Valero Energy Corporation (NYSE: VLO) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; fourth-quarter figures are identified separately below. Valero operates 15 refineries with approximately 3.1 million barrels per day of throughput capacity and 11 ethanol plants with approximately 1.4 billion gallons of annual capacity.
Financial results and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $75.659 billion | $87.804 billion |
| Operating income | $3.572 billion | $6.358 billion |
| Net income attributable to Valero stockholders | $2.289 billion | $3.990 billion |
| Diluted earnings per share | $4.94 | $7.99 |
| Cash from operating activities | $4.820 billion | $5.611 billion |
| Capital investments | Approximately $2.0 billion | Approximately $2.4 billion |
- Refining throughput averaged 2.855 million barrels per day, up from 2.799 million. Refining gross margin was $8.926 billion, down $4.327 billion; adjusted refining operating income was $3.354 billion, down $4.359 billion.
- Ethanol production averaged 3.842 million gallons per day. Adjusted ethanol operating income rose to $290 million from $192 million.
- At year-end, cash and temporary investments were $4.816 billion; current assets were $16.800 billion and current liabilities $8.328 billion. Total debt and capital lease obligations were $8.001 billion, including $115 million current and $7.886 billion long-term. Stockholders’ equity was $20.024 billion.
- Committed capacity available included $2.947 billion under Valero’s revolver and $720 million under VLP’s revolver. The accounts-receivable facility had $1.2 billion available and a July 2017 maturity.
- Fourth-quarter 2016 revenue was $20.712 billion, operating income $620 million, net income attributable to Valero stockholders $367 million, and diluted EPS $0.81. Fourth-quarter 2015 figures were $18.777 billion, $646 million, $298 million, and $0.62, respectively.
Changes versus prior period and unusual items
- Revenue fell 14% year over year, mainly reflecting lower refined-product prices and lower crude-feedstock costs. Operating income fell $2.786 billion, principally because refining operating income declined $2.978 billion; stronger ethanol results partially offset this.
- Refining margins weakened across regions: gasoline and distillate margins declined, crude-oil discounts narrowed, and refining adjusted operating income per barrel fell to $3.21 from $7.55. Higher throughput provided a partial offset.
- Renewable-fuel credit costs rose to $749 million from $440 million, driven by higher RIN prices. Ethanol results improved with lower corn costs and operating expenses, partly offset by lower co-product prices.
- Reported 2016 results included a $747 million noncash benefit from reversing the prior-year inventory valuation reserve; 2015 included a $790 million noncash charge. Valero also recorded a $56 million impairment related to Aruba assets and a $42 million tax benefit associated with the Aruba disposition. Management’s adjusted measures exclude specified unusual items and are non-GAAP.
- Operating cash flow benefited from a $976 million working-capital source in 2016, versus a $1.306 billion use in 2015. Cash uses included $1.336 billion of share repurchases and $1.111 billion of dividends. Long-term debt increased year over year.
Outlook, risks and contingencies
- Management said first-quarter 2017 refining and ethanol product margins were mixed and expected to remain near then-current levels; crude discounts were expected to remain weak amid industry-wide refinery maintenance. The filing does not provide specific earnings or margin guidance.
- Management expected approximately $2.7 billion of 2017 capital investments: $1.6 billion for stay-in-business needs and $1.1 billion for growth, including continued investment in the Diamond Pipeline. Environmental-compliance capital spending was estimated at $169 million for 2017 and $289 million for 2018, excluding strategic investments.
- Key risks include volatile refining margins and crude differentials, RIN and other environmental-credit costs, environmental regulation and remediation, crude supply and third-party transportation disruptions, refinery outages, severe weather, cyber incidents, and access to financing. The company also highlighted uncertainty around environmental rules and climate-related requirements.
- For the Hartford, Illinois cleanup and related site matters, Valero disclosed a reasonably possible additional loss range of $0–$200 million above its accrual. Other listed environmental enforcement matters were generally under discussion or resolution; the company said the proceedings were not expected to materially affect its financial position, results, or liquidity.
- Valero completed the Aruba disposition effective October 1, 2016 and no longer owns assets or operates there. It also disclosed risk that the earlier CST spin-off could be challenged as taxable. The company stated that it had investment-grade ratings and believed available funds and credit facilities were sufficient for ongoing requirements, while cautioning that future financing availability was not assured.
- The board declared a quarterly dividend of $0.70 per share in January 2017, up from $0.60 per quarter during 2016. Future dividends and repurchases remain subject to board decisions and business conditions.
Important facts for investors to verify
- How refining margins, crude differentials, throughput, and RIN prices evolved after year-end, and whether the first-quarter outlook proved accurate.
- The composition and sustainability of 2016 earnings and cash flow, particularly the inventory-reserve reversal, working-capital contribution, Aruba-related items, and non-GAAP adjustments.
- Debt maturities, the 2017 maturity of the receivables facility, the impact of new storage-tank capital leases, and liquidity after planned investment, dividends, and buybacks.
- Actual 2017 capital spending and progress, cost, and expected returns for the Diamond Pipeline and other growth projects.
- Developments in the Hartford environmental matter, other refinery enforcement proceedings, RIN obligations, and the tax and spin-off contingencies.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded that disclosure controls were effective as of December 31, 2016.