Business context and reporting period
Valero Energy Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2010, with comparisons to Q1 2009. Valero operates refining and retail businesses and, following acquisitions, an ethanol segment. Delaware City refinery results are reported as discontinued operations.
Financial and operating performance
- Revenue: $19.643 billion, up $6.315 billion (47%) year over year, primarily reflecting higher refined-product prices.
- Profit: Continuing-operations loss of $101 million, or $0.18 per diluted share, versus income of $364 million, or $0.70 per diluted share, in Q1 2009. Net loss was $113 million versus net income of $309 million. The filing does not provide a clear consolidated gross-margin figure.
- Refining: Operating loss of $51 million versus income of $693 million. Throughput margin fell 35% to $5.79 per barrel, and throughput declined 11% to 2.095 million barrels per day. Management attributed the deterioration chiefly to lower gasoline and distillate margins; Aruba remained shut.
- Other segments: Retail operating income rose to $71 million from $56 million, supported by stronger fuel margins. Ethanol contributed $57 million of operating income; there is no Q1 2009 comparison because the business was acquired later.
- Cash flow and investment: Operating cash flow was $982 million versus $781 million, including a $923 million tax refund. Investing cash use was $856 million, including $382 million of capital expenditures, $229 million of turnaround and catalyst costs, and $260 million for ethanol facilities. Cash increased by $1.062 billion to $1.887 billion.
- Debt and liquidity: Reported debt carrying amount, including current maturities, was $8.313 billion; fair value was $9.329 billion. The company issued $1.25 billion of notes and redeemed $294 million of 7.50% notes during the quarter. It reported $2.4 billion of Revolver capacity, no borrowings under committed revolving credit facilities, and a 30.6% debt-to-capitalization ratio against a 60% covenant limit.
- Margins and dividends: Consolidated operating loss was $32 million. The quarterly dividend was $0.05 per share, down from $0.15 in Q1 2009; the board declared another $0.05 dividend payable in June 2010.
Material changes versus Q1 2009
- Operating results swung from profit to loss, mainly due to a $744 million decline in refining segment operating income. Management cited weak demand, product inventory builds, increased global refining capacity, and refined-product prices rising more slowly than crude costs.
- Refinery throughput was 254,000 barrels per day lower, primarily because Aruba was temporarily shut. Distillate and gasoline benchmark margins weakened; management estimated respective adverse impacts of approximately $400 million and $180 million on refining margin.
- Revenue rose sharply despite lower throughput, reflecting higher product prices. Retail income improved, and the newly acquired ethanol business added earnings.
- Operating cash flow increased, largely because of the tax refund. Capital expenditures and turnaround costs together declined to $611 million from $902 million; dividends paid fell to $28 million from $77 million.
Outlook, commentary, risks and unusual items
- Management expected a gradual economic recovery and stronger refined-product demand to support margins and sour-crude differentials, while warning that excess global refining capacity could continue to pressure margins and constrain production. Valero said it would continue optimizing refinery operations.
- Valero forecast approximately $2.0 billion of 2010 capital investment: $1.5 billion of capital expenditures, including about $800 million for environmental projects, and $500 million for turnaround and catalyst costs. This excludes strategic acquisitions.
- Aruba’s refinery remained temporarily shut. Valero had signed a proposed settlement with Aruba involving a $118 million payment, release of prior tax claims, elimination of the export turnover tax, and a new tax regime. Effectiveness depended on parliamentary approval and implementing changes; the parties anticipated action by June 1, 2010, with arbitration possible if the settlement did not take effect.
- Valero agreed in April 2010 to sell Delaware City refinery, terminal and pipeline assets for $220 million, subject to regulatory approvals and agreements with Delaware. Closing was expected in Q2 2010.
- Credit agencies had negative outlooks on investment-grade ratings. Management cited weak refining margins and the economic slowdown; a downgrade could raise financing costs or impair access to financing. The accounts-receivable sales facility, with $200 million sold at quarter-end, was due to mature in June 2010; Valero anticipated renewal.
- Refinery impairment testing found no impairment indication at March 31, 2010, but management said weaker-than-expected prices or other changes—particularly at Aruba and Paulsboro—could result in a potentially material impairment.
- Other notable items: a $40 million insurance recovery reduced general and administrative expense; a $16 million charge related to health-care reform reduced the tax benefit; Valero accrued approximately $140 million for Aruba tax disputes. It reached an agreement to settle 25 MTBE cases, subject to final procedures, and an agreement in principle to settle Rosolowski litigation. It had not accrued for fuel-temperature class actions and said potential losses could not be estimated. A crude cargo aboard a hijacked tanker was in Somali pirates’ possession; management did not expect a material adverse effect.
- Key risks include volatile commodity prices and refining margins, operational outages, environmental and carbon regulation, litigation and tax uncertainty, ethanol margins and policy changes, currency fluctuations, and financing availability. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether refining margins, throughput and utilization recover, and whether Aruba restarts.
- Completion and cash proceeds of the Delaware City sale, and approval and implementation of the Aruba tax settlement.
- Ability to renew the receivables facility and maintain investment-grade ratings and covenant compliance.
- 2010 capital-investment spending, cash generation excluding the tax refund, and debt trajectory.
- Resolution and final costs of MTBE, fuel-temperature and Rosolowski litigation, and other environmental or tax matters.