VALERO ENERGY CORP/TX - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
OR
☐ | 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 001-13175
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock | VLO | New York Stock Exchange |
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||
Smaller reporting company | ☐ | Emerging growth company | ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 20, 2020 was 407,757,274.
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, 2020 | December 31, 2019 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 2,319 | $ | 2,583 | |||
Receivables, net | 4,152 | 8,904 | |||||
Inventories | 5,420 | 7,013 | |||||
Prepaid expenses and other | 871 | 469 | |||||
Total current assets | 12,762 | 18,969 | |||||
Property, plant, and equipment, at cost | 46,335 | 44,294 | |||||
Accumulated depreciation | (15,682 | ) | (15,030 | ) | |||
Property, plant, and equipment, net | 30,653 | 29,264 | |||||
Deferred charges and other assets, net | 5,684 | 5,631 | |||||
Total assets | $ | 49,099 | $ | 53,864 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Current portion of debt and finance lease obligations | $ | 587 | $ | 494 | |||
Accounts payable | 4,652 | 10,205 | |||||
Accrued expenses | 861 | 949 | |||||
Taxes other than income taxes payable | 1,083 | 1,304 | |||||
Income taxes payable | 117 | 208 | |||||
Total current liabilities | 7,300 | 13,160 | |||||
Debt and finance lease obligations, less current portion | 12,090 | 9,178 | |||||
Deferred income tax liabilities | 5,305 | 5,103 | |||||
Other long-term liabilities | 3,770 | 3,887 | |||||
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 | 6,824 | 6,821 | |||||
Treasury stock, at cost; 265,748,331 and 264,209,742 common shares | (15,760 | ) | (15,648 | ) | |||
Retained earnings | 30,575 | 31,974 | |||||
Accumulated other comprehensive loss | (1,799 | ) | (1,351 | ) | |||
Total Valero Energy Corporation stockholders’ equity | 19,847 | 21,803 | |||||
Noncontrolling interests | 787 | 733 | |||||
Total equity | 20,634 | 22,536 | |||||
Total liabilities and equity | $ | 49,099 | $ | 53,864 |
See Condensed Notes to Consolidated Financial Statements.
1
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, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Revenues (a) | $ | 10,397 | $ | 28,933 | $ | 32,499 | $ | 53,196 | |||||||
Cost of sales: | |||||||||||||||
Cost of materials and other | 9,079 | 26,083 | 29,031 | 48,061 | |||||||||||
Lower of cost or market (LCM) inventory valuation adjustment | (2,248 | ) | — | 294 | — | ||||||||||
Operating expenses (excluding depreciation and amortization expense reflected below) | 1,027 | 1,175 | 2,151 | 2,390 | |||||||||||
Depreciation and amortization expense | 566 | 552 | 1,135 | 1,089 | |||||||||||
Total cost of sales | 8,424 | 27,810 | 32,611 | 51,540 | |||||||||||
Other operating expenses | 3 | 2 | 5 | 4 | |||||||||||
General and administrative expenses (excluding depreciation and amortization expense reflected below) | 169 | 199 | 346 | 408 | |||||||||||
Depreciation and amortization expense | 12 | 14 | 25 | 28 | |||||||||||
Operating income (loss) | 1,789 | 908 | (488 | ) | 1,216 | ||||||||||
Other income, net | 27 | 12 | 59 | 34 | |||||||||||
Interest and debt expense, net of capitalized interest | (142 | ) | (112 | ) | (267 | ) | (224 | ) | |||||||
Income (loss) before income tax expense (benefit) | 1,674 | 808 | (696 | ) | 1,026 | ||||||||||
Income tax expense (benefit) | 339 | 160 | (277 | ) | 211 | ||||||||||
Net income (loss) | 1,335 | 648 | (419 | ) | 815 | ||||||||||
Less: Net income attributable to noncontrolling interests | 82 | 36 | 179 | 62 | |||||||||||
Net income (loss) attributable to Valero Energy Corporation stockholders | $ | 1,253 | $ | 612 | $ | (598 | ) | $ | 753 | ||||||
Earnings (loss) per common share | $ | 3.07 | $ | 1.47 | $ | (1.48 | ) | $ | 1.80 | ||||||
Weighted-average common shares outstanding (in millions) | 406 | 415 | 407 | 416 | |||||||||||
Earnings (loss) per common share – assuming dilution | $ | 3.07 | $ | 1.47 | $ | (1.48 | ) | $ | 1.80 | ||||||
Weighted-average common shares outstanding – assuming dilution (in millions) | 407 | 417 | 407 | 417 | |||||||||||
_______________________________________________ | |||||||||||||||
Supplemental information: | |||||||||||||||
(a) Includes excise taxes on sales by certain of our international operations | $ | 784 | $ | 1,410 | $ | 2,152 | $ | 2,740 |
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, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income (loss) | $ | 1,335 | $ | 648 | $ | (419 | ) | $ | 815 | ||||||
Other comprehensive income (loss): | |||||||||||||||
Foreign currency translation adjustment | 138 | — | (469 | ) | 155 | ||||||||||
Net gain on pension and other postretirement benefits | 12 | 2 | 24 | 5 | |||||||||||
Net gain (loss) on cash flow hedges | (25 | ) | 5 | 4 | 5 | ||||||||||
Other comprehensive income (loss) before income tax expense (benefit) | 125 | 7 | (441 | ) | 165 | ||||||||||
Income tax expense (benefit) related to items of other comprehensive income (loss) | (1 | ) | 1 | 5 | 2 | ||||||||||
Other comprehensive income (loss) | 126 | 6 | (446 | ) | 163 | ||||||||||
Comprehensive income (loss) | 1,461 | 654 | (865 | ) | 978 | ||||||||||
Less: Comprehensive income attributable to noncontrolling interests | 70 | 40 | 181 | 68 | |||||||||||
Comprehensive income (loss) attributable to Valero Energy Corporation stockholders | $ | 1,391 | $ | 614 | $ | (1,046 | ) | $ | 910 |
See Condensed Notes to Consolidated Financial Statements.
