Valero Energy Corporation — Q3 2010 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and nine months ended September 30, 2010, compared with the same 2009 periods. Valero operates refining, retail and ethanol businesses. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenues | $22,210 | $18,573 | $63,628 | $49,277 |
| Operating income (loss) | $571 | $(238) | $1,460 | $163 |
| Income (loss) from continuing operations | $292 | $(343) | $721 | $(170) |
| Net income (loss) | $292 | $(629) | $762 | $(574) |
| Diluted earnings (loss) per share | $0.51 | $(1.12) | $1.34 | $(1.08) |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $2,622 | $1,940 |
- Q3 refining operating income was $571, versus a $219 loss a year earlier; refining throughput margin rose to $7.87 per barrel from $5.08, and throughput increased to 2.364 million barrels per day from 2.228 million.
- For the first nine months, refining operating income was $1,441 versus $331. Reported throughput margin was $7.76 per barrel versus $6.23; average throughput was lower, at 2.266 million barrels per day versus 2.323 million.
- Q3 retail operating income was $105 versus $111; nine-month retail income was $285 versus $232. Ethanol operating income was $47 versus $49 in Q3 and $139 versus $71 for nine months.
- At September 30, cash was $2,352, up from $825 at year-end 2009. Current assets were $11,877 and current liabilities $8,213.
- Debt and capital lease obligations were $8,036, including $523 current; the filing reports debt carrying value excluding capital leases of $7,998. The $2.4 billion revolving facility had no borrowings outstanding. Revolver debt-to-capitalization was 27.0%, below its 60% covenant limit.
- Operating cash flow included a $923 tax refund. Cash increased by $1,527 over the nine months. Investing cash outflow was $1,661, including $1,226 of capital expenditures and $410 of turnaround and catalyst costs; financing provided $547.
Material changes versus the prior period
- Revenue rose 20% in Q3 and 29% year to date, primarily reflecting higher refined-product prices; Q3 also benefited from higher throughput.
- Management attributed the refining recovery mainly to stronger distillate and petrochemical margins and wider sour-crude discounts. In Q3, higher distillate margins were estimated to add $411 to refining margin and wider sour-crude discounts $125; lower gasoline margins reduced it by an estimated $93.
- For nine months, management estimated favorable effects of $290 from distillate margins, $179 from petrochemical margins and $375 net from sour-crude discounts and lower sour-crude throughput; lower gasoline margins had an estimated $420 adverse effect.
- Q3 2009 included a $58 asset impairment loss and a $114 Aruba tax-dispute accrual in refining results, and a $286 loss from discontinued operations at Delaware City. Delaware City was sold in June 2010; the nine-month 2010 discontinued-operations result included a $58 after-tax sale gain, partly offset by operating losses.
- Valero acquired three ethanol plants in early 2010. Their additional production increased nine-month ethanol income, while Q3 ethanol margins weakened and operating costs rose.
Outlook, commentary, risks and unusual items
- Management expected a slow economic recovery to support refined-product demand and sour-crude differentials, but cautioned that excess global refining capacity and high product inventories could pressure margins and constrain production. No specific earnings guidance was provided.
- Valero expected 2010 capital investments of approximately $2.3 billion: $1.8 billion in capital expenditures, including about $780 for environmental projects, and $540 for turnaround and catalyst costs.
- Management expected the Aruba refinery to restart in December 2010 after maintenance, but noted the restart and future economics were uncertain. Its $962 net book value was particularly sensitive to sour-crude differentials; a material impairment remained possible if differentials did not improve as assumed.
- The proposed sale of the Paulsboro refinery for $363 plus net working capital was subject to permits and other conditions. Management said timely receipt of a modified emissions permit was unlikely; the agreement could terminate if conditions were not met or waived by December 1, 2010. A completed sale on the agreed terms would result in an estimated $920 loss.
- In October 2010, Valero agreed to sell its 50% interest in CHOPS for $330 cash, with closing expected before year-end. The investment was carried at $274 as of September 30.
- Environmental uncertainty includes the EPA’s disapproval of Texas’s flexible-permit program, affecting permits at six Valero refineries; the company could not estimate the financial or operational impact. Greenhouse-gas rules and California’s AB 32 could also raise costs or restrict operations.
- Valero reported 21 fuel-temperature consumer class actions and had not accrued a loss; it said a possible loss could not be reasonably estimated. Other risks include commodity-price volatility, refinery outages, market demand and margins, and regulatory or litigation outcomes.
- Credit ratings were investment grade but carried negative outlooks: S&P BBB, Moody’s Baa2 and Fitch BBB. A downgrade could increase financing costs or impair access. The board declared a $0.05 quarterly dividend payable December 15, 2010.
- Unusual items included a $30 after-tax gain from settling Aruba tax claims after a $118 payment, and a $16 tax charge related to 2010 health-care reform. The filing also disclosed that crude oil cargo taken by Somali pirates remained unavailable; management did not expect a material adverse effect.
Important facts for investors to verify
- Whether refining margins, especially distillate and sour-crude differentials, remain strong enough to sustain the earnings recovery.
- Whether Aruba restarts as expected and whether its operating assumptions support the carrying value.
- The status and outcome of the Paulsboro sale, permit conditions and potential $920 loss.
- Cash-flow quality, including the effect of the one-time $923 tax refund, and funding needs for planned capital investment and pension contributions.
- Developments in Texas permit regulation, greenhouse-gas compliance, fuel-temperature litigation and the company’s negative credit-rating outlooks.