before the low-sulfur fuel, let's say, low carbon fuel credit and before the blenders credit as well. I kind of want to just get a sense of strategy and how things have developed in terms of the diversity of feedstock sourcing. How that net, (inaudible) what it takes to build up that network and sort of progress along those lines, it looks like there's been some solid progress over the last -- obviously saw several years, but now that we're disclosing it as a separate segment kind of wanted to think about how we should look at that longer term, both this year and further on?

Martin Parrish -- Senior Vice President-Alternative Fuels

Okay. Well, this is Martin. We've provided volume guidance today on an annual basis. We're also going to be publishing a DGD margin indicator on our website. We've been running at these higher rates now for six months feedstock is flowing fine. Our partnership with Darling Ingredients gives us an advantage in that space. They process about 10% of the world's meat by-products. So we feel good about being able to source the feedstock and looking forward to continued growth and expansion. And we're looking at this expansion that Joe mentioned an on additional 400 million gallons a year that will come on in late 2021.

Prashant Rao -- Citigroup -- Analyst

Okay. And in terms of sort of beyond just the soybean indicator that you've given a sort of, just wondering if you could give a more color on how diversified we could get if you're able to share anything. I know that we've heard and now the parts of the globe, if there is a lot of ingenuity in terms of what can be used as feedstock source? So I was just curious along maybe those lines if you -- how diversified it can get?

Homer Bhullar -- Vice President, Investor Relations

We're still running like we've said in the past. We're running about a third corn oil, a third used cooking oil and then a third beef tallow type, beef tallow or choice white grease, so same mix as we've been running historically.

Prashant Rao -- Citigroup -- Analyst

All right. Thank you very much. Appreciate it. I will turn it over.

Operator

Our next question comes from the line of Manav Gupta with Credit Suisse. Your line is now open.

Manav Gupta -- Credit Suisse -- Analyst

Hey, Joe, you talked about IMO 2020 in your opening comments. Yesterday, there was a very positive development on that front. Ben Hawkins, the Deputy of Commercial Regulation and Standards at the U.S. Gulf Coast Guard, said that the Coast Guard is getting ready to enforce the new fuel specifications and expects the industry to comply. He went on to say there's no possibility of slow rolling and he hopes for harmonized global approach to enforcement. The way I see it, it's a big change from the stand some government officials were taking last October and they were talking about a phased implementation and possible delays. So I'm trying to understand, do you believe the government is now more on board and the implementation program and so probability of success for rollout is materially higher than it was in October?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

No, it's a very good question. I'll let Jason talk about some of the specifics.

Jason Fraser -- Executive Vice President and General Counsel

That's right. Yes, we do agree with everything you said. We continue to expect IMO 2020 to be implemented in force on schedule as most recently indicated by those comments by the Coast Guard official you mentioned. It seems like things have quieted down with that administration in these EIA forecasts that have come out over the last several months which didn't show a dramatic jump in prices, that's kind of calmed the waters.

Manav Gupta -- Credit Suisse -- Analyst

Thank you, guys. Thank you for taking my question.

Operator

Our next question comes from the line of Blake Fernandez with Simmons Energy. Your line is now open.

Blake Fernandez -- Simmons Energy -- Analyst

Thanks guys. Good morning. I had two questions for you. One is probably for Gary on the supply side, but obviously there's a lot of discussion now with the Iranian waivers and potential for OPEC to ramp back up. I just didn't know if you had any comments on supply dynamics and how you see that may impact your inputs and maybe some of the heavy dynamics under way?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes. So far we don't have any indication of additional OPEC barrels making their way to the market. We don't have any coming into our system, as of yet, and we'll wait to kind of -- kind of hear. I think they're meeting in early May to determine whether they're going to ramp up production.

Blake Fernandez -- Simmons Energy -- Analyst

Okay. Second question is on Diamond Green. I believe there was a bill submitted to the house on a potential two-year extension for the BTC. And I didn't know if you had any updates or thoughts there on the lay of the land there?