3
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(millions of dollars)
(unaudited)
Valero Energy Corporation Stockholders’ Equity | |||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||
Balance as of March 31, 2020 | $ | 7 | $ | 6,814 | $ | (15,764 | ) | $ | 29,722 | $ | (1,937 | ) | $ | 18,842 | $ | 843 | $ | 19,685 | |||||||||||||
Net income | — | — | — | 1,253 | — | 1,253 | 82 | 1,335 | |||||||||||||||||||||||
Dividends on common stock ($0.98 per share) | — | — | — | (400 | ) | — | (400 | ) | — | (400 | ) | ||||||||||||||||||||
Stock-based compensation expense | — | 12 | — | — | — | 12 | — | 12 | |||||||||||||||||||||||
Transactions in connection with stock-based compensation plans | — | (2 | ) | 4 | — | — | 2 | — | 2 | ||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (126 | ) | (126 | ) | |||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | 138 | 138 | (12 | ) | 126 | ||||||||||||||||||||||
Balance as of June 30, 2020 | $ | 7 | $ | 6,824 | $ | (15,760 | ) | $ | 30,575 | $ | (1,799 | ) | $ | 19,847 | $ | 787 | $ | 20,634 | |||||||||||||
Balance as of March 31, 2019 | $ | 7 | $ | 6,802 | $ | (14,958 | ) | $ | 30,810 | $ | (1,352 | ) | $ | 21,309 | $ | 470 | $ | 21,779 | |||||||||||||
Net income | — | — | — | 612 | — | 612 | 36 | 648 | |||||||||||||||||||||||
Dividends on common stock ($0.90 per share) | — | — | — | (376 | ) | — | (376 | ) | — | (376 | ) | ||||||||||||||||||||
Stock-based compensation expense | — | 11 | — | — | — | 11 | — | 11 | |||||||||||||||||||||||
Transactions in connection with stock-based compensation plans | — | (1 | ) | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||||||
Open market stock purchases | — | — | (212 | ) | — | — | (212 | ) | — | (212 | ) | ||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (18 | ) | (18 | ) | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | 2 | 2 | 4 | 6 | |||||||||||||||||||||||
Balance as of June 30, 2019 | $ | 7 | $ | 6,812 | $ | (15,170 | ) | $ | 31,046 | $ | (1,350 | ) | $ | 21,345 | $ | 492 | $ | 21,837 |
See Condensed Notes to Consolidated Financial Statements.
4
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(millions of dollars)
(unaudited)
Valero Energy Corporation Stockholders’ Equity | |||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||
Balance as of December 31, 2019 | $ | 7 | $ | 6,821 | $ | (15,648 | ) | $ | 31,974 | $ | (1,351 | ) | $ | 21,803 | $ | 733 | $ | 22,536 | |||||||||||||
Net income (loss) | — | — | — | (598 | ) | — | (598 | ) | 179 | (419 | ) | ||||||||||||||||||||
Dividends on common stock ($1.96 per share) | — | — | — | (801 | ) | — | (801 | ) | — | (801 | ) | ||||||||||||||||||||
Stock-based compensation expense | — | 36 | — | — | — | 36 | — | 36 | |||||||||||||||||||||||
Transactions in connection with stock-based compensation plans | — | (33 | ) | 18 | — | — | (15 | ) | — | (15 | ) | ||||||||||||||||||||
Open market stock purchases | — | — | (130 | ) | — | — | (130 | ) | — | (130 | ) | ||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (127 | ) | (127 | ) | |||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (448 | ) | (448 | ) | 2 | (446 | ) | ||||||||||||||||||||
Balance as of June 30, 2020 | $ | 7 | $ | 6,824 | $ | (15,760 | ) | $ | 30,575 | $ | (1,799 | ) | $ | 19,847 | $ | 787 | $ | 20,634 | |||||||||||||
Balance as of December 31, 2018 | $ | 7 | $ | 7,048 | $ | (14,925 | ) | $ | 31,044 | $ | (1,507 | ) | $ | 21,667 | $ | 1,064 | $ | 22,731 | |||||||||||||
Net income | — | — | — | 753 | — | 753 | 62 | 815 | |||||||||||||||||||||||
Dividends on common stock ($1.80 per share) | — | — | — | (751 | ) | — | (751 | ) | — | (751 | ) | ||||||||||||||||||||
Stock-based compensation expense | — | 21 | — | — | — | 21 | — | 21 | |||||||||||||||||||||||
Transactions in connection with stock-based compensation plans | — | (3 | ) | 1 | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||||||
Open market stock purchases | — | — | (246 | ) | — | — | (246 | ) | — | (246 | ) | ||||||||||||||||||||
Acquisition of Valero Energy Partners LP (VLP) publicly held common units | — | (328 | ) | — | — | — | (328 | ) | (622 | ) | (950 | ) | |||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (18 | ) | (18 | ) | |||||||||||||||||||||
Other | — | 74 | — | — | — | 74 | — | 74 | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 157 | 157 | 6 | 163 | |||||||||||||||||||||||
Balance as of June 30, 2019 | $ | 7 | $ | 6,812 | $ | (15,170 | ) | $ | 31,046 | $ | (1,350 | ) | $ | 21,345 | $ | 492 | $ | 21,837 |
See Condensed Notes to Consolidated Financial Statements.
5
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
(unaudited)
Six Months Ended June 30, | |||||||
2020 | 2019 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | (419 | ) | $ | 815 | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization expense | 1,160 | 1,117 | |||||
LCM inventory valuation adjustment | 294 | — | |||||
Deferred income tax expense (benefit) | 223 | (12 | ) | ||||
Changes in current assets and current liabilities | (478 | ) | 413 | ||||
Changes in deferred charges and credits and other operating activities, net | (93 | ) | 61 | ||||
Net cash provided by operating activities | 687 | 2,394 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures (excluding variable interest entities (VIEs)) | (555 | ) | (854 | ) | |||
Capital expenditures of VIEs: | |||||||
Diamond Green Diesel Holdings LLC (DGD) | (177 | ) | (51 | ) | |||
Other VIEs | (143 | ) | (69 | ) | |||
Deferred turnaround and catalyst cost expenditures (excluding VIEs) | (437 | ) | (470 | ) | |||
Deferred turnaround and catalyst cost expenditures of DGD | (10 | ) | (1 | ) | |||
Investments in unconsolidated joint ventures | (29 | ) | (90 | ) | |||
Acquisitions of undivided interests | — | (29 | ) | ||||
Other investing activities, net | 12 | 9 | |||||
Net cash used in investing activities | (1,339 | ) | (1,555 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from debt issuances and borrowings (excluding VIEs) | 1,799 | 1,892 | |||||
Proceeds from borrowings of VIEs | 163 | 70 | |||||
Repayments of debt and finance lease obligations (excluding VIEs) | (432 | ) | (1,792 | ) | |||
Repayments of debt of VIEs | (3 | ) | (3 | ) | |||
Purchases of common stock for treasury | (147 | ) | (248 | ) | |||
Common stock dividends | (801 | ) | (751 | ) | |||
Acquisition of VLP publicly held common units | — | (950 | ) | ||||
Distributions to noncontrolling interests | (127 | ) | (18 | ) | |||
Other financing activities, net | (17 | ) | (25 | ) | |||
Net cash provided by (used in) financing activities | 435 | (1,825 | ) | ||||
Effect of foreign exchange rate changes on cash | (47 | ) | 37 | ||||
Net decrease in cash and cash equivalents | (264 | ) | (949 | ) | |||
Cash and cash equivalents at beginning of period | 2,583 | 2,982 | |||||
Cash and cash equivalents at end of period | $ | 2,319 | $ | 2,033 |
See Condensed Notes to Consolidated Financial Statements.
