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Valero Energy (NYSE:VLO)
Q3 2020 Earnings Call
Oct 22, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Valero Energy third quarter earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Bhullar, vice president of investor relations. Thank you, sir.

You may begin.

Homer Bhullar -- Vice President of Investor Relations

Good morning, everyone, and welcome to Valero Energy Corporation's third-quarter 2020 earnings conference call. With me today are Joe Gorder, our chairman and CEO; Lane Riggs, our president and COO; Jason Fraser, our executive vice president and CFO; Gary Simmons, our executive vice president and chief commercial officer; and several other members of Valero's senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments.

If you have any questions after reviewing these tables, please feel free to contact our investor relations team after the call. I would now like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC.

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

Joe Gorder -- Chairman and Chief Executive Officer

Thanks, Homer, and good morning, everyone. The third quarter was another challenging period, in which refining margins continue to be pressured by pandemic-imposed restrictions on global economies. These restrictions have limited individual movement and in-person activities across the globe, resulting in lower demand for finished refinery products. This, in turn, has created less incentive to produce crude oil and has led to narrower crude oil discounts compared to last year.

Despite this challenging environment, there were a number of positive developments from the previous quarter as product demand increased with incremental easing of restrictions on businesses and the reopening of some schools. Relative to the second quarter, DOE statistics show that gasoline, diesel and jet demand improved by 25%, 7% and 57%, respectively, which is in line with the increase in demand that we experienced across our system. Our wholesale volumes remained steady, moving over 50% of our total light products production. Our gasoline and distillate exports to Latin America and Europe were also robust in the third quarter.

We exported 316,000 barrels per day in the third quarter, which is significantly higher than the 170,000 barrels per day we exported in the second quarter. We also saw a steady increase in our wholesale volumes into Mexico, where we have been proactively expanding our logistics network for the last several years. In fact, Valero is now one of the largest private fuel importers into Mexico. With the incremental easing of restrictions and higher product demand, our refinery utilization increased from 74% in the second quarter to 80% in the third quarter, and we increased our ethanol plant production as well from 49% to 81% of capacity.

Our low-carbon renewable diesel business remains resilient with another quarter of solid performance, realizing a margin of $2.72 per gallon and setting a record for sales volumes. In addition, we remain well capitalized. We ended the quarter with over $4 billion of cash and almost $10 billion of total available liquidity. While we expect margins to improve as economies continue to reopen and product inventories come down to normal levels, we opportunistically raised another $2.5 billion of debt at very attractive rates to ensure that we're able to keep our high-return projects on track and to honor our commitment to shareholders, even if the current low-margin environment persists for longer than currently anticipated.

Turning to capital investments. We continue to execute on announced projects that are expected to drive long-term earnings growth. The St. Charles Alkylation Unit, which is designed to convert low-value feedstocks into a premium alkylate product, remains on track to be completed in the fourth quarter.

The Diamond Pipeline expansion and the Pembroke Cogen project are expected to be completed in 2021, and the Port Arthur Coker project is expected to be completed in 2023. We're also evaluating a number of other low-carbon growth projects that are in the development phase of our gated process, and we continue to strengthen our long-term competitive advantage with investments in our renewable diesel business. The Diamond Green Diesel expansion project at St. Charles, which is designed to increase renewable diesel production capacity by 400 million gallons per year to 675 million gallons per year is still expected to be completed in 2021.

Diamond Green Diesel also continues to make progress on the advanced engineering review for a potential new 400 million gallons per year renewable diesel plant at our Port Arthur, Texas refinery. As we look ahead, we expect to see improvement in margins as product inventories approach the normal five-year range. U.S. gasoline inventory is already in the middle of the five-year range.

And although distillate inventory is higher than the five-year range, it's been trending downwards in recent weeks. Diesel demand should continue to improve, supported by winter heating oil demand and harvest season. Fall refinery turnarounds, coupled with recently announced and anticipated closures or conversions of less advantaged refineries, should also further balance supply. Although there's a lot of uncertainty in the market, we remain steadfast in the execution of our strategy, pursuing excellence in operations, investing in earnings growth with lower volatility and honoring our commitment to stockholder returns.

Our unmatched execution, while being the lowest-cost producer and ample liquidity, position us well to manage this pandemic-induced low-margin environment and maintain our position of strength as the global economy recovers. Lastly, the guiding principles underpinning our capital allocation strategy remain unchanged. There is absolutely no change in our strategy, which prioritizes our investment-grade ratings, sustaining investments and honoring the dividend. So with that, Homer, I'll hand the call back to you.

Homer Bhullar -- Vice President of Investor Relations

Thanks, Joe. Before I provide our third-quarter financial results summary, I'm pleased to inform you that we recently posted a Sustainability Accounting Standards Board, or SASB, report on our website that aligns with the SASB framework for refining and marketing industry standards. As you'll see in our report, we're targeting to reduce and offset greenhouse gas emissions by 63% by 2025 through investments in board-approved projects. The targets will be achieved through absolute emissions reductions through refining efficiencies, offsets by our ethanol and renewable diesel production and global blending and credits for renewable fuels.

This is consistent with our strategy as we continue to leverage our global liquid fuels platform to expand our long-term competitive advantage with investments in economic low-carbon projects. And now turning to our quarterly performance. We incurred a net loss attributable to Valero stockholders of $464 million or $1.14 per share for the third quarter of 2020 compared to net income of $609 million or $1.48 per share for the third quarter of 2019. The third-quarter 2020 adjusted net loss attributable to Valero stockholders was $472 million or $1.16 per share compared to adjusted net income of $642 million or $1.55 per share for the third quarter of 2019.

Third-quarter 2020 adjusted results primarily exclude the benefit from an after-tax lower of cost or market, or LCM, inventory valuation adjustment of approximately $250 million and an after-tax loss of $218 million for an expected LIFO liquidation. For a full reconciliation of actual to adjusted amounts, please refer to the financial tables that accompany the release. The refining segment reported an operating loss of $629 million in the third quarter of 2020 compared to operating income of $1.1 billion in the third quarter of 2019. Excluding the LCM inventory valuation adjustment, the expected LIFO liquidation adjustment and other operating expenses, third-quarter 2020 adjusted operating loss for the refining segment was $575 million.

