VALERO ENERGY CORP/TX - Quarter Report: 2017 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________ |
Commission File Number 1-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 74-1828067 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
One Valero Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)
(210) 345-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o |
Smaller reporting company o Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 31, 2017 was 441,663,968.
VALERO ENERGY CORPORATION
TABLE OF CONTENTS
Page | |
i
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except par value)
June 30, 2017 | December 31, 2016 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and temporary cash investments | $ | 5,207 | $ | 4,816 | |||
Receivables, net | 4,573 | 5,901 | |||||
Inventories | 5,674 | 5,709 | |||||
Prepaid expenses and other | 277 | 374 | |||||
Total current assets | 15,731 | 16,800 | |||||
Property, plant, and equipment, at cost | 38,979 | 37,733 | |||||
Accumulated depreciation | (11,925 | ) | (11,261 | ) | |||
Property, plant, and equipment, net | 27,054 | 26,472 | |||||
Deferred charges and other assets, net | 3,189 | 2,901 | |||||
Total assets | $ | 45,974 | $ | 46,173 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Current portion of debt and capital lease obligations | $ | 121 | $ | 115 | |||
Accounts payable | 5,456 | 6,357 | |||||
Accrued expenses | 955 | 694 | |||||
Taxes other than income taxes | 1,076 | 1,084 | |||||
Income taxes payable | 75 | 78 | |||||
Total current liabilities | 7,683 | 8,328 | |||||
Debt and capital lease obligations, less current portion | 8,366 | 7,886 | |||||
Deferred income taxes | 7,254 | 7,361 | |||||
Other long-term liabilities | 1,906 | 1,744 | |||||
Commitments and contingencies | |||||||
Equity: | |||||||
Valero Energy Corporation stockholders’ equity: | |||||||
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 673,501,593 and 673,501,593 shares issued | 7 | 7 | |||||
Additional paid-in capital | 7,096 | 7,088 | |||||
Treasury stock, at cost; 231,498,415 and 222,000,024 common shares | (12,660 | ) | (12,027 | ) | |||
Retained earnings | 26,603 | 26,366 | |||||
Accumulated other comprehensive loss | (1,123 | ) | (1,410 | ) | |||
Total Valero Energy Corporation stockholders’ equity | 19,923 | 20,024 | |||||
Noncontrolling interests | 842 | 830 | |||||
Total equity | 20,765 | 20,854 | |||||
Total liabilities and equity | $ | 45,974 | $ | 46,173 |
See Condensed Notes to Consolidated Financial Statements.
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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(millions of dollars, except per share amounts)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Operating revenues (a) | $ | 22,254 | $ | 19,584 | $ | 44,026 | $ | 35,298 | |||||||
Costs and expenses: | |||||||||||||||
Cost of sales (excluding the lower of cost or market inventory valuation adjustment) | 19,609 | 17,120 | 39,037 | 30,627 | |||||||||||
Lower of cost or market inventory valuation adjustment | — | (454 | ) | — | (747 | ) | |||||||||
Operating expenses | 1,097 | 1,001 | 2,214 | 2,031 | |||||||||||
General and administrative expenses | 178 | 159 | 368 | 315 | |||||||||||
Depreciation and amortization expense | 499 | 471 | 999 | 956 | |||||||||||
Asset impairment loss | — | 56 | — | 56 | |||||||||||
Total costs and expenses | 21,383 | 18,353 | 42,618 | 33,238 | |||||||||||
Operating income | 871 | 1,231 | 1,408 | 2,060 | |||||||||||
Other income, net | 16 | 14 | 33 | 23 | |||||||||||
Interest and debt expense, net of capitalized interest | (119 | ) | (111 | ) | (240 | ) | (219 | ) | |||||||
Income before income tax expense | 768 | 1,134 | 1,201 | 1,864 | |||||||||||
Income tax expense | 196 | 291 | 308 | 508 | |||||||||||
Net income | 572 | 843 | 893 | 1,356 | |||||||||||
Less: Net income attributable to noncontrolling interests | 24 | 29 | 40 | 47 | |||||||||||
Net income attributable to Valero Energy Corporation stockholders | $ | 548 | $ | 814 | $ | 853 | $ | 1,309 | |||||||
Earnings per common share | $ | 1.23 | $ | 1.74 | $ | 1.90 | $ | 2.79 | |||||||
Weighted-average common shares outstanding (in millions) | 444 | 467 | 446 | 468 | |||||||||||
Earnings per common share – assuming dilution | $ | 1.23 | $ | 1.73 | $ | 1.90 | $ | 2.78 | |||||||
Weighted-average common shares outstanding – assuming dilution (in millions) | 446 | 470 | 448 | 471 | |||||||||||
Dividends per common share | $ | 0.70 | $ | 0.60 | $ | 1.40 | $ | 1.20 | |||||||
_______________________________________________ | |||||||||||||||
Supplemental information: | |||||||||||||||
(a) Includes excise taxes on sales by certain of our international operations | $ | 1,384 | $ | 1,470 | $ | 2,656 | $ | 2,865 |
See Condensed Notes to Consolidated Financial Statements.
2
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions of dollars)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 572 | $ | 843 | $ | 893 | $ | 1,356 | |||||||
Other comprehensive income (loss): | |||||||||||||||
Foreign currency translation adjustment | 208 | (202 | ) | 282 | (80 | ) | |||||||||
Net gain on pension and other postretirement benefits | 4 | 3 | 7 | 6 | |||||||||||
Other comprehensive income (loss) before income tax expense (benefit) | 212 | (199 | ) | 289 | (74 | ) | |||||||||
Income tax expense (benefit) related to items of other comprehensive income (loss) | 1 | 1 | 2 | (6 | ) | ||||||||||
Other comprehensive income (loss) | 211 | (200 | ) | 287 | (68 | ) | |||||||||
Comprehensive income | 783 | 643 | 1,180 | 1,288 | |||||||||||
Less: Comprehensive income attributable to noncontrolling interests | 24 | 29 | 40 | 48 | |||||||||||
Comprehensive income attributable to Valero Energy Corporation stockholders | $ | 759 | $ | 614 | $ | 1,140 | $ | 1,240 |
See Condensed Notes to Consolidated Financial Statements.
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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
(unaudited)
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 893 | $ | 1,356 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization expense | 999 | 956 | |||||
Lower of cost or market inventory valuation adjustment | — | (747 | ) | ||||
Asset impairment loss | — | 56 | |||||
Deferred income tax expense | 24 | 195 | |||||
Changes in current assets and current liabilities | 859 | 1,130 | |||||
Changes in deferred charges and credits and other operating activities, net | 10 | 13 | |||||
Net cash provided by operating activities | 2,785 | 2,959 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures | (572 | ) | (610 | ) | |||
Deferred turnaround and catalyst costs | (308 | ) | (325 | ) | |||
Investment in joint venture | (222 | ) | — | ||||
Acquisition of undivided interest in crude system assets | (72 | ) | — | ||||
Other investing activities, net | — | 4 | |||||
Net cash used in investing activities | (1,174 | ) | (931 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from debt issuances or borrowings | — | 197 | |||||
Repayments of debt and capital lease obligations | (11 | ) | (24 | ) | |||
Purchase of common stock for treasury | (660 | ) | (665 | ) | |||
Common stock dividends | (627 | ) | (564 | ) | |||
Proceeds from issuance of Valero Energy Partners LP common units | 36 | — | |||||
Distributions to noncontrolling interests (public unitholders) of Valero Energy Partners LP | (18 | ) | (14 | ) | |||
Distributions to other noncontrolling interests | (27 | ) | (33 | ) | |||
Other financing activities, net | (21 | ) | (134 | ) | |||
Net cash used in financing activities | (1,328 | ) | (1,237 | ) | |||
Effect of foreign exchange rate changes on cash | 108 | 20 | |||||
Net increase in cash and temporary cash investments | 391 | 811 | |||||
Cash and temporary cash investments at beginning of period | 4,816 | 4,114 | |||||
Cash and temporary cash investments at end of period | $ | 5,207 | $ | 4,925 |
See Condensed Notes to Consolidated Financial Statements.
