Valero Energy Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Business context and results
Valero operates refining and ethanol businesses. The filing presents the Aruba Refinery as discontinued operations following the May 2014 decision to abandon it; Valero continues operating the associated terminal assets. The retail business was separated into CST Brands in May 2013, so the prior-year nine-month comparison includes retail results that are absent in 2014.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $34,408 | $36,137 | $102,985 | $103,645 |
| Operating income | $1,670 | $532 | $4,106 | $2,395 |
| Net income attributable to Valero shareholders | $1,059 | $312 | $2,475 | $1,432 |
| Diluted EPS | $2.00 | $0.57 | $4.64 | $2.61 |
| Operating cash flow | — | — | $3,244 | $3,035 |
Financial position and cash flows
- At September 30, 2014, cash and temporary cash investments were $4,191, total assets $48,455, and equity $21,062.
- Debt and capital lease obligations totaled $6,383, including $600 current. The company reported no borrowings under its revolving credit facilities; its $3 billion corporate revolver had $54 million of letters of credit outstanding. The revolver debt-to-capitalization covenant ratio was 10%, versus a 60% maximum.
- Nine-month investing cash outflow was $1,986, including $1,453 of capital expenditures and $492 of turnaround and catalyst costs. Financing cash outflow was $1,316, including $799 of treasury-stock purchases, $411 of dividends, and $200 of debt repayment. Cash declined $101 from year-end 2013.
- Quarterly dividends were $0.275 per share. The board declared the same quarterly dividend for payment in December 2014. Valero had approximately $2 billion remaining under its $3 billion buyback authorization at September 30.
Material changes and operating drivers
- Q3 revenue declined 5%, but operating income increased $1,138 and diluted EPS rose to $2.00. Management attributed the profit improvement chiefly to refining: operating income rose to $1,664 from $600.
- Refining throughput margin increased to $11.81 per barrel from $7.76; throughput averaged 2.814 million barrels per day versus 2.772 million. Wider discounts on sweet and sour crude and stronger gasoline margins were favorable, partly offset by weaker distillate margins and higher energy costs.
- Ethanol operating income increased to $198 from $113. Lower corn costs and higher production, including the Mount Vernon plant’s August start-up, helped; lower ethanol and co-product prices partially offset the gains.
- For the first nine months, refining operating income increased $1,296 and ethanol operating income increased $406. Refining throughput was up 97,000 barrels per day; higher crude discounts and volumes were favorable, while weaker gasoline and distillate margins and higher energy costs were offsets.
- Nine-month discontinued operations included a $59 Aruba asset-retirement charge and $4 of contractual obligations, producing a $64 after-tax loss attributable to Valero shareholders; no tax benefit was recognized for the loss.
Outlook, risks, and contingencies
- Management said crude discounts had narrowed in the fourth quarter to date compared with Q3 and expected continued volatility in energy markets and margins. It expected lower average ethanol margins for the remainder of 2014 than in the first nine months.
- Estimated 2014 biofuel-credit compliance costs were $350–$400 million; costs were $265 million for the first nine months. These costs depend significantly on volatile credit prices and regulatory blending requirements.
- Expected capital investments were approximately $2.9 billion in 2014 and $2.8 billion in 2015, including about $700 million annually for turnaround and catalyst costs. Management expected significant costs from additional California and Quebec climate regulations taking effect in 2015, with the majority expected to be recoverable from customers.
- Environmental cleanup matters in Hartford, Illinois could result in losses of $0–$200 million above recorded accruals. The company also disclosed ongoing litigation and environmental enforcement proceedings; it said the reported proceedings were not expected to materially affect its financial position, results, or liquidity.
- Uncertain tax-position liabilities totaled $513 million, including $240 million classified as current. IRS audits and potential settlements remain ongoing. Valero reported investment-grade ratings with stable outlooks, while noting that downgrades could raise financing costs or impair access to financing.
- Management stated it expected operating cash flow and available credit to fund ongoing requirements. Forward results remain exposed to refining and ethanol margins, feedstock and product prices, outages, regulation, environmental obligations, and market conditions.
Important facts for investors to verify
- Whether narrowing crude discounts and weaker near-term ethanol margins materially reduce earnings after Q3.
- Actual full-year biofuel-credit costs compared with the $350–$400 million estimate, and the impact of regulatory changes.
- Capital spending and turnaround costs against the 2014 and 2015 estimates, alongside cash generation and shareholder returns.
- Developments in the Illinois cleanup exposure, Aruba abandonment obligations, and IRS audits and settlements.
- Whether the strong Q3 refining and ethanol results are sustainable; management cautioned interim results are not necessarily indicative of full-year results.