Third-quarter 2020 results were impacted by narrow crude oil differentials, lower product demand and lower prices as a result of the COVID-19 pandemic. Refining throughput volumes averaged 2.5 million barrels per day, which was lower than the third quarter of 2019 due to lower product demand. Throughput capacity utilization was 80% in the third quarter of 2020. Refining cash operating expenses of $4.26 per barrel were $0.21 per barrel higher than the third quarter of 2019, primarily due to the effect of lower throughput rates.

Operating income for the renewable diesel segment was $184 million in the third quarter of 2020 compared to $65 million in the third quarter of 2019. After adjusting for the retroactive blender's tax credit, adjusted renewable diesel operating income was $123 million for the third quarter of 2019. Renewable diesel sales volumes averaged 870,000 gallons per day in the third quarter of 2020, an increase of 232,000 gallons per day versus the third quarter of 2019 due to the effect of the planned maintenance that occurred during the third quarter of 2019. Operating income for the ethanol segment was $22 million in the third quarter of 2020 compared to a $43 million operating loss in the third quarter of 2019.

The third-quarter 2020 adjusted operating income for the ethanol segment was $36 million. Ethanol production volumes averaged 3.8 million gallons per day in the third quarter of 2020, which was 206,000 gallons per day lower than the third quarter of 2019. The increase in operating income from the third quarter of 2019 was primarily due to higher margins resulting from lower corn prices. For the third quarter of 2020, G&A expenses were $186 million and net interest expense was $143 million.

Depreciation and amortization expense was $614 million and the income tax benefit was $337 million in the third quarter of 2020. The effective tax rate was 47%, which was primarily impacted by an expected U.S. federal tax net operating loss that will be carried back to 2015 when the U.S. federal statutory tax rate was 35%.

Net cash provided by operating activities was $165 million in the third quarter of 2020. Excluding the favorable impact from the change in working capital of $246 million as well as our joint venture partner's 50% share of Diamond Green Diesel's net cash provided by operating activities, excluding changes in its working capital, adjusted net cash used by operating activities was $177 million. With regard to investing activities, we made $517 million of total capital investments in the third quarter of 2020, of which $205 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance, and $312 million was for growing the business. Excluding capital investments attributable to our partners, 50% share of Diamond Green Diesel and those related to other variable interest entities, capital investments attributable to Valero were $393 million.

Moving to financing activities. We returned $399 million to our stockholders in the third quarter of 2020 through our dividend, resulting in a year-to-date total payout ratio of 165% of adjusted net cash provided by operating activities. With respect to our balance sheet at quarter end, total debt and finance lease obligations were $15.2 billion and cash and cash equivalents were $4 billion. The debt to capitalization ratio, net of cash and cash equivalents, was 36%.

At the end of September, we had $5.8 billion of available liquidity, excluding cash. Turning to guidance. We expect approximately $2 billion in capital investments attributable to Valero for 2020. About 60% of our capital investments is allocated to sustaining the business and 40% to growth.

We expect our annual capital investments for 2021 to be approximately $2 billion as well, and approximately 40% of our overall growth capex for 2020 and 2021 is allocated to expanding our renewable diesel business. For modeling our fourth-quarter operations, we expect refining throughput volumes to fall within the following ranges: U.S. Gulf Coast at 1.41 million to 1.46 million barrels per day; U.S. Mid-Continent at 385,000 to 405,000 barrels per day; U.S.

West Coast at 230,000 to 250,000 barrels per day; and North Atlantic at 400,000 to 420,000 barrels per day. We expect refining cash operating expenses in the fourth quarter to be approximately $4.35 per barrel. With respect to the renewable diesel segment, we expect sales volumes to be 750,000 gallons per day in 2020, which reflects planned maintenance in October. Operating expenses in 2020 should be $0.45 per gallon, which includes $0.17 per gallon for noncash costs such as depreciation and amortization.

Our ethanol segment is expected to produce a total of 4.2 million gallons per day in the fourth quarter. Operating expenses should average $0.37 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the fourth quarter, net interest expense should be about $155 million, and total depreciation and amortization expense should be approximately $590 million. For 2020, we expect G&A expenses, excluding corporate depreciation, to be approximately $775 million, which is $50 million lower than our prior guidance, and we expect the RINs expense for the year to be between $400 million and $500 million.

Lastly, as discussed on our last earnings call, due to the impact of beneficial tax provisions in the CARES Act as well as the COVID-19 pandemic and its impact on our business, we're not providing any guidance on our effective tax rate for 2020. That concludes our opening remarks. [Operator instructions]

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from the line of Phil Gresh with JP Morgan. Please proceed with your question.

Phil Gresh -- J.P. Morgan -- Analyst

Yes. Hi. Good morning, everyone. I just wanted to start off by asking a bigger picture question around how Valero thinks about capacity management.

Obviously, recognizing Valero is at the low end of the cost curve, the guidance here for 4Q and the results in the past few quarters, you've had utilization in the low-80s, roughly. So I'm just curious how, philosophically, you think about managing capacity? Whether it's from a temporary perspective or from a permanent perspective? Just what are the decision points do you think about? Or is it more just managing, say, secondary units given the situation with diesel is more challenging than gasoline? Or just any thoughts you'd have would be helpful. Thank you.

Lane Riggs -- President and Chief Operating Officer

So Phil, this is Lane. I'll start by answering it on the near term, the way Valero looks at where we've been running our system is trying to optimize at a lower utilization and make sure that we be very selective on the crews we run, making sure we have the molecules where we want. And certainly — and it's a challenging time to do that. You just got to be very careful.

We've seen our ability to flex our refinery yields quite a bit. You can do a lot of that when you're at lower utilization. We've seen us move gasoline yields roughly 17% and distillate yields up and down 10%, which is a little different than when you're full. So in the near term, you're just sort of trying to constantly optimize your operations, obviously, to cash flow here.

