Valero Energy Corporation — 2010 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2010; comparison with the corresponding 2009 periods. Amounts are U.S. dollars; financial statement figures are in millions unless stated otherwise. The interim statements are unaudited.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $21,775 | $17,376 | $41,418 | $30,704 |
| Operating income (loss) | $921 | $(192) | $889 | $401 |
| Income from continuing operations | $530 | $(191) | $429 | $173 |
| Net income (loss), including discontinued operations | $583 | $(254) | $470 | $55 |
| Diluted EPS, continuing operations | $0.93 | $(0.36) | $0.76 | $0.33 |
| Diluted EPS, total | $1.03 | $(0.48) | $0.83 | $0.11 |
- Q2 refining operating income was $921 million, versus a $143 million loss in Q2 2009; refining throughput margin rose to $9.39 per barrel from $4.74. Management attributed the improvement primarily to stronger distillate margins and wider sour-crude discounts. Throughput volumes declined 2% to 2.337 million barrels per day.
- For the first half, refining operating income increased to $870 million from $550 million, but the comparison benefited substantially from lower impairment losses: $2 million in 2010 versus $139 million in 2009. First-half throughput margin rose to $7.70 per barrel from $6.77; throughput volume fell to 2.217 million barrels per day from 2.371 million.
- Q2 retail operating income was $109 million versus $65 million; ethanol operating income was $35 million versus $22 million. First-half figures were $180 million versus $121 million for retail and $92 million versus $22 million for ethanol. Ethanol results benefited from additional acquired plants; retail fuel margins benefited from ethanol blending.
- Six-month operating cash flow was $1.770 billion, compared with $1.407 billion. Management said the increase was primarily due to a $923 million tax refund. Investing cash use was $1.157 billion and financing cash provided was $575 million. Cash increased by $1.176 billion to $2.001 billion.
- At June 30, cash was $2.001 billion and current assets were $11.348 billion, against current liabilities of $7.914 billion. Debt and capital lease obligations were $523 million current and $7.511 billion long-term. The debt note separately reports a $7.996 billion carrying amount for debt, including current debt; the filing text does not reconcile this figure to the balance-sheet debt-and-lease totals.
- The $2.4 billion revolving credit facility was undrawn. The company reported a 28.6% debt-to-capitalization ratio under the facility covenant, below its 60% maximum. The accounts-receivable sales facility had $100 million of receivables sold at quarter-end and matures in June 2011.
- Six-month capital expenditures were $785 million and turnaround/catalyst spending was $343 million. The company paid $57 million in common dividends in the first half; quarterly dividend was $0.05 per share, down from $0.15 in Q2 2009.
Material changes and notable items
- Revenue increased 25% year over year in Q2 and 35% in the first half, primarily reflecting higher refined-product prices. Q2 operating results recovered from a loss to profit, driven chiefly by refining; first-half operating income also rose, with the lower impairment charge an important contributor.
- Valero sold its permanently shut Delaware City refinery and associated terminal and pipeline assets on June 1 for $220 million cash. The sale generated a $92 million pre-tax gain on refinery assets and a $3 million gain on terminal and pipeline assets. The refinery gain contributed $53 million to Q2 discontinued-operations income; first-half discontinued-operations income was $41 million.
- The company acquired three ethanol facilities in Q1 for total consideration of $281 million. Ethanol production averaged 3.190 million gallons per day in Q2, compared with 1.547 million in Q2 2009.
- Valero issued $1.25 billion of notes in February 2010 and redeemed $294 million of 7.50% notes and $190 million of 6.75% notes. Interest expense increased year over year, partly due to the new debt and reduced capitalization of interest.
- An Aruba tax settlement became effective June 1. Valero paid the Government of Aruba $118 million for release of pre-June tax claims; the settlement produced a $30 million after-tax gain. The new regime imposes a 7% profit tax and, from 2012, a $10 million minimum annual tax payment.
Outlook, risks and contingencies
- Management expected a slow economic recovery and higher refined-product demand, potentially supporting margins and sour-crude differentials. It cautioned that global refining capacity growth and high product inventories could continue to pressure margins. No specific earnings or EPS guidance was provided.
- Valero expected approximately $2.3 billion of 2010 capital investment: $1.8 billion of capital expenditures, including about $780 million for environmental projects, and $500 million for turnaround and catalyst costs.
- The Aruba refinery remained shut but was undergoing maintenance in preparation for a potential restart by the end of Q3 2010. A restart was not assured; its $1.1 billion net book value could face material impairment if restart assumptions change or the refinery is permanently closed. Valero was negotiating a possible sale of Paulsboro; no sale was certain, and the refinery had a $1.3 billion net book value.
- The EPA disapproved Texas’s flexible-permit program on June 30, calling into question permits at six Valero refineries. Litigation was anticipated; potential compliance costs, remedial work, capital needs, operating costs, and restrictions could be material, but Valero could not estimate the impact.
- Valero disclosed 21 consumer class actions concerning fuel-temperature sales practices. It intends to contest the cases, recorded no loss contingency, and said a possible loss range could not reasonably be estimated. Other disclosed risks include increasingly stringent environmental and greenhouse-gas regulation, commodity and foreign-exchange volatility, and credit-rating risk; the major rating agencies had negative outlooks while ratings remained investment grade.
- A crude-oil cargo aboard a hijacked tanker remained in the possession of Somali pirates. Valero had paid its supplier and expected to regain the cargo, with no anticipated adverse financial effect. The company also noted that the effects of the 2010 financial regulatory reform on derivatives were not yet known.
Important facts for investors to verify
- How much of reported earnings and cash generation is recurring, given the Delaware City gain and the $923 million tax refund.
- Whether refining margins, sour-crude discounts, product demand, and throughput can sustain the Q2 improvement amid excess global capacity and high inventories.
- Aruba restart economics and timing, Paulsboro strategic plans, and impairment sensitivity at both refineries.
- The eventual operational, compliance, and capital consequences of the EPA’s Texas flexible-permit action and other environmental rules.
- Debt and lease presentation, upcoming maturities, facility availability, and the impact of negative credit-rating outlooks; clarify the filing’s different debt carrying-value totals.
- Potential outcomes of the fuel-temperature litigation and the recovery of the hijacked crude cargo.