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Operator
Welcome to the Valero Energy Corporation reports 2014 third-quarter earnings results conference call.
My name is Daniel, and I will be your operator for today's call.
(Operator Instructions)
Please note that this conference is being recorded.
I will now turn the call over to Mr. John Locke.
Mr. Locke, you may begin.
John Locke - Executive Director of IR
Thank you, Daniel.
Good morning and welcome to Valero Energy Corporation's third-quarter 2014 earnings conference call.
With me today are Joe Gorder, our CEO and President; Mike Ciskowski, our Executive Vice President and CFO; Lane Riggs, our Executive Vice President of Refining Operations; Jay Browning, our Executive Vice President and General Counsel; and several other members of Valero's senior management team.
If you have not received the earnings release and would like a copy you can find 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.
Now I would like to direct your attention to the forward-looking statement disclaimer contained in the press release.
In summary, it says that statements in the press release and on this conference call that state the Company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws.
There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC.
Now, before we review the quarterly results, I'd like to highlight some of our strategic accomplishments in the last quarter.
These actions align with our key strategies to reduce feedstock costs by improving access to North American crudes and to grow our logistics investments and Valero Energy Partners LP, our sponsored logistics partnership.
In August we secured shipping rights and the option to purchase a 50% interest in Plains All American's Diamond Pipeline.
When completed in late 2016, that 440 mile pipeline will connect our Memphis refinery to the crude oil hub at Cushing, Oklahoma.
Regarding Valero Energy Partners LP, we completed our first drop for $154 million in cash at the beginning of the third quarter.
We also continued advancing our capability to access and process advantage crudes during the quarter with the commissioning of our rail unloading facility at the Port Arthur refinery.
With its start up in September, this is the third crude by rail facility we've completed in the past 13 months, with the other two completed facilities located at our St.
Charles and Quebec City refineries.
As mentioned in the release, we are also progressing on our other key investments as part of our strategy, including the completion of investments to receive advantaged crude at our Quebec refinery on Enbridge's Line 9B pipeline reversal.
We also expect to complete hydrocracker revamp at our Meraux refinery later this quarter.
Now looking out a little further, the two crude topping units at our Corpus Christi and Houston refineries, are progressing as planned.
Moving on to our quarterly results.
As you saw in our earnings release we had a strong quarter.
We reported third-quarter 2014 earnings of $1.1 billion or $2 per share.
Third-quarter 2014 operating income was $1.7 billion or $1.1 billion higher than the third quarter of 2013.
Most of the increase was in the refining segment, although the ethanol business also contributed.
Refining throughput margin in the third quarter of 2014 was $11.81 per barrel, an increase of $4.05 per barrel versus the third quarter of 2013.
Wider discounts on sweet and sour crude oils versus Brent and stronger gasoline margins in most regions, were slightly offset by weaker distillate margins versus Brent in most regions and a higher natural gas cost.
Also contributing to the higher throughput margin was our Quebec City refinery's higher year-over-year consumption of North American light crude in the third quarter.
The refineries feedstock diet consisted of 79% North American grades in the third quarter of 2014, which is up from 6% in the third quarter of 2013.
In addition, we realized a reduction in crude cost in our Mid-Continent region when we completed our connection to a pipeline in Childress, Texas.
This connection allowed us to receive an incremental 40,000 to 50,000 barrels per day of Midland priced WTI crude oil, primarily for our McKee refinery.
Lastly we continue to ramp up North American crude consumption in our Gulf Coast region by replacing an additional 100,000 barrels per day of foreign crude in the third quarter of 2014, versus the third quarter of 2013.
With some of those volumes delivered to Port Arthur by our new rail unloading facility I mentioned earlier.
Refining throughput volumes averaged 2.8 million barrels per day in the third quarter of 2014, which is an increase of 42,000 barrels per day versus the third quarter of 2013.
Less turnaround activity and higher throughput capacity utilization led to the increase in volumes, which was supported by strong product exports and the increased availability of North American light crude on the Gulf Coast.
We operated our refineries at 98% throughput capacity utilization for the quarter.
Now refining cash operating expenses in the third quarter of 2014 were $3.81 per barrel, which is $0.07 per barrel higher than the third quarter of 2013, due mainly to higher energy costs.
The ethanol segment generated record earnings of $198 million of operating income in the third quarter of 2014 versus $113 million of operating income in the third quarter of 2013.
The increase in ethanol segment operating income was mainly due to a $0.27 per gallon increase in gross margin, driven by lower corn prices on an abundant corn harvest and higher production volumes from the start up of our Mount Vernon, Indiana plant.
Ethanol production volumes averaged 3.6 million gallons per day in the third quarter of 2014.
General and administrative expenses, excluding corporate depreciation, were $180 million in the third quarter of 2014.
Net interest expense was $98 million and total depreciation and amortization expense was $430 million.
The effective tax rate was 32.9%.
With respect to our balance sheet at quarter end, total debt was $6.4 billion and cash and temporary cash investments were $4.2 billion, of which $231 million was held by Valero Energy Partners LP.
Valero's debt to capitalization ratio, net of cash, was 10.5%, excluding cash held by Valero Energy Partners LP.
Valero had approximately $5.6 billion and Valero Energy Partners had $300 million available liquidity in addition to cash.
Cash flows in the third quarter included $622 million of capital expenditures, of which $123 million was for turnaround and catalysts.
In the third quarter we raised our dividend for a second time this year with a 10% increase.
We returned $489 million in cash to our stockholders, which included $145 million in dividend payments and $344 million in purchases of approximately 7 million shares of Valero common stock.
And subsequent to the third quarter, we continued to return cash to stockholders by purchasing an additional 3 million shares of common stock for $138 million, which brings our total for 2014 to 18.4 million shares for $937 million.
For 2014, we are lowering our guidance for capital expenditures, including turnarounds and catalysts by $100 million to approximately $2.9 billion.
We expect stay in business capital to account for slightly less than 50% of total spending with the remainder related to growth investments, primarily for logistics and advantaged crude oil processing capability.