Longer term, I've sort of spoken about this in earlier calls. When a company, or Valero, looks at an asset from deciding whether it runs or not, it's largely driven by a change in trade flow, which means — what I mean by that is it's either lots a crude advantage or something's changed in its products, it fundamentally changes its sort of, I wouldn't say, its gross margin competitiveness and here is — and combined with, obviously, a big regulatory spend or capex. Those are really the things that in terms of what drives, I think, companies like us and other companies consider a refinery closure. And so when you think about that criteria, where do you see that? You see that in the U.S., it's on the West Coast and the East Coast.

You've seen companies make those decisions. And certainly, we've always felt like Europe because think about where Europe is, they're bringing all their crude oil and their kind of a lot of their products have to export. And that's a tough situation if you don't have a structural advantage on opex. And so that's sort of my answer on that.

Phil Gresh -- J.P. Morgan -- Analyst

OK. Great. That's helpful. The second question would just be around the third-quarter results themselves.

Obviously, in the prepared remarks, Joe, you talked about tighter crude differentials as a factor that drove the sequential capture rate declines, particularly in the Gulf Coast and the Mid-Con. But I was just curious, are there any other, say, onetime factors in the quarter? I'm thinking perhaps multiple hurricanes on the Gulf Coast as one that might have led to a more challenging performance versus what you had maybe ordinarily thought of.

Joe Gorder -- Chairman and Chief Executive Officer

Good question, Phil. Lane will take a crack at this, and then Gary can follow-on.

Lane Riggs -- President and Chief Operating Officer

Yes. So you're correct. Our Port Arthur refinery, we had to close for Hurricane Laura. And our ability to really come back up was impeded by the utility provider got really hit hard.

It's a regional sort of utility provider, and they had a difficult time providing power. They did a great job recovering, but ultimately, that slowed our ability to bring the refinery back up. So we had some volume — what we would characterize as volume variance for our refinery.

Gary Simmons -- Executive Vice President and Chief Commercial Officer

Yes. The only thing I'll add is, we pride ourselves, especially in the U.S. Gulf Coast system, on our ability to optimize and really go out and find a lot of these disadvantaged, discounted feedstocks. And those opportunities really just weren't there in the third quarter, and that certainly impacted our Gulf Coast operations.

Phil Gresh -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.

Manav Gupta -- Credit Suisse -- Analyst

Joe, in your prepared remarks, you had indicated that the renewable diesel margin for the quarter was about $2.72. And in the last quarter, this number was $2.22. So there's almost a $0.50 increase quarter over quarter. And when I look at the renewable diesel margin indicator you provide every week, which is very helpful, that was indicating a $0.01 improvement.

So if you could help us out a little as to how that $0.01 in indicator margin actually translated to over $0.50 in actual capture for the renewable diesel business segment?

Joe Gorder -- Chairman and Chief Executive Officer

Good morning. Listen, we'll have Martin take a crack on that one.

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

So the indicator margin, as you know, as you said, it's a gross margin, but as a proxy for feedstock, we use the soybean oil price. And we're obviously not paying soybean oil price for our feedstocks, for our waste feedstocks. So that fluctuates quite a bit, Manav. So that's the biggest reason, it's the actual feedstock versus the soybean oil.

Manav Gupta -- Credit Suisse -- Analyst

OK. And a quick follow-up is, I'm sure you've already secured the feedstocks for the St. Charles expansion. But again, there are a number of announcements out there.

So are you already in the process of securing more feedstock for Port Arthur? If you could help us out there a little.

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

Well, I think if you back up, there's a lot of announcements out there, and time will tell, if you look back historically, there's always been a lot of announcements and the announcements came and the projects never came. Will it be different this time? It may be somewhat different. But we're just confident in our ability to source waste feedstock going forward. Waste feedstock supplies is tied to global GDP growth, and our partnership with Darling gives us the benefits of vertically integrated access to low-cost, low-carbon intensity feedstocks.

We also get the benefit of Darling's experience in the global feedstock markets. Darling also helps us procure feedstocks from other people. So we just feel like we have a unique position here, and that's going to allow us to maintain these superior margins versus the competition.

Manav Gupta -- Credit Suisse -- Analyst

Thank you for taking my questions.

Operator

Thank you. Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.

Theresa Chen -- Barclays -- Analyst

Morning. I guess a follow-up question on the renewable diesel front. Clearly, the energy transition is a big theme along with ESG investing and happy to see the additional disclosures consistent with the SASB framework. Can you talk about how you view your renewable diesel position as far as the defensibility of your projected returns? How many of these projects that have been recently announced are you factoring in as ones that could come to fruition? And also on the LCFS prices as well, do you see any risk there?

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

Sure. I'll take a stab at that. This is Martin. Obviously, we keep track of all the announced projects.

We also keep track of all the new policies that are coming and what we expect to come. And it's cloudy. I mean there's nothing but cloudy. And the farther you go out, the cloudier it gets.

You're making projections here. But if you just, again, step back and look at where we're at, a lot of these projects aren't going to get built. That's just a fact. And you've got more policies coming.

So right now, you've got California, you've got RED II in Europe, the renewable energy directive, and then you've got British Columbia and Ontario. Those are the major markets. Well, in the future, Oregon's ramping up. You're going to have a nationwide clean fuel standard.

And Canada, Sweden, Norway, Finland are being more aggressive. Not huge demand there, but a huge percentage of renewable diesel. And you got the state of Washington that keeps moving a few steps forward, a few steps back. And you've got Midwest states and Colorado announcing policies, too.

And then the biggest one, though, is the New York, which the preliminary information they put out has a lot of renewable diesel in the plan. So we really feel good about the demand. And then if you look at renewable diesel, just the molecule, right, it's available. It's a drop-in fuel.

It's low-carbon intensity. There's no blend wall. So you have to think, too. If you take California, they've hit the brakes a few times when feeds — when low carbon wasn't available, right, they slowed down the program.

