Valero Energy Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated results; comparisons are with Q1 2010. Paulsboro and Delaware City refinery results were presented as discontinued operations in the 2010 comparison.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Operating revenue | $26.308 billion | $18.493 billion | Up 42%, principally higher product prices and throughput |
| Operating income | $244 million | $4 million | Up $240 million |
| Income from continuing operations | $104 million | Loss of $80 million | $0.18 versus loss of $0.14 per diluted share |
| Net income (loss) | $98 million | Loss of $113 million | Includes discontinued-operations losses of $6 million and $33 million, respectively |
| Operating cash flow | $2.058 billion | $982 million | Increase was substantially supported by working-capital changes |
| Capital expenditures and deferred turnaround/catalyst costs | $737 million | $611 million | Q1 2011 included $438 million and $299 million, respectively |
Margins and segments: Refining operating income was $276 million, versus a $15 million loss; reported throughput margin was $7.05 per barrel, including the derivative loss described below. Retail operating income declined to $66 million from $71 million; U.S. fuel margins weakened, while Canadian retail income improved. Ethanol operating income fell to $44 million from $57 million, primarily reflecting lower ethanol-to-corn margins and higher operating costs.
Cash, debt and liquidity: Cash and temporary investments were $4.133 billion at quarter-end, up from $3.334 billion at year-end 2010. Debt and capital lease obligations totaled $7.829 billion, including $312 million current and $7.517 billion long-term. The company repaid $210 million of notes and paid $300 million to acquire GO Zone bonds during the quarter. No revolving-credit borrowings were outstanding; the $2.4 billion revolver matures in November 2012. Revolver covenant debt-to-capitalization was 19.5%, versus a 60% maximum. The $1 billion receivables facility, with $100 million of receivables sold, was due to mature in June 2011; renewal was anticipated. A further $200 million debt repayment was made May 2, 2011.
Other measures: Total assets were $39.592 billion and stockholders’ equity was $15.224 billion. The quarterly dividend was $0.05 per share. The company reported investment-grade senior debt ratings: S&P BBB (stable), Moody’s Baa2 (stable), and Fitch BBB (negative).
Material changes and unusual items
- A realized $542 million pre-tax loss on commodity derivatives related to forward sales of refined products reduced Q1 2011 results; the after-tax effect was $352 million, or $0.61 per share. Management stated that, excluding this loss, operating income would have been $786 million and refining operating income $818 million. The loss was recorded in cost of sales.
- Refining improvement reflected stronger distillate margins, wider sour-crude discounts and higher throughput. Higher crude prices and product-margin volatility remained relevant countervailing factors.
- Revenue growth does not by itself indicate equivalent improvement in profitability: cost of sales rose to $24.568 billion from $17.056 billion.
- Q1 2010 G&A benefited from a $40 million insurance settlement; this contributed to the reported year-over-year increase in G&A.
- Q1 2011 operating cash flow benefited from a $1.603 billion source of cash from changes in current assets and liabilities. The filing attributes much of the year-over-year cash-flow increase to working capital.
Outlook, risks and contingencies
- Management expected U.S. and global economic recovery to support refined-product demand, but cautioned that continued rapid crude-price increases could weaken demand. Energy markets and margins were expected to remain volatile in the near to mid-term. The filing provides no specific earnings guidance.
- For 2011, Valero expected approximately $3.2 billion of capital investments: $2.6 billion of capital expenditures, including about $260 million for environmental projects, and $570 million of turnaround and catalyst costs. The estimate excludes strategic acquisitions.
- Valero agreed to acquire Chevron Limited, owner of the 270,000-barrel-per-day Pembroke Refinery and related U.K. and Ireland assets, for $730 million plus working capital, estimated at about $1 billion. Closing was expected in Q3 2011, subject to regulatory approvals, funded from available cash.
- The Aruba refinery restarted in January 2011 and was not deemed impaired at March 31. Its $967 million net book value is exposed to sour-crude differential assumptions; management warned that failure of those differentials to improve as expected could result in a potentially material impairment.
- Environmental and regulatory exposure includes federal greenhouse-gas requirements and California AB 32 measures, as well as uncertainty over Texas permitting. Compliance costs, capital spending, operating restrictions, and demand effects could be material; the filing does not quantify a clear total exposure.
- In 46 fuel-temperature sales lawsuits, 21 of which involved Valero, the company reported that a possible loss was reasonably possible but could not estimate a loss range; it recorded no liability. Kansas trial was scheduled for May 2012. The company said other known litigation was not expected to have a material adverse effect.
- Commodity-price, counterparty, foreign-exchange, credit-rating, acquisition-integration, and refining-market risks remain. The filing states that implementation effects of the Dodd-Frank Act on derivatives were not yet known.
- Valero planned approximately $100 million of 2011 pension contributions, although none were made in Q1. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Reconcile the $542 million derivative loss, its timing and accounting, and the underlying refining economics; assess the usefulness of management’s figures excluding it.
- Evaluate how much of Q1 operating cash flow came from working-capital movements and whether those movements are likely to reverse.
- Track refining margins by region, particularly distillate and gasoline margins, crude differentials, and West Coast operating losses.
- Verify Pembroke acquisition approvals, final working-capital adjustment, closing timing, and funding impact.
- Monitor Aruba’s restart performance and sour-crude differentials, along with environmental compliance and permitting developments.
- Confirm renewal or replacement of the June 2011 receivables and letter-of-credit facilities, debt repayments, and credit-rating outlooks.
- Review developments in fuel-temperature litigation, including class certification, trial timing, and any change in the company’s ability to estimate exposure.