Valero Energy Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2012. Unless noted, amounts are in millions of dollars. Valero operates refining, retail, and ethanol businesses.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $34,726 | $33,713 | $104,555 | $91,314 |
| Operating income | $1,309 | $1,979 | $2,426 | $3,513 |
| Net income attributable to Valero shareholders | $674 | $1,203 | $1,073 | $2,045 |
| Diluted earnings per share | $1.21 | $2.11 | $1.93 | $3.59 |
| Cash from operating activities | — | — | $5,107 | $4,328 |
Revenue rose year over year, primarily reflecting higher refined-product prices and, for the nine-month comparison, increased throughput and the inclusion of the Meraux and Pembroke refineries. Earnings declined despite higher revenue. Nine-month operating cash flow benefited in part from a $511 million favorable working-capital change versus the prior period.
At September 30, cash and temporary investments were $2,549, up from $1,024 at year-end 2011. Current assets were $16,267 and current liabilities $12,251. Debt and capital lease obligations totaled $7,048, including $585 current; debt excluding capital leases was reported at $6,997. The company had no borrowings outstanding under its $3 billion revolving facility, with $64 million of letters of credit outstanding. The accounts-receivable sales facility had $100 million outstanding at quarter-end.
For the first nine months, capital expenditures were $2,129 and turnaround and catalyst costs were $339. Financing cash outflows included $263 of dividends and $148 of treasury-stock purchases. The quarterly dividend was $0.175 per share, versus $0.05 a year earlier.
Operating results and changes
- Refining: Q3 operating income was $1,528 versus $1,947; nine-month income was $2,773 versus $3,476. Q3 throughput margin was $13.12 per barrel versus $13.24; nine-month margin was $10.51 versus $11.65. For Q3, stronger North Atlantic and Mid-Continent results were offset by weaker Gulf Coast and West Coast results. Nine-month results also reflected higher operating costs at the recently acquired Meraux and Pembroke refineries.
- Retail: Q3 operating income fell to $41 from $97; nine-month income was $253 versus $298. Management attributed the weakness principally to lower fuel margins, including the effect of rising wholesale prices.
- Ethanol: Q3 recorded an operating loss of $73, versus income of $107; nine-month loss was $59, versus income of $215. Lower margins reflected high corn prices, weaker ethanol prices, excess supply, reduced U.S. gasoline demand, and increased Brazilian imports.
- Special items: Q3 included $345 of impairments, primarily $333 related to Aruba, and $41 of Aruba severance expense. Nine-month impairments were $956, including $928 related to Aruba, plus the $41 severance expense. The 2011 nine-month comparison included a $542 loss on commodity derivatives, which partly complicates year-over-year comparisons.
Outlook, risks and contingencies
- Valero expected 2012 capital investments of approximately $3.0 billion, including about $150 million for environmental projects, plus $495 million for turnaround and catalyst costs.
- Management said ethanol margins had begun to recover in early Q4 but remained unfavorable, and expected energy markets and margins to remain volatile. Management cautioned that completion of crude-oil pipeline and logistics projects could narrow the WTI discount and reduce margins for refiners processing WTI-priced crude.
- In September, Valero decided to reorganize the suspended Aruba refinery into a crude-oil and refined-products terminal after a prospective buyer withdrew its nonbinding offer. The company recorded a further impairment and severance liability for 495 employees. It said refining assets would be maintained for possible restart; future abandonment could trigger a land-lease retirement obligation.
- Valero was reviewing potential transactions to separate its retail business, including a possible tax-efficient distribution to shareholders; no transaction was finalized in the filing.
- Environmental and regulatory risks include potential costs and operating restrictions from greenhouse-gas rules, California’s AB 32 programs, and uncertainty around Texas permitting. The company said it could not determine the costs or effects of certain permitting developments.
- IRS audits covered U.S. federal tax years 2002–2009. Valero was contesting certain assertions; an adverse outcome could reclassify deferred tax liabilities as current and materially affect liquidity. Other disclosed litigation loss-contingency liabilities were not material, according to the company.
- Senior unsecured ratings were investment grade at filing, with S&P BBB (negative outlook), Moody’s Baa2 (stable), and Fitch BBB (stable). The company warned that downgrades could raise financing costs or impair access to financing.
Key facts for investors to verify
- Whether Aruba remains a terminal operation or Valero later restarts or abandons the refinery assets, and whether further charges or obligations arise.
- Whether refining margins—particularly WTI-related feedstock advantages—and ethanol margins improve or weaken, and how acquired-refinery costs affect profitability.
- Progress, structure, timing, and financial consequences of the proposed retail-business separation.
- Actual 2012 capital investment and turnaround spending compared with management’s estimates, alongside cash generation and debt levels.
- Developments in IRS audits, environmental regulation and permitting, and any resulting cash, compliance, or operating impacts.