If it is available, I would expect these regulators to hit the accelerator. So at the end of the day, all that being said, is there an advantage to being a first mover? Yes, I would think so. And we're the first mover in the United States. And we feel really good about our position, and we feel really good about what we've laid out to do.

Theresa Chen -- Barclays -- Analyst

Understood. And Joe, related to your statements about the other low-carbon growth projects under development, can you give us a flavor of what kind of projects these could pertain to? Are you talking about additional investment in biofuels? Is it hydrogen related? Any color that you can share there?

Lane Riggs -- President and Chief Operating Officer

This is Lane. So what we're really — what we're looking at right now is carbon sequestration projects largely and really trying to tie those to the markets that Martin was talking about. This is where we think that we can make investments and lower our CIs of fuels and make them more competitive for these markets.

Theresa Chen -- Barclays -- Analyst

Thank you.

Operator

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Brad Heffern -- RBC Capital Markets -- Analyst

Hey. Good morning everyone. Joe, you made it pretty clear from the remarks in the press release and your remarks on the call that there's no change to the capital framework or the dividend policy. And I think you said that you're prepared even if this COVID weakness goes on for longer than expected.

Can you just put a little more color around that? If we see four more quarters of less than — minus $1 EPS, do you still see everything as being unchanged? Or at what point do you have to reevaluate how you think about things?

Joe Gorder -- Chairman and Chief Executive Officer

Brad, that's a good question. Let me let Jason give you some insights here, and then maybe I'll follow-on.

Jason Fraser -- Executive Vice President and Chief Financial Officer

Yes. This is Jason. We basically feel we're a long way from rethinking the dividend. At the end of September, you all saw we had a little over $4 billion in cash and about $5.7 billion of liquidity available under our committed facilities.

We saw positive signs in the third quarter, demand improved, export volumes picked up. So we think things are headed in the right direction. It's just a question of how fast. Of course, the vaccine would really accelerate things along.

But looking bigger picture, this pandemic is an isolated event, and we're very reluctant to revise our long-term capital allocation framework that served us well for so many years. With our cash and liquidity position and the way things appear to be headed right now, this time we just don't think adjusting the dividend is something a step we're going to need to take.

Joe Gorder -- Chairman and Chief Executive Officer

Yes. Let me just add to this. I mean, there has been a lot of question out there regarding the dividend. And I've been in this job a little over six years now.

And we came out with the capital allocation framework and our approach to rewarding shareholders at that time. We have done nothing every step of the way but walk that top. And we've been very clear in our communications, and we've demonstrated our commitment to our owners. And we're going to continue to do that.

I think one needs to decide when they're trying to determine who they're going to listen to and who really understands what's going on, so if it's going to be a management team that has demonstrated their commitment to their shareholders for six years or if it's somebody who is taking a position from a basis of very little knowledge and trying to create opportunities for movement in the equity that certainly affects our long-term shareholders. So anyway, if I were you, I would encourage everybody to listen to us and listen to our messaging, and I think we've been pretty clear about it at this time. And I think Jason's answer was exactly right.

Brad Heffern -- RBC Capital Markets -- Analyst

OK. And then maybe for Lane or Gary, just on the West Coast. Obviously, as part of the renewable diesel discussion, we've seen a couple of closures out there. I know historically, you've thought about that market as sort of being an option value market for Valero.

Do you think on the other side of all this COVID stuff that it's potentially a stronger market that's less like option value? Or sort of how do you see that playing out?

Lane Riggs -- President and Chief Operating Officer

This is Lane. I would say we're always going to manage it, and this is by being very careful with what we spend out there. But we certainly — we believe ultimately that COVID will pass, and gasoline and diesel demand will recover. And you've changed the balances out there.

So in the near term, it's an improved market for us. So I don't think — strategically, we think — we don't look at it like we'll employ a lot of capital in the West Coast. We're just going to run it well and take advantage of what at least in the near term looks like a pretty good opportunity.

Brad Heffern -- RBC Capital Markets -- Analyst

OK. Thank you.

Operator

Thank you. Our next question comes from Prashant Rao with Citigroup. Please proceed with your question.

Prashant Rao -- Citi -- Analyst

Hi. Good morning. Thanks for taking the question. My first one is on the balance sheet.

Jason, I wanted to ask a couple of follow-ups here. Given the inventory adjustments, the LIFO liquidation and the liquidity management you've done, I kind of wanted to focus on balance sheet cash and cash equivalents you need to keep on hand for working cap in the current environment. Is that lower now going forward? I know that we used to think about it as sort of the slightly sub-$2 billion bogey for balance sheet cash, but are the needs slightly lower? Does that give you a little room under the collar as we think about managing through the next couple of quarters into the recovery?

Jason Fraser -- Executive Vice President and Chief Financial Officer

We still target to be in that range. So I think that's still a good assumption.

Joe Gorder -- Chairman and Chief Executive Officer

Yes. Clearly, I think as we go forward, I mean, one of the things that we did is take advantage of the opportunity in the market today to reassess it. And as Lane spoke about earlier, the supply chain has changed. And so the working capital, the inventory volumes essentially that we need are different than they were in the past.

And so we took the P&L impact this year, but we run our business to — and we try to target proper operating levels for all of our inventors. That's what guides us. It's not so much, "gee, we need to take a LIFO impact or anything like that." It's more what is the proper operating level for our inventories, and we adjust to that. And so we've seen some benefit from the cash side.

Prashant Rao -- Citi -- Analyst

OK. Thank you. I'm sorry.

Joe Gorder -- Chairman and Chief Executive Officer

No. You're good. Go ahead.

Prashant Rao -- Citi -- Analyst

All right. Sorry. A little bit of static on my end here. I had another question on sort of the macro, specific on products on jet fuel.