Jason Fraser -- Executive Vice President and General Counsel

This is Jason. Of course, we support the extension of the blenders tax credit. We did see that bill introduced in the House is also one that's been introduced in the Senate by Grassley and Wyden. And of course this is one of Senator or Chairman Grassley's main initiatives, one of his program, he's most -- he will most aggressively push for. So we are hopeful that something will happen this year. First, with the change of leadership in the House, the Democrats have to sort through -- the Democrat leadership sort through their priorities for what they want to move this year. But we're hopeful something happens. It is an issue that has bipartisan support, which is very helpful with a split legislature like we have.

Blake Fernandez -- Simmons Energy -- Analyst

Right. Thank you, Jason. Appreciate it, guys.

Operator

Our next question comes from the line of Benny Wong with Morgan Stanley. Your line is now open.

Benny Wong -- Morgan Stanley -- Analyst

Thanks, good morning guys. I just want to touch upon, I'll follow-up the question from Prashant about the widening Maya. I think we've seen widening, saw the differentials across the regions. Just wanted to get your perspective. What's driving this, is it just really the weaker fuel oil prices or are you seeing other factors like coker turnarounds or are you seeing simple refineries switching to crude slate today ahead of IMO 2020?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Yes, I think most of what we're seeing today is driven by several components in the formula. We mentioned the high sulfur fuel oil getting weaker. The Brent TI arb widening also helps the Maya differential get weaker. And then the final thing is Midland, WTS is still part of the Maya formula, so as WTS gets weaker it helps as well. I think those are the key drivers and certainly high sulfur fuel oil should continue to get weaker and help the Maya spread wide now.

Lane Riggs -- Executive Vice President and Chief Operating Officer

Hey, this is Lane. I'll add a little further color just to that point. So right now, medium sours you're asking about that as well. It's still a little bit out of the market with respect to its value relative to sweet and heavy. Those are the two most economic crude. So they're still sort of an arbitrage that exists out there in the marketplace between medium and is that 3% discount. And you should see somewhat get some parity in all that and it was (ph) all this gets balanced again in the Atlantic Basin.

Benny Wong -- Morgan Stanley -- Analyst

Great, thanks. And my follow-up questions. Just a little extension on Blake's question. Just wanted to get a temperature check on DC. It seems like from where I am sitting, the EPA is a little bit more moderated with the headlines of them signaling they're going to issue less small refinery waivers and potentially walking back the proposal to freeze the CAFE standards. Just wondering how your discussions with them, has changed and if they're kind of shifting their focus or their approach a little differently going forward? Thanks.

Jason Fraser -- Executive Vice President and General Counsel

This is Jason again. And we haven't seen them really shift their approach. They are definitely under pressure, there is -- probably under constant pressure from the ethanol side to -- on the smaller refinery waivers and they have been for years. But they seem to understand the responsibility to grant small refinery exemptions as part of the statute, it's been reaffirmed by Congress and the court several times. There have been several appellate cases on the issue. And so, we're encouraged by Administrator Wheeler's comments during his confirmation hearing that he plan to follow the law. He understood how those programs are supposed to work. And we hope the agency continues to act as they have in the past, which is to grant the waivers where they see them to be appropriate.

Benny Wong -- Morgan Stanley -- Analyst

Great. Thanks for your thought, guys.

Operator

Our next question comes from the line of Roger Read with Wells Fargo. Your line is now open.

Roger Read -- Wells Fargo -- Analyst

Yes, thanks. Good morning. Yes, we could go back a little bit. I think, Gary, you mentioned earlier that you weren't running max diesel obviously diesel cracks or a little below what they have been. I mean not weak by any standard. But I was just wondering if you could dive in a little bit, what you're seeing in terms of diesel or distillate demand, both here in the U.S. and then in terms of export demand?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Sure. Yes, I think we had a little milder winter in the North Atlantic Basin than what we typically have which hurt demand a little bit. That was certainly offset by lower production with the lower refinery utilization. I think moving forward, certainly you're entering a time of the year where we typically see a little softer distillate demand as you don't have the heating oil demand. I think where this year is different is with the market structure and the strong carry in the market. I think the pump market will remain supported because as it weakens the barrels will be bid into storage. And so I think you'll see diesel continue to be supportive in the short-term and then you'll get the demand kick later in the year as we approach the IMO 2020 days.

