Valero Energy Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 7, 2013. Amounts are in U.S. dollars. Valero completed the separation of its retail business, CST Brands, on May 1, 2013; consequently, Q2 retail results include only April, and Valero retained a 20% CST stake.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $34.034bn | $34.662bn | $67.508bn | $69.829bn |
| Operating income | $808m | $1.361bn | $1.869bn | $1.117bn |
| Net income attributable to Valero stockholders | $466m | $831m | $1.120bn | $399m |
| Diluted EPS | $0.85 | $1.50 | $2.03 | $0.72 |
| Operating cash flow | Not separately provided | Not separately provided | $2.814bn | $2.834bn |
- Q2 margins and operations: Refining throughput margin was $9.26 per barrel, down $1.37 year over year; refining operating income fell $443m to $921m. Total throughput was 2.606m barrels per day versus 2.658m. Ethanol operating income rose to $95m from $5m, supported by higher gross margin per gallon ($0.65 versus $0.32). Retail operating income was $39m versus $172m, mainly because the business was separated.
- Six-month comparison: Operating income increased $752m, but the prior-year period included $611m of impairment losses, primarily for Aruba. Excluding those losses, 2013 operating income was up approximately $141m; refining operating income was up $277m on that adjusted comparison.
- Cash and investment: Cash and temporary cash investments were $2.398bn at June 30, versus $1.723bn at year-end 2012. Six-month capital expenditures were $1.211bn and deferred turnaround and catalyst costs were $449m; net cash used in investing was $1.683bn.
- Debt and liquidity: Balance-sheet debt and capital lease obligations totaled $6.564bn ($303m current and $6.261bn long-term); debt excluding capital leases was reported at $6.522bn. No amounts were drawn on the $3bn revolver or the Canadian facility. Revolver debt-to-capitalization was 19%, against a 60% covenant maximum. A $100m balance remained under the receivables facility.
- Capital returns: Valero repurchased $560m of stock and paid $220m in dividends in the first half. The Q2 dividend was $0.20 per share; after quarter-end, the board declared $0.225 per share. Approximately $3bn remained authorized for share purchases.
Material changes and management outlook
- Q2 earnings declined primarily because refining margins weakened: narrower discounts for heavy sour crude, higher RIN/biofuel-credit costs, and higher natural-gas costs. Management estimated that narrower heavy-sour discounts reduced Q2 refining margin by about $195m and higher natural-gas costs by about $57m.
- Management expected heavy-sour crude discounts to improve for the remainder of 2013, citing anticipated additional heavy Canadian crude flows to the U.S. Gulf Coast and increased Gulf Coast offshore production. It cautioned that energy markets and margins would remain volatile.
- Management estimated 2013 biofuel-credit compliance costs of $600m–$800m, based on recent credit prices and estimated purchase requirements; first-half costs were $267m, versus $126m in 2012.
- Expected 2013 capital investments were approximately $2.85bn, including about $650m for turnarounds and catalyst costs and $100m for environmental projects. Valero continued to evaluate a possible master limited partnership for its logistics assets; no transaction commitment was stated.
Risks, contingencies, and unusual items
- Valero estimated a reasonably possible additional loss of $0–$200m beyond recorded accruals for environmental cleanup and related litigation in Hartford, Illinois. It recorded $52m of environmental and legal reserves in Q2; the filing does not state that this $52m relates solely to the Hartford matter.
- Valero retained certain environmental and other liabilities from the former retail business and indemnified CST for specified self-insurance liabilities. The separation generated approximately $189m of tax liability, with most expected to be paid in the first half of 2014, and $30m of Q2 transaction costs.
- Unrecognized tax benefits totaled $386m. Valero was contesting IRS matters for tax years 2002–2009 and expected a settlement for 2004–2005 consistent with recorded amounts; timing of resolution remained uncertain.
- The $328m pension-liability reduction from plan amendments was recorded through other comprehensive income, not as current-period operating profit. Expected 2013 pension contributions were reduced to $45m.
- Valero continued to maintain Aruba’s idled refining assets while operating the site as a terminal; future abandonment could require asset-removal obligations. It also disclosed commodity, counterparty, foreign-exchange, regulatory, environmental, litigation, and market risks. Credit ratings were investment grade, with S&P showing a negative outlook.
Important facts for investors to verify
- Whether refining margins and heavy-sour crude discounts recover as management anticipated, and how changes in natural-gas costs affect results.
- Actual RIN/biofuel-credit costs versus the $600m–$800m 2013 estimate, including the impact of regulatory requirements and credit prices.
- Post-separation CST supply-agreement economics, retained 20% stake, planned sale timing, and any continuing liabilities or indemnities.
- Progress and ultimate cost of environmental matters, particularly the potential $0–$200m excess Hartford exposure, and resolution of tax audits.
- Execution of the $2.85bn capital-investment plan, cash generation, debt repayments, and share repurchases while maintaining liquidity.