We're sort of trying to get our arms around what would happen on — with a slower jet demand recovery? What does that look like for sort of refining margins? And how does the system cope with that if it takes a few more years to get back, let's say, in a bear case scenario and a normal jet fuel demand. Can you maybe help us with some color on what that means for how you run your operations? Where are you sort of comfortable with jet fuel recovering to maybe staying lower for longer? Is it 70% of typical demand or 80% of typical demand? At what level is it really not that much of a headwind? Sort of a little bit of color on how to think about that and where we can think about that stopping pressuring distillate inventory not just in your system, but overall globally?

Gary Simmons -- Executive Vice President and Chief Commercial Officer

Yes. So overall, i think you could see, we have full flexibility to pretty much not yield any jet, and we can blend all of those molecules in the ULSD. And what it really does is just overall impact our refinery utilization. So the advantage of jet demand improving is that we can start to pull those molecules out and raise utilization along with it.

I think overall, we've been very surprised at the rate of recovery in the jet market. In the second quarter to third quarter, we saw 57% increase in . And so far in the fourth quarter, the airline data is taking a 17% increase in passenger headcount, which is encouraging. To also go along with that, I would say, our nominations from the airlines that we're serving are also up.

The other thing you can start to see is that jet is now trading at a rate-adjusted parity to ULSD. I think that's the thing that you would like to see in the market is jet trading around rate-adjusted parity to ULSD, which allows us to pull those molecules out of the diesel pools, and you'll start to see that result in higher refinery utilization.

Prashant Rao -- Citi -- Analyst

All right. Thanks very much for your time. I'll turn it over.

Operator

Thank you. Our next question comes from Doug Leggate with Bank of America. Please proceed with your question.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning, everyone. Let me just say, Joe, first of all, I for one, and I think a lot of people appreciate you being as articulate and direct as you've been about the dividend question, because there's too much irresponsible investment analysis out there. And I think you're right, people need to listen to you guys.

So I appreciate you making that statement. With that, I've got two quick questions. First one is on debt tolerance. Can you just talk about? You've added some debt, obviously, this last quarter.

You're positioned with plenty of liquidity, but what do you see as the debt tolerance? Your bonds are trading just fine it seems. If you needed to, what do you think about the balance sheet here?

Jason Fraser -- Executive Vice President and Chief Financial Officer

Yes. I mean we — you're right, the bonds are trading well. We've got a lot of cash, given the steps we've taken. We still have our $5.7 billion of untapped liquidity, which we could rely on if we needed to.

We don't expect to need any more liquidity, and I'm sure we could — there are other things we could do if we needed to. But we feel like we're in a pretty good spot.

Joe Gorder -- Chairman and Chief Executive Officer

And I think, Doug, look, the business we — Jason mentioned earlier I think that you finance the business when it's attractive to do that. And there's no sense of adding any degree of risk to the operation. And so getting this debt, I was very impressed with the rates we got and the demand was very high for the offerings. And we remain committed to the investment-grade rating, no question about it.

But we think there's room — if we needed to do something else, there's room to do more. We don't anticipate that we're going to need to do more, but we certainly believe we could, if we needed to. Would you agree?

Jason Fraser -- Executive Vice President and Chief Financial Officer

Yes.

Joe Gorder -- Chairman and Chief Executive Officer

So — and I hope that answers that question, Doug.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Yes, it does. Thank you. And my follow-up is really more of a housekeeping issue. Maybe I missed some subtlety in prior calls, I don't know.

But in your last presentation, you still have the nondiscretionary spending at around about $1.5 billion. Your guidance today says a couple of billion in 2021, and the sustaining capital is 60% of that. That's obviously 1.2. Is that just a low point? Is it sustainable at that level? Or has something changed that has reset your sustaining capital? And I'll leave it there.

Thanks.

Lane Riggs -- President and Chief Operating Officer

Doug, this is Lane. So it's — I would say that's on the lower side. When we talk about our spend, our sustaining capital, what we're really talking about is over, I don't know, three or four-year cycle. That's roughly the average that we feel like we need to spend.

We have heavy turnaround years and lighter turnaround years. So you had to remember, in that $1.5 billion is our turnaround activity. So that's — I'll leave it with that.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

All right, guys. Thanks so much.

Operator

Thank you. Our next question comes from Paul Sankey with Sankey Research. Please proceed with your question.

Paul Sankey -- Sankey Research -- Independent Analyst

Good morning, everyone. Yes. Doug kind of hit on what I wanted to hit on. So the question really being the extent to which capex is flexible.

I think you answered very well there. Separately, could you talk about? Just give us the latest update, and I know it's a difficult question on the election. And what do you think are the top risks that you face from the potential outcome of Biden win? What are the biggest concerns and do you think overblown concerns about a potential, for example, Democrat sweep?

Rich Walsh -- Senior Vice President, General Counsel

This is Rich Walsh. I'll take a stab on trying to answer this. I mean, I think you're right. If you look at this, if you have a Democratic win, directionally, they're going to — they're probably going to want to look at higher taxes and probably more regulation.

But regardless of who wins, you're coming out of a pandemic herein. So you've got a first priority, which is high unemployment rate. You're going to need to stimulate the economy. The focus is going to be on those kinds of things.

And it's really hard to layer on a whole bunch of policies that would smother an effort to recover. So I think what you're going to see is a lot of campaign rhetoric right now, and then you're going to see a lot of that have to run into the wall of reality once they get through the election. The other part of it is, if you just look at Biden and his history, he's not one of these real ideologically driven individuals. He's had a long history of being supportive of manufacturing and supportive of union jobs in those facilities.

And so he's spoken positively also about the renewable industry. So we think that he'll be supportive in that area as well. So we — it's never as bad as they say it's going to be, and it's never as good as they say it's going to be. And so I think there's a lot of institutional and structural reasons why these changes will not be as as some people think.

And so we feel pretty good. We think there's going to be demand recovery here as we go through the economy, and we don't think that the administration is going to be doing anything that's going to really materially alter that.

Joe Gorder -- Chairman and Chief Executive Officer

Yes. The one thing I think that we see, Paul, is that there is going to be some kind of stimulus package following the election. It doesn't matter which party gets elected. As Rich referred to, they're going to have to get the economy rolling in.