Roger Read -- Wells Fargo -- Analyst

And when the -- speaking of that on the IMO front, when do you think we really start to see it in the forward curve? I mean you mentioned earlier, and I think everybody would agree with your high sulfur fuel oil discounts puts pressure on the lights or the sweet sour dip. But when do you think that shows up in the forward curve? Because one of the questions, we've been getting from investors is, you know, are we buying this from IMO, when do I believe that IMO is actually real? And I, in a sense, I need to see it in the curve before I want to invest wholeheartedly on that front?

Jason Fraser -- Executive Vice President and General Counsel

So what we understand is really the last loads of high sulfur fuel oil that head to the Far East for shipping probably occurred in late September. So you start to see an impact on the high sulfur fuel oil market sometime in that late September, early October region. And then on the distillate side, I think it's probably in November, December type timeframe before you start to see an impact on the diesel side.

Roger Read -- Wells Fargo -- Analyst

Okay, that's helpful. And I guess that's my two questions and I want to take up the slot formerly used by an analyst who is on a break right now.

Jason Fraser -- Executive Vice President and General Counsel

Thanks, Roger.

Roger Read -- Wells Fargo -- Analyst

See you, guys. Thanks.

Operator

Our next question comes from the line of Peter Low with Redburn. Your line is now open.

Peter Low -- Redburn -- Analyst

Hi, thanks for taking my two questions. The first was just on the balance sheet. Gearing is getting toward the top end of your guided range, I just wanted to know how comfortable you are with it at current levels? And how you expect to prioritize degearing versus buybacks over the coming quarters? The second was on the projects due for completion this year, particularly the Houston alkylation unit. Can you give us any color on the extent to which you expect those to impact capture rate, and earnings? Thanks.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Okay, so Donna, you want to...?

Donna M. Titzman -- Executive Vice President and Chief Financial Officer

Yes, sure. Yes, no, we're very comfortable, where we are on the balance sheet in the context of leverage. We design that target 20% to 30% to give us plenty of flexibility for growing our business and taking advantage of acquisitions as they come along. So we're very comfortable where we're at. We're at 27% but we're paying some debt off today. So that's going to bring this debt back down to 26%. What's the other..?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Yes. The other he was dovetailing it. And Peter, you tell me if this is wrong, but I thought like you were dovetailing it into the share repurchases. And we've been pretty clear all along that we weren't going to leverage the balance sheet to do share repurchases. And I think that's why you saw the repurchases, slightly less in the first quarter. We used the adjusted free cash flow metric as our target. And that's what we're going to live with. We're running the business for the long-term, and we feel that all of the components that we've identified, all of the goals we've set for ourselves are relevant and we don't want to deviate from that. So as cash flow picks up, I think you should expect that flywheel of share repurchase to increase also.

But I wouldn't tie the two directly together, the debt to cap and the share repurchase quantity.

Peter Low -- Redburn -- Analyst

(inaudible) And the second question.

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes. So on the final question on the Houston alky, it's on schedule to start up here in the second quarter, specifically at the end of May, maybe, give it sort of June 1st start-up. So what does that mean in terms of our result, that means you're going to have about a third of the benefit in the second quarter and then you'll have the full benefit in the third and fourth quarters. And it will absolutely go directly to capture rate. Some of our project like Toppers (ph) don't go directly to improving our capture rate, we get additional volume. But this will, because you're taking NGLs and getting all the way to sort of a premium gasoline component value so that should show up in our capture rates in the Gulf Coast.

Peter Low -- Redburn -- Analyst

That's great. Thanks guys.

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Thanks.

Operator

Our next question comes from the line of Sam Margolin with Wolfe Research. Your line is now open.

Sam Margolin -- Wolfe Research -- Analyst

Hey. Good morning, everybody.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Good morning, Sam.