4
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
General
As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.
These unaudited financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The balance sheet as of December 31, 2016 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016.
Reclassifications
Effective January 1, 2017, we revised our reportable segments to reflect a new reportable segment — VLP. The results of the VLP segment include the results of Valero Energy Partners LP (VLP), our majority-owned master limited partnership. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation. See Note 10 for additional information.
Certain amounts reported for the six months ended June 30, 2016 have been reclassified to conform with the 2017 presentation.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Accounting Pronouncements Adopted During the Period
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, “Inventory (Topic 330),” to simplify the measurement of inventory measured using the first-in, first-out or average cost methods. The provisions of this ASU require the inventory to be measured at the lower of cost and net realizable value rather than the lower of cost or market. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The provisions of this ASU are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. Our adoption of this ASU effective January 1,
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2017 did not affect our financial position or results of operations since the majority of our inventory is stated at last-in, first-out (LIFO).
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740),” to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The provisions of this ASU require an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory immediately when the transfer occurs. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The provisions should be applied on a modified retrospective basis with a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption to recognize the income tax consequences of intra-entity transfers of assets that occurred before the adoption date. Our early adoption of this ASU using the modified retrospective method effective January 1, 2017 did not have a material affect on our financial position or results of operations. Adoption of this guidance more accurately reflects the economics of an intra-entity asset transfer when it occurs by eliminating the previous exception that prohibited the recognition of the income tax consequences of an intra-entity asset transfer until the asset had been sold to an outside party.
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810),” to provide guidance on how a reporting entity that is a single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. The provisions should be applied on a retrospective basis to all relevant prior periods beginning with the fiscal year in which the VIE guidance was adopted with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Our adoption of this ASU effective January 1, 2017 did not affect our financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The provisions of this ASU provide a more robust framework to use in determining when a set of assets and activities is a business by clarifying the requirements related to inputs, processes, and outputs. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. Our early adoption of this ASU effective January 1, 2017 did not have an effect on our financial position or results of operations. However, more of our future acquisitions may be accounted for as asset acquisitions.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. This new standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We recently completed our evaluation of the provisions of this standard and concluded that our adoption will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. The majority of our revenues are generated from the sale of refined petroleum products and ethanol. These revenues are largely based on the current spot (market) prices of the products sold, which represents consideration specifically allocable to the products being sold on a given day, and we recognize
6
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
those revenues upon delivery and transfer of title to the products to our customers. The time at which delivery and transfer of title occurs is the point when our control of the products is transferred to our customers and when our performance obligation to our customers is fulfilled. We will adopt this new standard effective January 1, 2018, and we expect to use the modified retrospective method of adoption as permitted by the standard. Under that method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed. During 2017, we are developing our revenue disclosures and enhancing our accounting systems.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this ASU effective January 1, 2018 will not affect our financial position or results of operations, but will result in revised disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We will adopt this new standard on January 1, 2019 and we expect to use the modified retrospective method of adoption as permitted by the standard. We are developing enhanced contracting and lease evaluation processes and information systems to support such processes, as well as new and enhanced accounting systems to account for our leases and support the required disclosures. We continue to evaluate the effect that adopting this standard will have on our financial statements and related disclosures.
In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The provisions of this ASU require that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU is to be applied retrospectively for income statement items and prospectively for any capitalized benefit costs. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The adoption of this ASU effective January 1, 2018 is not expected to materially affect our financial position or results of operations.
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718),” to reduce diversity in practice, as well as reduce cost and complexity regarding a change to the terms or conditions of a share-based payment award. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The adoption of this ASU effective January 1, 2018 will not have an immediate effect on our
7
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financial position or results of operations as it will be applied prospectively to an award modified on or after adoption.
2. | ARUBA DISPOSITION |
Prior to the Aruba Disposition discussed below, we recognized an asset impairment loss of $56 million in June 2016 representing all of the remaining carrying value of our long-lived assets in Aruba. These assets were primarily related to our crude oil and refined petroleum products terminal and transshipment facility in Aruba (collectively, the Aruba Terminal), which were included in our refining segment. We recognized the impairment loss at that time because we concluded that it was more likely than not that we would ultimately transfer ownership of these assets to the Government of Aruba (GOA) as a result of agreements entered into in June 2016 between the GOA, CITGO Aruba Refining N.V. (CAR), and CITGO Petroleum Corporation (together with CAR and certain other affiliates, collectively, CITGO) providing for, among other things, the GOA’s lease of those assets to CITGO. (See Note 12 for disclosure related to the method to determine fair value.)
Effective October 1, 2016, we (i) transferred ownership of all of our assets in Aruba, other than certain hydrocarbon inventories and working capital, to Refineria di Aruba N.V., an entity wholly-owned by the GOA, (ii) settled our obligations under various agreements with the GOA, including agreements that required us to dismantle our leasehold improvements under certain conditions, and (iii) sold the working capital of our Aruba operations, including hydrocarbon inventories, to the GOA and CITGO. We refer to this transaction as the “Aruba Disposition.” The agreements associated with the Aruba Disposition were finalized in September 2016, including approval of such agreements by the Aruba Parliament. We no longer own any assets or have any operations in Aruba.
3. | INVENTORIES |
Inventories consisted of the following (in millions):
June 30, 2017 | December 31, 2016 | ||||||
Refinery feedstocks | $ | 2,254 | $ | 2,068 | |||
Refined petroleum products and blendstocks | 2,941 | 3,153 | |||||
Ethanol feedstocks and products | 227 | 238 | |||||
Materials and supplies | 252 | 250 | |||||
Inventories | $ | 5,674 | $ | 5,709 |
Inventories are valued at the lower of cost or market. As of December 31, 2015, we had a valuation reserve of $766 million in order to state our inventories at market. We recorded a change in our lower of cost or market inventory valuation reserve that resulted in a net benefit to our results of operations of $454 million and $747 million for the three and six months ended June 30, 2016, respectively.
As of June 30, 2017 and December 31, 2016, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $1.1 billion and $1.9 billion, respectively. As of June 30, 2017
8
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and December 31, 2016, our non-LIFO inventories accounted for $421 million and $641 million, respectively, of our total inventories.
4. | DEBT AND CAPITAL LEASE OBLIGATIONS |
Debt
There was no significant activity related to our debt during the six months ended June 30, 2017.
During the six months ended June 30, 2016, the following activity occurred related to our debt:
• | VLP borrowed $139 million under its $750 million senior unsecured revolving credit facility (the VLP Revolver) in connection with VLP’s acquisition from us of the McKee Terminal Services Business in April 2016, and |
• | one of our consolidated joint ventures entered into a C$72 million senior secured credit facility. |
We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (in millions):
June 30, 2017 | ||||||||||||||||||
Facility Amount | Maturity Date | Outstanding Borrowings | Letters of Credit Issued | Availability | ||||||||||||||
Committed facilities: | ||||||||||||||||||
Valero Revolver | $ | 3,000 | November 2020 | $ | — | $ | 150 | $ | 2,850 | |||||||||
VLP Revolver | $ | 750 | November 2020 | $ | 30 | $ | — | $ | 720 | |||||||||
Canadian Revolver | C$ | 25 | November 2017 | C$ | — | C$ | 10 | C$ | 15 | |||||||||
Accounts receivable sales facility (a) | $ | 1,300 | July 2017 | $ | 100 | n/a | $ | 999 | ||||||||||
Letter of credit facility | $ | 100 | November 2017 | n/a | $ | — | $ | 100 | ||||||||||
Uncommitted facilities: | ||||||||||||||||||
Letter of credit facilities | n/a | n/a | n/a | $ | 202 | n/a |
___________________
(a) | As of June 30, 2017, the actual availability under the accounts receivable sales facility fell below the facility borrowing capacity to $1.1 billion due to a decrease in eligible trade receivables. In July 2017, we amended this facility to extend the maturity date from July 2017 to July 2018. |
In June 2017, one of our committed letter of credit facilities with a borrowing capacity of $125 million expired and was not renewed.
