Valero Energy Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited fourth-quarter results. Valero operates 15 refineries and 11 ethanol plants, with refining and ethanol as its reportable segments.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $87.8 billion | $130.8 billion |
| Operating income | $6.36 billion | $5.90 billion |
| Net income attributable to Valero stockholders | $3.99 billion | $3.63 billion |
| Diluted EPS | $7.99 | $6.85 |
| Cash provided by operations | $5.61 billion | $4.24 billion |
| Capital investments | $2.43 billion | $2.80 billion |
| Dividends per common share | $1.70 | $1.05 |
Revenue fell 33%, mainly as refined-product prices declined; lower feedstock costs reduced cost of sales by more, supporting higher operating income. FY2015 included a $790 million noncash inventory valuation charge ($624 million after tax, or $1.25 per diluted share). FY2014 included a $233 million LIFO inventory gain ($151 million after tax). Excluding these items, management reported operating income of approximately $7.1 billion in 2015 versus $5.7 billion in 2014.
- Refining: Reported segment operating income was $6.97 billion versus $5.88 billion. Excluding the 2015 inventory charge and 2014 LIFO gain, it was approximately $7.7 billion versus $5.6 billion. Refining throughput margin averaged $12.97 per barrel, up from $11.05; throughput rose to 2.799 million barrels per day. Stronger gasoline and other product margins were partly offset by weaker distillate margins and narrower crude discounts.
- Ethanol: Reported segment operating income was $142 million versus $786 million. Excluding inventory valuation and LIFO effects, it was $192 million versus $782 million. Gross margin declined to $0.49 per gallon from $1.06, principally due to lower ethanol and co-product prices; lower corn costs and higher production partly offset the decline.
- Fourth quarter: Revenue was $18.78 billion, operating income $646 million, net income attributable to Valero stockholders $298 million, and diluted EPS $0.62. The quarter included the $790 million inventory charge.
- Cash and balance sheet: Cash and temporary cash investments were $4.11 billion at year-end, compared with $3.69 billion; total assets were $44.34 billion. Working-capital changes used $1.31 billion of cash in 2015.
- Debt and liquidity: Debt and capital lease obligations totaled $7.38 billion, including $7.29 billion of debt; long-term debt and lease obligations, less current portion, were $7.25 billion. The $3.0 billion revolving credit facility had $2.943 billion available, and VLP’s $750 million revolver had $575 million available. Senior unsecured debt retained investment-grade ratings with stable outlooks.
Material changes and capital allocation
- Operating income rose by $456 million as refining improved, while ethanol earnings weakened. Refining margins benefited from stronger gasoline and other-product margins; the year-over-year change in crude discounts and distillate margins was unfavorable.
- Operating cash flow increased to $5.61 billion. Cash uses included $2.84 billion for share repurchases, $848 million for common dividends, $2.49 billion of net investing cash outflow, and $513 million of debt and lease repayments.
- Valero issued $1.25 billion of senior notes in 2015: $600 million at 3.65% due 2025 and $650 million at 4.9% due 2045. Debt and capital lease obligations increased from $6.39 billion at year-end 2014 to $7.38 billion.
- The board authorized an additional $2.5 billion share-repurchase program in July 2015; $1.3 billion remained available at year-end. The board declared a quarterly dividend of $0.60 per share in January 2016.
- Valero exercised an option for a 50% interest in the planned Diamond Pipeline, expected to carry up to 200,000 barrels per day to the Memphis refinery and be completed in 2017, subject to approvals.
Outlook, risks and contingencies
- Management expected energy markets and margins to remain volatile in 2016. It anticipated near-term recovery from seasonal lows in gasoline and distillate margins, continued wide discounts for medium and heavy sour crude, and depressed ethanol margins while gasoline prices remained low. These are expectations, not earnings guidance.
- Expected 2016 capital investments were approximately $2.6 billion: $1.6 billion for stay-in-business spending and $1.0 billion for growth, including Diamond Pipeline. Environmental-compliance capital expenditures were estimated at $83 million in 2016 and $95 million in 2017, excluding strategic investments.
- Key business risks include volatile refining and ethanol margins, feedstock availability and pricing, refinery outages, transportation disruptions, competition, commodity and credit-market volatility, and changes in environmental, climate, tax and biofuel-credit regulation. The filing notes that future RIN and emissions-credit prices and regulatory costs could affect results.
- Environmental liabilities were $258 million on the balance sheet. For Hartford cleanup matters, Valero estimated a reasonably possible additional loss of $0–$200 million above its accrual. Several environmental enforcement matters remained under resolution; the company said adverse outcomes in the disclosed proceedings were not expected to materially affect its financial position, results or liquidity.
- Net uncertain tax-position liabilities, including interest and penalties, were $391 million. IRS audits for 2008–2011 remained open; management expected the 2008–2009 audits to settle within 12 months for amounts consistent with recorded liabilities. Valero also disclosed tax risk relating to the prior CST retail spin-off.
- Valero reported effective internal control over financial reporting, and KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile reported earnings with the $790 million noncash inventory charge and the prior-year $233 million LIFO gain; assess how inventory-price changes could affect subsequent results.
- Track refining and ethanol margins, crude-oil differentials, distillate demand, throughput, and the sustainability of the strong 2015 refining performance.
- Review cash conversion and the effects of working capital, especially receivables, payables, taxes and inventory, alongside the planned 2016 investment program.
- Monitor debt maturities, access to credit facilities, credit ratings, and the balance between capital spending, dividends and share repurchases.
- Follow the Hartford environmental exposure, open tax audits and CST spin-off tax risk, as well as RIN, emissions-credit and other regulatory costs.