6
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
General
The terms “Valero,” “we,” “our,” and “us,” as used in this report, 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. As discussed in Note 2, the outbreak of COVID-19 and its development into a pandemic in March 2020 resulted in significant economic disruption globally. This disruption became more acute in the latter half of March 2020. While demand and market prices for most of our products increased during the second quarter of 2020 compared to the end of the first quarter of 2020, developments with respect to COVID-19 have been occurring at a rapid pace and the risk remains that circumstances could change. For instance, during the latter part of the second quarter of 2020, governmental authorities in various states across the U.S. began to lift many of the restrictions created by actions taken to slow down the spread of COVID-19. However, many of the states where such restrictions were lifted, and several states where the restrictions have essentially never been lifted (such as California in our U.S. West Coast region), have recently experienced a marked increase in the spread of COVID-19 and many governmental authorities in such areas have responded by reimposing certain restrictions they had previously lifted. Therefore, our operating results for the six months ended June 30, 2020 do not fully reflect the impact this disruption will likely continue to have on us.
The balance sheet as of December 31, 2019 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, 2019.
Reclassifications
Prior year amounts for capital expenditures, deferred turnaround and catalyst cost expenditures, and repayments of debt and finance lease obligations in the consolidated statements of cash flows have been reclassified to conform to the 2020 presentation to separately present these activities for us and our consolidated VIEs.
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.
7
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adoption of Accounting Pronouncements
We adopted the following Accounting Standards Updates (ASUs) on January 1, 2020. Our adoption of these ASUs did not have a material impact on our financial statements or related disclosures.
ASU | Basis of Adoption | ||
2016-13 | Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (including codification improvements in ASUs 2018-19 and 2019-11 and ASU 2020-02— Financial Instruments—Credit Losses (Topic 326): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119) | Cumulative effect | |
2018-15 | Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | Prospectively | |
2019-12 | Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | Prospectively |
The following ASU was issued on and adopted by us on March 12, 2020. Our adoption of this ASU did not have a material impact on our financial statements or related disclosures.
ASU | Basis of Adoption | ||
2020-04 | Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | Prospectively |
2. | UNCERTAINTIES AND CERTAIN SIGNIFICANT ACCOUNTING ESTIMATES |
Overview
The outbreak of COVID-19 and its development into a pandemic in March 2020 and certain developments in the global oil markets have impacted and continue to impact our business. We responded, and will strive to continue to respond, to the impact from these matters on our business. We reduced the amount of crude oil processed at most of our refineries in response to the decreased demand for our products, we temporarily idled various gasoline-making units at certain of our refineries to further limit gasoline production, and we took measures to reduce jet fuel production. Eight of our ethanol plants were temporarily idled, and production at our remaining six ethanol plants was reduced earlier this year to address the decreased demand for ethanol. Demand for most of our products partially recovered during the latter part of the second quarter of 2020. As a result, we have increased the production of most of our products and recently restarted the gasoline-making units and four ethanol plants that had been temporarily idled.
Many uncertainties remain with respect to COVID-19, including its resulting economic effects, and we are unable to predict the ultimate economic impacts from COVID-19 on our business and how quickly national economies can recover once the pandemic subsides, or whether any recovery will ultimately experience a reversal or other setbacks. However, the adverse impacts of the economic effects from COVID-19 and uncertainty in the global oil markets on our business have been and will likely continue to be significant. We believe we have proactively addressed many of the known impacts of COVID-19 to the extent possible and we will strive to continue to do so, but there can be no assurance that any measures we have taken or may take will be fully effective. As a result, we expect these matters may affect our estimates and assumptions on amounts reported in the financial statements and accompanying notes in the near term.
8
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment Analysis of Long-Lived Assets
Due to the adverse economic conditions discussed above, we reviewed our significant operating assets for the existence of impairment indicators. As a result of this review, we evaluated six ethanol plants for potential impairment as of June 30, 2020, assuming that we would operate these plants in the future and considering current economic conditions on our future estimated cash flows. Based on our analysis, we determined that the carrying amount of each of these plants was recoverable, as the undiscounted future cash flows from each plant exceeded its respective carrying value. Nonetheless, we will continue to evaluate the economic conditions and their impact on our assumptions.
Impairment Analysis of Goodwill
We have $260 million of goodwill as of June 30, 2020. All of our goodwill is allocated to one reporting unit, the U.S. Gulf Coast refining region. Our annual test for the impairment of goodwill is performed on October 1 of each year. However, as discussed above, there were adverse changes in the capital and commodity markets that contributed to a significant decline in our common stock price compared to the price as of December 31, 2019 and early March 2020. Despite the decline in our common stock price, we determined our goodwill was not impaired as of June 30, 2020. Nonetheless, we will continue to evaluate the economic conditions and their impact on our assumptions.
Inventory Valuation
See Note 4 regarding our $294 million LCM inventory valuation reserve and the estimates used to determine the market value of our inventories.
3. | MERGER WITH VLP |
On January 10, 2019, we completed our acquisition of all of the outstanding publicly held common units of VLP pursuant to a definitive Agreement and Plan of Merger (Merger Agreement, and together with the transactions contemplated thereby, the Merger Transaction) with VLP. Upon completion of the Merger Transaction, each outstanding publicly held common unit was converted into the right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units were automatically canceled and ceased to exist. Upon completion of the Merger Transaction, we paid aggregate merger consideration of $950 million, which was funded with available cash on hand.
Prior to the completion of the Merger Transaction, we consolidated the financial statements of VLP and reflected noncontrolling interests on our balance sheet for the portion of VLP’s partners’ capital held by VLP’s public common unitholders. Upon completion of the Merger Transaction, VLP became our indirect wholly owned subsidiary and, as a result, we no longer reflect noncontrolling interests on our balance sheet with respect to VLP. In addition, we no longer attribute a portion of VLP’s net income to noncontrolling interests. Because we had a controlling financial interest in VLP before the Merger Transaction and retained our controlling financial interest in VLP after the Merger Transaction, the change in our ownership interest in VLP as a result of the merger was accounted for as an equity transaction. Accordingly, we did not recognize a gain or loss on the Merger Transaction.