As of June 30, 2017 and December 31, 2016, the weighted-average interest rate on the VLP Revolver was 2.5625 percent and 2.3125 percent, respectively. As of June 30, 2017 and December 31, 2016, the weighted-average interest rate on the accounts receivable sales facility was 1.7249 percent and 1.3422 percent, respectively.
9
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Disclosures
Interest and debt expense, net of capitalized interest is comprised of the following (in millions):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest and debt expense | $ | 134 | $ | 130 | $ | 268 | $ | 258 | |||||||
Less capitalized interest | 15 | 19 | 28 | 39 | |||||||||||
Interest and debt expense, net of capitalized interest | $ | 119 | $ | 111 | $ | 240 | $ | 219 |
Capital Leases
In January 2017, we recognized capital lease assets and related obligations totaling approximately $490 million for the lease of storage tanks located at three of our refineries. These lease agreements have initial terms of 10 years each with successive 10-year automatic renewals.
5. | COMMITMENTS AND CONTINGENCIES |
Environmental Matters
We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and during 2015, one of these companies assumed the ongoing remediation in the Village pursuant to a federal court order. We had previously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The parties involved in the initial response may have further claims among themselves for costs already incurred. We also continue to be engaged in site assessment and interim measures at the adjacent shutdown refinery site, which we acquired as part of an acquisition in 2005, and we are in litigation with other potentially responsible parties and the Illinois EPA relating to the remediation of the site. In each of these matters, we have various defenses, limitations, and potential rights for contribution from the other responsible parties. We have recorded a liability for our expected contribution obligations. However, because of the unpredictable nature of these cleanups, the methodology for allocation of liabilities, and the State of Illinois’ failure to directly sue third parties responsible for historic contamination at the site, it is reasonably possible that we could incur a loss in a range of $0 to $200 million in excess of the amount of our accrual to ultimately resolve these matters. Factors underlying this estimated range are expected to change from time to time, and actual results may vary significantly from this estimate.
Litigation Matters
We are party to claims and legal proceedings arising in the ordinary course of business. We have not recorded a loss contingency liability with respect to some of these matters because we have determined that it is remote that a loss has been incurred. For other matters, we have recorded a loss contingency liability where we have determined that it is probable that a loss has been incurred and that the loss is reasonably estimable. These loss contingency liabilities are not material to our financial position. We re-evaluate and update our loss contingency liabilities as matters progress over time, and we believe that any changes to the recorded liabilities will not be material to our financial position, results of operations, or liquidity.
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. | EQUITY |
Reconciliation of Balances
The following is a reconciliation of the beginning and ending balances of equity attributable to our stockholders, equity attributable to noncontrolling interests, and total equity (in millions):
Six Months Ended June 30, | |||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||
Valero Stockholders’ Equity | Non- controlling Interests (a) | Total Equity | Valero Stockholders’ Equity | Non- controlling Interests (a) | Total Equity | ||||||||||||||||||
Balance as of beginning of period | $ | 20,024 | $ | 830 | $ | 20,854 | $ | 20,527 | $ | 827 | $ | 21,354 | |||||||||||
Net income | 853 | 40 | 893 | 1,309 | 47 | 1,356 | |||||||||||||||||
Dividends | (627 | ) | — | (627 | ) | (564 | ) | — | (564 | ) | |||||||||||||
Stock-based compensation expense | 25 | — | 25 | 23 | — | 23 | |||||||||||||||||
Stock purchases in connection with stock-based compensation plans | (13 | ) | — | (13 | ) | (43 | ) | — | (43 | ) | |||||||||||||
Stock purchases under purchase program | (649 | ) | — | (649 | ) | (610 | ) | — | (610 | ) | |||||||||||||
Distributions to noncontrolling interests | — | (45 | ) | (45 | ) | — | (47 | ) | (47 | ) | |||||||||||||
Other | 23 | 17 | 40 | 3 | — | 3 | |||||||||||||||||
Other comprehensive income (loss) | 287 | — | 287 | (69 | ) | 1 | (68 | ) | |||||||||||||||
Balance as of end of period | $ | 19,923 | $ | 842 | $ | 20,765 | $ | 20,576 | $ | 828 | $ | 21,404 |
___________________
(a) | The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See Note 7 for information about our consolidated VIEs. |
Share Activity
There was no significant share activity during the six months ended June 30, 2017 and 2016.
Common Stock Dividends
On July 20, 2017, our board of directors declared a quarterly cash dividend of $0.70 per common share payable on September 7, 2017 to holders of record at the close of business on August 9, 2017.
11
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows (in millions):
Six Months Ended June 30, | |||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||
Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Total | Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Total | ||||||||||||||||||
Balance as of beginning of period | $ | (1,021 | ) | $ | (389 | ) | $ | (1,410 | ) | $ | (605 | ) | $ | (328 | ) | $ | (933 | ) | |||||
Other comprehensive income (loss) before reclassifications | 282 | — | 282 | (81 | ) | 8 | (73 | ) | |||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 5 | 5 | — | 4 | 4 | |||||||||||||||||
Net other comprehensive income (loss) | 282 | 5 | 287 | (81 | ) | 12 | (69 | ) | |||||||||||||||
Balance as of end of period | $ | (739 | ) | $ | (384 | ) | $ | (1,123 | ) | $ | (686 | ) | $ | (316 | ) | $ | (1,002 | ) |
7. | VARIABLE INTEREST ENTITIES |
Overview
In the normal course of business, we have financial interests in certain entities that have been determined to be VIEs. We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary such that we have (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to make this determination, we evaluated our contractual arrangements with the VIEs, including arrangements for the use of assets, purchases of products and services, debt, equity, or management of operating activities.
Our significant VIE’s include:
• | VLP, a publicly traded master limited partnership formed to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets; and |
• | Diamond Green Diesel Holdings LLC (DGD), a joint venture formed to construct and operate a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel. |
The VIEs’ assets can only be used to settle their own obligations and the VIEs’ creditors have no recourse to our assets. We do not provide financial guarantees to our VIEs. Although we have provided credit facilities to the VIEs in support of their construction or acquisition activities, these transactions are eliminated in consolidation. Our financial position, results of operations, and cash flows are impacted by our consolidated VIEs’ performance, net of intercompany eliminations, to the extent of our ownership interest in each VIE.
12
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present summarized balance sheet information for the significant assets and liabilities of our VIEs, which are included in our balance sheets (in millions).
