Valero Energy Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Valero operates refining, retail and ethanol businesses. Results include the Meraux and Pembroke refineries acquired in 2011. Amounts below are in U.S. dollars; financial-statement figures are generally in millions.
Financial performance and liquidity
- Revenue: $35.17 billion, up 34% from $26.31 billion, mainly reflecting higher product prices and greater throughput, including acquired-refinery volumes.
- Profitability: Operating loss was $244 million versus operating income of $244 million. Net loss attributable to Valero shareholders was $432 million, or $0.78 per diluted share, compared with net income of $98 million, or $0.17 per diluted share, in Q1 2011. The 2011 result included $6 million of discontinued-operations losses.
- Unusual items and adjusted comparison: Q1 2012 included a $611 million impairment charge, primarily the $595 million Aruba Refinery write-down, plus $16 million for equipment from a cancelled project. Q1 2011 included a $542 million loss on commodity derivatives related to forward refined-product sales. Excluding these items, management reported continuing-operations net income of $173 million ($0.31 per share) in Q1 2012 versus $456 million ($0.80 per share) in Q1 2011. This is a management-presented adjustment, not GAAP income.
- Refining: Segment operating loss was $119 million, versus income of $276 million; excluding the impairment and prior-year derivative loss, operating income was $492 million versus $818 million. Throughput margin fell to $7.71 per barrel from $9.91, while total operating costs were $5.60 per barrel versus $5.59. Lower sour-crude discounts and weaker margins for certain other products outweighed stronger gasoline and distillate margins in several regions.
- Other segments: Retail operating income declined to $40 million from $66 million, primarily on lower fuel margins. Ethanol income fell to $9 million from $44 million as lower ethanol prices reduced gross margin per gallon to $0.34 from $0.50.
- Cash flow: Operating cash flow was $1.704 billion, down from $2.058 billion; management attributed the decrease mainly to a $540 million unfavorable working-capital effect. Investing cash use was $874 million, including $726 million of capital expenditures and $158 million of turnaround and catalyst costs. Financing cash use was $319 million. Cash increased $535 million to $1.559 billion.
- Debt and liquidity: At March 31, debt and capital lease obligations totaled $7.603 billion, including $1.143 billion current; cash was $1.559 billion. The $3 billion revolver had no borrowings, and its covenant debt-to-capitalization ratio was 27% against a 60% maximum. The accounts-receivable facility had $100 million outstanding at quarter-end and matured in June 2012. Debt fair value was $8.653 billion versus carrying amount of $7.554 billion.
- Equity and distributions: Q1 dividends were $0.15 per share, versus $0.05 a year earlier. Valero repurchased shares, with $106 million shown as cash spent on treasury-stock purchases. The board declared another $0.15 quarterly dividend payable June 20, 2012.
Material changes, outlook and risks
- Valero decided to suspend Aruba refinery operations by the end of March after the facility failed to generate sustained positive cash flow. A prospective buyer indicated interest at $350 million plus working capital; the offer was non-binding, due diligence and negotiations remained ongoing, and the refinery was not classified as held for sale. Valero warned that a sale was uncertain and a further impairment could be required if it could not sell the refinery.
- Management expected volatile energy markets and refining margins in the near to mid-term. Pipeline and logistics projects could narrow the discount on inland WTI-priced crude relative to Brent, reducing the feedstock advantage for refiners processing WTI-priced crude. Capacity rationalization and potential continued operation of otherwise unprofitable refineries were additional margin uncertainties. No earnings or margin guidance was provided in the supplied filing text.
- Valero expected approximately $3.0 billion of 2012 capital investments, including about $135 million for environmental projects, plus $510 million for deferred turnaround and catalyst costs. The estimates exclude strategic acquisitions and may change.
- After quarter-end, Valero repaid $750 million of 6.875% notes and $4 million of industrial revenue bonds in April, redeemed $108 million of industrial revenue bonds on May 3, and sold $850 million of receivables under its facility in late April, repaying $500 million on May 4.
- Regulatory and legal exposures: Potential costs from greenhouse-gas rules, California AB 32 programs, clean-fuel outlet requirements and permitting uncertainty could raise compliance costs, capital spending or operating restrictions; amounts were not clearly quantifiable in the filing. IRS audits cover federal tax years 2002–2009; Valero is contesting assertions for 2002–2007 and says an adverse outcome could reclassify deferred tax liabilities as current. Reported litigation accruals were not material. The filing describes environmental enforcement matters at Port Arthur and Three Rivers, including potential EPA stipulated penalties of $4.7 million and $522,500, respectively, and a proposed $180,911 TCEQ penalty.
- Commodity prices, crude differentials, product demand, refinery outages, foreign exchange, environmental regulation, tax matters and credit ratings were identified as risks. Management said liquidity was sufficient for ongoing requirements, but future financing availability and terms were not assured. Senior unsecured debt ratings were investment grade with stable outlooks at the three agencies cited.
Important facts for investors to verify
- Whether the Aruba transaction reaches a definitive agreement, the final proceeds and working-capital terms, and any further impairment exposure.
- Whether refining margins and sour-crude differentials weaken as management anticipated, particularly as logistics capacity changes.
- Actual 2012 capital investment and turnaround spending compared with the stated estimates, and the effect on cash and debt.
- Renewal or replacement of the receivables facility maturing in June 2012, and liquidity after the disclosed post-quarter debt repayments.
- Developments in IRS audits, environmental regulation and enforcement, and the potential costs of compliance or adverse rulings.