Business context and reporting period
Valero Energy Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2009. Valero operates refining and retail businesses and added ethanol as a third reportable segment following its acquisition of seven VeraSun ethanol plants.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share and operating figures.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $17,925 | $36,640 | $31,749 | $64,585 |
| Operating income (loss) | $(317) | $1,158 | $190 | $1,630 |
| Net income (loss) | $(254) | $734 | $55 | $995 |
| Diluted earnings (loss) per share | $(0.48) | $1.37 | $0.11 | $1.85 |
- Refining: Operating loss was $268 million in Q2 versus $1.235 billion operating income a year earlier. Refining throughput margin declined to $4.64 per barrel from $10.82; throughput fell 9% to 2.489 million barrels per day. For the first half, throughput margin was $6.69 per barrel versus $9.68.
- Other segments: Q2 retail operating income was $65 million, up from $49 million. Ethanol contributed $22 million of operating income after acquisition; acquired plants generated $263 million of revenue and $13 million of net income from April 1 through June 30.
- Cash flow: First-half operating cash flow was $1.407 billion, down from $1.802 billion. Investing used $2.174 billion, including $1.351 billion of capital expenditures, $249 million of turnaround and catalyst costs, and $556 million for VeraSun. Financing provided $1.428 billion. Cash rose by $683 million to $1.623 billion.
- Debt and funding: Debt and capital lease obligations were $7.368 billion at June 30 (current $137 million; long-term $7.231 billion), versus $6.576 billion at year-end 2008. The debt note reports carrying amount of $7.330 billion, including current portion. Valero issued $1 billion of notes in March at 9.375% and 10.5%, and raised $799 million net from a June offering of 46 million shares. No borrowings were outstanding under revolving bank credit facilities at quarter-end.
- Liquidity: Current assets were $11.173 billion and current liabilities $7.324 billion. Restricted cash was $141 million, including $111 million held in connection with Aruba tax disputes. The $1 billion receivables-sale facility had $100 million outstanding at quarter-end and was extended to June 2010.
- Margins and dividends: Lower crude and refined-product prices drove the 51% year-over-year revenue decline. Gasoline and some secondary-product margins improved, but diesel and jet fuel margins and sour crude differentials weakened. The quarterly dividend remained $0.15 per share; first-half dividends totaled $155 million.
Material changes versus prior period
- Q2 shifted from substantial profit to a net loss, principally because refining operating income fell by approximately $1.5 billion. First-half net income fell 94% to $55 million.
- The global downturn reduced product demand; new refining capacity and higher inventories pressured distillate margins. Sour crude differentials narrowed significantly, while gasoline margins strengthened.
- Refining throughput declined due to refinery downtime, the 2008 Krotz Springs refinery sale, and economically driven operating cuts. Lower energy costs and other savings partly offset the margin and volume declines.
- First-half 2008 results included approximately $100 million of pre-tax insurance proceeds relating to the 2007 McKee refinery fire.
- Valero booked a $122 million write-off of cancelled project costs in Q2 and suspended several projects. Total assets increased to $37.221 billion from $34.417 billion, while stockholders’ equity increased to $16.407 billion from $15.620 billion, reflecting, among other items, the share offering.
Outlook, risks, contingencies, and unusual items
- Management expected weak demand, elevated product inventories, low refining margins, and narrow sour crude differentials to persist near term. It expected Q3 2009 margins to be similar to Q2, potentially resulting in a quarterly loss, and described Q4 as challenging. No full-year earnings guidance was provided.
- Valero temporarily shut the Aruba refinery in July, citing uneconomic conditions, and was evaluating possible transactions, including a sale. The Corpus Christi East coker unit was also temporarily shut. Management continued to assess other facilities for possible partial or full shutdowns.
- No impairment was recorded for significant operating assets at June 30, but management identified Delaware City, with approximately $2.0 billion net book value, as an area of focus. The Aruba refinery had approximately $1.0 billion net book value. Changes in market conditions or assumptions could lead to future impairment charges.
- Two Gulf Coast hydrocracker projects were suspended after approximately $915 million had been spent; other suspended projects represented approximately $430 million of costs. Management’s 2009 capital-investment estimate was approximately $2.5 billion: $2.1 billion of capital expenditures, including about $500 million for environmental projects, plus $440 million for turnaround and catalyst costs.
- A proposed $600 million purchase of Dow’s 45% interest in the TRN refinery, plus inventory, remained unresolved after Total exercised its right of first refusal. Valero said the agreement had not been formally terminated.
- Aruba tax disputes remained pending. Valero paid $8 million of assessed turnover tax plus $1 million interest in Q2; other disputed amounts included approximately $25 million of additional taxes and $30 million of foreign-exchange payments. The company had not recognized liabilities for the remaining disputed periods and amounts.
- Valero reported 33 active MTBE groundwater cases and 21 fuel-temperature class actions as of August 1, 2009. It had accrued for MTBE litigation but said an adverse outcome across all or many cases could materially affect results; possible losses could not be reasonably estimated. No liability was recorded for the fuel-temperature cases.
- Potential federal greenhouse-gas cap-and-trade requirements could increase compliance costs and restrict operations if enacted. Management also cited general refining-market, environmental, regulatory, litigation, commodity-price, and financing risks.
- Credit ratings were investment grade with stable outlooks at June 30. Management said operating cash flow and available credit were expected to support ongoing needs, but future financing availability and terms were not assured.
Most important facts for investors to verify
- Whether refining margins, sour crude differentials, and demand recover as management’s outlook assumed, and whether further refinery shutdowns occur.
- Potential impairment exposure at Delaware City and other assets, and the eventual status and economics of suspended capital projects.
- VeraSun plant performance, ongoing capital needs, and integration results beyond the partial-quarter contribution reported here.
- Final resolution of the TRN agreement, Aruba tax disputes, and material litigation, including possible exposures not currently estimable.
- Debt and liquidity trends, including the cost and availability of financing, outstanding receivables-sale funding, and the sustainability of the dividend and capital-investment plan.