Valero Energy Corporation — FY2013 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2013. Valero operated 16 refineries with approximately 3.1 million barrels per day of combined throughput capacity and 10 ethanol plants. Following its May 1, 2013 separation of CST Brands, Valero’s reportable segments were refining and ethanol; 2013 results still include the former retail business through April.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Operating revenue | $138.1 billion | $139.3 billion |
| Operating income | $4.0 billion | $4.0 billion |
| Net income attributable to Valero stockholders | $2.72 billion | $2.08 billion |
| Diluted earnings per share | $4.97 | $3.75 |
| Cash provided by operating activities | $5.56 billion | $5.27 billion |
| Cash and temporary cash investments at year-end | $4.29 billion | $1.72 billion |
| Debt and capital lease obligations | $6.56 billion | $7.05 billion |
Refining throughput margin declined to $9.69 per barrel from $10.96; refining operating income was $4.22 billion versus $4.45 billion as reported. Ethanol operating income improved to $491 million from a $47 million loss, with gross margin rising to $0.77 per gallon from $0.30. Refining throughput averaged 2.682 million barrels per day, up from 2.613 million.
Current assets were $19.28 billion and current liabilities $13.12 billion. Valero had no borrowings under its $3 billion revolving credit facility at year-end, though letters of credit were outstanding. Senior unsecured debt ratings remained investment grade: Moody’s Baa2 (stable), S&P BBB (negative), and Fitch BBB (stable). The company paid $462 million in dividends and repurchased $928 million of stock during 2013.
Fourth-quarter 2013 revenue was $34.43 billion, operating income $1.56 billion, net income attributable to Valero stockholders $1.29 billion, and diluted EPS $2.38.
Material changes versus the prior period
- Reported net income attributable to Valero stockholders rose $637 million. Management attributed the increase principally to $1.0 billion of impairment losses recorded in 2012 and a $325 million nontaxable gain from disposing of Valero’s retained CST interest in 2013. Excluding these significant items, management said 2013 net income declined $702 million.
- Management reported a $1.3 billion year-over-year decline in refining operating income after adjusting 2012 for impairment and severance items. Lower gasoline margins, narrower discounts on light sweet crude, and biofuel credit costs were key pressures; higher distillate margins and wider medium sour crude discounts provided offsets.
- Biofuel credit costs, primarily U.S. RINs, increased to $517 million from $250 million. Higher distillate production associated with new hydrocrackers helped refining margins.
- The retail separation reduced comparability: 2013 includes retail results only through April 30. Valero completed the IPO of Valero Energy Partners LP in December, receiving $369 million in net proceeds; Valero retained control and consolidated the partnership.
Outlook, risks, contingencies, and unusual items
- Management described refining margins, crude oil differentials, product prices, and RIN prices as volatile. For 2014, it estimated RIN compliance costs of $250 million to $350 million, while noting uncertainty in market prices and EPA blending requirements.
- Expected 2014 capital expenditures were approximately $2.3 billion, plus approximately $700 million for deferred turnaround and catalyst costs. Environmental compliance capital expenditures were estimated at $90 million in 2014 and $204 million in 2015, excluding strategic investments.
- Major risks include volatile refining economics and feedstock differentials; refinery, logistics, or information-technology disruptions; crude supply and transportation interruptions; environmental regulation and remediation; and access to financing and derivative counterparties.
- For Hartford environmental cleanup matters, Valero disclosed a reasonably possible loss of $0 to $200 million in excess of its accrual. The company also cited uncertainty over greenhouse-gas permitting and Title V permits; potential costs and effects could not be determined clearly.
- The CST spin-off’s tax-free treatment remains subject to IRS or court challenge if relevant facts, representations, or conditions prove inaccurate or are not met. Valero generally bears certain related taxes under its tax matters agreement.
- Valero reported $443 million of uncertain tax position liabilities at year-end and ongoing IRS audits. It expected to pay approximately $400 million of taxes in the first quarter of 2014. The filing also describes pension and environmental estimates that depend on assumptions and may change.
- The 2012 Aruba refinery impairment totaled approximately $928 million; operations had been suspended in March 2012 and the site reorganized as a terminal. No impairment was recorded in 2013. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Assess refining earnings apart from the prior-year Aruba impairment and the 2013 CST disposal gain; confirm how much of the reported earnings increase reflects these items.
- Track regional refining margins, crude oil discounts, utilization, and the contribution of the Port Arthur and St. Charles hydrocrackers.
- Monitor RIN prices and actual 2014 compliance costs against management’s $250 million–$350 million estimate.
- Review the impact of the CST separation on revenue mix, ongoing fuel-supply agreements, retained liabilities, and tax exposure.
- Reconcile planned capital and turnaround spending with operating cash flow, liquidity, debt maturities, and share repurchases.
- Follow Hartford remediation exposure, environmental permitting and compliance costs, and the resolution of IRS audits and uncertain tax positions.