Sam Margolin -- Wolfe Research -- Analyst

I had a supply question too. The last quarter's call, there was some probing about the Venezuela sanctions and how that might affect you. But it looks like there's a lot of offset supply coming on from Brazil. Brazil production from 2018 was deferred. It looks like it's coming on now. Is that a suitable substitute for you? Are you looking at that at all? Or does the spec not really work? I'm just wondering like what are the developments in your sort of Atlantic Basin Latin America crude supply story since the last quarter's call and the Venezuela sanctions?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes. So I would tell you since the Venezuelan sanctions, about a third of the barrels, we were getting from Venezuela then replaced by running incremental domestic light sweet, about a third of it is incremental heavy Canadian and then a third of it is just opportunistic cargos and some of that production that you're talking about from Brazil fits into that opportunistic cargo. We've definitely seen more volumes of Brazilian crude coming into the Gulf and also our West Coast.

Sam Margolin -- Wolfe Research -- Analyst

Okay, thanks so much. And then this is a, it's been a recurring theme now for a while that your MidCon segment is really starting to breakout and capture versus historical rates are, is up a lot. It obviously has a lot to do with Diamond Pipeline. Other operators outside of the Diamond partnership talk about Diamond a lot. It's an interesting strategic piece for other infrastructure that wants to loop into it or connected to some other ideas.

Are you guys still in sort of a strategic dynamic review process with Diamond? Or are you very satisfied with the role it's playing in Valero today? And you don't necessarily want to include it in other operator's plans for trying to get crude to the Eastern Gulf?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

For you guys, there's two pieces to that question right. There is the, I mean, the conversation around strategic use of the pipeline, but I mean, our initial emphasis for the pipeline was to assure crude supply, and a particular crude supply into the Memphis refinery. You guys want to talk about that at all?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes. So that's gone extremely well and we saw a stronger contribution of Diamond Pipeline in the first quarter of '19 than we did in the first quarter of '18. And some of that's the wider Brent TIR. The other change in our system was the Sunrise pipeline, which came online in the fourth quarter of '18. That not only improved our ability to get Midland Cushing -- Midland barrels to Ardmore and McKee, but we are now able to get Midland barrels to Memphis and we saw -- certainly saw an uplift from that in the first quarter.

And I'll let Rich handle the second part.

Richard F. Lashway -- Senior Vice President

Sure. So it was in January. There was a -- open season was on the Capline was announced and part of that reversal open season was to tie the diamond into the Capline. So Plains just got a -- an open season out there, that will conclude next week. And I think it's Monday, the 29th. And so they'll see whether or not there's enough interest to expand the cap -- expand the Diamond Pipeline, which would then tie into a cap line reversal. So that would be the -- the strategic part of expanding the pipeline to get Cushing barrels to the Gulf Coast.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

So Sam, I mean from our perspective, the key is, as Gary stated, is just to be sure that we retain our ability to shift the volumes that we need into the Memphis refinery. And then from as an investor in the pipeline, I think we'll look at the options associated with a possible expansion.

Sam Margolin -- Wolfe Research -- Analyst

Thanks, that was exactly my question. Okay, thanks everybody.

Operator

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Your line is now open.

Brad Heffern -- RBC Capital Markets -- Analyst

Hey, good morning, everyone. Maybe for Gary. I was just wondering if you could give thoughts on West Coast product supply. Obviously there's been a lot of outages. We've seen some larger import activity on the gasoline side. And obviously, if the West Coast gets behind it can struggle to catch up during driving season. So, any thoughts on how that plays out through the year?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes. So I think, you know, like we've always talked, the West Coast is a little long refining capacity. But when you have maintenance activities, it tightens up the market. And we've seen maintenance activities on the West Coast and inventories are low heading into gasoline season, which I think bodes well to a fairly strong gasoline season on the West Coast.

Brad Heffern -- RBC Capital Markets -- Analyst

Okay. And then looking at the Gulf Coast crude runs this quarter. You guys ran the most sweet, you've ever run, you ran the least medium. I'm just curious if that's sort of the most barbell the system can get or is there still room for more light and less medium if the spreads are telling you that?