More than 50% of Valero's estimated growth investments in 2014 are for logistics and we believe most of this will be eligible for drop-down into Valero Energy Partners LP.
Now for 2015 capital expenditures, including turnarounds and catalysts, we expect to spend approximately $2.8 billion consisting of approximately $1.8 billion (sic - see Correction Below "$1.5b") for stay in business capital and $1.3 billion for growth investments.
The majority of growth investments are allocated to logistics and increasing our capability to process advantaged crudes.
So for modeling our fourth-quarter operations, we expect throughput volumes to fall within the following ranges: Gulf Coast at 1.55 million to 1.6 million barrels per day; Mid-Continent at 450,000 to 470,000 barrels per day; West Coast at 260,000 to 280,000 barrels per day; and North Atlantic at 410,000 to 430,000 barrels per day.
We expect refining cash operating expenses in the fourth quarter to be around $4 per barrel.
For our ethanol operations in the fourth quarter, we expect total production volumes of 3.7 million gallons per day and operating expenses should average $0.41 per gallon, which includes $0.04 per gallon for non-cash costs such as depreciation and amortization.
We expect G&A expense, excluding depreciation, for the fourth quarter to be around $190 million and net interest expense should be about $95 million.
Total depreciation and amortization expense in the fourth quarter should be approximately $425 million and our effective tax rate should be around 35%.
So now I will turn the call over to Joe for a few remarks.
Joe Gorder - President & CEO
Well, thank you John.
And as you may have seen last week, we announced that Bill Klesse has chosen to step down as Chairman of Valero Energy's Board of Directors at the end of this year.
So on behalf of our Valero team, we just want to thank Bill for all he's done to make this Company successful over his 45 year career.
And we would really like to wish Margie and Bill all the best going forward.
John?
John Locke - Executive Director of IR
Thank you Joe.
So before I turn it over to Q&A, I just want to clarify on the 2015 stay in business capital, it should be $1.5 billion -- I believe I said $1.8 billion.
So okay.
Daniel, we have concluded our opening remarks.
In a moment we will open the call to questions.
During the segment we request that callers limit each turn to two questions.
But callers may rejoin the queue with additional questions.
Operator
(Operator Instructions)
Jeff Dietert, Simmons.
Jeff Dietert - Analyst
Yes.
It's Jeff Dietert with Simmons.
Good morning.
Joe Gorder - President & CEO
Good morning Jeff.
Jeff Dietert - Analyst
So my question has to do with some of your crude feedstock costs and specifically one with Saudi having raised their prices to the US.
It appears that some of their crudes were not terribly competitive.
We saw the crude imports for the total US drop from 1.6 million barrels a day in April to less than 900,000 barrels a day in September.
While Saudi was increasing prices during that period of time.
Since then they've had four consecutive months of price reductions.
And I was wondering if you could provide some color as to how attractive the Saudi crudes have been in the market through the spring and summer?
And whether or not these recent reductions in prices make them more competitive now?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Jeff this is Gary Simmons.
You're exactly right, I mean the Saudi barrels have gotten to where we felt like they were on competitive versus our alternatives.
In the third quarter our volumes from the total Middle East were down considerably where we've historically run.
We're now seeing that they are making pricing moves to bring their barrels back and be competitive in the market.
I would say with their recent announcement on their OSP -- they're competitive or at least within $0.50 of ours.
Jeff Dietert - Analyst
Okay.
And secondly with the Brent pricing being weak and some of the West African prices being soft, have you seen those barrels price themselves back into either of the East Coast market or the Gulf coast market?
With some of the softness relative to LLS, we've seen this fall.
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Yes.
Jeff.
The place that we pivot first is really our Quebec refinery.
And we definitely as Brent got weak we saw incentive to start by some West African grades again and backing out some of the grades that we were taking from the US Gulf Coast.
Jeff Dietert - Analyst
Yes.
So both that sounds like increases in imports in a market where we've got pretty substantial domestic production growth.
Do you think domestic prices have to soften to back those imports back out of the market?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Yes.
And you could kind of see that in the markets.
The Brent got that weak about three or four weeks ago.
We started to pivot as others did and then we've had three straight weeks where crude oil inventories in the US built.
So it kind of tells you the differentials have to come back off to force those barrels back into the market.
Jeff Dietert - Analyst
Thanks for your comments.
Operator
Paul Cheng, Barclays.
Paul Cheng - Analyst
Hey guys.
Good morning.
Joe Gorder - President & CEO
Good morning, Paul.
Paul Cheng - Analyst
I have one request and two questions.
The request is that it seems that some of the part in losses may turn out to be an emerging investment team in the sector.
I know there's still a small number, but it would be helpful I think for your shareholders if in your press release somewhere that you put down what is the GP cash flow.
And your total number of units in the LP and also that the total LP unit -- I mean even though that those numbers can be found in your VLP disclosure it's just helpful to be in one document.
In terms of the question, with the announcement or that from one of your competitors last week in terms of their strategy in drop-down they have substantially [their rate], is there any key or more transparent strategy or data that you can put one in terms of your VLP drop-down pace or the distribution growth for the next several years?
Joe Gorder - President & CEO
Yes.
No, Paul.
That's a fair question.
This is Joe.
Since -- if we look at VLP.
Since the IPO we've stated that we're going to grow our distributions between 20% and 25% a year.
We're in target to be in the middle to the high end of that range.
We just completed a drop and a distribution increase and we're working on the next drop.
Now VLP is less than a year old.
We don't have a debt rating yet.
We'll be in the process of getting that in the next year or so and it's our intention to be investment grade.
When you consider the size and the pace of our drops to VLP, our original plan was to start with the logistics assets that would be more traditional.
And that's where we said that we've got the $800 million of EBITDA.
That is not a specific business unit that we have within Valero.
It's assets that are used to support the rest of the operations and so we haven't had P&L's for them.
That being said, that we can go in and we can calculate what the EBITDA would be for those assets based on market rates and that's what we've done.