9
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. | INVENTORIES |
Inventories consisted of the following (in millions):
June 30, 2020 | December 31, 2019 | ||||||
Refinery feedstocks | $ | 2,000 | $ | 2,399 | |||
Refined petroleum products and blendstocks | 3,161 | 4,034 | |||||
Renewable diesel feedstocks and products | 53 | 46 | |||||
Ethanol feedstocks and products | 224 | 260 | |||||
Materials and supplies | 276 | 274 | |||||
Inventories before LCM inventory valuation reserve | 5,714 | 7,013 | |||||
LCM inventory valuation reserve | (294 | ) | — | ||||
Inventories | $ | 5,420 | $ | 7,013 |
We compare the market value of inventories to their cost on an aggregate basis, excluding materials and supplies. In determining the market value of our inventories, we assume that feedstocks are converted into refined products, which requires us to make estimates regarding the refined products expected to be produced from those feedstocks and the conversion costs required to convert those feedstocks into refined products. We also estimate the usual and customary transportation costs required to move the inventory from our plants to the appropriate points of sale. We then apply an estimated selling price to our inventories. If the aggregate market value is less than the aggregate cost, we recognize a loss for the difference in our statements of income. To the extent the aggregate market value subsequently increases, we would recognize an increase to the value of our inventories (not to exceed cost) and a gain in our statements of income.
The market value of our last-in, first-out (LIFO) inventory fell below our historical LIFO inventory costs as of March 31, 2020, and as a result, we recorded an LCM inventory valuation reserve of $2.5 billion in order to state our inventories at market. As of June 30, 2020, our LCM inventory valuation reserve was $294 million. The change in our LCM inventory valuation reserve resulted in a net benefit of $2.2 billion and a net charge of $294 million to our results of operations during the three and six months ended June 30, 2020, respectively. As of December 31, 2019, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $2.5 billion.
Our non-LIFO inventories accounted for $912 million and $1.4 billion of our total inventories as of June 30, 2020 and December 31, 2019, respectively.
10
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. | LEASES |
Lease Costs and Other Supplemental Information
Our total lease cost comprises costs that are included in our income statement, as well as costs capitalized as part of an item of property, plant, and equipment or inventory. Total lease cost by class of underlying asset was as follows (in millions):
Pipelines, Terminals, and Tanks | Transportation | Feedstock Processing Equipment | Energy and Gases | Real Estate | Other | Total | |||||||||||||||||||||||||
Marine | Rail | ||||||||||||||||||||||||||||||
Three months ended June 30, 2020 | |||||||||||||||||||||||||||||||
Finance lease cost: | |||||||||||||||||||||||||||||||
Amortization of right-of-use (ROU) assets | $ | 28 | $ | — | $ | — | $ | 3 | $ | 1 | $ | — | $ | — | $ | 32 | |||||||||||||||
Interest on lease liabilities | 25 | — | — | 1 | — | — | — | 26 | |||||||||||||||||||||||
Operating lease cost | 42 | 37 | 15 | 4 | 2 | 6 | 1 | 107 | |||||||||||||||||||||||
Variable lease cost | 17 | 15 | — | — | — | 1 | — | 33 | |||||||||||||||||||||||
Short-term lease cost | 2 | 14 | — | 7 | — | — | — | 23 | |||||||||||||||||||||||
Sublease income | — | (2 | ) | — | — | — | — | — | (2 | ) | |||||||||||||||||||||
Total lease cost | $ | 114 | $ | 64 | $ | 15 | $ | 15 | $ | 3 | $ | 7 | $ | 1 | $ | 219 | |||||||||||||||
Three months ended June 30, 2019 | |||||||||||||||||||||||||||||||
Finance lease cost: | |||||||||||||||||||||||||||||||
Amortization of ROU assets | $ | 12 | $ | — | $ | — | $ | 1 | $ | 1 | $ | — | $ | — | $ | 14 | |||||||||||||||
Interest on lease liabilities | 12 | — | — | 1 | 1 | — | — | 14 | |||||||||||||||||||||||
Operating lease cost | 47 | 34 | 13 | 5 | 2 | 10 | 2 | 113 | |||||||||||||||||||||||
Variable lease cost | 15 | 7 | — | — | — | — | — | 22 | |||||||||||||||||||||||
Short-term lease cost | 4 | 12 | — | 8 | — | — | — | 24 | |||||||||||||||||||||||
Sublease income | — | (15 | ) | — | — | — | (1 | ) | — | (16 | ) | ||||||||||||||||||||
Total lease cost | $ | 90 | $ | 38 | $ | 13 | $ | 15 | $ | 4 | $ | 9 | $ | 2 | $ | 171 |
11
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pipelines, Terminals, and Tanks | Transportation | Feedstock Processing Equipment | Energy and Gases | Real Estate | Other | Total | |||||||||||||||||||||||||
Marine | Rail | ||||||||||||||||||||||||||||||
Six months ended June 30, 2020 | |||||||||||||||||||||||||||||||
Finance lease cost: | |||||||||||||||||||||||||||||||
Amortization of ROU assets | $ | 50 | $ | — | $ | — | $ | 6 | $ | 2 | $ | — | $ | — | $ | 58 | |||||||||||||||
Interest on lease liabilities | 46 | — | — | 1 | 1 | — | — | 48 | |||||||||||||||||||||||
Operating lease cost | 84 | 76 | 30 | 8 | 4 | 12 | 2 | 216 | |||||||||||||||||||||||
Variable lease cost | 33 | 33 | 1 | 1 | — | 1 | — | 69 | |||||||||||||||||||||||
Short-term lease cost | 6 | 36 | — | 21 | — | — | — | 63 | |||||||||||||||||||||||
Sublease income | — | (8 | ) | — | — | — | — | — | (8 | ) | |||||||||||||||||||||
Total lease cost | $ | 219 | $ | 137 | $ | 31 | $ | 37 | $ | 7 | $ | 13 | $ | 2 | $ | 446 | |||||||||||||||
Six months ended June 30, 2019 | |||||||||||||||||||||||||||||||
Finance lease cost: | |||||||||||||||||||||||||||||||
Amortization of ROU assets | $ | 20 | $ | — | $ | — | $ | 2 | $ | 2 | $ | — | $ | — | $ | 24 | |||||||||||||||
Interest on lease liabilities | 22 | — | — | 1 | 2 | — | — | 25 | |||||||||||||||||||||||
Operating lease cost | 94 | 68 | 24 | 12 | 4 | 14 | 2 | 218 | |||||||||||||||||||||||
Variable lease cost | 33 | 17 | — | — | — | — | — | 50 | |||||||||||||||||||||||
Short-term lease cost | 7 | 26 | — | 14 | — | — | — | 47 | |||||||||||||||||||||||
Sublease income | — | (16 | ) | — | — | — | (2 | ) | — | (18 | ) | ||||||||||||||||||||
Total lease cost | $ | 176 | $ | 95 | $ | 24 | $ | 29 | $ | 8 | $ | 12 | $ | 2 | $ | 346 |
12
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents additional information related to our operating and finance leases (in millions, except for lease terms and discount rates):
June 30, 2020 | December 31, 2019 | ||||||||||||||
Operating Leases | Finance Leases | Operating Leases | Finance Leases | ||||||||||||
Supplemental balance sheet information | |||||||||||||||
ROU assets, net reflected in the following balance sheet line items: | |||||||||||||||
Property, plant, and equipment, net | $ | — | $ | 2,225 | $ | — | $ | 790 | |||||||
Deferred charges and other assets, net | 1,273 | — | 1,329 | — | |||||||||||
Total ROU assets, net | $ | 1,273 | $ | 2,225 | $ | 1,329 | $ | 790 | |||||||
Current lease liabilities reflected in the following balance sheet line items: | |||||||||||||||
Current portion of debt and finance lease obligations | $ | — | $ | 71 | $ | — | $ | 41 | |||||||
Accrued expenses | 325 | — | 331 | — | |||||||||||
Noncurrent lease liabilities reflected in the following balance sheet line items: | |||||||||||||||
Debt and finance lease obligations, less current portion | — | 2,177 | — | 750 | |||||||||||
Other long-term liabilities | 920 | — | 959 | — | |||||||||||
Total lease liabilities | $ | 1,245 | $ | 2,248 | $ | 1,290 | $ | 791 | |||||||
Other supplemental information | |||||||||||||||
Weighted-average remaining lease term | 7.5 years | 22.4 years | 7.7 years | 19.7 years | |||||||||||
Weighted-average discount rate | 4.7 | % | 4.3 | % | 4.9 | % | 5.2 | % |
Supplemental cash flow information related to our operating and finance leases is presented in Note 13.
