Valero Energy Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Valero is a U.S.-based refining and marketing company with refining, retail, and ethanol segments. At year-end it operated 16 refineries (Aruba operations suspended), 10 ethanol plants, and retail operations in the U.S. and Canada.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $139.25 billion | $125.99 billion |
| Operating income | $4.01 billion | $3.68 billion |
| Net income attributable to Valero stockholders | $2.083 billion | $2.090 billion |
| Diluted EPS from continuing operations | $3.75 | $3.69 |
| Cash from operating activities | $5.27 billion | $4.04 billion |
| Capital expenditures and turnaround/catalyst costs | $3.41 billion | $2.98 billion |
- Revenue grew 11%, mainly from higher average refined-product prices and increased refining throughput, including full-year contributions from the Meraux and Pembroke acquisitions.
- Refining operating income was $4.45 billion, up $934 million as reported. Excluding Aruba and other asset impairments, Aruba severance, and the 2011 derivative loss, refining operating income was approximately $5.5 billion versus $4.1 billion. Refining throughput margin increased to $10.96 per barrel from $9.91.
- Ethanol recorded a $47 million operating loss, versus $396 million of income in 2011, as high corn costs and weaker ethanol prices compressed margins. Retail operating income declined to $348 million from $381 million, primarily reflecting weaker Canadian fuel margins.
- Net income was broadly flat despite improved underlying refining results. The filing reports $1.014 billion of impairment losses, including $928 million associated with Aruba, $65 million for cancelled projects, and $21 million for retail stores. Aruba impairment and severance did not receive tax benefits.
- Year-end cash and temporary investments were $1.723 billion; current assets were $16.46 billion and current liabilities $11.93 billion. Total debt and capital lease obligations were $7.049 billion, including $586 million current; long-term debt and leases were $6.463 billion. The company had no revolving-credit borrowings at year-end and a $3 billion U.S. revolver.
- Total assets were $44.48 billion and equity $18.10 billion. The Revolver covenant debt-to-capitalization ratio was 23%, against a 60% maximum. Senior debt ratings remained investment grade, with S&P at BBB and a negative outlook.
- Valero paid $360 million in common dividends during 2012; the annual dividend was $0.65 per share. The board declared a quarterly dividend of $0.20 per share in January 2013.
Fourth quarter: Revenue was $34.70 billion, operating income $1.584 billion, net income attributable to stockholders $1.010 billion, and diluted EPS $1.82. For fourth-quarter 2011, the corresponding figures were $34.67 billion, $167 million, $45 million, and $0.08.
Outlook, material developments, and risks
- Management expected 2013 capital expenditures of approximately $1.9 billion, including about $100 million for environmental projects, plus approximately $600 million for turnaround and catalyst costs. No specific company-wide earnings or margin guidance was provided.
- Management expected modest ethanol-margin improvement in 2013 from depressed 2012 levels, while emphasizing that energy markets and margins were likely to remain volatile.
- Management warned that the Mid-Continent crude-cost advantage could narrow as pipeline and logistics projects move inland U.S. and Canadian crude to the Gulf Coast, potentially reducing margins. Refinery closures and supply disruptions could support margins, but continued operation of marginal refineries could weigh on them.
- Valero planned to distribute 80% of CST Brands to shareholders, subject to regulatory and tax conditions, and expected the separation in the second quarter of 2013. It expected to receive about $1.1 billion in cash and incur approximately $230 million in tax liability; it also planned to dispose of the retained 20% interest. The separation could reduce diversification and increase volatility, and completion was not assured.
- Aruba refining was suspended in March 2012 after sustained inability to generate positive cash flow. Following withdrawal of a prospective buyer’s offer, Valero decided to reorganize the site as a crude-oil and refined-products terminal. It said the refinery assets would be maintained for a possible restart, although restarting is not assured.
- Key exposures include volatile refining margins and crude differentials, feedstock and transport disruptions, refinery outages, environmental and climate regulation, commodity and derivative risk, credit-market access, and pension funding. Environmental capital spending was $135 million in 2012; estimates were $100 million for 2013 and $70 million for 2014, excluding strategic investments.
- For the Hartford environmental matters, Valero disclosed a reasonably possible loss of $0 to $250 million above its accrual. Other listed environmental enforcement matters included unresolved notices and alleged violations; Valero stated that the reported proceedings were not expected to materially affect its financial position, results, or liquidity.
Important facts for investors to verify
- Whether refining margins remain resilient if the WTI-Brent differential narrows, and the pace and effect of pipeline and logistics expansions.
- Whether 2013 ethanol margins improve as management expected, given corn prices, ethanol supply, and export demand.
- Completion terms and timing of the CST separation, including the tax ruling, cash proceeds, tax cost, and treatment of Valero’s retained shares.
- Potential additional Aruba-related costs or changes to the terminal/restart plan, and the assumptions behind the recorded impairment.
- Environmental remediation exposure, particularly the Hartford matter, and future regulatory compliance costs.
- Cash generation relative to capital spending, debt maturities, dividends, and share repurchases; also monitor credit ratings and the receivables facility maturity in July 2013.