* Inland U.S. crudes getting lighter, prompting some refinery rate cuts
* First-quarter profit up 27 pct
* Shares down 1.4 percent
* Analysts optimistic about Q2 (Adds comment from analysts and conference call)
By Kristen Hays and Anna Driver
April 29 (Reuters) - Valero Energy Corp, the largest U.S. independent refiner, said cheap inland U.S. crude oil boosted its first-quarter profits and also prompted rate cuts at a pair of plants that can only run so much of it.
Valero and other refiners' profit margins have been fattened by ample supplies of oil produced from U.S. shale formations. Those market conditions have continued into the second quarter and are likely to boost earnings as companies make investments and adjustments to their plants to process more of the crude.
"We see a trend toward the crude getting lighter and it has caused some operating issues for us, some constraints where we have to cut rates," Gary Simmons, corporate vice president of crude, feedstock, supply and trading, told analysts on Tuesday during the company's quarterly earnings call.
Booming inland U.S. crude output is largely light sweet, which can prompt refiners to cut rates if plants are not re-configured to run more than they have traditionally run.
Valero is building special "crude topper" units at its Houston and Corpus Christi refineries to increase light-sweet crude processing capabilities, and has added a similar unit to its Three Rivers refinery to do the same.
Other refiners along the U.S. Gulf Coast, with plants configured to run heavier crudes like those produced in Canada or Venezuela, are making similar adjustments, including Flint Hills Resources and Delek U.S. Holdings.
Without such adjustments, refiners with too much light sweet crude coming in can face constraints like distillation units unable to handle more vapors or hydraulic capacity limits.
Simmons said such constraints had prompted Valero to cut rates at its refineries in northwest Texas and Oklahoma with a combined capacity of 241,000 barrels per day.
"We try to control that the best we can by working with producers to control the quality of the barrels that we're getting," Simmons said.
BETTER THAN EXPECTED RESULTS
Valero reported a better-than-expected first-quarter profit as cheaper crude fattened margins.
U.S. Gulf Coast refiners' margins are benefiting as new pipelines bring in cheap inland U.S. shale oil and other grades of crude like Mexico's Mayan are trading at strong discounts.
"Q2 is off to a strong start for the key drivers of Valero's earnings," analysts at Credit Suisse said in a note to clients on Tuesday. "Although narrower than the first quarter Maya remains cheap vs. Brent, and product margins are stronger quarter over quarter, particularly."
Valero said it also expected to benefit from increased fuel demand as the economy recovers.
"U.S. gasoline demand and margins look positive as we enter the summer driving season," Chief Executive Bill Klesse said in a statement. Klesse is stepping down as CEO this week and will remain chairman while Chief Operating Officer Joe Gorder takes the helm as CEO.
Valero said it was looking at growing access to cheap North American crude oil. The company said on Tuesday that its rail unloading facility at Port Arthur, Texas was expected to be completed in the fourth quarter.
At its plant in Quebec City, 45 percent of the crude it processes is now cheaper North American oil, a figure that is expected to rise to 100 percent by the end of the year after a pipeline reversal.
Operating income in the refining business rose 8 percent to $1.3 billion in the first quarter, from a year earlier.
Ethanol operating income ballooned to $243 million from $14 million due to weather-related supply disruptions, lower industry ethanol inventories, import volumes and corn costs.
Net income rose to $828 million, or $1.54 per share, in the quarter ended March 31, from $654 million, or $1.18 per share, a year earlier.
The average analyst estimate was for a profit of $1.38, according to Thomson Reuters I/B/E/S.
Lower taxes helped Valero's earnings top Wall Street expectations, analysts said.
Valero's shares were down 85 cents at $57.12 in afternoon New York Stock Exchange trading.
(Additional reporting by Swetha Gopinath in Bangalore; Editing by Don Sebastian, Maju Samuel and Andrew Hay)