Now what's come up here recently is this additional set of cases that would include do you put fuel margins and process units, into the MLP?
So we're going to take a look at everything and we're going to act accordingly.
Obviously it's never as simple as taking EBITDA, putting a multiple on it, and saying that's what the value is.
You've got a lot of tax effects that need to be considered.
The other thing then is with the use of proceeds could they be used -- I mean, I expect that we're going to use them to do growth projects.
Or to return the cash to the shareholders depending on which option has the highest returns.
But one of the questions we ask ourselves is if we do accelerate the drops are we going to get some of the parts valuation increased in Valero?
Because that's something that although we've executed the MLP we haven't seen it yet.
Paul Cheng - Analyst
Yes.
But at least based on what Tesoro and MPC reaction on the last several weeks that seems like that is started catching on as a new theme.
Joe Gorder - President & CEO
Yes.
We see it too, Paul.
Paul Cheng - Analyst
Yes.
A second question on the $2.8 billion next year budget is that including anything in the methanol projects?
And if it is indeed going to go for FID, should we assume it is just an add-on or that you're going to [bond] and adjusting it so that you still could get the $2.8 billion?
Lane Riggs - SVP Refining Operations
Hi Paul.
It's Lane Riggs.
The $150 million in the 2015 CapEx with $2.8 billion is not approved yet.
We're in the phase two development of the project and we'll have another review and sort of decide go or no go somewhere in the second quarter of 2015.
Paul Cheng - Analyst
And Lane if you do go ahead should we assume you're still keep $2.8 billion or that this is incremental?
In other words will you adjust your other projects so that you don't go beyond the $2.8 billion?
Lane Riggs - SVP Refining Operations
It is in the $2.8 billion.
Joe Gorder - President & CEO
Yes Paul.
The 150 is -- we have a $150 million as a placeholder in that $2.8 billion budget.
Paul Cheng - Analyst
Okay.
Joe Gorder - President & CEO
If we didn't proceed with the methanol plant we wouldn't spend that $150 million and we'd be at $2.65 billion.
Paul Cheng - Analyst
I see.
Got it.
Thank you.
Operator
Blake Fernandez, Howard Weil.
Blake Fernandez - Analyst
Good morning.
Thanks.
Congratulations on the rollover in CapEx into 2015.
I guess this is kind of a combination of a high level question from Paul and maybe a tie on from Jeff as well as with regard to the Saudi pricing.
It looks like the lower -- the logistics spending is decreasing like 45% of the total down to about 30% of the growth total.
And I guess I'm just wondering with the Saudi's changing their pricing and I guess I'm just wondering is there a chance where some of the infrastructure in North American crude investments that have been made -- we do we get to a point where some of that isn't quite as necessary?
Do you still have the flexibility to shift back and forth to foreign versus domestic runs in your system?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Yes a Blake.
I would say I think we've been very selective on what we've chosen to invest capital around logistics.
We still think it makes sense but as you talked about we haven't done anything to lose our optionality that we can continue to import the foreign barrels.
And if Saudi makes more sense to run those barrels we haven't lost any of our optionality to be able to do that.
Joe Gorder - President & CEO
Yes, Blake, Gary makes a great point here.
I mean what we're dealing with are markets that are really volatile.
And the opportunity today is the opportunity today and it'll change tomorrow or the next day.
And the one thing that's certain is if you don't have the logistics in place to take advantage of the opportunity when it's there, it's gone.
And so we feel very good about the projects that we've undertaken.
I mean, the rail crude projects can move heavy sour crudes in, are very good projects for us as are the unloading facilities that we've got.
Our commitments to pipelines I think are very solid for us going forward.
And the fact that you've got the pressure on the crude price right now affecting the Saudi's willingness to move barrels back in, at the end of the day is going to be good because we're going to see pressure on all of the barrels as they try to find a home in a refinery going forward.
So we feel pretty good about what we've done and what we've got on the plate to do going forward.
Blake Fernandez - Analyst
Okay.
Thanks.
The second question is on exports.
We've seen record high utilization levels earlier this year and you mentioned product exports in your press release.
For one, can you give us a capacity number of what your current capacity is?
And is that kind of one of the main drivers that's been driving this higher utilization?
Because when I look at my modeling it seems like the earnings in 2012 were very comparable with where we're going to land this year and basically that insinuates it's not really that much more incentive from an economic standpoint to run, so is it simply a function of additional export capacity?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Yes.
So what we did in the third quarter is we did 90,000 barrels a day of gasoline exports that primarily went to Mexico and Latin America.
We did 227,000 barrels of straight distillate or 240,000 barrels of diesel, when you include the kerosene.
The distillate exports went to Latin America and Europe.
We still have quite a bit of capacity left on the gasoline side.
We can probably do about 255,000 barrels a day, around 400,000 barrels a day of distillate exports.
So we still have a lot of room to increase our exports, but for us this is just an optimization that we do every day, Blake.
It's just a matter of where we can get the best netback for the barrels.
So when you look today the domestic diesel market is very strong and so some of our diesel exports have slowed down a bit.
As we send the barrels to the best netback market, which today some of the domestic markets.
Blake Fernandez - Analyst
Okay.
Thanks so much.
Operator
Doug Leggate, Bank of America.
Doug Leggate - Analyst
Thanks.
Good morning everyone.
Good morning Joe.
Joe Gorder - President & CEO
Hello Doug.
Doug Leggate - Analyst
And by the way, Joe congrats on you ascending to the Chairmanship as well.
It's nice to see with all of the titles.
Joe Gorder - President & CEO
Thank you.
Doug Leggate - Analyst
My -- you've see what Tesoro has done here recently by talking about a full-service MLP.
And obviously a lot of -- there's a lot of different strategies seem to be going on within the space I guess Phillips is pursuing a similar kind of thing.
I guess I'm curious as to looking outside of the refining backyard, so to speak, how do you view your MLP vehicle strategically in terms of maybe moving beyond just what we would associate as a normal course of business in the refining?
Joe Gorder - President & CEO
I'll tell you Doug.
