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VLO > SEC Filings for VLO > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for VALERO ENERGY CORP/TX

Form 10-Q for VALERO ENERGY CORP/TX


8-May-2014

Quarterly Report


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 discussion 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 product inventories;

our anticipated level of capital investments, including deferred refinery turnaround and catalyst costs and capital expenditures for environmental and other purposes, 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 products globally and in the regions where we operate;

expectations regarding environmental, tax, and other regulatory initiatives; and

the effect of general economic and other conditions on refining and ethanol 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 products or receive feedstocks;

political and economic conditions in nations that produce crude oil or consume refined products;

demand for, and supplies of, refined products such as gasoline, diesel fuel, 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;

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;


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changes in the cost or availability of transportation for feedstocks and refined products;

the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;

the levels of government subsidies for ethanol and other alternative fuels;

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 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 to be implemented under the California Global Warming Solutions Act (also known as AB 32) and the United States (U.S.) Environmental Protection Agency's (EPA) regulation of greenhouse gases, 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; and

overall economic conditions, including the stability and liquidity of financial markets.

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.


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OVERVIEW AND OUTLOOK

Overview
For the first quarter of 2014, we reported net income attributable to Valero
stockholders of $828 million, or $1.54 per share (assuming dilution), compared
to $654 million, or $1.18 per share (assuming dilution), for the first quarter
of 2013.
The increase in net income attributable to Valero stockholders of $174 million
was primarily due to the increase of $289 million in our operating income as
outlined by business segment in the table below (in millions).
                                                     Three Months Ended March 31,
                                                   2014             2013        Change
Operating income (loss) by business segment:
Refining                                       $    1,279       $    1,212     $   67
Retail                                                  -               42        (42 )
Ethanol                                               243               14        229
Corporate                                            (172 )           (207 )       35
Total                                          $    1,350       $    1,061     $  289

The $67 million increase in refining segment operating income in the first quarter of 2014 compared to the first quarter of 2013 was primarily due to higher refining throughput margin per barrel and higher throughput volumes in most of our regions, partially offset by higher energy costs and higher depreciation expense between the periods.
On May 1, 2013, we completed the separation of our retail business, creating an independent public company named CST Brands, Inc. (CST), and as a result, we no longer operate a retail business. Therefore, we did not have any retail segment operating results for the first quarter of 2014, resulting in the $42 million decrease in retail segment operating income in the first quarter of 2014 compared to the first quarter of 2013.
Our ethanol segment operating income increased $229 million in the first quarter of 2014 compared to the first quarter of 2013 due to higher gross margin per gallon and higher production volumes. Significantly lower corn prices combined with higher ethanol prices quarter over quarter contributed to the increase in gross margin per gallon. Production volumes increased between the quarters in response to the improved ethanol gross margin per gallon.
Additional analysis of the changes in the operating income of our business segments and other components of net income attributable to Valero stockholders is provided below under "RESULTS OF OPERATIONS." Outlook
Our refining segment benefits from processing sour crude oils (such as Mars and Maya crude oil) and light sweet crude oils (such as West Texas Intermediate and Louisiana Light Sweet crude oil) due to the favorable discounts between the prices of these types of crude oil and the price of Brent crude oil. Because the market for refined products generally tracks the price of Brent crude oil, which is a benchmark sweet crude oil, we benefit when we process crude oils that are priced at a discount to Brent crude oil. The discounts in the prices of certain light sweet crude oils and sour crude oils compared to the price of Brent crude oil in the first quarter of 2014 widened compared to the first quarter of 2013, which positively impacted our refining margins. Thus far in the second quarter of 2014, discounts on crude oils have shown mixed results compared to the first quarter of 2014 as some crude oil discounts have widened while others have narrowed, and we expect these discounts to remain volatile. Gasoline margins, which were seasonally weak during the first quarter of 2014, have increased in the second quarter and look positive as the summer driving season


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approaches. Energy markets and margins are volatile, and we expect them to continue to be volatile in the near to mid-term.
Thus far in the second quarter of 2014, ethanol margins have narrowed substantially. This is primarily due to lower ethanol prices as the weather-related transportation issues that limited supplies and production in the first quarter of 2014 are being resolved. We expect lower average ethanol margins for the remainder of 2014 as compared to the first quarter of 2014.

RESULTS OF OPERATIONS

The following tables highlight our results of operations, our operating
performance, and market prices that directly impact our operations. The
narrative following these tables provides an analysis of our results of
operations.