And some would say it is rolling along. But there's — our view is there's going to be some kind of stimulus package. And any type of stimulus package just going to trigger greater demand for the products that we produce. And so we're — although we're watching it carefully and we're well positioned and organized as a company to deal with whatever comes, I think we're not as pessimistic as many are about the potential outcome for a change of administration.

Paul Sankey -- Sankey Research -- Independent Analyst

Great. Thanks. And I like the wall of reality concept. The follow-up is, you referenced...

Joe Gorder -- Chairman and Chief Executive Officer

We try to live along that wall.

Paul Sankey -- Sankey Research -- Independent Analyst

The follow-up is, there's a lot of talk about further to stimulus about bail out for airlines and stuff. Can you just remind us how — to what extent you've been helped out by federal government programs, if any?

Joe Gorder -- Chairman and Chief Executive Officer

Well, I'm trying to think.

Rich Walsh -- Senior Vice President, General Counsel

Yes. I mean, I think there's been a substantial effort here to prop up the airlines and provide them with protections. And we think in any of the bills that are coming through, you're likely to see more support for the airline industry and obviously, supporting them helps reinforce the demand for jet. So I think that's where we would think we would benefit from that.

Joe Gorder -- Chairman and Chief Executive Officer

Yes. I think that's the primary one.

Paul Sankey -- Sankey Research -- Independent Analyst

So obviously, your response implies that Valero has not received much?

Joe Gorder -- Chairman and Chief Executive Officer

No. No. Not much.

Paul Sankey -- Sankey Research -- Independent Analyst

I just want to clarify that. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Roger Read with Wells Fargo. Please proceed with your question.

Roger Read -- Wells Fargo Securities -- Analyst

Hello. A lot of the stuff has been hit. I guess, maybe if we could go back and address a little bit kind of the issue with the way the industry is losing money hand over fist at the current environment, and that's likely to continue at least a little bit longer. What do you see — even if you don't want to name a particular company or a particular unit that would be at risk, I know you've talked about the regions, but what are the kind of things that we should pay attention to from the outside that would indicate someone to make the decision to shut a unit, if not absolutely permanently, at least for the foreseeable future? I mean everybody is losing cash, but is it a crude supply chain? Is it a demand concern? Is it, I think, the high maintenance costs in the very near term than cited previous times? Just anything else? I suppose that question is for you, Lane, but whoever wants to jump in there.

Joe Gorder -- Chairman and Chief Executive Officer

Yes. No. After the preface of losing money hand over fist, we are going to.

Lane Riggs -- President and Chief Operating Officer

Other than that, I kind of spoke earlier about the change in trade flow. And what I really mean by that is you can really see in some of those places where maybe product demand is falling, and they don't have a crude advantage. So that's obviously a part of it. I think — and I talked about regulatory spend.

The other spend that can happen to someone is to have a large turnaround. Like I don't want to say, it probably like an FCC sort of base turnaround, where you have FCC and those end up being very large. And that will — that might be of companies that maybe have stretched balance sheet or struggling and as you layer on these other issues and based on their location. That might factor in that some of the companies thinking about whether they either just sort of shut part of a refinery down or maybe consider shutting it down altogether.

Roger Read -- Wells Fargo Securities -- Analyst

Yes. Well, certainly going to be — it's already been interesting. It will continue to be interesting. I guess one last question since so much of it has been on the negative front.

A lot of stress in the system, a lot of questions about longer-term viability of fuel demand. But if you were believing in the long-term success of refining, are there — or would you expect any interesting opportunities to come along particularly in the areas that you already operate in, where you could really get some synergies built in there? So kind of the M&A wish list question, so to speak.

Joe Gorder -- Chairman and Chief Executive Officer

Yes. Well, let me just start, and then we'll see if Rich wants to add anything to this, but certainly, we do believe in the long-term viability of refining. I mean, it is totally impractical to think that we would live in a world over, certainly, I would guess, my lifetime, which I hope is more than a couple of years. We're losing money hand over fist.

But in my lifetime, where we're going to be able to displace fuels, motor fuels, liquid fuels that are produced from fossil fuels. I mean, it's just — it is part of what is necessary to make the world function that we live in. And so anyway, we are believers in the long-term viability of refining. Cleaner fuels will be a part of it.

We're obviously making investments to take care of that. But we do believe that our refining business is going to continue to be strong and successful going forward. So Rich, anything on the M&A front?

Rich Walsh -- Senior Vice President, General Counsel

No. There's really nothing to say other than it's hard to justify any kind of an acquisition, given that we're preserving cash and we've got a queue of good organic projects that we kind of can push back some. So — and we're not buying back shares. So in this environment, it's really difficult to see any kind of M&A activity.

Joe Gorder -- Chairman and Chief Executive Officer

Yes. That's a very good point.

Roger Read -- Wells Fargo Securities -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from Paul Cheng with Scotiabank.

Paul Cheng -- Scotiabank -- Analyst

Thank you. Good morning, guys. Two questions. One, yes, for Jason.

I think that's relatively straightforward. And one, maybe a longer term. For Jason, have you received any cash tax refund, given your loss? And if you are, what is your expectation that — what percentage of — if there's tax loss — reported tax loss in the next 12 to 18 months, what percentage you would be able to receive as cash tax refund? The second — should I also tell you guys my second question or should I wait until Jason answer that first?

Homer Bhullar -- Vice President of Investor Relations

Do you mind repeating the question real quick? It's just tough to hear you.

Paul Cheng -- Scotiabank -- Analyst

OK. So the first question is on the cash tax refund. Are you guys receiving any, given the tax law and you have tax loss carry forward maybe back into 2015 when you were making money? And if you are receiving cash tax refund from the government? Over the next 12 months, let's assume that you are still reporting loss, what percentage of that tax benefit you will actually receive as a cash tax refund?

Joe Gorder -- Chairman and Chief Executive Officer

OK. So the first part of it is the NOL, right? What's the value of the NOL to us next year?