June 30, 2017 | |||||||||||||||
VLP | DGD | Other | Total | ||||||||||||
Assets | |||||||||||||||
Cash and temporary cash investments | $ | 88 | $ | 155 | $ | 12 | $ | 255 | |||||||
Other current assets | 1 | 55 | — | 56 | |||||||||||
Property, plant, and equipment, net | 945 | 371 | 130 | 1,446 | |||||||||||
Liabilities | |||||||||||||||
Current liabilities | $ | 14 | $ | 17 | $ | 6 | $ | 37 | |||||||
Debt and capital lease obligations, less current portion | 525 | — | 45 | 570 |
December 31, 2016 | |||||||||||||||
VLP | DGD | Other | Total | ||||||||||||
Assets | |||||||||||||||
Cash and temporary cash investments | $ | 71 | $ | 167 | $ | 15 | $ | 253 | |||||||
Other current assets | 3 | 87 | — | 90 | |||||||||||
Property, plant, and equipment, net | 865 | 355 | 133 | 1,353 | |||||||||||
Liabilities | |||||||||||||||
Current liabilities | $ | 15 | $ | 17 | $ | 7 | $ | 39 | |||||||
Debt and capital lease obligations, less current portion | 525 | — | 46 | 571 |
13
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. | EMPLOYEE BENEFIT PLANS |
The components of net periodic benefit cost related to our defined benefit plans were as follows (in millions):
Pension Plans | Other Postretirement Benefit Plans | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Three months ended June 30: | |||||||||||||||
Service cost | $ | 30 | $ | 28 | $ | 2 | $ | 1 | |||||||
Interest cost | 22 | 21 | 2 | 3 | |||||||||||
Expected return on plan assets | (38 | ) | (34 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Net actuarial (gain) loss | 14 | 12 | (1 | ) | — | ||||||||||
Prior service credit | (5 | ) | (5 | ) | (4 | ) | (4 | ) | |||||||
Net periodic benefit cost (credit) | $ | 23 | $ | 22 | $ | (1 | ) | $ | — | ||||||
Six months ended June 30: | |||||||||||||||
Service cost | $ | 61 | $ | 56 | $ | 3 | $ | 3 | |||||||
Interest cost | 43 | 42 | 5 | 6 | |||||||||||
Expected return on plan assets | (75 | ) | (69 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Net actuarial (gain) loss | 27 | 24 | (2 | ) | — | ||||||||||
Prior service credit | (10 | ) | (10 | ) | (8 | ) | (8 | ) | |||||||
Net periodic benefit cost (credit) | $ | 46 | $ | 43 | $ | (2 | ) | $ | 1 |
We contributed $14 million and $14 million, respectively, to our pension plans and $13 million and $8 million, respectively, to our other postretirement benefit plans during the six months ended June 30, 2017 and 2016.
Management has elected to increase the discretionary contributions to our pension plans by $80 million in the third quarter of 2017, resulting in expected contributions to our pension plans of $108 million for 2017. Our anticipated contributions to our other postretirement benefit plans during 2017 have not changed from the amount previously disclosed in our financial statements for the year ended December 31, 2016.
14
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. | EARNINGS PER COMMON SHARE |
Earnings per common share were computed as follows (dollars and shares in millions, except per share amounts):
Three Months Ended June 30, | |||||||||||||||
2017 | 2016 | ||||||||||||||
Participating Securities | Common Stock | Participating Securities | Common Stock | ||||||||||||
Earnings per common share: | |||||||||||||||
Net income attributable to Valero stockholders | $ | 548 | $ | 814 | |||||||||||
Less dividends paid: | |||||||||||||||
Common stock | 311 | 281 | |||||||||||||
Participating securities | 1 | 1 | |||||||||||||
Undistributed earnings | $ | 236 | $ | 532 | |||||||||||
Weighted-average common shares outstanding | 2 | 444 | 1 | 467 | |||||||||||
Earnings per common share: | |||||||||||||||
Distributed earnings | $ | 0.70 | $ | 0.70 | $ | 0.60 | $ | 0.60 | |||||||
Undistributed earnings | 0.53 | 0.53 | 1.14 | 1.14 | |||||||||||
Total earnings per common share | $ | 1.23 | $ | 1.23 | $ | 1.74 | $ | 1.74 | |||||||
Earnings per common share – assuming dilution: | |||||||||||||||
Net income attributable to Valero stockholders | $ | 548 | $ | 814 | |||||||||||
Weighted-average common shares outstanding | 444 | 467 | |||||||||||||
Common equivalent shares | 2 | 3 | |||||||||||||
Weighted-average common shares outstanding – assuming dilution | 446 | 470 | |||||||||||||
Earnings per common share – assuming dilution | $ | 1.23 | $ | 1.73 |
15
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | ||||||||||||||
Participating Securities | Common Stock | Participating Securities | Common Stock | ||||||||||||
Earnings per common share: | |||||||||||||||
Net income attributable to Valero stockholders | $ | 853 | $ | 1,309 | |||||||||||
Less dividends paid: | |||||||||||||||
Common stock | 625 | 562 | |||||||||||||
Participating securities | 2 | 2 | |||||||||||||
Undistributed earnings | $ | 226 | $ | 745 | |||||||||||
Weighted-average common shares outstanding | 2 | 446 | 1 | 468 | |||||||||||
Earnings per common share: | |||||||||||||||
Distributed earnings | $ | 1.40 | $ | 1.40 | $ | 1.20 | $ | 1.20 | |||||||
Undistributed earnings | 0.50 | 0.50 | 1.59 | 1.59 | |||||||||||
Total earnings per common share | $ | 1.90 | $ | 1.90 | $ | 2.79 | $ | 2.79 | |||||||
Earnings per common share – assuming dilution: | |||||||||||||||
Net income attributable to Valero stockholders | $ | 853 | $ | 1,309 | |||||||||||
Weighted-average common shares outstanding | 446 | 468 | |||||||||||||
Common equivalent shares | 2 | 3 | |||||||||||||
Weighted-average common shares outstanding – assuming dilution | 448 | 471 | |||||||||||||
Earnings per common share – assuming dilution | $ | 1.90 | $ | 2.78 |
Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan.
16
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. | SEGMENT INFORMATION |
Effective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — VLP. The results of the VLP segment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.
As a result, we have three reportable segments as follows:
• | Refining segment includes our refining operations, the associated marketing activities, and certain logistics assets that support our refining operations that are not owned by VLP; |
• | Ethanol segment includes our ethanol operations, the associated marketing activities, and logistics assets that support our ethanol operations; and |
• | VLP segment includes the results of VLP, which provides transportation and terminaling services in support of our refining segment. |
Operations that are not included in any of the reportable segments are included in the corporate category.
Our reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires unique technologies and marketing strategies. Performance is evaluated based on segment operating income, which includes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates.
17
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reflects activity related to our reportable segments (in millions):
Refining | Ethanol | VLP | Corporate and Eliminations | Total | |||||||||||||||
Three months ended June 30, 2017: | |||||||||||||||||||
Operating revenues: | |||||||||||||||||||
Operating revenues from external customers | $ | 21,415 | $ | 839 | $ | — | $ | — | $ | 22,254 | |||||||||
Intersegment revenues | — | 28 | 110 | (138 | ) | — | |||||||||||||
Total operating revenues | 21,415 | 867 | 110 | (138 | ) | 22,254 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of sales: | |||||||||||||||||||
Cost of sales from external customers | 18,899 | 710 | — | — | 19,609 | ||||||||||||||
Intersegment cost of sales | 138 | — | — | (138 | ) | — | |||||||||||||
Total cost of sales | 19,037 | 710 | — | (138 | ) | 19,609 | |||||||||||||
Operating expenses | 965 | 107 | 27 | (2 | ) | 1,097 | |||||||||||||
General and administrative expenses | — | — | — | 178 | 178 | ||||||||||||||
Depreciation and amortization expense | 454 | 19 | 12 | 14 | 499 | ||||||||||||||
Total costs and expenses | 20,456 | 836 | 39 | 52 | 21,383 | ||||||||||||||
Operating income (loss) | $ | 959 | $ | 31 | $ | 71 | $ | (190 | ) | $ | 871 | ||||||||
Three months ended June 30, 2016: | |||||||||||||||||||
Operating revenues: | |||||||||||||||||||
Operating revenues from external customers | $ | 18,664 | $ | 920 | $ | — | $ | — | $ | 19,584 | |||||||||
Intersegment revenues | — | 45 | 87 | (132 | ) | — | |||||||||||||
Total operating revenues | 18,664 | 965 | 87 | (132 | ) | 19,584 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of sales (excluding the lower of cost or market inventory valuation adjustment): | |||||||||||||||||||
Cost of sales from external customers | 16,322 | 798 | — | — | 17,120 | ||||||||||||||
Intersegment cost of sales | 132 | — | — | (132 | ) | — | |||||||||||||
Total cost of sales (excluding the lower of cost or market inventory valuation adjustment) | 16,454 | 798 | — | (132 | ) | 17,120 | |||||||||||||
Lower of cost or market inventory valuation adjustment | (434 | ) | (20 | ) | — | — | (454 | ) | |||||||||||
Operating expenses (a) | 878 | 99 | 24 | — | 1,001 | ||||||||||||||
General and administrative expenses | — | — | — | 159 | 159 | ||||||||||||||
Depreciation and amortization expense (a) | 430 | 19 | 11 | 11 | 471 | ||||||||||||||
Asset impairment loss | 56 | — | — | — | 56 | ||||||||||||||
Total costs and expenses | 17,384 | 896 | 35 | 38 | 18,353 | ||||||||||||||