                              Financial Highlights
                (millions of dollars, except per share amounts)
                                                         Three Months Ended March 31,
                                                      2014             2013          Change
Operating revenues                               $    33,663       $   33,474     $      189
Costs and expenses:
Cost of sales                                         30,630           30,685            (55 )
Operating expenses:
Refining                                                 973              876             97
Retail                                                     -              169           (169 )
Ethanol                                                  129               77             52
General and administrative expenses                      160              176            (16 )
Depreciation and amortization expense:
Refining                                                 397              358             39
Retail                                                     -               30            (30 )
Ethanol                                                   12               11              1
Corporate                                                 12               31            (19 )
Total costs and expenses                              32,313           32,413           (100 )
Operating income                                       1,350            1,061            289
Other income, net                                         15               14              1
Interest and debt expense, net of capitalized
interest                                                (100 )            (83 )          (17 )
Income before income tax expense                       1,265              992            273
Income tax expense                                       429              340             89
Net income                                               836              652            184
Less: Net income (loss) attributable to
noncontrolling interests                                   8               (2 )           10
Net income attributable to Valero stockholders   $       828       $      654     $      174

Earnings per common share - assuming dilution    $      1.54       $     1.18     $     0.36


________________

See note references on page 38.


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                         Refining Operating Highlights
                (millions of dollars, except per barrel amounts)

                                                     Three Months Ended March 31,
                                                      2014             2013      Change
Refining:
Operating income                               $    1,279            $ 1,212    $   67
Throughput margin per barrel (a)               $    10.90            $ 10.59    $ 0.31
Operating costs per barrel:
Operating expenses                                   4.00               3.79      0.21
Depreciation and amortization expense                1.64               1.55      0.09
Total operating costs per barrel                     5.64               5.34      0.30
Operating income per barrel                    $     5.26            $  5.25    $ 0.01

Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude                                      478                494       (16 )
Medium/light sour crude                               510                419        91
Sweet crude                                         1,063              1,089       (26 )
Residuals                                             203                224       (21 )
Other feedstocks                                      128                 83        45
Total feedstocks                                    2,382              2,309        73
Blendstocks and other                                 319                257        62
Total throughput volumes                            2,701              2,566       135

Yields (thousand barrels per day):
Gasolines and blendstocks                           1,296              1,198        98
Distillates                                         1,024                909       115
Other products (b)                                    415                480       (65 )
Total yields                                        2,735              2,587       148


_______________

See note references on page 38.


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                  Refining Operating Highlights by Region (c)
                (millions of dollars, except per barrel amounts)
                                                   Three Months Ended March 31,
                                                  2014           2013       Change
U.S. Gulf Coast:
Operating income                              $      882       $   591     $   291
Throughput volumes (thousand barrels per day)      1,584         1,421         163
Throughput margin per barrel (a)              $    11.47       $ 10.00     $  1.47
Operating costs per barrel:
Operating expenses                                  3.61          3.77       (0.16 )
Depreciation and amortization expense               1.67          1.61        0.06
Total operating costs per barrel                    5.28          5.38       (0.10 )
Operating income per barrel                   $     6.19       $  4.62     $  1.57

U.S. Mid-Continent:
Operating income                              $      230       $   477     $  (247 )
Throughput volumes (thousand barrels per day)        398           424         (26 )
Throughput margin per barrel (a)              $    12.60       $ 17.41     $ (4.81 )
Operating costs per barrel:
Operating expenses                                  4.45          3.37        1.08
Depreciation and amortization expense               1.73          1.55        0.18
Total operating costs per barrel                    6.18          4.92        1.26
Operating income per barrel                   $     6.42       $ 12.49     $ (6.07 )

North Atlantic:
Operating income                              $      198       $   186     $    12
Throughput volumes (thousand barrels per day)        470           485         (15 )
Throughput margin per barrel (a)              $     9.47       $  8.45     $  1.02
Operating costs per barrel:
Operating expenses                                  3.71          3.32        0.39
Depreciation and amortization expense               1.07          0.86        0.21
Total operating costs per barrel                    4.78          4.18        0.60
Operating income per barrel                   $     4.69       $  4.27     $  0.42

U.S. West Coast:
Operating loss                                $      (31 )     $   (42 )   $    11
Throughput volumes (thousand barrels per day)        249           236          13
Throughput margin per barrel (a)              $     7.24       $  6.26     $  0.98
Operating costs per barrel:
Operating expenses                                  6.34          5.68        0.66
Depreciation and amortization expense               2.29          2.56       (0.27 )
Total operating costs per barrel                    8.63          8.24        0.39
Operating loss per barrel                     $    (1.39 )     $ (1.98 )   $  0.59

Total refining operating income               $    1,279       $ 1,212     $    67


_______________

See note references on page 38.


