Valero Energy Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Valero operates refining, ethanol, and midstream businesses; results are compared with Q1 2017. Amounts are in U.S. dollars unless noted.
Financial performance and liquidity
- Revenue: $26.44 billion, up 21% from $21.77 billion, primarily reflecting higher refined-product prices, especially distillates.
- Earnings: Operating income was $801 million versus $528 million; net income attributable to Valero shareholders was $469 million versus $305 million. Diluted EPS was $1.09 versus $0.68. Adjusted operating income, a non-GAAP measure, was $693 million versus $528 million; adjusted net income was $431 million versus $305 million.
- Margins and segments: Refining segment margin was $2.21 billion, up $127 million; adjusted refining operating income rose $122 million to $762 million. Refinery throughput increased to 2.931 million barrels per day from 2.838 million; adjusted refining income per barrel was $2.89 versus $2.51. Ethanol operating income increased to $45 million from $22 million, while VLP operating income rose to $84 million from $70 million.
- Cash flow: Operating cash flow was $138 million, down from $988 million, mainly due to a $1.026 billion working-capital outflow versus a $151 million inflow in Q1 2017. Investing cash outflow was $752 million; financing cash outflow was $573 million. Cash fell to $4.658 billion from $5.850 billion.
- Debt and liquidity: Debt and capital lease obligations totaled $8.957 billion at quarter-end, compared with $8.872 billion at December 31, 2017. Reported total liquidity was $8.802 billion, including $4.215 billion of available committed borrowing capacity and $4.587 billion of cash available to the relevant operations. Valero reported $21.9 billion of stockholders’ equity.
- Shareholder returns: Dividends were $0.80 per share, up from $0.70. Cash dividends paid were $345 million and treasury-stock purchases were $320 million. The board authorized an additional $2.5 billion share-purchase program; $3.5 billion of authorization remained at March 31.
Material changes and unusual items
- Higher distillate margins and throughput supported refining results. Management estimated favorable impacts of about $420 million from improved distillate margins and $70 million from higher throughput; narrower crude-oil discounts reduced margin by about $268 million.
- Biofuel-credit costs rose to $206 million from $146 million. Q1 2018 results also included a $170 million pre-tax biodiesel blender’s tax credit attributable to 2017 blending, including $80 million attributable to noncontrolling interests, and a $52 million environmental reserve charge. Valero’s adjusted measures exclude these items and related tax effects.
- The effective tax rate was 20%, down from 26%, primarily reflecting the U.S. statutory rate reduction to 21% under Tax Reform. The company had not completed its accounting for certain Tax Reform effects and expected further information and IRS guidance in the second half of 2018.
- Valero adopted the new revenue-recognition standard in January 2018; management reported no material effect on its financial position or Q1 results.
Outlook, risks, and commitments
- For Q2 2018, management expected gasoline margins to improve with seasonal driving demand, distillate margins to remain near current levels, ethanol margins to remain near current levels, and medium/heavy sour crude discounts to remain weaker than five-year averages. Sweet crude discounts were expected near current levels.
- A fire at the Texas City refinery on April 19, 2018, affected its alkylate fractionator. The refinery was operating at reduced rates while damage and repairs were assessed; management did not expect a material adverse effect on Q2 results, based on its preliminary assessment.
- Valero expected approximately $2.7 billion of 2018 capital investments, including $1.7 billion for stay-in-business needs and $1.0 billion for growth. Major projects include its share of the MVP terminal, the Central Texas Pipeline, and the Sunrise Pipeline System.
- Environmental remediation at the Hartford, Illinois site could result in a loss of $0–$200 million above the amount accrued. The company cited exposure to refining and commodity-market volatility, biofuel and emissions-credit prices, operational outages, regulatory changes, project execution, and environmental and litigation outcomes.
- Valero stated it had sufficient funds from operations and available credit to meet ongoing needs, while noting future financing availability and terms cannot be assured. Its senior unsecured debt ratings were investment grade with stable outlooks. Management expected adoption of the lease standard in 2019 to materially increase balance-sheet assets and liabilities, but not materially affect earnings or liquidity.
Important facts for investors to verify
- Whether the Texas City refinery’s reduced operating rates, repair costs, and timing differ materially from management’s preliminary Q2 assessment.
- Whether refining margins, crude discounts, throughput, and biofuel-credit costs develop in line with the stated outlook.
- How much of the $1.026 billion working-capital outflow reverses, and whether operating cash flow supports planned investment, dividends, and repurchases.
- The final amount and timing of any Hartford environmental liability above the recorded accrual, and updates on other environmental proceedings.
- Final accounting adjustments related to Tax Reform and the balance-sheet impact of lease-standard adoption.
- Execution, cost, and completion progress for the disclosed capital projects and the remaining share-repurchase authorization.