We do look at it as an entity that's there to support the core business operations of Valero Energy.
I mean we set it up with that intent.
We set it up as a traditional logistics MLP.
It was going to primarily focus on transportation and terminalling assets.
Obviously the market's changing here a little bit.
If people are making decisions to put a lot of third-party assets in, in some cases and to put some of the margin -- the fuels margin in the assets also.
I mean, that's something that we'll take a look at going forward.
But our view of it is a very attractive, low cost of capital way to support a Valero's core business.
Doug Leggate - Analyst
Okay.
I appreciate I'll take some follow-ups off-line because there's obviously multiple paths you can go down with that one.
But I guess my follow-up question is really to get your latest thinking on the fuels market generally, the gasoline market in particular.
You still have your Aruba Refinery mothballed.
It looks like Hovensa might have found a buyer and obviously the whole crude complex has come down.
So I'm just kind of curious as to how -- what's your prognosis for the Atlantic basin gasoline market?
And should we expect the kind of resilience in cracks that we've seen in the last couple of years or do you think there's an over supply risk emerging on the margins?
And I'll leave it there.
Thanks.
Joe Gorder - President & CEO
Thanks, Doug.
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
So I guess two separate questions, I don't know Lane do you want to address the Aruba one first?
Lane Riggs - SVP Refining Operations
Go ahead on the gasoline.
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
So overall I think we see gasoline demand in the Atlantic basin fairly flat.
And so a lot of the question on the Atlantic basin is really going to be what happens in Western Europe and do you have rationalization occur, in Western Europe?
And that'll probably be the big driver on the overall supply/demand balance is in the Atlantic basin moving forward.
Doug Leggate - Analyst
That assumes you don't have a crude export scenario, I'm guessing?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Yes.
Doug Leggate - Analyst
Okay.
And on the impact of Hovensa, do you see that impacting your Gulf Coast markets particularly?
Joe Gorder - President & CEO
Hi, Doug.
Look.
I think that project is going to be a bit challenged.
And I mean if they're producing gasoline it's going to have to go somewhere so we'll probably see it in the market.
But I would stack up the competitive position of our Gulf Coast refineries against any refinery like that.
Doug Leggate - Analyst
All right.
We [don't] have a similar view.
Thanks a lot Joe.
I appreciate the time.
Joe Gorder - President & CEO
Thanks.
Operator
Brad Heffern, RBC Capital Markets.
Brad Heffern - Analyst
Good morning everyone.
Joe Gorder - President & CEO
Good morning.
Brad Heffern - Analyst
So going back sort of to an earlier question, has there been any change as to the demand that you guys are seeing in export markets currently?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
No.
I would tell you from the third quarter to the fourth quarter what I would expect is that our exports will probably be up a little bit.
Most of that will be in gasoline exports will increase into the fourth quarter distillate exports probably fairly flat.
Which is typical for us -- gasoline typically the exports are a little stronger in the fourth quarter and first quarter and fall off over here in summer driving season here in the US.
Brad Heffern - Analyst
Okay.
Got you.
And then you had a competitive last week talking about sort of a tight Maya market on the Gulf coast, I was wondering if you guys have seen that and had any difficulty getting sort of the heavier crudes in the door?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Our Maya volumes for the third quarter were right at our contract levels and up about 20,000 barrels a day what we ran in the second quarter.
Brad Heffern - Analyst
Okay.
Thank you.
Operator
Ryan Todd, Deutsche Bank.
Ryan Todd - Analyst
Great.
Thanks.
Good morning gentlemen.
A couple questions.
Maybe one if you could talk a little bit about capture rate across -- various run capture rates that we saw across the portfolio this quarter.
And I realize that falling crude prices probably increase the profitability of the bottom end of the barrel.
But outside of that can you talk about maybe any other drivers of strong profitability and how sustainable maybe some of those might be on go forward quarters?
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
Hi, Ryan.
This is Ashley Smith.
Yes.
We performed well.
We had very limited turnaround activity in the quarter so other quarters might not be as comparable when we had more turnaround activity.
But a lot of the capture rate is partially due to our investments -- the hydrocrackers are running well.
In fact St.
Charles hydrocracker is running and consistently running in excessive capacity.
In addition you saw some typical market stuff that's not in the indicator such as BGO is relatively cheap in the quarter and that paid us well too.
Ryan Todd - Analyst
Okay so probably some obviously nonrecurring things, but it may be at least underlined there is some recurring things from your past investments?
I guess is that safe to say?
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
That is very -- that's basically it.
You're always going to have some movement in the items that are not in the indicator.
But we also are seeing benefits from a previous investments, particularly in the hydrocrackers.
Ryan Todd - Analyst
Okay.
Thanks.
And then maybe one more on -- and I apologize if this was -- I missed a little bit of the call.
On crude flows from Corpus to Eastern Canada, I know you guys have moved some crude that's gone around there to the East Coast of Canada refining system.
How much have you been moving and how do you expect that to change in 2015?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Yes.
So we moved 124,000 barrels a day of Gulf Coast crude to Quebec.
That didn't all move through Corpus.
Our project at Corpus will be online and fully functional first quarter -- early first quarter.
So we'll start using our Corpus assets in the first quarter.
But the volume we moved was largely over third-party logistics assets that we moved to Quebec.
Ryan Todd - Analyst
Okay.
And if you just -- when you look out to 2015 dynamics both from the Line 9B eventual start up and Quebec is that a number that you think you can grow substantially in 2015 or are there some limit there?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Well when Line 9B starts up, we will run the less barrels from the US Gulf Coast than what we ran in the third quarter.
And we'll supply more of Quebec's volume through Line 9B.
Ryan Todd - Analyst
Okay.
I'll leave it there.
Thank you.
Operator
Roger Read, Wells Fargo.
Roger Read - Analyst
Hi.
Good morning.
Joe Gorder - President & CEO
Hello Roger.
Roger Read - Analyst
I guess just to pick up a little bit more on sort of the CapEx for 2015 and maybe for 2016 with the crude topping projects and I guess Corpus and in Houston.
