Valero Energy Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts are in millions of dollars except per-share data, margins, and where otherwise noted. Valero is primarily a petroleum refiner and also operated an ethanol business; it completed the separation of its retail business, CST Brands, on May 1, 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $36,137 | $34,726 | $103,645 | $104,555 |
| Operating income | $532 | $1,309 | $2,401 | $2,426 |
| Net income attributable to Valero stockholders | $312 | $674 | $1,432 | $1,073 |
| Diluted earnings per share | $0.57 | $1.21 | $2.61 | $1.93 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $3,035 | $4,947 |
- Q3 earnings fell materially: Stockholder net income declined $362 million year over year, mainly reflecting a $777 million drop in operating income, partly offset by $441 million lower income tax expense. Q3 2012 included $345 million of impairments and $41 million of Aruba-related severance; excluding those items, 2012 operating income was about $1.7 billion.
- Refining: Q3 refining operating income was $600 million versus $1,528 million reported in Q3 2012. Excluding 2012 impairments and severance, refining income declined about $1.3 billion. Throughput margin fell to $7.76 per barrel from $13.12; throughput volumes increased to 2.772 million barrels per day from 2.600 million.
- Ethanol: Q3 operating income improved to $113 million from a $73 million loss, reflecting higher gross margin per gallon ($0.73 versus $0.06) and greater production.
- Nine-month comparison: Stockholder net income rose $359 million despite slightly lower operating income. The comparison benefited from $372 million lower income tax expense in 2013; 2012 tax expense included no tax benefit for major Aruba impairment and severance charges. Excluding 2012 impairments and severance, management said nine-month operating income declined about $1.0 billion.
- Cash flow and investment: Nine-month operating cash flow was $3.035 billion, down from $4.947 billion, including a $231 million working-capital outflow versus a $1.191 billion inflow in 2012. Capital expenditures were $1.690 billion and turnaround/catalyst costs were $527 million. Cash increased $185 million to $1.908 billion.
- Liquidity and debt: At September 30, cash was $1.908 billion; current assets were $18.593 billion and current liabilities $13.668 billion. Balance-sheet debt and capital lease obligations totaled $6.564 billion, including $303 million current. No borrowings were outstanding under the $3 billion revolving credit facility; the facility had $59 million of letters of credit outstanding. The revolver covenant debt-to-capitalization ratio was 20%, against a 60% maximum.
- Shareholder returns: Nine-month dividends were $342 million; treasury-stock purchases were $589 million. The quarterly dividend was $0.225 per share, compared with $0.175 a year earlier.
Material changes and unusual items
- Valero distributed 80% of CST to shareholders and retained 20%, which it intended to liquidate within 18 months. The separation generated $735 million of net cash before tax effects; Valero reported an approximately $189 million tax liability, mostly payable in the first half of 2014. It recorded $30 million of separation costs in the first half of 2013. A post-quarter borrowing of $525 million on October 24, 2013 was intended to be repaid by exchanging the retained CST shares.
- Valero’s retail results are included through the separation date; historical retail results were not presented as discontinued operations. After the separation, Valero continued long-term fuel-supply agreements with CST through 2028.
- A pension-plan amendment reduced pension liabilities by $328 million and increased other comprehensive income; this benefit is to be amortized into income through 2025. Expected 2013 pension contributions were reduced to $45 million.
- The 2012 cash-flow comparison was corrected to classify $160 million of Paulsboro-related note proceeds as investing rather than operating cash flow. The reclassification did not change total cash.
Outlook, commentary, and risks
- Management said crude-oil discounts to Brent had widened so far in Q4 versus Q3 and expected that trend to continue through the remainder of Q4, while gasoline margins were seasonally weak. Management cautioned that energy markets and refining margins remain volatile.
- Valero estimated 2013 costs for biofuel-blending compliance credits, primarily U.S. RINs, at $500 million to $600 million, after $454 million in the first nine months. Management reported that RIN prices had fallen significantly early in Q4, but stressed their volatility and dependence on EPA blending requirements.
- Expected 2013 capital investments were approximately $2.85 billion, including about $650 million for turnaround and catalyst costs and $80 million for environmental projects.
- The company reported an environmental cleanup exposure in Hartford, Illinois: possible additional loss of $0 to $200 million above its accrual. Other ordinary-course litigation liabilities were described as not material.
- Unrecognized tax benefits totaled $378 million. Valero was contesting IRS audit matters, expected a 2004–2005 settlement consistent with recorded amounts, and did not expect settlements of the remaining audits or related cash payments within 12 months.
- Valero disclosed no material changes to the risk factors in its 2012 Form 10-K. Key exposures include volatile refining margins and feedstock differentials, RIN and other regulatory costs, refinery disruptions, environmental requirements, and market and credit conditions. Senior debt ratings were investment grade, with S&P’s outlook negative and Moody’s and Fitch’s stable.
- Valero Energy Partners LP had filed for a proposed IPO; its size and price were undetermined, the registration statement was not effective, and completion was not assured.
Most important facts for investors to verify
- Whether refining margins, crude-oil discounts, and Q4 seasonal gasoline weakness develop as management expected.
- Actual 2013 RIN/compliance-credit costs versus the $500–$600 million estimate, and how EPA requirements and credit prices evolve.
- Cash generation and working-capital needs relative to planned capital investment, turnaround spending, dividends, and repurchases.
- The completion and economics of the planned CST share liquidation, the related short-term borrowing, and the proposed Valero Energy Partners IPO.
- Developments in the Hartford cleanup, IRS audits, and other environmental or legal contingencies, including potential losses above recorded accruals.