Jason Fraser -- Executive Vice President and Chief Financial Officer

We'll get it, yes. Yes, we expect to get it in the second quarter. We expect to receive cash related to the refund.

Paul Cheng -- Scotiabank -- Analyst

Jason, is it always that the second quarter for the previous year?

Jason Fraser -- Executive Vice President and Chief Financial Officer

Yes.

Paul Cheng -- Scotiabank -- Analyst

So in other words, that 2021 if you have a loss, those cash tax refund we will receive in 2022. Any idea? Is it dollar to dollar or that is a percentage?

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

No. To be clear, and this is Martin, the tax loss that we're incurring this year, we'll receive the tax refund in April of next year. So that has nothing to do with what our results might be in 2021.

Paul Cheng -- Scotiabank -- Analyst

No. I understand. I understand. So I'm saying that we — if you have your — in your book, if you report your tax and, let's say, for this year, argument sake, $300 million, is the entire $300 million you expect to receive as cash or that is only a portion of that?

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

Well, I'm not sure I really totally understand your question. But if you look at the effective tax rate that we're running, that would probably give you a good idea of what the refund would be next year.

Paul Cheng -- Scotiabank -- Analyst

OK. So that's all. OK. Yes.

And my second question is that, Joe and Lane, if we look at the regulatory environment in Europe and in California, in both areas the government is trying to — or at least the current laws saying that they will ban the sale of the hydrocarbon or gasoline or even diesel — hydrocarbon-based vehicle by 2035 or so. How that impact your outlook or your game plan for the facility in those areas? And we've also done on a long-term way — some of your bigger customers has been talking about energy transition plan. Do you think that, that is something for lateral need to type of plan?

Joe Gorder -- Chairman and Chief Executive Officer

OK. So we'll take the first part first. Do you want to go?

Lane Riggs -- President and Chief Operating Officer

Yes, I'll take. So I alluded to it earlier, trade flow and regulatory environment can drive some — how you think about assets. I think the one thing I would preface is that, government's intentions and plans and targets — we live in an aspirational world. There's a tendency to put — and markets that are trying to do that or regulators that are trying to do, their tendency is to put a goal out there, but the feasibility of the goal has a tendency to push the goal out.

So I don't necessarily think that either California or the U.K. or Europe that you're going to have zero fossil fuel gasoline transportation in 2035. Now with that said, there's — that's what they're trying to do. And so ultimately, as I said earlier, what are we doing in the West Coast, what we're doing in Pembroke, we're being very, very careful in the capex that we — how we run them.

We're very careful in trying to manage the cost of those refineries. Whether it's through our routine costs or our turnaround costs, we just are very careful.

Joe Gorder -- Chairman and Chief Executive Officer

And Paul, on the question of the future and positioning the company strategically for the future, we continue to work on that. And obviously, I think we've been a leader on several fronts. We were early to get into the ethanol business. Now we're looking at ways to lower the carbon footprint of the ethanol that we produce.

And we'll market that into the market seeking and rewarding lower carbon fuels. And the renewable diesel business is another example of that. We will continue to evolve the portfolio based on what the market's calling for and using the strong refining base that we've got as a basis for the cash flow to do this kind of transition. But — and we can — I think we put out our documents now what our targets are for carbon reductions over the — between now and 2025 with already — projects are already approved by the Board.

So we're clearly working in this direction. We don't have our heads buried in sand on that front by any stretch. And we'll position Valero to be very successful for a very long time.Thank you.

Operator

Thank you. Our next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.

Ryan Todd -- Simmons Energy -- Analyst

Thanks. Good morning, guys. Maybe a follow-up on some of the conversations from earlier on the renewable diesel side. You talked about some of the advantages, obviously, that the Darling partnership offers on the feedstock side.

Can you talk — as you think about your expansion, the one coming in 2021, the possible one for 2024, can you talk a little bit more about how you see those being positioned on things like — how do you compare transport costs in terms of transporting product to California versus operational costs of running a plant like that in Louisiana, Texas as opposed to California. How do the relative economics you see those in terms of competitive positioning?

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

Sure. This is Martin. Well, we would just flat out say, we feel like the Gulf Coast is the best place to be. It's lower capital cost to build.

It's lower operating cost. And then also, when you think about just the logistics, the rail infrastructure, getting into the Gulf Coast, from where you're going to source the feedstock is great. And then the logistics getting out. We don't know where the highest priced market is going to be in the future, and it's going to move.

So whether we're going to California, Canada, Europe, somewhere else, just — the Gulf Coast is just tough to beat. We've been at this seven years now, and what we always try to do is to build the advantage, low open and high flexibility plants. And what we've learned is that you need to co-locate with a large operating refinery. It needs to be an operating refinery.

And by doing that, it reduces costs. And again, I can't stress the logistics enough that we just have a huge advantage there, and we intend to keep that by being in the Gulf Coast.

Ryan Todd -- Simmons Energy -- Analyst

Great. I appreciate that. And then maybe just a follow-up on the macro side on refining. I mean, third-quarter differentials were a large headwind.

I mean, even more so than in the second quarter. In particular, sweet and sour differentials have been tough. I mean, is there a scenario in which the outlook for sweet/sour diffs or crude differentials in general improve meaningfully without a meaningful recovery in oil demand or absolute prices from here? How do you think about this as you look forward over the next six to 12 months?

Gary Simmons -- Executive Vice President and Chief Commercial Officer

Yes. So this is Gary. Certainly, we saw a very, very narrow crude quality differentials in the third quarter. Some of that — a lot of the balancing in the market came from OPEC production.

We got some OPEC production back in August. Additionally, you had the storms that affected the Gulf of Mexico medium sour production. So getting some of that production online has helped. And so you've seen the asking differential move out a little bit wider so far in the fourth quarter tended to follow it.

But we believe what really needs to happen is as global oil demand continues to improve, a greater percentage of that will be incrementally filled from OPEC production sour barrels. And so you'll have more of a gradual recovery in the following differentials that go along with that.

Ryan Todd -- Simmons Energy -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Jason Gabelman with Cowen. Please proceed with your question.