And then maybe what the decision timeframe is on that?
And I'm thinking also, alright crude softened up a little bit and may see some slowdown eventually in US production if that has any impact on your thinking?
And then whether or not the recent developments on the crude exports side thinking of the DOE or EIAs report on gasoline prices being driven by Brent not by domestic prices as sort of a shot across the mouth for being in favor of exports.
Crude exports.
Lane Riggs - SVP Refining Operations
Hi Roger.
This Lane, I'll answer the questions about the crude units.
They're approved and they're under construction, we're building them.
And we'll -- right now we're sort of forecasting that they'll be complete, mechanically complete at the end of next year, or oil-in roughly the beginning of the first quarter of 2016.
Somewhere in that timeframe.
In terms of the project basis economics, we assumed that it [all else is a parity] Brent and that's not where we are today, so those are still good projects.
They had returns around 30% and that pricing environment so we still see those good projects that are ultimately about backing out our intermediate purchases.
Again we're long conversion capacity so today we have to go to the market to buy intermediate largely from West Africa and the North-Sea and this just sort of changes our feedstock.
The way we're going to feed our system and what was the second question?
Joe Gorder - President & CEO
Roger Yes, could you restate your second question?
Roger Read - Analyst
Well it was just more along the lines of I was pointing out with the EIA having come out with that report on gasoline whether that had any impact on these projects overall.
I mean originally these were going to be online in 2015, so I was just trying to figure out if you were -- maybe the question is why are they now 2016 instead of 2015?
Just delayed on construction?
Or was there -- were you looking at it internally and saying, well if things change maybe we don't want to go forward?
Lane Riggs - SVP Refining Operations
No.
The projects were always sort of in the fourth quarter 2015, first quarter 2016.
And it's about mechanical completion versus oil-in dates.
There's not been any delay with them.
We're not hesitant about these projects and we're going forward with them because we're not really about trying to produce more gasoline and more diesel, this was about trying to feed our system more economically.
Right?
With domestic oil versus a foreign import intermediate.
Roger Read - Analyst
Okay.
And then as you look at the fourth quarter here relative to the third quarter, in terms of what we've seen in crude differentials, how has it shaken up for you?
I know we can look at the screens and make our guesses, but are you seeing anything significantly different in terms of the Gulf Coast, let's call it the light heavies here?
Lane Riggs - SVP Refining Operations
No.
Not anything too significant.
Overall when you look at the LLS market and Mars, Mars continues to price competitive with LLS.
And I think the heavies continue to price competitively with Mars.
As you move West in the Gulf you start to see a bigger advantage to run some of the light sweets, but that's not too different from what we saw in the third quarter.
Roger Read - Analyst
Okay.
Thank you.
Operator
Philip Gresh, JPMorgan.
Phil Gresh - Analyst
Hey.
Good morning.
Joe Gorder - President & CEO
Good morning Phil.
Phil Gresh - Analyst
Yes.
Couple questions.
First one is just on the cash flow for the quarter and just what the working capital contribution might've been?
I know there was a few sizable negatives in the first quarter for working capital.
Wasn't sure if that was a reversal of the big positive of the fourth quarter of last year, or just kind of where we stand working capital in general?
And how do you think about that in the fourth quarter?
Mike Ciskowski - EVP & CFO
Okay.
Our change in cash for the quarter was an increase of $700 million and of that amount about $300 million of it was attributable to working capital.
So we had an increase in our payables receivables net.
So that's primarily -- I mean that's going to be a timing issue.
Most likely.
Phil Gresh - Analyst
And for the fourth quarter?
Any thoughts on whether there's additional contribution?
Mike Ciskowski - EVP & CFO
Towards the end of the year as we manage around the LIFO inventory levels, there's the potential that we could have a reduction in our working capital.
Phil Gresh - Analyst
Okay.
And then just with respect to the cash flow generation profile in general, obviously very strong and Joe your stock is cheaper on a free cash flow yield than most refiners.
So I'm just wondering how you're thinking about impacting that valuation whether it be -- you obviously talked about the MLP structure as an opportunity, but whether it's increasing buybacks or a meaningful step up in the dividend or something else you can do to change the game?
Just curious how you're thinking about things.
Joe Gorder - President & CEO
No.
And Phil, that's a good question.
When we look at the use of cash we've got some very good projects so we're going to continue with the projects that we have underway.
These have very strong returns and they make as much more efficient.
And we realize that there's a balance between investment for growth and returning cash to shareholders.
Now I think our actions in the third quarter and through this year really reflect this realization.
We've had two dividend increases and we've had increased share repurchases, while continuing with the growth projects that improve our overall business.
And to the extent that we have free cash flow going forward and to the extent that there aren't tremendous capital projects to use the cash for, I think you could see us continue on this path.
And we'll be comfortable with returning it to shareholders.
Phil Gresh - Analyst
Okay.
Thanks.
I'll turn it over.
Operator
Mohit Bhardwaj, Citigroup.
Mohit Bhardwaj - Analyst
Yes.
Thanks for taking my question.
Joe if you could just -- if I could just follow-up on your comments about Atlantic basin.
If you look at where the crude prices are right now and it seems like there is excess crude supply in the Atlantic basin, what do you think it does for the refining business in the US?
And how do you think production moves or the supply moves going forward?
Joe Gorder - President & CEO
Okay.
Yes.
Let's let Gary Simmons give you a shot at that.
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Very difficult to say.
I think the key question there is what is the marginal cost of production in North America versus other regions in the globe?
And of course we're not an upstream Company, so I don't really know how all that shakes out.
I think the assumption you're kind of making with the question is that as crude price falls that the North American production falls with the flat price fall and that may happen.
But I really don't know enough to be able to comment on that.
Mohit Bhardwaj - Analyst
Right.
So if you look at third quarter versus fourth quarter one of the things that you said for the third quarter was that you were utilizing the front of the refining a lot more.
So filling up the [tires] a little bit more and utilizing the downstream units a little bit less and where the VGO prices are and availability of light sweet crude.