Operating income (loss) | $ | 1,280 | $ | 69 | $ | 52 | $ | (170 | ) | $ | 1,231 |
___________________
(a) | The VLP segment information for the three months ended June 30, 2016 has been retrospectively adjusted for VLP’s acquisitions that occurred subsequent to June 30, 2016. |
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Refining | Ethanol | VLP | Corporate and Eliminations | Total | |||||||||||||||
Six months ended June 30, 2017: | |||||||||||||||||||
Operating revenues: | |||||||||||||||||||
Operating revenues from external customers | $ | 42,302 | $ | 1,724 | $ | — | $ | — | $ | 44,026 | |||||||||
Intersegment revenues | — | 88 | 216 | (304 | ) | — | |||||||||||||
Total operating revenues | 42,302 | 1,812 | 216 | (304 | ) | 44,026 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of sales: | |||||||||||||||||||
Cost of sales from external customers | 37,540 | 1,497 | — | — | 39,037 | ||||||||||||||
Intersegment cost of sales | 304 | — | — | (304 | ) | — | |||||||||||||
Total cost of sales | 37,844 | 1,497 | — | (304 | ) | 39,037 | |||||||||||||
Operating expenses | 1,949 | 216 | 51 | (2 | ) | 2,214 | |||||||||||||
General and administrative expenses | — | — | — | 368 | 368 | ||||||||||||||
Depreciation and amortization expense | 903 | 46 | 24 | 26 | 999 | ||||||||||||||
Total costs and expenses | 40,696 | 1,759 | 75 | 88 | 42,618 | ||||||||||||||
Operating income (loss) | $ | 1,606 | $ | 53 | $ | 141 | $ | (392 | ) | $ | 1,408 | ||||||||
Six months ended June 30, 2016: | |||||||||||||||||||
Operating revenues: | |||||||||||||||||||
Operating revenues from external customers | $ | 33,584 | $ | 1,714 | $ | — | $ | — | $ | 35,298 | |||||||||
Intersegment revenues | — | 79 | 166 | (245 | ) | — | |||||||||||||
Total operating revenues | 33,584 | 1,793 | 166 | (245 | ) | 35,298 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of sales (excluding the lower of cost or market inventory valuation adjustment): | |||||||||||||||||||
Cost of sales from external customers | 29,121 | 1,506 | — | — | 30,627 | ||||||||||||||
Intersegment cost of sales | 245 | — | — | (245 | ) | — | |||||||||||||
Total cost of sales (excluding the lower of cost or market inventory valuation adjustment) | 29,366 | 1,506 | — | (245 | ) | 30,627 | |||||||||||||
Lower of cost or market inventory valuation adjustment | (697 | ) | (50 | ) | — | — | (747 | ) | |||||||||||
Operating expenses (a) | 1,785 | 198 | 48 | — | 2,031 | ||||||||||||||
General and administrative expenses | — | — | — | 315 | 315 | ||||||||||||||
Depreciation and amortization expense (a) | 879 | 31 | 23 | 23 | 956 | ||||||||||||||
Asset impairment loss | 56 | — | — | — | 56 | ||||||||||||||
Total costs and expenses | 31,389 | 1,685 | 71 | 93 | 33,238 | ||||||||||||||
Operating income (loss) | $ | 2,195 | $ | 108 | $ | 95 | $ | (338 | ) | $ | 2,060 |
___________________
(a) | The VLP segment information for the six months ended June 30, 2016 has been retrospectively adjusted for VLP’s acquisitions that occurred subsequent to June 30, 2016. |
19
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by reportable segment were as follows (in millions):
June 30, 2017 | December 31, 2016 | ||||||
Refining | $ | 37,401 | $ | 38,095 | |||
Ethanol | 1,314 | 1,316 | |||||
VLP | 1,072 | 972 | |||||
Corporate | 6,187 | 5,790 | |||||
Total assets | $ | 45,974 | $ | 46,173 |
11. | SUPPLEMENTAL CASH FLOW INFORMATION |
In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
Decrease (increase) in current assets: | |||||||
Receivables, net | $ | 1,396 | $ | (467 | ) | ||
Inventories | 123 | 422 | |||||
Income taxes receivable | 45 | 169 | |||||
Prepaid expenses and other | 41 | 14 | |||||
Increase (decrease) in current liabilities: | |||||||
Accounts payable | (942 | ) | 1,090 | ||||
Accrued expenses | 262 | (113 | ) | ||||
Taxes other than income taxes | (41 | ) | 7 | ||||
Income taxes payable | (25 | ) | 8 | ||||
Changes in current assets and current liabilities | $ | 859 | $ | 1,130 |
Noncash investing and financing activities during the six months ended June 30, 2017 included the recognition of a capital lease asset and related obligation associated with an agreement for storage tanks near three of our refineries. This noncash transaction is further described in Note 4. There were no significant noncash investing or financing activities during the six months ended June 30, 2016.
Cash flows reflected as “other financing activities, net” for the six months ended June 30, 2016 included the payment of a long-term liability of $137 million owed to a joint venture partner associated with an owner-method joint venture investment.
20
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash flows related to interest and income taxes were as follows (in millions):
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
Interest paid in excess of amount capitalized | $ | 235 | $ | 213 | |||
Income taxes paid, net | 263 | 137 |
12. | FAIR VALUE MEASUREMENTS |
Recurring Fair Value Measurements
The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of June 30, 2017 and December 31, 2016.
We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the tables below on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
June 30, 2017 | |||||||||||||||||||||||||||||||
Total Gross Fair Value | Effect of Counter- party Netting | Effect of Cash Collateral Netting | Net Carrying Value on Balance Sheet | Cash Collateral Paid or Received Not Offset | |||||||||||||||||||||||||||
Fair Value Hierarchy | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||
Commodity derivative contracts | $ | 650 | $ | 12 | $ | — | $ | 662 | $ | (612 | ) | $ | (5 | ) | $ | 45 | $ | — | |||||||||||||
Investments of certain benefit plans | 59 | — | 11 | 70 | n/a | n/a | 70 | n/a | |||||||||||||||||||||||
Total | $ | 709 | $ | 12 | $ | 11 | $ | 732 | $ | (612 | ) | $ | (5 | ) | $ | 115 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||
Commodity derivative contracts | $ | 605 | $ | 14 | $ | — | $ | 619 | $ | (612 | ) | $ | (7 | ) | $ | — | $ | (68 | ) | ||||||||||||
Environmental credit obligations | — | 274 | — | 274 | n/a | n/a | 274 | n/a | |||||||||||||||||||||||
Physical purchase contracts | — | 4 | — | 4 | n/a | n/a | 4 | n/a | |||||||||||||||||||||||
Foreign currency contracts | 10 | — | — | 10 | n/a | n/a | 10 | n/a | |||||||||||||||||||||||
Total | $ | 615 | $ | 292 | $ | — | $ | 907 | $ | (612 | ) | $ | (7 | ) | $ | 288 |
21
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2016 | |||||||||||||||||||||||||||||||
Total Gross Fair Value | Effect of Counter- party Netting | Effect of Cash Collateral Netting | Net Carrying Value on Balance Sheet | Cash Collateral Paid or Received Not Offset | |||||||||||||||||||||||||||
Fair Value Hierarchy | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||
Commodity derivative contracts | $ | 874 | $ | 38 | $ | — | $ | 912 | $ | (875 | ) | $ | — | $ | 37 | $ | — | ||||||||||||||
Foreign currency contracts | 3 | — | — | 3 | n/a | n/a | 3 | n/a | |||||||||||||||||||||||
Investments of certain benefit plans | 58 | — | 11 | 69 | n/a | n/a | 69 | n/a | |||||||||||||||||||||||
Total | $ | 935 | $ | 38 | $ | 11 | $ | 984 | $ | (875 | ) | $ | — | $ | 109 | ||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||
Commodity derivative contracts | $ | 872 | $ | 23 | $ | — | $ | 895 | $ | (875 | ) | $ | (20 | ) | $ | — | $ | (88 | ) | ||||||||||||
Environmental credit obligations | — | 188 | — | 188 | n/a | n/a | 188 | n/a | |||||||||||||||||||||||
Physical purchase contracts | — | 5 | — | 5 | n/a | n/a | 5 | n/a | |||||||||||||||||||||||
Total | $ | 872 | $ | 216 | $ | — | $ | 1,088 | $ | (875 | ) | $ | (20 | ) | $ | 193 |
A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:
• | Commodity derivative contracts consist primarily of exchange-traded futures and swaps, and as disclosed in Note 13, some of these contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but because they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy. |
• | Physical purchase contracts represent the fair value of fixed-price corn purchase contracts. The fair values of these purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy. |
• | Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer. |
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
• | Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. |
• | Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily Renewable Identification Numbers (RINs) in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California Global Warming Solutions Act (the California cap-and-trade system, also known as AB 32), Quebec’s Environmental Quality Act (the Quebec cap-and-trade system), and Ontario’s Climate Change Mitigation and Low-Carbon Economy Act (the Ontario cap-and-trade system), (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. These programs are further described in Note 13 under “Environmental Compliance Program Price Risk.” The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using the market approach based on quoted prices from an independent pricing service. |
There were no transfers between levels for assets and liabilities held as of June 30, 2017 and December 31, 2016 that were measured at fair value on a recurring basis.