Lane Riggs -- Executive Vice President and Chief Operating Officer

Yeah, this is Lane. We were clearly in that mode, I sort of alluded to that earlier maximum. We had some turnaround activity, our St. Charles refinery has been turnaround. So when you see us come out into the second and third quarter as our refineries come out of all this, you could see us have additional capacity where we're -- have that strategy. So we have some more room to do that.

Brad Heffern -- RBC Capital Markets -- Analyst

Okay, thanks.

Operator

Our next question comes from the line of Neil Mehta with Goldman Sachs. Your line is now open.

Neil Mehta -- Goldman Sachs -- Analyst

Hey, thanks a lot. Appreciate the opportunity. So a couple of questions. So I guess the first is, if you have a number of organic projects that have come online over the course of the last year. And so just trying to think about what the earnings power would have been in the first quarter independent of some of those growth projects, so we can isolate the growth on a commodity agnostic basis. Can you just talk about if the earnings power has structurally improved relative to a year ago, as some of those projects have come online?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

You guys want to talk about the impact of the projects.

Lane Riggs -- Executive Vice President and Chief Operating Officer

The -- I am trying to think about -- the only project we really had come on, that's different than the last few quarters, maybe was ...

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Sunrise.

Lane Riggs -- Executive Vice President and Chief Operating Officer

Well, obviously OK. I was thinking refinery, we only have the Wilmington cogen.

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes. So the Sunrise definitely had a material impact on the first quarter results for us as you were able to capture that Midland to Cushing differential on the pipeline we -- space we have on Sunrise.

Lane Riggs -- Executive Vice President and Chief Operating Officer

Yeah, Neil, there has been a host of things though, right. I mean, we've got the Diamond Green Diesel expansion that we're seeing the benefits of also. And you've seen it multiple times, but in the deck we've got the fact that we believe that the projects that were completed, produced another $340 million of incremental EBITDA. So if you compare year-over-year and how we performed in kind of a similar margin environment, I think you would find that the projects have contributed significantly to the earnings capability of the company.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

But over pipeline projects and then the Diamond Green Diesel expansion.

Lane Riggs -- Executive Vice President and Chief Operating Officer

Right.

Neil Mehta -- Goldman Sachs -- Analyst

Yeah, that's helpful. And then this follow-up question is just on the cash balances, you guys are at around $2.8 billion. Is it fair -- is it -- long-term target still to move toward $2 billion, that's still the right level. You were running substantially higher than that before, but how do we think about that optical cash balance number?

Donna M. Titzman -- Executive Vice President and Chief Financial Officer

Yeah. So if you look at the $2.8 billion, you know so we issued some debt toward the end of March, $1 billion that was slated to refinance the maturity that is in early 2020. Today, we paid -- we redeemed that those notes today. So you kind of pro forma the cash, it was really closer to $1.9 billion at the end of March.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

We think that's still a reasonable target and we will test around it both directions and just see if it holds up longer term. And then the other thing to keep in mind is that we bought back VLP during the quarter. And that was $950 million...?

Donna M. Titzman -- Executive Vice President and Chief Financial Officer

Correct.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

...of cash. So there will be times, when I think you'll see the cash balance increaseif we're looking at something like that. But otherwise, the $2 billion is still probably a good point of reference for you guys to use in your modeling.

Neil Mehta -- Goldman Sachs -- Analyst

Perfect. Thanks guys.

Operator

Our next question comes from the line of Phil Gresh with JPMorgan. Your line is now open.

Phil Gresh -- JPMorgan -- Analyst

Hey, good morning.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Hi, Phil.

Phil Gresh -- JPMorgan -- Analyst

The first question with Diamond Green Diesel here as a new segment. You gave us some color on throughput and costs. Your JV partner, I think has given a view on EBITDA guidance of $1.25 to $1.40 per gallon, I believe. Your first quarter obviously was a bit below that maybe seasonality, you could talk to that. But is that a right way for us to be thinking about this business? Is that something you'd agree with? Just a little color to help us think about this business longer term.

