VALERO ENERGY CORP quarterly report, Q2 FY2018

Valero Energy Corporation — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Valero operates refining, ethanol, and midstream businesses.

Financial results and key metrics

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Revenue	$31,015	$22,254	$57,454	$44,026
Operating income	$1,253	$860	$2,054	$1,388
Net income attributable to Valero stockholders	$845	$548	$1,314	$853
Diluted earnings per share	$1.96	$1.23	$3.04	$1.90
Operating cash flow	Not separately stated	Not separately stated	$2,197	$2,785

Profitability: Q2 adjusted net income attributable to Valero stockholders was $928 million versus $548 million a year earlier. First-half adjusted net income was $1,359 million versus $853 million. These are non-GAAP measures and exclude specified items.
Margins and operations: Q2 refining margin was $2,848 million, up $470 million; adjusted refining operating income was $1,408 million, up $463 million. Refining throughput fell 121,000 barrels per day to 2.898 million. Ethanol operating income rose to $43 million from $31 million; VLP operating income rose to $83 million from $71 million.
Cash flow and investment: First-half operating cash flow declined to $2,197 million, mainly reflecting a $445 million use of cash from working-capital changes, versus an $859 million source in 2017. Investing used $2,132 million, including $740 million in capital expenditures and $490 million in turnaround and catalyst costs. Financing used $1,402 million. Cash ended the period at $4,451 million, down from $5,850 million at year-end 2017.
Debt and liquidity: Debt and capital lease obligations totaled $9,059 million, including $183 million current. Management reported total liquidity of $8,402 million, including $4,168 million of cash available to the parent and $4,234 million of available borrowing capacity; $283 million of cash held by consolidated VIEs was excluded from parent liquidity.
Shareholder returns: First-half common dividends were $690 million; treasury-stock purchases were $647 million. The quarterly dividend was $0.80 per share, and the board had authorized up to an additional $2.5 billion of repurchases in January 2018.

Changes versus the prior comparable period

Revenue rose sharply year over year, primarily because refined-product prices were higher; the increase did not reflect higher refining throughput.
Management attributed the improvement in refining results principally to stronger distillate margins and wider crude-oil and other-feedstock discounts. Lower gasoline and other-product margins, lower Q2 throughput, and higher VLP service charges partly offset the gains.
The effective tax rate was 22% in Q2 and 21% for the first half, versus 26% in each 2017 period, primarily following the U.S. statutory rate reduction under Tax Reform.
Operating cash flow was lower year over year despite higher earnings, with working-capital movements a key difference.

Outlook, management commentary, risks and unusual items

Q3 outlook: Management expected refined-product margins and ethanol margins to remain near then-current levels, with domestic and export demand strong. Medium and heavy sour crude discounts were expected to remain weaker than five-year averages; sweet crude discounts were expected near current levels.
Capital plan: 2018 capital investments were expected to total approximately $2.7 billion, including about $1.7 billion for stay-in-business investment and $1.0 billion for growth strategies.
Acquisition: Valero acquired Pure Biofuels del Peru on May 14 for $471 million, including $122 million for working capital subject to final settlement. The preliminary allocation included $228 million of goodwill; purchase accounting remained subject to change.
Unusual charges and credits: First-half results included a $108 million environmental reserve adjustment, $14 million of Texas City refinery fire response costs, and a $38 million charge for early redemption of high-coupon notes. They also included a $170 million pre-tax biodiesel blender’s tax credit relating to 2017 activity. Management’s adjusted results exclude specified items; review the reconciliations when comparing periods.
Contingencies and risks: Valero assumed liability under a consent order for cleanup of its former Hartford, Illinois refinery site and continues to pursue contribution from other potentially responsible parties; actual cleanup costs may differ from estimates. The company also disclosed a Texas City refinery fire and a TCEQ enforcement notice concerning a 2017 crude-oil release. Principal business risks include refining-margin and commodity-price volatility, regulatory and environmental compliance costs, operational disruptions, project execution, foreign exchange, and tax matters.
Other notable items: Valero had not completed its accounting for certain Tax Reform effects and expected further information and IRS guidance in the second half of 2018. It expected adoption of the new lease standard in 2019 to materially increase assets and liabilities, but not materially affect results or liquidity. Management said liquidity was sufficient for ongoing needs, while noting future financing availability and terms were not assured.

Important facts for investors to verify

Whether refining margins and crude discounts remained supportive after Q2, and how throughput and planned maintenance affected subsequent results.
The final purchase-price allocation and working-capital settlement for the Peru acquisition, and the acquired business’s contribution to results.
The magnitude and timing of Hartford cleanup costs, potential recoveries from other responsible parties, and the outcome of the Texas City enforcement matter.
Whether operating cash flow, working capital, capital investment, dividends, and repurchases remained balanced with liquidity and debt levels.
The final impact of Tax Reform accounting and the balance-sheet effect of lease-standard adoption.