Significant Lease Commencement
We have a 50 percent membership interest in MVP Terminalling, LLC (MVP), an unconsolidated joint venture formed in September 2017 with a subsidiary of Magellan Midstream Partners LP, to construct, own, and operate the Magellan Valero Pasadena marine terminal (MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal upon completion of the initial two phases of construction, which occurred in the first quarter of 2020. During the six months ended June 30, 2020, we recognized a finance lease ROU asset and related liability of approximately $1.4 billion in connection with this agreement. The terminaling agreement has an initial term of 12 years with two five-year automatic renewals, and year-to-year renewals thereafter.
13
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maturity Analysis
The remaining minimum lease payments due under our long-term leases were as follows (in millions):
June 30, 2020 | December 31, 2019 | ||||||||||||||
Operating Leases | Finance Leases | Operating Leases | Finance Leases | ||||||||||||
2020 (a) | $ | 207 | $ | 85 | $ | 376 | $ | 88 | |||||||
2021 | 287 | 171 | 250 | 86 | |||||||||||
2022 | 214 | 173 | 194 | 87 | |||||||||||
2023 | 179 | 178 | 160 | 91 | |||||||||||
2024 | 142 | 170 | 125 | 82 | |||||||||||
Thereafter | 510 | 2,922 | 498 | 1,011 | |||||||||||
Total undiscounted lease payments | 1,539 | 3,699 | 1,603 | 1,445 | |||||||||||
Less: Amount associated with discounting | 294 | 1,451 | 313 | 654 | |||||||||||
Total lease liabilities | $ | 1,245 | $ | 2,248 | $ | 1,290 | $ | 791 |
____________________
(a) | The amounts as of June 30, 2020 are for the remaining six months of 2020. |
6. | DEBT |
Public Debt
During the six months ended June 30, 2020, we issued $850 million of 2.700 percent Senior Notes due April 15, 2023 and $650 million of 2.850 percent Senior Notes due April 15, 2025. Proceeds from these debt issuances totaled $1.499 billion before deducting the underwriting discount and other debt issuance costs.
During the six months ended June 30, 2019, the following activity occurred:
• | We issued $1.0 billion of 4.00 percent Senior Notes due April 1, 2029. Proceeds from this debt issuance totaled $992 million before deducting the underwriting discount and other debt issuance costs. The proceeds were used to redeem our 6.125 percent Senior Notes due February 1, 2020 (6.125 percent Senior Notes) for $871 million, or 102.48 percent of stated value, which included an early redemption fee of $21 million that is reflected in “other income, net” in our statements of income for the three and six months ended June 30, 2019. |
• | In connection with the completion of the Merger Transaction, Valero Energy Corporation, the parent company, entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment, when due, of the following debt issued by VLP, one of its wholly owned subsidiaries, that was outstanding as of June 30, 2020: |
◦ | 4.375 percent Senior Notes due December 15, 2026; and |
◦ | 4.5 percent Senior Notes due March 15, 2028. |
Effective March 31, 2020, we early applied the U.S. Securities and Exchange Commission’s (SEC’s) Final Rule Release No. 33-10762, Financial Disclosures About Guarantors and Issuers of
14
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities. This rule allows us to cease providing the previously required condensed consolidating financial information in our periodic reports while the senior notes issued by VLP noted above are outstanding, as VLP’s reporting obligation was suspended on January 22, 2019 in connection with the completion of the Merger Transaction.
Credit Facilities
Summary of Credit Facilities
We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (amounts in millions and currency in U.S. dollars, except as noted):
June 30, 2020 | ||||||||||||||||||
Facility Amount | Maturity Date | Outstanding Borrowings | Letters of Credit Issued (a) | Availability | ||||||||||||||
Committed facilities: | ||||||||||||||||||
Valero Revolver | $ | 4,000 | March 2024 | $ | — | $ | 33 | $ | 3,967 | |||||||||
364-day Revolving Credit Facility | $ | 875 | April 2021 | $ | — | n/a | $ | 875 | ||||||||||
Canadian Revolver | C$ | 150 | November 2020 | C$ | — | C$ | 7 | C$ | 143 | |||||||||
Accounts receivable sales facility (b) | $ | 1,300 | July 2020 | $ | — | n/a | $ | 726 | ||||||||||
Letter of credit facility | $ | 50 | November 2020 | n/a | $ | — | $ | 50 | ||||||||||
Committed facilities of VIE (c): | ||||||||||||||||||
IEnova Revolver | $ | 612 | February 2028 | $ | 511 | n/a | $ | 101 | ||||||||||
Uncommitted facilities: | ||||||||||||||||||
Letter of credit facilities | n/a | n/a | n/a | $ | 92 | n/a |
___________________
(a) | Letters of credit issued as of June 30, 2020 expire at various times in 2020 through 2021. |
(b) | The available borrowing capacity was lower than the facility amount due to a decline in product prices. In July 2020, we extended the maturity date of this facility to July 2021 and decreased the facility amount from $1.3 billion to $1.0 billion. |
(c) | Creditors of our VIE do not have recourse against us. |
364-day Revolving Credit Facility
In April 2020, we entered into an $875 million 364-Day Credit Agreement (the 364-day Revolving Credit Facility) with several lenders. This facility provides for a revolving credit facility in an aggregate principal amount of up to $875 million and matures 364 days from April 13, 2020.