Jason Gabelman -- Cowen and Company -- Analyst

Hey. Good morning. So I wanted to ask about the investment-grade rating and kind of the metrics that are critical for determining that. Debt-to-cap is over 30%, so I'm assuming that's not what's really driving the conversation between Valero and credit rating companies.

So when we're trying to assess kind of your targets for the balance sheet, what are the right credit metrics to kind of look at outside of debt-to-cap?

Jason Fraser -- Executive Vice President and Chief Financial Officer

Yes. This is Jason. I can talk a little bit about that. As you know, our investment-grade rating is a key top priority for us, and we've discussed this with the rating agencies.

We have excellent liquidity, which is really one of the most key factors for them. They also rate through the cycle for the long term, right? They're not just looking at the next six months and 12 months. And they clearly recognize our strengths. Longer term, if you read their reports, talk about our excellent facility, top operators.

So I don't think there's any concerns on their part with us being investment-grade. And also the way we structured our debt, you'll notice, at least our most recent offering, the big one was biased toward the shorter term. And we did that intentionally. We had a lot of maturities in '23, '24, '25, '27, and we have the ability to call the $575 million tranche of three-year floaters as early as next fall.

And we did that to give us the flexibility to deleverage more quickly if the circumstances are right. And the ratios we look at — they look at, each agency looks at all the ratios, but they have their own pet ones or ones that they highlight the most. Their versions of debt-to-EBITDA and retained cash flow and those type of things, and then net cash flow — I mean, net debt-to-cap. But they look at kind of the same things, but we don't think we're at all at risk for investment-grade rating.

And we did get put on negative outlook when we did this last offering — rating. I could tell you a little bit at least about the way I think they were thinking about that. So each of them does their own analysis and has their own separate view, but we really think that outlook change was mainly driven by the change in expectations for the timing of the recovery versus the assumptions that were made when they last looked at us back in April. The view in April was that this would be a one to two-quarter event with pretty full earnings recovery in the fourth quarter.

That's what we were looking at. I think that was their view, too. But that was before the summer infection spikes hit and things clearly going to take more than getting back to absolute normal in the fourth quarter. And we really think that view — that there's going to be delayed recovery along with our new debt, which will — that will all lead to a longer period with elevated credit ratios.

That's really what the negative outlook reflects. They look out the next 12 months, and are you going to have higher ratios than what they like in your regular baseline, and the answer is yes. And that is true. But it doesn't affect their view of us as an investment-grade credit longer term.

Jason Gabelman -- Cowen and Company -- Analyst

Great. That's really clear. So they're thinking about recovery when they're assessing the rating in 2022-ish?

Joe Gorder -- Chairman and Chief Executive Officer

Earlier than that. Aren't they?

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

That's right. I think — I can't remember exactly. They stated in their reports, one of them is thinking second half of next year. And they admit that they think it's going to happen more quickly.

And the other one, I don't think, was as clear, but they think the next 12 to 18 months, generally.

Jason Gabelman -- Cowen and Company -- Analyst

OK. Great. And then I wanted to ask a follow-up on Lane's comment on carbon sequestration, which I think you mentioned as one of the low carbon investment opportunities. What's the economic case for that? Is that driven by the U.S.

tax credits offered or is there something else driving the potential to generate returns from investing in that? And then on that topic, I'm surprised that hydrogen wasn't mentioned, just given that there is a lot of interest globally in investing in the hydrogen value chain and refineries produce a lot of hydrogen already. So just wondering any thoughts on that.

Lane Riggs -- President and Chief Operating Officer

Well, this is Lane. I'll answer that. I'm sure some other people might want to as well. So when we're looking at these projects, our first filter, our first way we think about it from developing them is, does it improve our carbon intensity into an LCFS market.

That's where we see the higher value for carbon and we can get the biggest bank for our buck. And then we stress test it with the U.S. tax credit and try to understand what that looks like as well. So that's how we're developing and looking at these types of projects.

And on the hydrogen, we're just — we're starting to look at some of those things. Again, we're looking at it in the context of some of our existing hydrogen plants and their technology and we have the ability to obviously get the carbon dioxide out of those streams to lower their intensity, not so much trying to make hydrogen for fuel cells.

Joe Gorder -- Chairman and Chief Executive Officer

Yes, there's a lot of things like that, if you take a look at. But at the end of the day, the economics just don't work. And like the 45Q tax credit is a key one when you're looking at sequestration going forward. Where it sits today, you can — it looks like you can earn a return on some of these projects into an LCFS market, as Lane said.

Barring that, a lot of these projects just don't have economics. And so that's why it's interesting to talk about it. And it's like the topic de jure, but is there — are they feasible or not? That's one of the things that we look at, and we're certainly not prepared to announce any steps in that directions at this point.

Operator

We have reached the end of our question-and-answer session. So I'd like to pass the floor back over to Mr. Bhullar for any additional closing comments.

Homer Bhullar -- Vice President of Investor Relations

Great. Thank you. And thank you, everyone, for joining us. I appreciate everyone's questions.

Unfortunately, we're out of time. So if you have any follow-up questions, feel free to reach out to the IR team. Thanks, again.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Homer Bhullar -- Vice President of Investor Relations

Joe Gorder -- Chairman and Chief Executive Officer

Phil Gresh -- J.P. Morgan -- Analyst

Lane Riggs -- President and Chief Operating Officer

Gary Simmons -- Executive Vice President and Chief Commercial Officer

Manav Gupta -- Credit Suisse -- Analyst

Martin Parrish -- Senior Vice President, Alternative Energy and Project Development

Theresa Chen -- Barclays -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Jason Fraser -- Executive Vice President and Chief Financial Officer

Prashant Rao -- Citi -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Paul Sankey -- Sankey Research -- Independent Analyst

Rich Walsh -- Senior Vice President, General Counsel

Roger Read -- Wells Fargo Securities -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Ryan Todd -- Simmons Energy -- Analyst

Jason Gabelman -- Cowen and Company -- Analyst

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