Valero Energy Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone quarterly filing; it also provides unaudited fourth-quarter results. Valero operates 15 refineries, 14 ethanol plants, and a renewable-diesel joint venture, with refining, ethanol, and renewable diesel reportable segments.
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $108.324 billion | $117.033 billion |
| Operating income | $3.836 billion | $4.572 billion |
| Adjusted operating income (non-GAAP) | $3.699 billion | $4.713 billion |
| Net income | $2.784 billion | $3.353 billion |
| Net income attributable to Valero stockholders | $2.422 billion | $3.122 billion |
| Diluted EPS | $5.84 | $7.29 |
| Cash from operating activities | $5.531 billion | $4.371 billion |
Revenue declined 7.4% and stockholder-attributable net income fell about 22%, while operating cash flow increased. Refining throughput averaged 2.952 million barrels per day, versus 2.986 million in 2018. The filing does not provide a single consolidated profit-margin percentage.
- Refining: Segment adjusted operating income was $4.040 billion, down $1.140 billion. Weaker crude-oil and other-feedstock discounts and lower throughput outweighed improved distillate margins.
- Ethanol: Adjusted operating income was $4 million, down $78 million; higher corn costs and operating expenses more than offset higher ethanol prices.
- Renewable diesel: Adjusted operating income was $576 million, up $259 million, supported by higher sales volumes and blender’s tax credits.
- Fourth quarter: Revenue was $27.879 billion, operating income $1.739 billion, net income attributable to stockholders $1.060 billion, and diluted EPS $2.58. In Q4 2018, the corresponding figures were $28.730 billion, $1.299 billion, $952 million, and $2.24.
Cash, debt, and liquidity
- Year-end cash and cash equivalents were $2.583 billion. Reported total liquidity was $7.801 billion, including $5.328 billion of available borrowing capacity; $110 million of cash held by variable-interest entities was restricted to their use.
- Total debt and finance lease obligations were $9.672 billion, including $494 million current and $9.178 billion long-term. Debt excluding finance leases was $8.881 billion. Senior unsecured debt ratings remained investment grade with stable outlooks.
- Operating cash flow of $5.531 billion funded capital investments of approximately $2.7 billion, dividends of $1.492 billion, share repurchases of $777 million, and the $950 million acquisition of publicly held Valero Energy Partners units. Cash declined by $399 million during the year.
- Dividends per share increased to $3.60 for 2019 from $3.20 in 2018. The board declared a quarterly dividend of $0.98 per share in January 2020.
Material changes, outlook, and risks
- Valero acquired the remaining publicly held Valero Energy Partners units on January 10, 2019 for $950 million. It also revised segment reporting: logistics assets moved into refining, and Diamond Green Diesel operations were reported in a separate renewable-diesel segment.
- The 2019 results included a $449 million pre-tax blender’s tax credit benefit recognized after legislation was enacted in December; it related to volumes blended in 2019 and 2018. Management’s adjusted measures reassign credits to the periods associated with the blending volumes.
- Management expected 2020 capital investments of approximately $2.5 billion, about 60% for sustaining the business and 40% for growth. No specific full-year earnings guidance is provided in the filing.
- For Q1 2020, management expected distillate margins to improve, gasoline margins to remain near then-current levels, ethanol margins to decline, and renewable-diesel margins to remain near then-current levels. These are expectations, not guarantees.
- Management warned that coronavirus-related concerns could reduce transportation-fuel demand. Other key exposures include volatile refining margins and crude differentials, RIN and other environmental-credit costs, environmental and climate regulation, severe weather, refinery outages, transportation disruptions, and cybersecurity events. Brexit-related uncertainty could affect U.K. and Ireland operations.
- Environmental proceedings included proposed penalties of $3.4 million for an EPA fuels matter and $1.3 million related to a Corpus Christi asphalt-plant incident, plus other unresolved air-emissions matters. Management stated that it did not expect the disclosed environmental proceedings, individually or collectively, to materially affect financial position, results, or liquidity.
- Valero reported $868 million of unrecognized tax benefits excluding related interest and penalties in its liquidity discussion; the financial-statement reconciliation reports gross unrecognized tax benefits of $897 million and a balance-sheet liability of $968 million including other items. A $525 million biofuel-incentive refund claim is offset by a corresponding uncertain-tax-position liability.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether refining margins and feedstock discounts recover, and how throughput and maintenance costs trend.
- The sustainability of earnings and cash flows after separating recurring operations from blender’s tax credits and other adjustments.
- Liquidity availability, upcoming debt and facility maturities, and the effect of substantial contractual purchase obligations.
- Progress, costs, and expected returns from the Diamond Green Diesel expansion and the stated 2020 capital program.
- Developments in tax audits and biofuel-incentive refund claims, environmental proceedings, RFS/RIN obligations, and demand risks identified by management.