Borrowings under this facility bear interest at the base rate or the eurodollar rate (at our election) plus an applicable rate ranging from 0.150 percent to 1.700 percent, based upon the elected interest rate type and our debt ratings from certain rating agencies. The facility requires us to pay a commitment fee accruing on the daily amount of used and unused commitments of the lenders, also based upon our debt ratings mentioned
15
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
above. The interest and commitment fees under this facility are payable quarterly. The facility also requires us to pay a customary agency fee to the administrative agent. The facility contains various customary covenants and events of default.
Accounts Receivable Sales Facility
During the six months ended June 30, 2020, we sold $300 million of eligible receivables under our accounts receivable sales facility and repaid $400 million. The weighted-average interest rate on the borrowings outstanding for this facility was 1.5221 percent and 2.5275 percent during the six months ended June 30, 2020 and 2019, respectively.
IEnova Revolver
During the six months ended June 30, 2020, Central Mexico Terminals (as described in Note 8) amended its combined unsecured revolving credit facility (IEnova Revolver) with IEnova (defined in Note 8) to increase the facility amount from $491 million to $612 million. During the six months ended June 30, 2020 and 2019, Central Mexico Terminals borrowed $163 million and $70 million, respectively, and had no repayments under this revolver. As of June 30, 2020 and December 31, 2019, the variable interest rate was 5.083 percent and 5.749 percent, respectively.
The IEnova Revolver is available only to the operations of Central Mexico Terminals, and the creditors of Central Mexico Terminals do not have recourse against us.
Other Disclosures
“Interest and debt expense, net of capitalized interest” is comprised as follows (in millions):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Interest and debt expense | $ | 161 | $ | 136 | $ | 306 | $ | 272 | |||||||
Less: Capitalized interest | 19 | 24 | 39 | 48 | |||||||||||
Interest and debt expense, net of capitalized interest | $ | 142 | $ | 112 | $ | 267 | $ | 224 |
7. | EQUITY |
Share Activity
There was no significant share activity during the six months ended June 30, 2020 and 2019.
Common Stock Dividends
On July 16, 2020, our board of directors declared a quarterly cash dividend of $0.98 per common share payable on September 2, 2020 to holders of record at the close of business on August 4, 2020.
16
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):
Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gains (Losses) on Cash Flow Hedges | Total | Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gains on Cash Flow Hedges | Total | ||||||||||||||||||||||||
Balance as of beginning of period | $ | (1,282 | ) | $ | (663 | ) | $ | 8 | $ | (1,937 | ) | $ | (869 | ) | $ | (483 | ) | $ | — | $ | (1,352 | ) | |||||||||
Other comprehensive income (loss) before reclassifications | 138 | — | (2 | ) | 136 | (1 | ) | — | 1 | — | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 10 | (8 | ) | 2 | — | 2 | — | 2 | ||||||||||||||||||||||
Other comprehensive income (loss) | 138 | 10 | (10 | ) | 138 | (1 | ) | 2 | 1 | 2 | |||||||||||||||||||||
Balance as of end of period | $ | (1,144 | ) | $ | (653 | ) | $ | (2 | ) | $ | (1,799 | ) | $ | (870 | ) | $ | (481 | ) | $ | 1 | $ | (1,350 | ) |
Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gains (Losses) on Cash Flow Hedges | Total | Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gains on Cash Flow Hedges | Total | ||||||||||||||||||||||||
Balance as of beginning of period | $ | (676 | ) | $ | (672 | ) | $ | (3 | ) | $ | (1,351 | ) | $ | (1,022 | ) | $ | (485 | ) | $ | — | $ | (1,507 | ) | ||||||||
Other comprehensive income (loss) before reclassifications | (468 | ) | — | 19 | (449 | ) | 152 | — | 1 | 153 | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 19 | (18 | ) | 1 | — | 4 | — | 4 | ||||||||||||||||||||||
Other comprehensive income (loss) | (468 | ) | 19 | 1 | (448 | ) | 152 | 4 | 1 | 157 | |||||||||||||||||||||
Balance as of end of period | $ | (1,144 | ) | $ | (653 | ) | $ | (2 | ) | $ | (1,799 | ) | $ | (870 | ) | $ | (481 | ) | $ | 1 | $ | (1,350 | ) |
17
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. | VARIABLE INTEREST ENTITIES |
Consolidated VIEs
We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary. As of June 30, 2020, our significant consolidated VIEs included:
• | DGD, a joint venture with a subsidiary of Darling Ingredients Inc., which owns and operates a plant that processes animal fats, used cooking oils, and other vegetable oils into renewable diesel; and |
• | Central Mexico Terminals, which is a collective group of three subsidiaries of Infraestructura Energetica Nova, S.A.B. de C.V. (IEnova), a Mexican company and subsidiary of Sempra Energy, a U.S. public company. We have terminaling agreements with Central Mexico Terminals that represent variable interests. We do not have an ownership interest in Central Mexico Terminals. |
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 some of our 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.
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, 2020 | |||||||||||||||
DGD | Central Mexico Terminals | Other | Total | ||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 331 | $ | — | $ | 16 | $ | 347 | |||||||
Other current assets | 234 | 44 | 27 | 305 | |||||||||||
Property, plant, and equipment, net | 887 | 506 | 99 | 1,492 | |||||||||||
Liabilities | |||||||||||||||
Current liabilities, including current portion of debt and finance lease obligations | $ | 80 | $ | 556 | $ | 7 | $ | 643 | |||||||
Debt and finance lease obligations, less current portion | — | — | 27 | 27 |
18
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2019 | |||||||||||||||
DGD | Central Mexico Terminals | Other | Total | ||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 85 | $ | — | $ | 25 | $ | 110 | |||||||
Other current assets | 567 | 33 | 89 | 689 | |||||||||||
Property, plant, and equipment, net | 706 | 381 | 105 | 1,192 | |||||||||||
Liabilities | |||||||||||||||
Current liabilities, including current portion of debt and finance lease obligations | $ | 66 | $ | 409 | $ | 8 | $ | 483 | |||||||
Debt and finance lease obligations, less current portion | — | — | 31 | 31 |
Non-Consolidated VIEs
We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. These non-consolidated VIEs are not material to our financial position or results of operations and are accounted for as equity investments.