There was no activity during the three and six months ended June 30, 2017 and 2016 related to the fair value amounts categorized in Level 3 as of June 30, 2017 and December 31, 2016.
Nonrecurring Fair Value Measurements
As discussed in Note 2, we concluded that the Aruba Terminal was impaired as of June 30, 2016, which resulted in an asset impairment loss of $56 million that was recorded in June 2016. The fair value of the Aruba Terminal was determined using an income approach and was classified in Level 3. We employed a probability-weighted approach to possible future cash flow scenarios, including transferring ownership of the business to the GOA or continuing to operate.
There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016.
23
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below along with their associated fair values (in millions):
June 30, 2017 | December 31, 2016 | ||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial assets: | |||||||||||||||
Cash and temporary cash investments | $ | 5,207 | $ | 5,207 | $ | 4,816 | $ | 4,816 | |||||||
Financial liabilities: | |||||||||||||||
Debt (excluding capital leases) | 7,928 | 9,129 | 7,926 | 8,882 |
The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:
• | The fair value of cash and temporary cash investments approximates the carrying value due to the low level of credit risk of these assets combined with their short maturities and market interest rates (Level 1). |
• | The fair value of debt is determined primarily using the market approach based on quoted prices provided by third-party brokers and vendor pricing services (Level 2). |
13. | PRICE RISK MANAGEMENT ACTIVITIES |
We are exposed to market risks primarily related to the volatility in the price of commodities, and foreign currency exchange rates, and the price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note 12), as summarized below under “Fair Values of Derivative Instruments,” with changes in fair value recognized currently in income. The effect of these derivative instruments on our income is summarized below under “Effect of Derivative Instruments on Income.”
Risk Management Activities by Type of Risk
Commodity Price Risk
We are exposed to market risks related to the volatility in the price of crude oil, refined petroleum products (primarily gasoline and distillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.
24
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fair value and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for trading purposes. Our objectives for entering into hedges or trading derivatives are described below.
• | Economic Hedges – Economic hedges represent commodity derivative instruments that are used to manage price volatility in certain (i) feedstock and refined petroleum product inventories, (ii) fixed-price purchase contracts, and (iii) forecasted feedstock, refined petroleum product or natural gas purchases and refined petroleum product sales. The objectives of our economic hedges are to hedge price volatility in certain feedstock and refined petroleum product inventories and to lock in the price of forecasted feedstock, refined petroleum product, or natural gas purchases or refined petroleum product sales at existing market prices that we deem favorable. Economic hedges are not designated as fair value or cash flow hedges for accounting purposes, usually due to the difficulty of establishing the required documentation at the date the derivative instrument is entered into for them to qualify as hedging instruments for accounting purposes. |
As of June 30, 2017, we had the following outstanding commodity derivative instruments that were used as economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels and soybean oil contracts that are presented in thousands of pounds).
Notional Contract Volumes by Year of Maturity | ||||||
Derivative Instrument | 2017 | 2018 | ||||
Crude oil and refined petroleum products: | ||||||
Swaps – long | 14,194 | — | ||||
Swaps – short | 14,479 | — | ||||
Futures – long | 69,198 | 7,005 | ||||
Futures – short | 72,906 | 6,982 | ||||
Corn: | ||||||
Futures – long | 35,610 | 5 | ||||
Futures – short | 64,260 | 4,545 | ||||
Physical contracts – long | 28,720 | 4,573 | ||||
Soybean oil: | ||||||
Futures – long | 168,178 | — | ||||
Futures – short | 246,957 | — |
25
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
• | Trading Derivatives – Our objective for entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions for crude oil and refined petroleum products. |
As of June 30, 2017, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units and corn contracts that are presented in thousands of bushels).
Notional Contract Volumes by Year of Maturity | ||||||
Derivative Instrument | 2017 | 2018 | ||||
Crude oil and refined petroleum products: | ||||||
Swaps – long | 2,070 | — | ||||
Swaps – short | 2,070 | — | ||||
Futures – long | 53,842 | 20,816 | ||||
Futures – short | 52,419 | 21,091 | ||||
Options – long | 75,375 | 102,300 | ||||
Options – short | 75,577 | 102,300 | ||||
Natural gas: | ||||||
Futures – long | 2,500 | — | ||||
Futures – short | 1,750 | — | ||||
Corn: | ||||||
Futures – long | 2,500 | — | ||||
Futures – short | 2,500 | — |
We had no commodity derivative contracts outstanding as of June 30, 2017 and 2016 or during the six months ended June 30, 2017 and 2016 that were designated as fair value or cash flow hedges.
Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated in currencies other than the local (functional) currencies of those operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes and therefore are classified as economic hedges. As of June 30, 2017, we had forward contracts to purchase $424 million of U.S. dollars. These commitments matured on or before July 31, 2017.
Environmental Compliance Program Price Risk
We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. Certain of these programs require us to blend biofuels into the products we produce, and we are
26
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. The cost of meeting our obligations under these compliance programs was $255 million and $173 million for the three months ended June 30, 2017 and 2016, respectively, and $401 million and $334 million for the six months ended June 30, 2017 and 2016, respectively. These amounts are reflected in cost of sales.
We are subject to additional requirements under greenhouse gas (GHG) emission programs, including the cap-and-trade systems, as discussed in Note 12. Under these cap-and-trade systems, we purchase various GHG emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we recovered the majority of these costs from our customers for the three and six months ended June 30, 2017 and 2016 and expect to continue to recover the majority of these costs in the future. For the three and six months ended June 30, 2017 and 2016, the net cost of meeting our obligations under these compliance programs was immaterial.
Fair Values of Derivative Instruments
The following tables provide information about the fair values of our derivative instruments as of June 30, 2017 and December 31, 2016 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 12 for additional information related to the fair values of our derivative instruments.
As indicated in Note 12, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.