Martin Parrish -- Senior Vice President-Alternative Fuels

And this is Martin. I think that's a good way to think about the business. You're right on the first quarter, we were at $0.85 per gallon EBITDA, that was negatively impacted by a hedge loss of $0.37 a gallon. So if you adjusted EBITDA, it would have been $1.22. I think a better way to look at it is the last six months because we had a big hedge positive in the fourth quarter. So if you look at the last six months, the weighted average EBITDA was $1.24 a gallon, so right on top of the $1.25. And this hedge gain and loss is not significant over the life of Diamond Green. It's just been these big moves in the ULSD flat price in the last six months.

Phil Gresh -- JPMorgan -- Analyst

Okay, that's helpful. Thank you. And the second question, I guess would be a bit of a follow-up to Roger's question, where he was asking about how the strip is representing expectations for the diesel crack looking out to early 2020. I guess is it your view that that -- many times we talk about the strip is never right, but is it your view that this is not an accurate representation of what might happen to the diesel price or there are some prior comments about how maybe there's going to be more VGO feedstocks that will enter the diesel pool. Just curious how you think this actually plays out over the next 6 or 12 months. Thanks.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Yeah, so I would say that I think the diesel forward curve is not a very good representation of what we would expect the forward market to look like. You are seeing more contango start to edge its way into the market. I think that will continue as you get closer to the date. But I think we'll have a stronger diesel environment than what's currently reflected in the curve.

Phil Gresh -- JPMorgan -- Analyst

Okay, thanks a lot.

Operator

Our next question comes from Jason Gabelman with Cowen. Your line is now open.

Jason Gabelman -- Cowen -- Analyst

Yeah, hey, thanks for taking the call. I wanted to ask, I know there was a question about the West Coast but just wanted to follow-up on it. I believe your Benicia plant has been down for a little bit. I was wondering what the impact was on the quarter. And if you have line of sight for when that asset is going to come back online?

Lane Riggs -- Executive Vice President and Chief Operating Officer

Well, this is Lane. So yeah, we have about 8 days of downtime in our Benicia refinery. We had a crude leak in the furnace. And so we had to bring entire refinery down to repair and so consequently we moved a turnaround that we had budgeted in the first quarter '20 into this timeframe. So we're essentially executing a turnaround, so we should start the refinery up sort of mid-May-ish or somewhere in the later May, but it will be somewhere in the May timeframe in terms of starting the refinery up. The other -- sort of the other thing that we had happen in the quarter that didn't get a lot of press was, we had our McKee refinery had an air blower, a main air blower outage and so. And that was a big event as well in terms of our impact in the quarter, an unusual event and sort of was $90 million. So if you're trying to sort of frame what the earnings potential for the first quarter could have been, the bigger event in the first quarter, actually was our McKee outage. And again, it was about a $90 million sort of gross margin impact.

Jason Gabelman -- Cowen -- Analyst

Got it, thanks. And if I could ask a question on, I believe you moved the Memphis turnaround from April of this year into 2020. And I thought that was an interesting data point, just because it seems like your peers are doing the opposite trying to conduct their maintenance in the first half of this year. So I'm wondering if you saw something in the market that made you alter maintenance plans there. And then just what you're seeing more generally in the industry, on maintenance activities in the first half of this year and maybe into the second half as well? Thanks.

Lane Riggs -- Executive Vice President and Chief Operating Officer

Yes, so I unfortunately I gave some bad information. Our Memphis refinery goes into an SEC turnaround in about a week. So, but we don't normally try to position take -- we will maybe nudge, turnarounds around certain things, but we aren't taking. We didn't make a huge effort to try to move our turnarounds and to accommodate IMO 2020 because we have a lot of assets.

So, but anyway that's kind of where we are on that. In terms of the industry, we don't really comment on other players in the industry or what we think maintenance activity might be.

Jason Gabelman -- Cowen -- Analyst

Got it. Thanks a lot.

