Valero Energy Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Amounts are in U.S. dollars. Comparisons are with Q1 2012 unless otherwise stated.
Business context
Valero operated refining, retail and ethanol businesses. Refining drove the quarter’s results. On May 1, 2013, after quarter-end, Valero separated its retail business as CST Brands: 80% of CST shares were distributed to Valero shareholders, with Valero retaining 20% and expecting to sell that stake within 18 months. The filing says the continuing fuel-supply relationship means CST’s historical results are not reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $33.474 billion | $35.167 billion; down 5% |
| Operating income (loss) | $1.061 billion | $(244) million; improvement of $1.305 billion |
| Net income (loss) attributable to Valero | $654 million | $(432) million |
| Diluted earnings (loss) per share | $1.18 | $(0.78) |
| Operating cash flow | $1.549 billion | $1.544 billion |
| Capital expenditures and deferred turnaround/catalyst costs | $864 million | $884 million |
| Cash and temporary cash investments, March 31 | $1.857 billion | $1.723 billion at December 31, 2012 |
| Debt and capital lease obligations | $6.869 billion | $7.049 billion at December 31, 2012 |
| Stockholders’ equity | $18.343 billion | $18.032 billion at December 31, 2012 |
Operating cash flow funded investment, a $180 million scheduled debt repayment, $304 million of treasury-stock purchases and $111 million of dividends; cash increased by $134 million. The $3 billion revolving credit facility was undrawn. The facility’s debt-to-capitalization covenant was 60%; Valero reported a 21% ratio at quarter-end and said it expected to remain compliant. The receivables sales facility, with capacity up to $1.5 billion, was due to mature in July 2013; Valero expected to renew it.
Refining throughput margin rose to $10.59 per barrel from $7.71. Refining operating income was $1.212 billion versus a $119 million loss; excluding the prior-year impairment, refining income increased $720 million. Retail operating income was $42 million versus $40 million, and ethanol operating income was $14 million versus $9 million. The filing does not provide a consolidated gross-margin percentage.
Material changes and notable items
- Revenue declined mainly because average refined-product prices were lower. Profit improved primarily on stronger refining margins, including wider discounts on crude oils and improved diesel and jet fuel margins.
- Q1 2012 included $611 million of asset impairment losses, principally the $595 million Aruba Refinery write-down. Valero suspended Aruba refining operations in 2012 and reorganized the site as a crude-oil and refined-products terminal; refining assets were not classified as discontinued operations.
- Valero’s pension-plan amendments reduced pension liabilities by $328 million and increased other comprehensive income by the same amount in Q1 2013. The benefit is to be amortized into income through 2025. Expected 2013 pension contributions were reduced by $100 million to $45 million.
- After quarter-end, Valero reported receiving $1.05 billion in connection with the CST separation through short-term financing and a CST distribution. It expected net cash proceeds of approximately $500 million after related taxes; approximately $220 million of tax liability was expected to be paid mostly in the first half of 2014.
Outlook, risks and contingencies
- Management expected the advantage from processing discounted domestic light crude to continue in 2013, but warned that new pipeline and logistics capacity could narrow WTI–Brent differentials. It reported that Mid-Continent margins had declined and heavy-sour crude discounts had narrowed in Q2 2013.
- Valero planned approximately $2.2 billion of 2013 capital investments, including about $100 million for environmental projects, plus $650 million of deferred turnaround and catalyst costs. It ordered 2,500 additional rail cars in Q1 and expected the St. Charles hydrocracker to begin operating late in Q2.
- Management estimated 2013 costs to meet biofuel blending obligations at $500 million–$750 million, based on recent RIN prices and expected requirements; Q1 cost was $130 million, compared with $67 million a year earlier.
- Other stated risks include volatile refining and ethanol margins, crude and product supply and demand, refinery reliability and turnarounds, regulatory and environmental requirements, commodity and currency movements, and financing and credit-rating risks. Management cautioned that actual results may differ materially from forward-looking statements.
- For environmental cleanup in Hartford, Illinois, Valero disclosed a reasonably possible loss of $0–$250 million in excess of its accrual. It also reported ongoing IRS audits for 2002–2009 and $389 million of unrecognized tax benefits; it did not expect settlement payments within 12 months.
- Valero intended to repay $300 million of 4.75% notes maturing in June 2013. It also anticipated renewing $550 million of letter-of-credit facilities expiring in June. Its senior unsecured debt ratings were investment grade at filing, with S&P at BBB with a negative outlook.
Important facts for investors to verify
- Whether refining margins and crude-oil discounts remained resilient as pipeline capacity and market spreads changed after Q1.
- Actual 2013 RIN compliance costs versus the $500 million–$750 million estimate.
- Completion, cash and tax consequences of the CST separation, including the disposition of Valero’s retained 20% stake.
- Renewal of the receivables and letter-of-credit facilities, and repayment of the $300 million notes due in June 2013.
- Developments in the Hartford cleanup exposure and IRS audits, including any changes to accruals or expected cash payments.
- Execution and cost of planned capital projects, turnarounds and the St. Charles hydrocracker startup.