Balance Sheet Location | June 30, 2017 | ||||||||
Asset Derivatives | Liability Derivatives | ||||||||
Derivatives not designated as hedging instruments | |||||||||
Commodity contracts: | |||||||||
Futures | Receivables, net | $ | 650 | $ | 605 | ||||
Swaps | Receivables, net | 8 | 12 | ||||||
Options | Receivables, net | 4 | 2 | ||||||
Physical purchase contracts | Inventories | — | 4 | ||||||
Foreign currency contracts | Accrued expenses | — | 10 | ||||||
Total | $ | 662 | $ | 633 |
27
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance Sheet Location | December 31, 2016 | ||||||||
Asset Derivatives | Liability Derivatives | ||||||||
Derivatives not designated as hedging instruments | |||||||||
Commodity contracts: | |||||||||
Futures | Receivables, net | $ | 874 | $ | 872 | ||||
Swaps | Receivables, net | 32 | 21 | ||||||
Options | Receivables, net | 6 | 2 | ||||||
Physical purchase contracts | Inventories | — | 5 | ||||||
Foreign currency contracts | Receivables, net | 3 | — | ||||||
Total | $ | 915 | $ | 900 |
Market Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.
Effect of Derivative Instruments on Income
The following tables provide information about the gain or loss recognized in income on our derivative instruments and the income statement line items in which such gains and losses are reflected (in millions).
Derivatives Designated as Economic Hedges | Location of Gain (Loss) Recognized in Income on Derivatives | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||
Commodity contracts | Cost of sales | $ | 25 | $ | (113 | ) | $ | (72 | ) | $ | (252 | ) | ||||||
Foreign currency contracts | Cost of sales | (20 | ) | 4 | (26 | ) | 1 |
Trading Derivatives | Location of Gain (Loss) Recognized in Income on Derivatives | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||
Commodity contracts | Cost of sales | $ | (3 | ) | $ | (3 | ) | $ | (2 | ) | $ | 38 |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q, including without limitation our disclosures below under the heading “OVERVIEW AND OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “should,” “may,” and similar expressions.
These forward-looking statements include, among other things, statements regarding:
• | future refining margins, including gasoline and distillate margins; |
• | future ethanol margins; |
• | expectations regarding feedstock costs, including crude oil differentials, and operating expenses; |
• | anticipated levels of crude oil and refined petroleum product inventories; |
• | our anticipated level of capital investments, including deferred costs for refinery turnarounds and catalyst, capital expenditures for environmental and other purposes, and joint venture investments, and the effect of those capital investments on our results of operations; |
• | anticipated trends in the supply of and demand for crude oil and other feedstocks and refined petroleum products in the regions where we operate, as well as globally; |
• | expectations regarding environmental, tax, and other regulatory initiatives; and |
• | the effect of general economic and other conditions on refining, ethanol, and midstream industry fundamentals. |
We based our forward-looking statements on our current expectations, estimates, and projections about ourselves and our industry. We caution that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:
• | acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined petroleum products or receive feedstocks; |
• | political and economic conditions in nations that produce crude oil or consume refined petroleum products; |
• | demand for, and supplies of, refined petroleum products such as gasoline, diesel, jet fuel, petrochemicals, and ethanol; |
• | demand for, and supplies of, crude oil and other feedstocks; |
• | the ability of the members of the Organization of Petroleum Exporting Countries to agree on and to maintain crude oil price and production controls; |
• | the level of consumer demand, including seasonal fluctuations; |
• | refinery overcapacity or undercapacity; |
• | our ability to successfully integrate any acquired businesses into our operations; |
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• | the actions taken by competitors, including both pricing and adjustments to refining capacity in response to market conditions; |
• | the level of competitors’ imports into markets that we supply; |
• | accidents, unscheduled shutdowns, or other catastrophes affecting our refineries, machinery, pipelines, equipment, and information systems, or those of our suppliers or customers; |
• | changes in the cost or availability of transportation for feedstocks and refined petroleum products; |
• | the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles; |
• | the levels of government subsidies for alternative fuels; |
• | the volatility in the market price of biofuel credits (primarily RINs needed to comply with the U.S. federal Renewable Fuel Standard) and GHG emission credits needed to comply with the requirements of various GHG emission programs; |
• | delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects; |
• | earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil, grain and other feedstocks, and refined petroleum products and ethanol; |
• | rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage; |
• | legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by governmental authorities, including tax and environmental regulations, such as those implemented under the California Global Warming Solutions Act (also known as AB 32), the Quebec cap-and-trade system, the Ontario cap-and-trade system, and the U.S. EPA’s regulation of GHGs, which may adversely affect our business or operations; |
• | changes in the credit ratings assigned to our debt securities and trade credit; |
• | changes in currency exchange rates, including the value of the Canadian dollar, the pound sterling, and the euro relative to the U.S. dollar; |
• | overall economic conditions, including the stability and liquidity of financial markets; and |
• | other factors generally described in the “Risk Factors” section included in our annual report on Form 10-K for the year ended December 31, 2016 that is incorporated by reference herein. |
Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
This Form 10-Q includes references to financial measures that are not defined under U.S. GAAP. These non-GAAP financial measures include adjusted net income attributable to Valero stockholders, gross margin, and adjusted operating income. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods. See the accompanying financial tables in “RESULTS OF OPERATIONS” and note (d) to the accompanying tables for reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures. Also in note (d), we disclose the reasons why we believe our use of the non-GAAP financial measures provides useful information.
30
OVERVIEW AND OUTLOOK
Overview
Second Quarter Results
In the second quarter of 2017, we reported net income attributable to Valero stockholders of $548 million compared to $814 million in the second quarter of 2016, which represents a decrease of $266 million. This decrease is primarily due to lower operating income between the periods (net of the resulting decrease of $95 million in income tax expense). Operating income was $871 million in the second quarter of 2017 compared to $1.2 billion in the second quarter of 2016, which represents a decrease of $360 million.
Operating income and net income attributable to Valero stockholders in the second quarter of 2016 were positively impacted by a noncash benefit from a lower of cost or market inventory valuation adjustment, partially offset by a noncash charge from an impairment loss related to our Aruba Terminal. By excluding these items, adjusted operating income was $833 million and adjusted net income attributable to Valero stockholders was $503 million for the second quarter of 2016. Compared to these adjusted amounts, operating income and net income attributable to Valero stockholders in the second quarter of 2017 increased by $38 million and $45 million, respectively.
The $38 million increase in adjusted operating income is due primarily to the following:
• | Refining segment. Refining segment operating income increased by $57 million due to higher margins on refined petroleum products and higher throughput volumes, partially offset by lower discounts on sour crude oils, higher cost of biofuel credits, an increase in charges from the VLP segment related to additional transportation and terminaling services provided by that segment to the refining segment, and higher operating expenses. This is more fully described on pages 40 through 42. |
• | Ethanol segment. Ethanol segment operating income decreased by $18 million due to lower ethanol and corn related co-product prices and higher operating expenses, partially offset by lower corn prices. This is more fully described on page 42. |
• | VLP segment. VLP segment operating income increased by $19 million primarily due to incremental revenues generated from transportation and terminaling services provided to the refining segment associated with businesses acquired from Valero in 2016 and the acquisition of an undivided interest in crude system assets in January 2017. This is more fully described on pages 42 and 43. |
• | General and administrative expenses. General and administrative expenses increased by $19 million primarily due to an increase in legal and environmental reserves and charitable contributions. |
First Six Months Results
In the first six months of 2017, we reported net income attributable to Valero stockholders of $853 million compared to $1.3 billion in the first six months of 2016, which represents a decrease of $456 million. This decrease is primarily due to lower operating income between the periods (net of the resulting decrease of $200 million in income tax expense). Operating income was $1.4 billion in the first six months of 2017 compared to $2.1 billion in the first six months of 2016, which represents a decrease of $652 million.
Operating income and net income attributable to Valero stockholders in the first six months of 2016 were positively impacted by a noncash benefit from a lower of cost or market inventory valuation adjustment, partially offset by a noncash charge from an impairment loss related to our Aruba Terminal. By excluding
31
these items, adjusted operating income was $1.4 billion and adjusted net income attributable to Valero stockholders was $786 million for the first six months of 2016. Compared to these adjusted amounts, operating income and net income attributable to Valero stockholders in the first six months of 2017 increased by $39 million and $67 million, respectively.