Operator

Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Your line is now open.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Hey. Good morning, everyone. Thanks for taking my question here. So compared to a year ago, you ran substantially higher light sweet crude volumes, or at least the share of your total crude slate, and at the same time, your distillate yield ticked up a little bit. And so I was wondering if -- can we draw a direct connection there, a higher distillate yield with these lights? Or was that just noise year-over-year?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

No, actually what we see is as we maximize light sweet, we tend to make the same amount of gasoline and less, a little bit less distillate. So the yield shift is probably more tied to hydrocracker utilizations and what units, we actually had down for maintenance rather than a change in the crude slate.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Got it. Okay and then just an accounting clarification. So this $2.5 billion of CapEx for next two years, does that include the $550 million of spending for the Diamond Green Diesel expansion?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Well, it will. I mean. Yes. Not all in the year. Okay. I mean this is spread out over through 2021. Yes. So, but yes it does.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Craig Shere with Tuohy Brothers. Your line is now open.

Craig Shere -- Tuohy Brothers -- Analyst

Good morning.

Jason Fraser -- Executive Vice President and General Counsel

Hi, Craig.

Craig Shere -- Tuohy Brothers -- Analyst

What a great comments about catalysts for improving cracks into the second half in 2020. I guess my question is more systemic in terms of the new mid-cycle levels we might see aided by IMO 2020? Or are you getting more confident that we could see some sustained benefit lasting three years to five years here?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

So really I think that question goes to what's the sustainability of the tailwinds for IMO 2020.

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Yes, I think there's -- it's hard for us to predict how quickly ships put in scrubbers. It looks like, that's not going to be fast and that the impact of IMO 2020 will be longer-lasting than what we initially assumed. But I don't know that we have a lot of great data on that.

Craig Shere -- Tuohy Brothers -- Analyst

Are ships even able to put in scrubbers the way we're thinking a year ago? It sounded like some of the waste water disposal becomes an issue now?

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

It's certainly, the most economic scrubbers are the open-loop scrubbers which put the sulfur back into the ocean. And so, as questions have come up, whether they're going to be allowed to do that, it certainly presents another degree of difficulty when people are trying to make those capital investments.

Craig Shere -- Tuohy Brothers -- Analyst

Okay. And last quick question. I noticed that the corporate expense was down sequentially and year-over-year. Anything to read into efficiencies or cost controls?

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

We're always focused on efficiencies and cost controls. I just don't know if it would have been material enough.

Jason Fraser -- Executive Vice President and General Counsel

In the first quarter of '18, we actually had an environmental reserve, adjustment that's one of the special items that's reflected in the press release.

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Okay.

Craig Shere -- Tuohy Brothers -- Analyst

Okay, great. Thank you.

Operator

And that concludes today's question-and-answer session. I'd like to turn the call back to Mr. Bhullar for closing remarks.

Homer Bhullar -- Vice President, Investor Relations

Great thanks, Liz. We appreciate everyone joining in and feel free to contact IR team, if you have any additional questions. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.

Duration: 52 minutes

Call participants:

Homer Bhullar -- Vice President, Investor Relations

Joseph W. Gorder -- Chairman, Chief Executive Officer & President

Gary Simmons -- Senior Vice President-Supply, International Operations and Systems Optimization

Clay -- Bank of America Merrill Lynch -- Analyst

Prashant Rao -- Citigroup -- Analyst

Martin Parrish -- Senior Vice President-Alternative Fuels

Manav Gupta -- Credit Suisse -- Analyst

Jason Fraser -- Executive Vice President and General Counsel

Blake Fernandez -- Simmons Energy -- Analyst

Benny Wong -- Morgan Stanley -- Analyst

Lane Riggs -- Executive Vice President and Chief Operating Officer

Roger Read -- Wells Fargo -- Analyst

Peter Low -- Redburn -- Analyst

Donna M. Titzman -- Executive Vice President and Chief Financial Officer

Sam Margolin -- Wolfe Research -- Analyst

Richard F. Lashway -- Senior Vice President

Brad Heffern -- RBC Capital Markets -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Phil Gresh -- JPMorgan -- Analyst

Jason Gabelman -- Cowen -- Analyst

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Craig Shere -- Tuohy Brothers -- Analyst

More VLO analysis

All earnings call transcripts

AlphaStreet Logo