Valero Energy Corporation — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Unaudited consolidated financial statements; amounts below are in U.S. dollars unless noted. Valero operates refining and retail businesses and added ethanol as a third reportable segment following its 2009 VeraSun acquisition.
Financial performance and liquidity
- Third quarter: Revenue was $19.489 billion, down 46% from $35.960 billion. Operating loss was $693 million versus operating income of $1.840 billion; net loss was $629 million, or $1.12 per diluted share, versus net income of $1.152 billion, or $2.18 per diluted share.
- First nine months: Revenue was $51.238 billion, down 49% from $100.545 billion. Operating loss was $503 million versus operating income of $3.470 billion; net loss was $574 million, or $1.08 per diluted share, versus net income of $2.147 billion, or $4.02 per diluted share.
- Refining margins and activity: Refining throughput margin was $4.86 per barrel in Q3, down from $13.11; year to date it was $6.09, down from $10.80. Refining throughput fell 8% in both comparisons: 2.379 million barrels per day in Q3 and 2.445 million year to date. Refining segment operating losses were $674 million for Q3 and $335 million year to date.
- Other segments: Retail operating income was $111 million in Q3 and $232 million year to date, compared with $107 million and $206 million, respectively. The newly acquired ethanol business contributed operating income of $49 million in Q3 and $71 million year to date.
- Cash flow: Operating cash flow was $1.940 billion for the first nine months, down from $3.520 billion. Investing cash outflow was $2.683 billion, including $1.820 billion of capital expenditures, $301 million of turnaround and catalyst costs, and $556 million for VeraSun facilities. Financing provided $1.343 billion. Cash increased by $665 million to $1.605 billion.
- Balance sheet: At September 30, cash was $1.605 billion, restricted cash $144 million, current assets $10.865 billion, and current liabilities $7.757 billion. Debt and capital lease obligations on the balance sheet totaled $7.375 billion, versus $6.576 billion at year-end 2008. Stockholders’ equity was $15.890 billion.
- Capital and funding: Valero raised $998 million net of issuance costs from $1 billion of notes issued in March, and $799 million net from a June offering of 46 million shares. It paid $239 million in dividends year to date. No revolving-credit borrowings were outstanding at September 30; the company reported $2.5 billion of revolving capacity then, reduced to $2.4 billion in October after Lehman Brothers Bank failed to fund its $84 million commitment.
Material changes versus 2008
- Weak demand and higher product inventories pressured refining economics. Diesel and jet-fuel margins declined substantially; gasoline margins were generally better year to date, while margins on certain secondary products improved.
- Crude oil prices were sharply lower, but sour-crude discounts also narrowed, reducing a feedstock advantage important to Valero. Q3 WTI averaged $68.18 per barrel versus $117.83; the year-to-date averages were $56.90 versus $113.25.
- Q3 and year-to-date results included asset impairment charges of $417 million and $575 million, respectively, compared with $43 million in each comparable 2008 period. The 2009 charges included abandonment of Delaware City’s gasification unit and cancelled capital projects. The 2008 comparisons included a $305 million gain on the Krotz Springs refinery sale; 2008 year-to-date results also benefited from a roughly $100 million McKee refinery insurance settlement.
- Valero acquired seven VeraSun ethanol plants and a development site for total consideration of $556 million, including working capital. The acquisition expanded reporting to three segments and added $673 million of ethanol revenue for the post-acquisition portion of the first nine months.
- Refinery throughput declined due to economic operating decisions, the temporary Aruba shutdown, maintenance and unplanned downtime, and the prior-year Krotz Springs sale. Refining operating expenses decreased, partly reflecting lower energy costs.
Outlook, risks, contingencies and unusual items
- Management expected weak demand, elevated inventories, and pressure on refined-product margins and sour-crude differentials to persist in the near term. It forecast fourth-quarter throughput margins similar to Q3 levels, which could result in losses in Q4 and for full-year 2009. No numerical earnings guidance was provided.
- The Aruba refinery, with approximately $1.0 billion net book value, was temporarily shut in July and was expected to remain idle until economics improved; potential alternatives included a sale. The Corpus Christi East coker and Delaware City coker were also shut temporarily; Delaware City’s gasification unit was permanently shut down.
- Capital projects totaling about $1.6 billion were suspended, including two Gulf Coast hydrocracker projects with approximately $1.0 billion spent to date. Costs on suspended projects had not been written off. Management warned further impairment charges could occur if market conditions or underlying assumptions worsened.
- Valero recorded a $140 million loss-contingency accrual, including interest, for disputed Aruba dividend and turnover taxes after an interim arbitration ruling. Restricted cash associated with the Aruba tax dispute was $114 million. The arbitration had not finally resolved the remaining tax issues; Valero said it would continue to pursue its claims.
- Management said that if industry conditions did not improve measurably for 2010, the board would evaluate reducing the quarterly dividend, then $0.15 per share. The filing also identified potential costs and operating restrictions from proposed U.S. greenhouse-gas legislation.
- Litigation included 33 active MTBE cases and 21 fuel-temperature class actions as of November 5, 2009. Valero had accrued for MTBE litigation but not the fuel-temperature matters; it said possible aggregate losses could not reasonably be estimated. Environmental enforcement matters and other ordinary-course claims were also disclosed.
- Valero reported investment-grade ratings at period end, with S&P at BBB with a negative outlook, Moody’s at Baa2 stable, and Fitch at BBB stable. It cautioned that downgrades could increase borrowing costs or impair access to financing. Management stated that available operating funds and credit facilities were expected to cover ongoing requirements, while noting future financing availability was not assured.
Important facts for investors to verify
- Whether refining margins, sour-crude differentials, product demand, and refinery utilization improve from the levels management described.
- The status, carrying-value recoverability, and potential sale or restart plans for Aruba and other idled units; and the disposition of suspended projects and further impairment risk.
- The final outcome and cash exposure from Aruba tax proceedings, including the $140 million accrual and restricted cash.
- Cash generation, capital spending, debt maturities and costs, credit-facility availability after the Lehman commitment reduction, and the ability to maintain the dividend.
- Actual ethanol-segment performance and margins following the VeraSun acquisition, plus material developments in litigation and environmental proceedings.