But do you think that still the case in the fourth quarter?
Joe Gorder - President & CEO
Lane?
Lane Riggs - SVP Refining Operations
So I'll try -- I'll take a shot at it.
This is Lane.
Our signals in the third quarter were obviously maxed on everything and to the extent that we're -- there was a signal to run a high a crude rate as possible, because we had positive crude margins.
And we have really good conversion unit margins because VGO prices were inexpensive.
We still see those signals going forward in the fourth quarter.
They're not as strong as they were in the third quarter, but we still have signals to run our system relatively full.
Mohit Bhardwaj - Analyst
Right.
And one final one from me.
Just on the Diamond Pipeline.
So just to be clear, you guys have not exercised the 50% option on the pipeline yet?
And if you could also follow-up on if you look at some of your peers were talking about doing a study on capline and you were the main consumer as far as Memphis refineries concerned on the capline does Diamond Pipeline option also allow you to sort of if there is a reversal for capline to participate in that?
Joe Gorder - President & CEO
Rich, you want to --
Rich Lashway - VP of Logistics Operations
Yes.
I'll take a crack at that.
So the Diamond Pipeline is progressing.
It is connected -- it will be connected to the capline.
So today we're -- Memphis is connected to the capline pipeline.
So we would have dual supply source into the Memphis refinery potentially and be able to take advantage of a reversal.
But I think they're just undertaking a study as we speak, so it may be sometime before that actually becomes a reality.
Joe Gorder - President & CEO
As far as the option on the Diamond Pipeline, --
Rich Lashway - VP of Logistics Operations
Yes.
I'm sorry I missed that first part.
So on the option we have not exercised the option we have that option through early January of 2016 to make that decision.
Mohit Bhardwaj - Analyst
Thank you for taking my questions.
Rich Lashway - VP of Logistics Operations
Sure, Mohit.
Operator
Evan Calio, Morgan Stanley.
Evan Calio - Analyst
Hey.
Good afternoon guys.
Joe Gorder - President & CEO
Good morning, Evan.
Evan Calio - Analyst
Joe, can you walk us through the decision to reduce 2015 CapEx sequentially from 2014?
Is that a -- is that a top-down decision to raise distributable cash or a function of higher hurdle rates or the project queue?
And particularly as it may relates to midstream?
Joe Gorder - President & CEO
As it relates to midstream?
Evan Calio - Analyst
Just in total -- it's down sequentially, is that a desire to increase distributable cash flow or a function of how those projects shook out in the review process?
Joe Gorder - President & CEO
No.
It's the latter.
Evan, we start with a list of projects.
And if you look at it from the refining perspective, Lane has a process that he goes through -- a tremendous rigorous review.
And I think the fact that he's got this rigorous review shows up in the timing on the methanol project.
Right?
This is a big project and we want to be sure that we've got the capital right so he's going through this in a very methodical way just to be sure we're on target.
We put together a list of perspective projects and we do this every year.
And what we're doing now is -- our list of projects that we talk about are those that we've scrubbed to the point that we feel that there is a reasonable probability that we're going to do them.
So the projects that we feel we can execute next year, from either the refining side or the logistics, have been included in the budget.
We feel we're fairly committed to that $2.65 billion number, the $150 million from ethanol is kind of a let's see what we get.
But it is a kind of bottom-up what projects do we have to take a look at and then we look at it from the top down.
And say these are the ones that we want to undertake based on their return thresholds.
There is though a general view among this management team that we'd like to try to return more cash to shareholders.
And so having a capital -- having our capital at this level is something we're very comfortable with.
We believe it creates that proper value between -- or proper balance between continued investment to grow and optimize the business and rewarding the shareholder for his loyalty to us.
Evan Calio - Analyst
And just for clarification I think in the opening you stated that midstream is 50% of that growth CapEx, yet the release is 30% which would be sequentially down.
Is it a -- which of the two is midstream, as a function of growth?
Joe Gorder - President & CEO
No.
I think if you look at 2014 versus 2015 we've got significant investment for example in the rail cars in 2014.
That falls off.
We haven't intentionally tried to reduce the investments that we're making in the midstream side of the business.
Okay?
What we've got is probably timing issues here of developing the projects to the point where we're willing to put them in the capital budget.
That's all we're dealing with.
Evan Calio - Analyst
Okay.
So it's a plus $390 million -- or it's $390 million I presume if it's at the 30% figure and then should we -- is that right?
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
Hey, Evan.
This is Ash, yes.
You're correct.
So we're going from 2014, it was over 50%, both capital and logistics.
And it's because of rail cars falling off it's just going to be next year a little over 30%.
And you're right it's right around $400 million in logistics.
Evan Calio - Analyst
Great.
So the MLP EBITDA [exits] up $70 million-ish estimate is that reasonable?
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
It certainly keeps growing.
Evan Calio - Analyst
Right.
Great.
All right.
Good luck.
I look forward to your analysis of larger scope of droppable assets and good results guys.
Joe Gorder - President & CEO
Thanks a lot.
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
Thanks, Evan.
Operator
Ed Westlake, Credit Suisse.
Ed Westlake - Analyst
Hey.
Pretty soon we're just going to call these logistics conference calls as opposed to refining conference calls.
Joe Gorder - President & CEO
We did notice that Ed.
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
If they trade higher, they'll do it.
Ed Westlake - Analyst
Yes.
With the multiple, arbitrage is pretty obvious.
So let's carry on in that vein.
So Diamond Pipe, any sort of color on the EBITDA that might contribute if you move forward with that plan or overall investment level?
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
Well, I think we've talked about the cost being approximately $900 million.
And when you look at a proper multiple of around 10 times that would get you $90 million.
And 50% of that would kind of back you into a $45 million of EBITDA.
Ed Westlake - Analyst
Great.
And then another strategy -- obviously I don't -- you must've seen the EPD/Oiltanking acquisition, which was a somewhat elevated multiple.
And obviously assuming that there was going to be a lot of export growth to obviously drive throughputs and drive that multiple down.