19
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. | 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 | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Three months ended June 30 | |||||||||||||||
Service cost | $ | 35 | $ | 30 | $ | 2 | $ | 1 | |||||||
Interest cost | 22 | 25 | 2 | 3 | |||||||||||
Expected return on plan assets | (46 | ) | (41 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Net actuarial (gain) loss | 19 | 10 | — | (1 | ) | ||||||||||
Prior service credit | (5 | ) | (5 | ) | (2 | ) | (2 | ) | |||||||
Special charges | 1 | 2 | — | — | |||||||||||
Net periodic benefit cost | $ | 26 | $ | 21 | $ | 2 | $ | 1 | |||||||
Six months ended June 30 | |||||||||||||||
Service cost | $ | 70 | $ | 60 | $ | 3 | $ | 2 | |||||||
Interest cost | 43 | 49 | 4 | 6 | |||||||||||
Expected return on plan assets | (90 | ) | (83 | ) | — | — | |||||||||
Amortization of: | |||||||||||||||
Net actuarial (gain) loss | 37 | 20 | — | (2 | ) | ||||||||||
Prior service credit | (10 | ) | (9 | ) | (3 | ) | (4 | ) | |||||||
Special charges | 1 | 2 | — | 1 | |||||||||||
Net periodic benefit cost | $ | 51 | $ | 39 | $ | 4 | $ | 3 |
The components of net periodic benefit cost other than the service cost component (i.e., the non-service cost components) are included in “other income, net” in the statements of income.
During the six months ended June 30, 2020 and 2019, we contributed $19 million and $23 million, respectively, to our pension plans and $7 million and $8 million, respectively, to our other postretirement benefit plans.
We previously disclosed in our annual report on Form 10-K for the year ended December 31, 2019 that we planned to contribute approximately $140 million to our pension plans and $21 million to our other postretirement benefit plans during 2020. Due to the current economic environment, we are reconsidering our intent to make a discretionary contribution of $100 million to our qualified U.S. pension plan.
20
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. | INCOME TAXES |
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended. The most significant changes affecting us were as follows:
• | Modification of the limitations previously set by the Tax Cuts and Jobs Act of 2017 by providing that tax net operating losses (NOLs) arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. This provision allows the taxpayer to recover taxes previously paid at a 35 percent federal income tax rate during tax years prior to 2018. In addition, the CARES Act removed the taxable income limitation to allow a tax NOL to fully offset taxable income for tax years beginning before January 1, 2021. |
• | Increased the deductibility of interest expense from 30 percent to 50 percent of adjusted taxable income for 2019 and 2020. Also, a taxpayer can elect to use its 2019 adjusted taxable income in 2020 to determine the deductible amount of interest expense in that year. |
Our income tax expense (benefit) for the three and six months ended June 30, 2020 included a tax benefit of $7 million and $117 million, respectively, attributable to the expected tax NOL carryback provided under the CARES Act for expected tax NOLs from our current tax year to our 2015 tax year in which we paid federal income tax at a 35 percent tax rate.
21
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. | EARNINGS (LOSS) PER COMMON SHARE |
Earnings (loss) per common share were computed as follows (dollars and shares in millions, except per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Earnings (loss) per common share | |||||||||||||||
Net income (loss) attributable to Valero stockholders | $ | 1,253 | $ | 612 | $ | (598 | ) | $ | 753 | ||||||
Less: Income allocated to participating securities | 4 | 2 | 3 | 2 | |||||||||||
Net income (loss) available to common stockholders | $ | 1,249 | $ | 610 | $ | (601 | ) | $ | 751 | ||||||
Weighted-average common shares outstanding | 406 | 415 | 407 | 416 | |||||||||||
Earnings (loss) per common share | $ | 3.07 | $ | 1.47 | $ | (1.48 | ) | $ | 1.80 | ||||||
Earnings (loss) per common share – assuming dilution | |||||||||||||||
Net income (loss) attributable to Valero stockholders | $ | 1,253 | $ | 612 | $ | (598 | ) | $ | 753 | ||||||
Less: Income allocated to participating securities | 4 | 2 | 3 | 2 | |||||||||||
Net income (loss) available to common stockholders | $ | 1,249 | $ | 610 | $ | (601 | ) | $ | 751 | ||||||
Weighted-average common shares outstanding | 406 | 415 | 407 | 416 | |||||||||||
Effect of dilutive securities | 1 | 2 | — | 1 | |||||||||||
Weighted-average common shares outstanding – assuming dilution | 407 | 417 | 407 | 417 | |||||||||||
Earnings (loss) per common share – assuming dilution | $ | 3.07 | $ | 1.47 | $ | (1.48 | ) | $ | 1.80 |
Participating securities include restricted stock and performance awards granted under our 2020 Omnibus Stock Incentive Plan (2020 OSIP) or our 2011 Omnibus Stock Incentive Plan (2011 OSIP). Dilutive securities include participating securities as well as outstanding stock options granted under our 2020 OSIP or our 2011 OSIP. On April 30, 2020, our stockholders approved the 2020 OSIP.
22
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. | REVENUES AND SEGMENT INFORMATION |
Revenue from Contracts with Customers
Disaggregation of Revenue
Revenue is presented in the table below under “Segment Information” disaggregated by product because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements.
Contract Balances
Contract balances were as follows (in millions):
June 30, 2020 | December 31, 2019 | Decrease | |||||||||
Receivables from contracts with customers, included in receivables, net | $ | 2,603 | $ | 5,610 | $ | (3,007 | ) | ||||
Contract liabilities, included in accrued expenses | 34 | 55 | (21 | ) |
Receivables from contracts with customers is a component of “receivables, net” as presented on the balance sheet. The decrease in “receivables, net” is described in Note 13.
For the six months ended June 30, 2020, we recognized as revenue $52 million that was included in contract liabilities as of December 31, 2019.
Remaining Performance Obligations
We have spot and term contracts with customers, the majority of which are spot contracts with no remaining performance obligations. We do not disclose remaining performance obligations for contracts that have terms of one year or less. The transaction price for our remaining term contracts includes a fixed component and variable consideration (i.e., a commodity price), both of which are allocated entirely to a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance obligation. The fixed component is not material and the variable consideration is highly uncertain. Therefore, as of June 30, 2020, we have not disclosed the aggregate amount of the transaction price allocated to our remaining performance obligations.
Segment Information
We have three reportable segments — refining, renewable diesel, and ethanol. Each segment is a strategic business unit that offers different products and services by employing unique technologies and marketing strategies and whose operations and operating performance are managed and evaluated separately. Operating performance is measured based on the operating income generated by the segment, 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. The following is a description of each segment’s business operations.