The $39 million increase in adjusted operating income is due primarily to the following:
• | Refining segment. Refining segment operating income increased by $52 million due to higher margins on refined petroleum products and higher throughput volumes, partially offset by lower discounts on sour crude oils, higher cost of biofuel credits, an increase in charges from the VLP segment related to additional transportation and terminaling services provided by that segment to the refining segment, and higher operating expenses. This is more fully described on pages 51 through 53. |
• | Ethanol segment. Ethanol segment operating income decreased by $5 million due to lower corn-related co-product prices and higher operating expenses, partially offset by higher ethanol prices and lower corn prices. This is more fully described on pages 53 and 54. |
• | VLP segment. VLP segment operating income increased by $46 million due to incremental revenues generated from transportation and terminaling services provided to the refining segment associated with businesses acquired from Valero in 2016 and the acquisition of an undivided interest in crude system assets in January 2017. This is more fully described on page 54. |
• | General and administrative expenses. General and administrative expenses increased by $53 million primarily due to an increase in legal and environmental reserves and charitable contributions. |
Additional details and analysis of the changes in operating income and adjusted operating income for our business segments and other components of net income and adjusted net income attributable to Valero stockholders, including a reconciliation of non-GAAP financial measures used in this Overview to their most comparable measures reported under U.S. GAAP, are provided below under “RESULTS OF OPERATIONS” beginning on page 34.
Effective January 1, 2017, we revised our reportable segments to reflect a new reportable segment — VLP. The results of operations of the VLP segment were previously included in the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation. See Note 10 of Condensed Notes to Consolidated Financial Statements for additional segment information.
32
Outlook
Below are several factors that have impacted or may impact our results of operations during the third quarter of 2017:
• | Product margins are expected to continue to be supported by strong domestic and export demand. |
• | Medium and heavy sour crude oil discounts are expected to remain narrower than their five-year averages as supplies of sour crude oils in the market remain suppressed. |
• | Sweet crude oil discounts are expected to widen slightly as increased supplies from the Permian Basin are delivered into U.S. Gulf Coast markets. |
• | Ethanol margins are expected to remain weak as domestic inventory levels remain at seasonal highs. |
33
RESULTS OF OPERATIONS
The following tables highlight our results of operations, our operating performance, and market prices that directly impact our operations. In addition, these tables include financial measures that are not defined under U.S. GAAP and represent non-GAAP financial measures. These non-GAAP financial measures are reconciled to their most comparable U.S. GAAP financial measures and include adjusted net income attributable to Valero stockholders, adjusted operating income, and gross margin. In note (d) to these tables, we disclose the reasons why we believe our use of non-GAAP financial measures provides useful information.
Effective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — VLP. The results of the VLP segment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation. The narrative following these tables provides an analysis of our results of operations.
Second Quarter Results -
Financial Highlights By Segment and Total Company
(millions of dollars)
Three Months Ended June 30, 2017 | |||||||||||||||||||
Refining | Ethanol | VLP | Corporate and Eliminations | Total Company | |||||||||||||||
Operating revenues: | |||||||||||||||||||
Operating revenues from external customers | $ | 21,415 | $ | 839 | $ | — | $ | — | $ | 22,254 | |||||||||
Intersegment revenues | — | 28 | 110 | (138 | ) | — | |||||||||||||
Total operating revenues | 21,415 | 867 | 110 | (138 | ) | 22,254 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of sales: | |||||||||||||||||||
Cost of sales from external customers | 18,899 | 710 | — | — | 19,609 | ||||||||||||||
Intersegment cost of sales | 138 | — | — | (138 | ) | — | |||||||||||||
Total cost of sales | 19,037 | 710 | — | (138 | ) | 19,609 | |||||||||||||
Operating expenses | 965 | 107 | 27 | (2 | ) | 1,097 | |||||||||||||
General and administrative expenses | — | — | — | 178 | 178 | ||||||||||||||
Depreciation and amortization expense | 454 | 19 | 12 | 14 | 499 | ||||||||||||||
Total costs and expenses | 20,456 | 836 | 39 | 52 | 21,383 | ||||||||||||||
Operating income (loss) | $ | 959 | $ | 31 | $ | 71 | $ | (190 | ) | 871 | |||||||||
Other income, net | 16 | ||||||||||||||||||
Interest and debt expense, net of capitalized interest | (119 | ) | |||||||||||||||||
Income before income tax expense | 768 | ||||||||||||||||||
Income tax expense | 196 | ||||||||||||||||||
Net income | 572 | ||||||||||||||||||
Less: Net income attributable to noncontrolling interests | 24 | ||||||||||||||||||
Net income attributable to Valero Energy Corporation stockholders | $ | 548 |
34
Second Quarter Results -
Financial Highlights By Segment and Total Company (continued)
(millions of dollars)
Three Months Ended June 30, 2016 | |||||||||||||||||||
Refining | Ethanol | VLP | Corporate and Eliminations | Total Company | |||||||||||||||
Operating revenues: | |||||||||||||||||||
Operating revenues from external customers | $ | 18,664 | $ | 920 | $ | — | $ | — | $ | 19,584 | |||||||||
Intersegment revenues | — | 45 | 87 | (132 | ) | — | |||||||||||||
Total operating revenues | 18,664 | 965 | 87 | (132 | ) | 19,584 | |||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of sales (excluding the lower of cost or market inventory valuation adjustment): | |||||||||||||||||||
Cost of sales from external customers | 16,322 | 798 | — | — | 17,120 | ||||||||||||||
Intersegment cost of sales | 132 | — | — | (132 | ) | — | |||||||||||||
Total cost of sales (excluding the lower of cost or market inventory valuation adjustment) | 16,454 | 798 | — | (132 | ) | 17,120 | |||||||||||||
Lower of cost or market inventory valuation adjustment (a) | (434 | ) | (20 | ) | — | — | (454 | ) | |||||||||||
Operating expenses (b) | 878 | 99 | 24 | — | 1,001 | ||||||||||||||
General and administrative expenses | — | — | — | 159 | 159 | ||||||||||||||
Depreciation and amortization expense (b) | 430 | 19 | 11 | 11 | 471 | ||||||||||||||
Asset impairment loss (c) | 56 | — | — | — | 56 | ||||||||||||||
Total costs and expenses | 17,384 | 896 | 35 | 38 | 18,353 | ||||||||||||||
Operating income (loss) | $ | 1,280 | $ | 69 | $ | 52 | $ | (170 | ) | 1,231 | |||||||||
Other income, net | 14 | ||||||||||||||||||
Interest and debt expense, net of capitalized interest | (111 | ) | |||||||||||||||||
Income before income tax expense | 1,134 | ||||||||||||||||||
Income tax expense | 291 | ||||||||||||||||||
Net income | 843 | ||||||||||||||||||
Less: Net income attributable to noncontrolling interests | 29 | ||||||||||||||||||
Net income attributable to Valero Energy Corporation stockholders | $ | 814 |
___________________
See note references on pages 49 through 51.
35
Second Quarter Results -
Financial Highlights By Segment and Total Company (continued)
(millions of dollars)
Three Months Ended June 30, 2016 | |||||||||||||||||||
Refining | Ethanol | VLP | Corporate and Eliminations | Total Company | |||||||||||||||
Reconciliation of actual (U.S. GAAP) to adjusted (non-GAAP) amounts (d) | |||||||||||||||||||
Actual and adjusted operating income (loss) | |||||||||||||||||||
Operating income (loss) | $ | 1,280 | $ | 69 | $ | 52 | $ | (170 | ) | $ | 1,231 | ||||||||
Exclude adjustments: | |||||||||||||||||||
Lower of cost or market inventory valuation adjustment (a) | 434 |