VALERO ENERGY CORP annual report, FY2020

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Valero Energy Corporation (NYSE: VLO) — 2020 Form 10-K

Business context and reporting period. Filed February 23, 2021, this annual report covers the fiscal year ended December 31, 2020; fourth-quarter results are also reported. Valero operates 15 petroleum refineries, a consolidated 50/50 renewable-diesel joint venture (Diamond Green Diesel, or DGD), and 13 ethanol plants. Its segments are refining, renewable diesel, and ethanol.

Financial performance and position

  • Revenue: $64.9 billion, down $43.4 billion (40%) from $108.3 billion in 2019, mainly reflecting lower refined-product prices.
  • Earnings: Consolidated operating loss was $1.58 billion versus operating income of $3.84 billion in 2019. Consolidated net loss was $1.11 billion; net loss attributable to Valero stockholders was $1.42 billion, or $3.50 per diluted share, compared with attributable net income of $2.42 billion, or $5.84 per diluted share, in 2019. Adjusted operating loss, a non-GAAP measure, was $1.31 billion versus adjusted operating income of $3.70 billion.
  • Segment results: Refining adjusted operating loss was $1.11 billion, down $5.15 billion year over year; refining margin fell $5.41 billion to $4.98 billion, and throughput declined to 2.555 million barrels per day from 2.952 million. Renewable-diesel adjusted operating income rose $62 million to $638 million. Ethanol adjusted operating loss was $36 million versus $4 million of income.
  • Fourth quarter: Revenue was $16.60 billion, operating loss $470 million, net loss attributable to Valero stockholders $359 million, and diluted loss per share $0.88.
  • Cash flow and investment: Operating cash flow was $948 million, down from $5.53 billion. Capital investments were $2.49 billion ($1.97 billion attributable to Valero under its non-GAAP definition). Cash and cash equivalents increased $730 million to $3.31 billion. Dividends paid totaled $1.60 billion; share repurchases under the buyback program were paused after mid-March.
  • Debt and liquidity: Debt and finance lease obligations totaled $14.68 billion, including $13.01 billion of debt; long-term debt and finance leases were $13.95 billion. Total stated liquidity was $9.04 billion, comprising $3.15 billion cash and $5.89 billion available borrowing capacity. The company issued about $4.02 billion of public debt in 2020.
  • Other metrics: Total assets were $51.77 billion, down from $53.86 billion. Dividends per share for 2020 were $3.92. Environmental-credit compliance costs were $648 million, versus $318 million in 2019.

Material changes versus 2019

  • COVID-19-related restrictions sharply reduced travel and fuel demand, product prices, refinery throughput, and ethanol production. Refining adjusted operating income fell $5.15 billion; lower gasoline and distillate margins were the main drivers.
  • Operating cash flow dropped by $4.58 billion. Lower earnings and working-capital movements contributed; inventory reduction provided cash, while changes in receivables and payables were affected by falling prices and volumes.
  • Debt and finance lease obligations increased from $9.67 billion to $14.68 billion, principally alongside 2020 borrowing and new finance leases.
  • Renewable diesel remained comparatively resilient: its adjusted operating income increased, partly reflecting favorable derivative results. Ethanol performance weakened as prices and production fell.

Outlook, risks, contingencies, and unusual items

  • Near-term outlook: Management expected gasoline, jet-fuel, and diesel prices to improve as inventories drew down and demand recovered; sour-crude discounts were not expected to improve until OPEC production increased. Renewable-diesel margins were expected to remain near then-current levels, while ethanol margins were expected to decline. These were expectations, not full-year earnings guidance.
  • Capital plans: 2021 capital investments were estimated at $2.385 billion, or $2.0 billion attributable to Valero. The company expected nearly $2 billion of DGD investment over 2021–2023 for an existing-plant expansion and a new Port Arthur plant; the expansion was expected to finish in Q4 2021. The Port Arthur project was approved in January 2021.
  • Pandemic and operating risks: Management said demand had not returned to pre-pandemic levels and the pandemic’s duration and effects remained uncertain. A severe February 2021 winter storm disrupted facilities and logistics; the financial impact was not yet estimable in the filing.
  • Regulatory and market risks: The filing highlights volatile refining and ethanol margins, crude and feedstock supply and pricing, renewable-fuel mandates and RIN costs, climate rules and litigation, and competition from alternative fuels. The 2021 Renewable Volume Obligations had not been set at filing time.
  • Unusual accounting and tax items: A $2.5 billion LIFO lower-of-cost-or-market inventory write-down recorded in Q1 was fully reversed by Q3 as prices recovered. A $224 million LIFO inventory-layer liquidation charge reduced 2020 results. The CARES Act NOL carryback generated a $360 million income-tax benefit. The Riga, Michigan ethanol plant ceased operations; a $30 million accelerated-depreciation charge was recorded.
  • Contingencies: The company disclosed unresolved environmental matters involving the Benicia Refinery, a Corpus Christi asphalt plant, and the Port Arthur Refinery. Management stated that adverse outcomes in the identified proceedings were not expected to materially affect financial position, results, or liquidity. The filing also reports $821 million of unrecognized tax benefits excluding interest and penalties; $525 million relates to biofuel incentive refund claims and is offset by a recorded receivable.
  • Assurance: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Gross unrecognized tax benefits were identified as a critical audit matter.

Investor facts to verify

  • Whether fuel demand, refinery utilization, and refining margins recovered as management anticipated, and how the February 2021 storm affected operations and results.
  • Whether planned DGD expansion and construction spending, timing, and expected capacity were achieved, and how renewable-fuel policies and feedstock availability affect returns.
  • How Valero’s debt, lease obligations, liquidity, and borrowing costs evolved after the 2020 debt issuance; review maturities and the negative outlooks attached to investment-grade ratings.
  • Whether RIN and other environmental-credit costs, the pending 2021 renewable-fuel obligations, and disclosed legal and tax matters produced material changes.
  • How much of earnings and cash flow reflected non-GAAP adjustments, tax benefits, inventory valuation reversals, and other unusual items; compare those reconciliations with GAAP results.