Valero Energy Corporation — FY2017 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2017 (not only the fourth quarter). Valero operates 15 refineries in the U.S., Canada, and U.K. with combined throughput capacity of about 3.13 million barrels per day, 11 U.S. ethanol plants, and majority-owned logistics partnership VLP. Effective January 1, 2017, Valero began reporting VLP as a separate segment and retrospectively adjusted prior-period segment information.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Operating revenue | $93.98 billion | $75.66 billion |
| Operating income | $3.60 billion | $3.57 billion |
| Net income attributable to Valero stockholders | $4.07 billion | $2.29 billion |
| Diluted EPS | $9.16 | $4.94 |
| Cash from operating activities | $5.48 billion | $4.82 billion |
| Cash and temporary cash investments at year-end | $5.85 billion | $4.82 billion |
| Debt and capital lease obligations, total | $8.87 billion | $8.00 billion |
All amounts are U.S. dollars. FY2017 net income included a $1.86 billion income tax benefit from Tax Reform; excluding that item, adjusted net income attributable to stockholders was $2.20 billion, versus $1.72 billion in 2016. Adjusted operating income, a non-GAAP measure, was $3.66 billion versus $2.88 billion.
- Cash flow and investment: Operating cash flow was $5.48 billion; investing activities used $2.38 billion and financing activities used $2.27 billion. Capital investments, including capital expenditures, turnaround and catalyst costs, and joint-venture investments, totaled about $2.3 billion.
- Liquidity: Current assets were $19.31 billion and current liabilities $11.07 billion. Valero’s $3.0 billion revolving facility had $2.95 billion available at year-end; VLP’s $750 million revolver had $340 million available.
- Operating performance: Refining adjusted operating income rose to $4.08 billion from $3.13 billion; refining throughput increased to 2.94 million barrels per day from 2.86 million. Refining margin averaged $9.12 per barrel, up from $8.20. Ethanol adjusted operating income fell to $172 million from $290 million, while production increased to 3.97 million gallons per day from 3.84 million.
- Shareholder returns: Valero paid $2.80 per share in dividends in 2017 and repurchased $1.3 billion of stock. The board later declared a $0.80 quarterly dividend and authorized an additional $2.5 billion share repurchase program in January 2018.
Material changes versus FY2016
- Revenue increased $18.3 billion, mainly as higher refined-product prices lifted sales; higher crude and other feedstock costs largely offset the revenue increase in reported operating income.
- Adjusted operating income increased $779 million. Refining improved by $942 million, principally from stronger gasoline and distillate margins and higher throughput; weaker sour-crude/feedstock discounts, higher biofuel-credit costs, and higher operating expenses partially offset gains.
- Ethanol adjusted operating income declined $118 million, primarily due to lower ethanol and co-product prices. VLP adjusted operating income increased $74 million, primarily from acquired terminals and pipeline assets and increased throughput.
- Reported net income rose substantially, but the comparison is affected by the 2017 Tax Reform benefit. FY2016 also included a $747 million noncash inventory valuation benefit and a $56 million Aruba asset impairment loss.
Outlook, commentary, risks, and unusual items
- Near-term outlook: Management expected first-quarter 2018 refining and ethanol margins to remain near then-current levels. Medium and heavy sour crude discounts were expected to remain weaker than their five-year averages; sweet crude discounts were expected near current levels.
- Tax and other items: Tax Reform reduced the U.S. corporate tax rate to 21% beginning in 2018. The company recorded a $734 million provisional transition-tax liability on deemed repatriated foreign earnings, payable over eight years, and said parts of its tax accounting remained incomplete and subject to revision. Management did not expect Tax Reform overall to adversely affect cash taxes, results, or financial condition.
- Expected 2018 spending: Capital investments were estimated at approximately $2.7 billion, excluding potential strategic acquisitions. Environmental-compliance capital expenditures were estimated at $290 million for 2018 and $123 million for 2019; estimates may change with regulatory actions.
- Identified benefit: Legislation extending the biodiesel blender’s tax credit for 2017 volumes was expected to produce an approximately $170 million first-quarter 2018 benefit to refining cost of materials; about half, after tax, was expected to be excluded from Valero-attributable net income because it would be recognized by a 50%-owned consolidated entity.
- Principal risks: Volatile refining margins and crude differentials; rising or volatile Renewable Identification Number (RIN) and other environmental-credit costs; crude-supply, transport, and refinery-outage risks; environmental and climate regulation; severe weather; cyber incidents; and access to financing. RIN costs increased to $942 million from $749 million in 2016.
- Contingencies and unusual operating effects: Hurricane Harvey-related damage costs were included in $61 million of other operating expenses in 2017. In the Hartford, Illinois environmental matters, the company disclosed a reasonably possible loss of $0–$200 million above its accrual. Management stated that specified environmental enforcement proceedings, if decided adversely, were not expected to materially affect financial position, results, or liquidity.
Most important facts for investors to verify
- Separate operating performance from the $1.86 billion Tax Reform benefit; review the provisional tax accounting and transition-tax payment schedule.
- Track refining margins, crude/feedstock discounts, throughput, and RIN costs, which drove much of the year-over-year operating change.
- Assess whether the $2.7 billion 2018 capital-investment estimate and announced dividend and buyback plans remain consistent with operating cash generation and debt obligations.
- Review the Hartford environmental exposure, open tax audits, and remaining environmental enforcement matters, including whether estimates or accrued liabilities change.
- Consider debt and lease obligations alongside liquidity: total debt and capital leases were $8.87 billion, and contractual purchase obligations totaled $30.23 billion, largely tied to market-priced or indexed supply and service arrangements.