So I look at your logistics and your refining system in Texas.
I look at what Phillips 66 has done at Beaumont and the Bakken pipe project that's associated with that.
I look at the Permian and the Eagle Ford and still growing and I think there has to be something to be done.
So how -- am I off in terms of the landscape or are there competitive barriers for you being able to compete as effectively?
Joe Gorder - President & CEO
There's -- I mean there's competitive barriers to everything -- right?
But there's no reason that we can't compete effectively with this.
And as I mentioned earlier when we talked about the capital, we've included in the capital budget projects that we're highly confident we're going to do.
The one exception is the methanol plant and I'm not saying we will or won't do it, we're just still in the process of looking at it.
But we've got a lot of logistics projects right now that Rich Lashway and his team are in the process of developing.
They're not far enough along to include in the capital budget.
But they would be logistics type assets that we would use to support the existing refining portfolio.
And there's some of them that look like they're very good projects but we're not going to get out in front of ourselves and share information on them until we get it pinned down.
Ed Westlake - Analyst
Okay.
And then I should ask a refining question.
With that opening remark -- the turnarounds obviously were pretty high as you connected up a lot of the hydrocrackers and did a lot of reliability work in 2012 and 2013 and obviously still in the second quarter.
And obviously it's easy to see how good your throughputs were in the third quarter.
As you look out from here I mean do you feel that you have a more reliable refining system or is there still more work that needs to be done to get the reliability to where you need it to be?
And maybe a comment on general turnaround schedules into next year.
Lane Riggs - SVP Refining Operations
Hi Ed.
This is Lane.
So our last really big reliability project we did was with Memphis in the second quarter and that was replacing the reactor.
And the only thing -- now we're in the process of starting up in the Meraux hydrocracker, which is again sort of reconfiguring that refinery.
We don't really have anything quite like that going forward in our capital plan.
It's sort of --other than we're doing these crude units, but those won't really impact our throughputs per se.
So really from here going forward we just have our, what I would say is, our regimen of standard turnaround execution.
So --
Ed Westlake - Analyst
Yes.
So all things equal we should expect better sort of overall utilization next year and perhaps the year after that perhaps the last three-year run rate?
Lane Riggs - SVP Refining Operations
Yes.
And we always, I mean our number one focus on everything we do is to try -- well first is safety, but right behind that is really reliability.
And we do have -- our reliability spend is actually slowing, because we're pretty confident that we have spent the right money on the right things to maintain a higher reliability rate in our system.
Ed Westlake - Analyst
Very clear.
Thanks so much.
Operator
Sam Margolin, Cowen and Company.
Sam Margolin - Analyst
Hi.
Good morning everybody.
Joe Gorder - President & CEO
Hey, Sam.
Sam Margolin - Analyst
A lot's been covered I guess I'll stick to ethanol if refining questions are out of favor, too.
But the business has responded really well to lower corn prices.
Obviously results have been getting better and better.
Just strategically do you think you can -- it can tolerate any kind of stabilizing business component, a tolling agreement, or something like that might make it eligible for a different structure?
Or is this just normal volatility in the industry with a really good corn crop this year, in your mind?
Joe Gorder - President & CEO
Do you want to speak to the market aspect of his?
Martin Parrish - VP of Alternative Fuels
Sure Sam.
This is Martin Parrish.
On the market aspect we like where we're positioned.
Production's been high as you can see inventories have only built like one million barrels in total for the year.
So we feel really good where we're positioned.
Exports are high we think margins going forward are going to be good.
We like the business.
Joe Gorder - President & CEO
As far as a tolling type deal, I mean -- Sam what are you thinking there?
Is this a question about do we want to monetize the business?
Sam Margolin - Analyst
Yes.
I suppose that.
I mean it's been a pretty steady stream of a better and better results in the segment.
And so you mentioned your sum of the parts earlier I was wondering if this factors into it at all now that -- if maybe you see earnings getting more reliable or visible in the segment?
Joe Gorder - President & CEO
Well we'd like to believe they'd stay at these levels forever but I think 2012 it was -- wasn't it, would reminded of just there can be a lot of volatility in this business too.
And we've looked at the ethanol plant portfolio and it trades -- if you look at comps there just aren't a whole bunch of them first of all.
And they tend to trade at the same multiple as the refining assets trade at.
So there's really not a big significant incentive for Valero to go out and monetize these and try to create additional value.
At the same time I would say that we're very pleased with the operation of the business.
Martin has done a fine job leading it.
He's got a very strong team.
And the cash flow that's being produced by these assets is tremendous.
And we do like having it as part of our core business and we do believe long-term that ethanol's going to be fundamentally part of the fuel mix.
And so having this business as part of our portfolio makes sense.
Sam Margolin - Analyst
Okay.
And then just touching on that as a follow-up, the RFS we seem to be a little bit behind schedule on an update here.
It seems like your thesis has played out based on refining margins that wins are kind of being passed through.
Is that -- do you see that as giving momentum to I don't know maybe a mandate reduction or any kind of movement at all?
If you -- if we can get any update that would be great.
Ashley Smith - SVP of IR, Market Analysis & Strategic Planning
Yes.
I don't know if we have a lot of insight here I think we feel like it's going to be after the elections here before we get the new RVO and it's so late in the year at this stage that we don't think that it'll be substantially different from where we were last year.
Sam Margolin - Analyst
Okay.
Great.
Sorry.
Joe Gorder - President & CEO
It is pretty interesting that we're here in November and we don't know what 2014 obligation number is yet but --
Sam Margolin - Analyst
Interesting is one word for it.
Yes.
I guess.
Joe Gorder - President & CEO
Thank you pal.
Sam Margolin - Analyst
Thanks a lot guys.
Have a good one.
Joe Gorder - President & CEO
You too.
Operator
Paul Sankey, Wolfe Research.
Paul Sankey - Analyst
Hi.
Good morning everyone.
Joe Gorder - President & CEO
Hey Paul.
Paul Sankey - Analyst
We've covered a lot of ground here with getting to the points of the ethanol MLP.
