Valero Energy Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures below provide Q4 context. Valero operated refining, retail, and ethanol businesses, with 16 refineries and approximately 3.0 million barrels per day of capacity at year-end. 2011 results include the Pembroke acquisition from August 1 and the Meraux acquisition from October 1.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $126.0 billion | $82.2 billion |
| Operating income | $3.68 billion | $1.88 billion |
| Income from continuing operations | $2.10 billion | $923 million |
| Net income attributable to Valero stockholders | $2.09 billion | $324 million |
| Diluted EPS | $3.68 | $0.57 |
| Cash provided by operating activities | $4.04 billion | $3.05 billion |
| Capital expenditures and turnaround/catalyst costs | $2.98 billion | $2.27 billion |
| Cash and temporary cash investments at year-end | $1.02 billion | $3.33 billion |
| Debt and capital lease obligations | $7.74 billion | $8.34 billion |
- Operating margin was approximately 2.9% of revenue; net income attributable to Valero stockholders was approximately 1.7% of revenue.
- Refining operating income rose to $3.52 billion from $1.90 billion. Refining throughput margin increased to $9.30 per barrel from $7.80; throughput averaged 2.434 million BPD versus 2.129 million BPD.
- U.S. Mid-Continent refining was the standout: operating income increased to $1.41 billion from $339 million, with throughput margin of $15.10 per barrel versus $7.33. The main driver was the discount of inland WTI-type crude to LLS and Brent benchmarks.
- Retail operating income was $381 million, up from $346 million; ethanol operating income was $396 million, up from $209 million.
- Q4 operating income was $167 million and continuing-operations income was $45 million, versus $1.979 billion and $1.203 billion, respectively, in Q3. Q4 diluted EPS was $0.08. Management attributed the weak quarter to narrower crude differentials and significantly lower product margins.
- Current assets were $15.97 billion and current liabilities $12.71 billion, a current ratio of approximately 1.26. Cash declined during the year as Valero funded acquisitions, investment, debt repayments, and shareholder returns.
Material changes and capital allocation
- Revenue increased 53% year over year, reflecting higher refined-product prices, higher throughput, the Aruba restart, and the partial-year contribution from Pembroke and Meraux. Acquisitions and changes in commodity prices limit direct comparability.
- Valero paid approximately $1.7 billion for Pembroke and related U.K./Ireland marketing and logistics assets, and $547 million for Meraux and related logistics assets. Both businesses recorded losses from continuing operations during their partial-year inclusion: Pembroke $10 million and Meraux $74 million.
- Operating cash flow increased by about $1.0 billion. Investing cash outflow was $5.30 billion, including acquisition spending. Valero paid $169 million in common dividends and spent $349 million on common stock purchases; the filing says the latter purchases were for employee compensation-plan obligations, not purchases under the publicly announced programs.
- Year-end debt and capital lease obligations were $7.74 billion, including $1.01 billion current. Valero had no borrowings under its revolving credit facilities and had a new $3.0 billion revolving facility maturing in December 2016. Senior unsecured debt ratings were investment grade with stable outlooks.
Outlook, risks, and unusual items
- Management said product margins improved in early 2012 but expected energy markets and margins to remain volatile. No earnings or margin guidance was provided.
- Expected 2012 capital investment was approximately $3.4 billion: $2.8 billion of capital expenditures, including about $140 million for environmental projects, and $560 million for turnaround and catalyst costs. Environmental-compliance capital spending was estimated at $140 million for 2012 and $155 million for 2013; these estimates may change.
- Valero was evaluating strategic alternatives for the Aruba refinery, which had not generated sustained positive cash flow since restarting. Its year-end net book value was $958 million; a shutdown or lower expected cash flows could cause a material impairment. Management expected to conclude its evaluation in Q1 2012.
- Key risks include volatile refining margins and crude differentials, reduced demand or excess capacity, refinery outages and transportation disruptions, feedstock supply and price exposure, derivative and counterparty risk, and increasingly stringent environmental rules. Potential greenhouse-gas, California fuel and cap-and-trade requirements, and permitting changes could raise costs or constrain operations.
- Environmental and tax contingencies warrant attention. The IRS was auditing U.S. federal tax returns for 2002–2009; an adverse outcome could materially affect liquidity through reclassification of deferred tax liabilities. Environmental liabilities were $274 million at year-end. Disclosed enforcement matters included a planned approximately $2.3 million Wilmington flare mitigation payment and other pending or anticipated penalties; the filing stated the cited proceedings were not expected to materially affect financial position or results.
- The 2011 results included a $247 million benefit to cost of sales from LIFO inventory-layer liquidations. The 2010 comparison included a $599 million after-tax discontinued-operations loss, largely related to refinery sales, making total net income comparisons less representative of continuing performance.
- Management and KPMG reported effective financial reporting controls; the assessment excluded the recently acquired Valero Energy Ltd. and Meraux operations, representing about 7% of annual revenue and 10% of year-end assets, with integration planned for 2012.
Important facts for investors to verify
- Whether refining margins and crude-oil differentials—especially inland crude discounts—persisted or reversed after the strong first three quarters and weak Q4.
- The outcome of the Aruba strategic review and any resulting impairment, shutdown, or additional cash requirements.
- Post-acquisition operating performance, integration, and actual contribution from Pembroke and Meraux relative to their partial-year losses.
- 2012 capital spending, turnaround costs, environmental compliance spending, and resulting free cash flow and liquidity.
- Developments in IRS audits, environmental proceedings, and regulatory requirements, including their potential cash and operating impacts.
- Reconciliation of annual cash generation with the decline in cash, acquisition spending, debt maturities, and the company’s shareholder-return plans.