Valero Energy Corporation — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; fourth-quarter results are also summarized below. Valero is a petroleum refiner and wholesaler with 15 refineries and an ethanol business with 11 plants. It reported refining and ethanol as its continuing reportable segments; its retail business was spun off in 2013.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenues | $130.844 billion | $138.074 billion |
| Operating income | $5.902 billion | $3.957 billion |
| Income from continuing operations | $3.775 billion | $2.722 billion |
| Net income attributable to Valero stockholders | $3.630 billion | $2.720 billion |
| Diluted EPS from continuing operations | $6.97 | $4.96 |
| Cash from operating activities | $4.241 billion | $5.564 billion |
- Margins and operations: Refining operating income rose to $5.884 billion from $4.211 billion. Refining throughput margin increased to $11.28 per barrel from $9.69; throughput averaged 2.765 million barrels per day versus 2.682 million. Ethanol operating income increased to $786 million from $491 million, and gross margin rose to $1.06 per gallon from $0.77.
- Cash investment and returns: Capital expenditures were $2.153 billion and deferred turnaround and catalyst costs were $649 million. Valero repurchased $1.296 billion of stock and paid $554 million in common dividends. The annual dividend was $1.05 per share, up from $0.85.
- Liquidity and debt: Cash and temporary investments were $3.689 billion, down from $4.292 billion. Current assets were $16.614 billion and current liabilities $9.980 billion. Debt and capital lease obligations totaled $6.386 billion, including $606 million current; long-term debt and lease obligations were $5.780 billion. No amounts were borrowed under revolving credit facilities at year-end. The $3 billion revolving facility was available through November 2018, subject to its terms.
- Fourth quarter: Revenue was $27.859 billion, operating income $1.796 billion, net income attributable to Valero stockholders $1.155 billion, and diluted EPS $2.22. For fourth-quarter 2013, the corresponding figures were $34.429 billion, $1.562 billion, $1.288 billion, and $2.38.
Material changes and unusual items
- Revenue declined 5%, mainly because refined-product prices fell, while operating income increased $1.945 billion. Refining gains reflected wider discounts on sweet and sour crude relative to Brent, increased Gulf Coast throughput, and stronger margins on products such as petroleum coke and sulfur. Weaker distillate margins partly offset the gains.
- Ethanol performance improved mainly because of lower corn costs and higher production, partly offset by lower ethanol and co-product prices and higher operating costs.
- Operating cash flow fell $1.323 billion, primarily due to a $2.7 billion unfavorable working-capital impact, partly offset by higher income. The filing reports a $1.810 billion cash use from changes in current assets and liabilities in 2014, versus a $922 million source in 2013.
- Valero abandoned its Aruba refinery in May 2014, while retaining terminal assets. It recorded $59 million for an asset-retirement obligation and $4 million for contractual obligations; discontinued operations reported a $64 million loss for 2014.
- 2013 comparisons include a $325 million nontaxable gain from disposing of Valero’s retained CST interest. The 2013 retail results also include operations only until the May 1 spin-off.
- The replacement cost of LIFO inventories exceeded their carrying value by approximately $857 million at year-end 2014, compared with $6.9 billion a year earlier.
Outlook, risks, and contingencies
- Management expected continued near- to mid-term volatility in energy markets and margins. For the first quarter of 2015, it expected refined-product margins to strengthen with demand and refinery maintenance, while ethanol margins were expected to remain relatively low if gasoline prices stayed low. Crude differentials and biofuel-credit prices remained uncertain.
- 2015 planned spending was approximately $1.95 billion for capital expenditures and $700 million for deferred turnaround and catalyst costs. Environmental compliance capital expenditures were estimated at $106 million for 2015 and $67 million for 2016; these estimates excluded strategic investments and could change with regulatory action.
- Key risks include volatile refining and ethanol margins; changes in crude and product prices and feedstock differentials; crude supply and transportation disruptions; refinery outages; environmental rules and remediation; rail regulation; biofuel-credit costs; labor disruptions; and access to financing and counterparty performance. At filing, strikes had been called at 12 U.S. refineries; four Valero refineries could potentially be targeted, but none had been targeted at that time.
- The company disclosed a reasonably possible additional loss of $0 to $200 million, above its accrual, for environmental cleanup matters involving Hartford, Illinois. It also had ongoing IRS audits for 2004–2011 and $484 million of uncertain tax-position liabilities, including related penalties and interest.
- Management expected to recover the majority of costs related to California and Quebec cap-and-trade and low-carbon-fuel requirements from customers, but recovery was not assured. The filing also describes potential tax exposure if the CST spin-off were ultimately found taxable.
- Valero reported investment-grade senior debt ratings with stable outlooks from Moody’s, S&P, and Fitch. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts investors should verify
- Whether refining profitability and crude differentials remained favorable after the sharp late-2014 market changes, and how lower product prices affected subsequent results and inventory valuation.
- Whether operating cash flow recovered from the 2014 working-capital outflow, and how planned capital, turnaround, dividend, and repurchase spending was funded.
- Actual 2015 refining and ethanol margins, utilization, maintenance schedules, and performance of the acquired Mount Vernon ethanol plant.
- Subsequent developments in refinery labor negotiations, environmental requirements and cleanup exposures, and the IRS audits and uncertain tax positions.
- Whether the Aruba abandonment obligations, inventory LIFO-value gap, and any potential CST spin-off tax exposure changed materially after year-end.