• | The refining segment includes the operations of our 15 petroleum refineries, the associated marketing activities, and logistics assets that support our refining operations. The principal products |
23
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
manufactured by our refineries and sold by this segment include gasolines and blendstocks, distillates, and other products.
• | The renewable diesel segment includes the operations of DGD, our consolidated joint venture as discussed in Note 8. The principal product manufactured by DGD and sold by this segment is renewable diesel. This segment sells some renewable diesel to the refining segment, which is then sold to that segment’s customers. |
• | The ethanol segment includes the operations of our 14 ethanol plants, the associated marketing activities, and logistics assets that support our ethanol operations. The principal products manufactured by our ethanol plants are ethanol and distillers grains. This segment sells some ethanol to the refining segment for blending into gasoline, which is sold to that segment’s customers as a finished gasoline product. |
Operations that are not included in any of the reportable segments are included in the corporate category.
24
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables reflect information about our operating income (loss) by reportable segment (in millions):
Refining | Renewable Diesel | Ethanol | Corporate and Eliminations | Total | |||||||||||||||
Three months ended June 30, 2020 | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Revenues from external customers | $ | 9,615 | $ | 239 | $ | 543 | $ | — | $ | 10,397 | |||||||||
Intersegment revenues | 2 | 57 | 38 | (97 | ) | — | |||||||||||||
Total revenues | 9,617 | 296 | 581 | (97 | ) | 10,397 | |||||||||||||
Cost of sales: | |||||||||||||||||||
Cost of materials and other | 8,539 | 135 | 501 | (96 | ) | 9,079 | |||||||||||||
LCM inventory valuation adjustment | (2,137 | ) | — | (111 | ) | — | (2,248 | ) | |||||||||||
Operating expenses (excluding depreciation and amortization expense reflected below) | 928 | 20 | 79 | — | 1,027 | ||||||||||||||
Depreciation and amortization expense | 533 | 12 | 21 | — | 566 | ||||||||||||||
Total cost of sales | 7,863 | 167 | 490 | (96 | ) | 8,424 | |||||||||||||
Other operating expenses | 3 | — | — | — | 3 | ||||||||||||||
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | — | — | 169 | 169 | ||||||||||||||
Depreciation and amortization expense | — | — | — | 12 | 12 | ||||||||||||||
Operating income by segment | $ | 1,751 | $ | 129 | $ | 91 | $ | (182 | ) | $ | 1,789 | ||||||||
Three months ended June 30, 2019 | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Revenues from external customers | $ | 27,746 | $ | 222 | $ | 964 | $ | 1 | $ | 28,933 | |||||||||
Intersegment revenues | 8 | 73 | 53 | (134 | ) | — | |||||||||||||
Total revenues | 27,754 | 295 | 1,017 | (133 | ) | 28,933 | |||||||||||||
Cost of sales: | |||||||||||||||||||
Cost of materials and other | 25,172 | 189 | 855 | (133 | ) | 26,083 | |||||||||||||
Operating expenses (excluding depreciation and amortization expense reflected below) | 1,026 | 17 | 132 | — | 1,175 | ||||||||||||||
Depreciation and amortization expense | 518 | 12 | 22 | — | 552 | ||||||||||||||
Total cost of sales | 26,716 | 218 | 1,009 | (133 | ) | 27,810 | |||||||||||||
Other operating expenses | 1 | — | 1 | — | 2 | ||||||||||||||
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | — | — | 199 | 199 | ||||||||||||||
Depreciation and amortization expense | — | — | — | 14 | 14 | ||||||||||||||
Operating income by segment | $ | 1,037 | $ | 77 | $ | 7 | $ | (213 | ) | $ | 908 |
25
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Refining | Renewable Diesel | Ethanol | Corporate and Eliminations | Total | |||||||||||||||
Six months ended June 30, 2020 | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Revenues from external customers | $ | 30,600 | $ | 545 | $ | 1,354 | $ | — | $ | 32,499 | |||||||||
Intersegment revenues | 4 | 110 | 102 | (216 | ) | — | |||||||||||||
Total revenues | 30,604 | 655 | 1,456 | (216 | ) | 32,499 | |||||||||||||
Cost of sales: | |||||||||||||||||||
Cost of materials and other | 27,666 | 265 | 1,314 | (214 | ) | 29,031 | |||||||||||||
LCM inventory valuation adjustment | 277 | — | 17 | — | 294 | ||||||||||||||
Operating expenses (excluding depreciation and amortization expense reflected below) | 1,923 | 40 | 188 | — | 2,151 | ||||||||||||||
Depreciation and amortization expense | 1,069 | 23 | 43 | — | 1,135 | ||||||||||||||
Total cost of sales | 30,935 | 328 | 1,562 | (214 | ) | 32,611 | |||||||||||||
Other operating expenses | 5 | — | — | — | 5 | ||||||||||||||
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | — | — | 346 | 346 | ||||||||||||||
Depreciation and amortization expense | — | — | — | 25 | 25 | ||||||||||||||
Operating income (loss) by segment | $ | (336 | ) | $ | 327 | $ | (106 | ) | $ | (373 | ) | $ | (488 | ) | |||||
Six months ended June 30, 2019 | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Revenues from external customers | $ | 50,964 | $ | 474 | $ | 1,757 | $ | 1 | $ | 53,196 | |||||||||
Intersegment revenues | 10 | 124 | 105 | (239 | ) | — | |||||||||||||
Total revenues | 50,974 | 598 | 1,862 | (238 | ) | 53,196 | |||||||||||||
Cost of sales: | |||||||||||||||||||
Cost of materials and other | 46,337 | 413 | 1,549 | (238 | ) | 48,061 | |||||||||||||
Operating expenses (excluding depreciation and amortization expense reflected below) | 2,097 | 36 | 257 | — | 2,390 | ||||||||||||||
Depreciation and amortization expense | 1,021 | 23 | 45 | — | 1,089 | ||||||||||||||
Total cost of sales | 49,455 | 472 | 1,851 | (238 | ) | 51,540 | |||||||||||||
Other operating expenses | 3 | — | 1 | — | 4 | ||||||||||||||
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | — | — | 408 | 408 | ||||||||||||||
Depreciation and amortization expense | — | — | — | 28 | 28 | ||||||||||||||
Operating income by segment | $ | 1,516 | $ | 126 | $ | 10 | $ | (436 | ) | $ | 1,216 |
26
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a disaggregation of revenues from external customers for our principal products by reportable segment (in millions):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Refining: | |||||||||||||||
Gasolines and blendstocks | $ | 3,993 | $ |