Valero Energy Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Valero operates refining and ethanol businesses. Comparisons are with Q1 2014 unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $21.33 billion | $33.66 billion |
| Operating income | $1.495 billion | $1.351 billion |
| Net income attributable to Valero stockholders | $964 million | $828 million |
| Diluted EPS | $1.87 | $1.54 |
| Operating cash flow | $1.433 billion | $244 million |
| Capital expenditures and turnaround/catalyst costs | $698 million | $517 million |
| Cash and temporary cash investments | $4.870 billion at March 31 | $3.689 billion at December 31, 2014 |
| Debt and capital lease obligations | $7.424 billion at March 31 | $6.386 billion at December 31, 2014 |
Revenue fell about 37%, primarily reflecting lower refined-product prices; cost of sales also declined, mainly due to lower crude feedstock costs. Operating income rose $144 million, but operating cash flow’s year-over-year increase was driven largely by a $1.1 billion favorable working-capital comparison. Refining throughput margin increased to $12.39 per barrel from $10.90; refining operating income rose to $1.641 billion from $1.280 billion. Ethanol gross margin fell to $0.43 per gallon from $1.38, and segment operating income declined to $12 million from $243 million.
At March 31, current assets were $16.788 billion and current liabilities were $8.634 billion. Q1 financing included $1.446 billion of debt proceeds and $402 million of repayments; Valero issued $600 million of 3.65% notes due 2025 and $650 million of 4.9% notes due 2045. It repurchased $325 million of stock and paid $206 million in dividends. The quarterly dividend was $0.40 per share.
Material changes and operating drivers
- Refining income improved $361 million. Higher gasoline and other-product margins and lower natural-gas costs more than offset narrower crude discounts; management estimated crude-discount effects were unfavorable by about $460 million in total.
- Ethanol income fell $231 million as lower ethanol and co-product prices outweighed lower corn costs and increased production. Production rose to 3.776 million gallons per day from 3.095 million.
- Foreign-currency translation contributed a $366 million loss to other comprehensive income; total other comprehensive loss was $363 million.
- Effective March 1, Valero transferred its Houston and St. Charles terminal services business to consolidated subsidiary VLP for $571 million cash and VLP units valued at $100 million. VLP also borrowed $200 million under its revolver.
Outlook, risks and contingencies
- Management expected refining margins to improve slightly in Q2, particularly gasoline margins, partly offset by narrower crude discounts. Ethanol margins were expected to remain depressed while gasoline prices remained low. Management expected continued market volatility.
- 2015 estimates: approximately $1.95 billion in capital expenditures and $700 million for deferred turnaround and catalyst costs. These estimates exclude potential strategic acquisitions and joint ventures.
- Management warned that further declines in crude and refined-product prices could reduce inventory carrying values. Biofuel-credit prices were expected to remain volatile; Q1 compliance costs were $133 million versus $92 million a year earlier. Most Q1 costs under new greenhouse-gas cap-and-trade requirements were recovered from customers.
- Environmental cleanup matters in Hartford, Illinois could result in a loss of $0–$200 million above recorded accruals. Ordinary-course litigation liabilities recorded were not material.
- IRS audits covered 2006–2011; Valero expected to settle 2006–2007 audits within 12 months and believed settlements would not exceed recorded uncertain-tax-position liabilities. The filing reports no material change in risk factors from the 2014 Form 10-K.
- Valero reported investment-grade debt ratings with stable outlooks and compliance with its revolver covenant. Its $1.5 billion receivables facility had $100 million outstanding; availability had fallen to $1.3 billion. VLP cash is restricted to VLP obligations.
Key facts for investors to verify
- Whether refining margins and crude-oil discounts developed as management expected, and how much earnings depended on favorable product margins.
- Whether ethanol margins recovered from the sharp year-over-year decline.
- How much operating cash flow reflects sustainable operations versus working-capital timing.
- Debt, refinancing needs, credit ratings, receivables-facility availability, and cash held by international subsidiaries or VLP.
- Potential inventory valuation exposure, environmental cleanup costs, RIN and emissions-credit costs, and outcomes of tax audits.