I won't ask a follow-up on that one.
Could we just sort of bring it all together a bit.
Joe -- what concerns me is I think we were hoping for quite a significant step down in CapEx next year.
And what I'm listening to is that you're competing in an mature market but you're still spending on these numbers about double your maintenance or stay in business CapEx.
With the remainder being obviously growth CapEx.
Can't we get to a place where you are much more aggressive about cash return to shareholders as the kind of a predominant aim?
I hear good stuff about you potentially not doing the methanol project but at the same time there seems to be a potential for logistics spend to step up.
And as I say to me this is a CapEx number, which is kind of flat next year with this year whereas we were hoping for something that was quite a bit lower.
Thanks.
Joe Gorder - President & CEO
Yes.
And okay Paul and I know this has been your perspective.
When we look at the capital -- okay?
You've got $1.4 billion -- $1.5 billion that we need to spend on the assets to maintain them, the way we want to maintain them.
We've got the crude unit projects which have 25% plus rates of return and they're not putting any more juice in the market per se.
They're optimization projects.
We've got the opportunity to drop at higher multiples, logistics assets.
We're going to continue to invest in those.
If you extract the methanol plant, the $150 million placeholder from the $2.8 billion -- we're at $2.65 billion, that is well below the $3 billion that we forecasted this year.
And we don't arbitrarily select projects to undertake without looking at the alternative use for the cash.
And so if we're deciding to do a capital project I think we're very comfortable making our day in court and sharing what the returns are going to look like on this and why it's a better alternative to us than repurchasing shares, for example.
So I do think that this management team has reduced the capital spend.
I think if we look at it going forward with the rigor we have in the process and the thresholds we're setting for acceptance of projects, we're going to see this continue to be at this level.
It may continue to decline.
But I don't want to not do projects that improve the operation of the business that have good returns when they're available to us.
Paul Sankey - Analyst
Yes.
I understand that.
I guess the concern is really what you're saying is that -- you have to see European refineries shut down, in order to make room for some of this stuff.
And that's just a concern we have that there's too much capital going into the business overall that's kind of dependent on the competitive environment moving in your favor.
Joe Gorder - President & CEO
Okay.
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Paul, keep mind our projects are designed principally to reduce feedstock costs.
And if we have cheaper crude we're going to shut down -- I mean that's going to force excess capacity in Europe to shut down.
So we will become more competitive.
Paul Sankey - Analyst
Great.
And just my final part of this is what do you think a competitive return to shareholders is?
You've got a couple percent yield, can you just talk a little bit more about that, Joe?
And I'll leave it there.
Thanks
Joe Gorder - President & CEO
I'm sorry, Paul real quick though are you talking about at VLP or are you talking about Valero Energy?
Paul Sankey - Analyst
Well yes just for example if I own a Valero share how do you think -- what do you think of as being a good returns the shareholder in terms of you saying that you're respectful of cash returns to shareholders?
Joe Gorder - President & CEO
From a cash perspective or just total?
Paul Sankey - Analyst
Yes.
Total's fine.
I mean people obviously prefer a regular dividend, but I understand that the volatility of the business makes that a tough commitment.
Joe Gorder - President & CEO
Yes.
Okay.
I think what we would say is we have a cost of capital.
Okay?
We've got a cost of capital out there which dictates our assessment of where we are in projects.
And then you've got a return on capital employed that we're hoping to have be in this -- we haven't set the target per se, but 10% range, 12% range.
And a piece of that is certainly going to be the dividend that share repurchase aspect of it.
But we recognize that we've got a need to exceed cost of capital on our projects.
And on our business.
Paul Sankey - Analyst
Understood.
Thank you very much, Joe.
Operator
Allen Good, Morningstar.
Allen Good - Analyst
Good morning everyone I'll be brief as we're getting here late.
Suncor CEO made some comments last week about shipping Canadian heavy to Europe and down the US Atlantic Coast and maybe even to the Gulf Coast.
Do you see that is a viable alternative long-term to get greater heavy -- Canadian heavy volumes to the Gulf Coast?
And could that even be a potentially a source of opportunity for Pembroke at some point?
Gary Simmons - Corporate VP of Crude, Feedstock, Supply & Trading
Yes.
So of course for us I think we feel like there's better options to get Canadian heavy to the US Gulf Coast than taking it to the East Coast and around.
But absent of any of those opportunities moving forward, we definitely see that it's an option to get additional heavy supply to the Gulf.
And we also see that there is an opportunity to move the Canadian barrels to Pembroke as well.
Allen Good - Analyst
Great.
Thanks and then could you just give us an update on the projects you have either underway or sort of on the planned stages to increase competitiveness of California and get some discount crude out there?
And then just your latest thoughts on your assets out there as well.
Lane Riggs - SVP Refining Operations
Yes.
Allen, this is Lane, I would also-- we are still working on that the Benicia rail project.
Our comment period on the EIR is over.
The City is answering all the questions and we sort of expect that to be finished in December.
We think permits will get issued in the first quarter.
So that's really -- in terms of the strategic capital that we have spending on the West Coast, that's pretty much it.
Everything else we're being very careful in our spend on the West Coast.
Because we have obviously a great opportunities in our Gulf Coast and our Mid-Continent and our Northeastern assets.
So we're very careful.
We run a very tight ship out there and that's sort of how we're managing the West Coast.
Joe Gorder - President & CEO
And then from of strategic perspective, we think it's great to have good assets with strong management teams out there that provide us the option to take advantage of the strong margin environments that you can have from time to time out there.
Allen Good - Analyst
Great.
Thanks.
I appreciate it.
Operator
We have no further questions at this time.
John Locke - Executive Director of IR
That's okay.
I was just going to say we appreciate everyone calling in and listening to the call today.
If you have additional questions or didn't get a chance to ask your question, please contact our investor relations department.
Joe Gorder - President & CEO
Thank you.
Operator
Okay.
Thank you to my speakers and thank you ladies and gentlemen.
This concludes today's conference.
Thank you for participating.
You may now disconnect.