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               Average Market Reference Prices and Differentials
                     (dollars per barrel, except as noted)

                                                           Three Months Ended March 31,
                                                         2014            2013         Change
Feedstocks:
Brent crude oil                                     $   107.90        $  112.63     $   (4.73 )
Brent less West Texas Intermediate (WTI) crude oil        9.18            18.33         (9.15 )
Brent less Alaska North Slope (ANS) crude oil             2.05             2.31         (0.26 )
Brent less Louisiana Light Sweet (LLS) crude oil          2.90            (2.49 )        5.39
Brent less Mars crude oil                                 6.42             2.32          4.10
Brent less Maya crude oil                                18.44             9.68          8.76
LLS crude oil                                           105.00           115.12        (10.12 )
LLS less Mars crude oil                                   3.52             4.81         (1.29 )
LLS less Maya crude oil                                  15.54            12.17          3.37
WTI crude oil                                            98.72            94.30          4.42

Natural gas (dollars per million British thermal
units (MMBtu))                                            5.23             3.43          1.80

Products:
U.S. Gulf Coast:
CBOB gasoline less Brent                                  1.78             4.70         (2.92 )
Ultra-low-sulfur diesel less Brent                       15.16            16.97         (1.81 )
Propylene less Brent                                      2.63             6.48         (3.85 )
CBOB gasoline less LLS                                    4.68             2.21          2.47
Ultra-low-sulfur diesel less LLS                         18.06            14.48          3.58
Propylene less LLS                                        5.53             3.99          1.54
U.S. Mid-Continent:
CBOB gasoline less WTI (d)                               13.10            23.83        (10.73 )
Ultra-low-sulfur diesel less WTI                         25.87            35.48         (9.61 )
North Atlantic:
CBOB gasoline less Brent                                  5.39             9.34         (3.95 )
Ultra-low-sulfur diesel less Brent                       22.61            18.70          3.91
U.S. West Coast:
CARBOB 87 gasoline less ANS                              10.20            14.10         (3.90 )
CARB diesel less ANS                                     17.44            21.37         (3.93 )
CARBOB 87 gasoline less WTI                              17.33            30.12        (12.79 )
CARB diesel less WTI                                     24.57            37.39        (12.82 )
New York Harbor corn crush (dollars per gallon)           1.20            (0.08 )        1.28


_______________

See note references on page 38.


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                    Retail and Ethanol Operating Highlights
                (millions of dollars, except per gallon amounts)

                                                        Three Months Ended March 31,
                                                     2014            2013          Change
Ethanol:
Operating income                                 $       243     $       14     $      229
Production (thousand gallons per day)                  3,095          2,712            383
Gross margin per gallon of production (a)        $      1.38     $     0.42     $     0.96
Operating costs per gallon of production:
Operating expenses                                      0.46           0.31           0.15
Depreciation and amortization expense                   0.05           0.05              -
Total operating costs per gallon of production          0.51           0.36           0.15
Operating income (loss) per gallon of production $      0.87     $     0.06     $     0.81

Retail:
Operating income                                 $         -     $       42     $      (42 )


_______________

See note references below.

The following notes relate to references on pages 34 through 38.
(a) Throughput margin per barrel represents operating revenues less cost of sales of our refining segment divided by throughput volumes. Gross margin per gallon of production represents operating revenues less cost of sales of our ethanol segment divided by production volumes.

(b) Other products primarily include petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt.

(c) The regions reflected herein contain the following refineries: the U.S. Gulf Coast region includes the Aruba, Corpus Christi East, Corpus Christi West, Houston, Meraux, Port Arthur, St. Charles, Texas City, and Three Rivers Refineries; the U.S. Mid-Continent region includes the Ardmore, McKee, and Memphis Refineries; the North Atlantic region includes the Pembroke and Quebec City Refineries; and the U.S. West Coast region includes the Benicia and Wilmington Refineries.

(d) U.S. Mid-Continent product specifications for gasoline changed on September 16, 2013 to CBOB gasoline. Therefore, average market reference prices for comparable products meeting the new specifications required in this region are provided for all periods presented.

General
Operating revenues increased $189 million (or 1 percent) in the first quarter of 2014 compared to the first quarter of 2013 primarily as a result of increased revenues from our ethanol segment due to an increase in both the price of ethanol and an increase in volumes quarter over quarter. Operating income increased $289 million in the first quarter of 2014 compared to the first quarter of 2013 primarily due to a $229 million increase in ethanol segment operating income and a $67 million increase in refining segment operating income, partially offset by a $42 million decrease in retail segment operating income. The reasons for these changes in the operating results of our segments and other items that affected our income are discussed below.

Refining
Refining segment operating income increased $67 million from $1.2 billion in the first quarter of 2013 to $1.3 billion in the first quarter of 2014, primarily due to a $203 million increase in refining margin partially


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offset by a $97 million increase in operating expenses and a $39 million increase in depreciation and amortization expense.

Refining margin increased $203 million for the first quarter of 2014 compared to the first quarter of 2013 primarily due to the following:

Higher discounts on light sweet crude oils and sour crude oils - Because the market for refined products generally tracks the price of Brent crude oil, which is a benchmark sweet crude oil, we benefit when we process crude oils that are priced at a discount to Brent crude oil. During the first quarter of 2014, the discount in the price of light sweet crude oils and sour crude oils processed in our U.S. Gulf Coast region widened compared to the price of Brent crude oil. For example, in our U.S. Gulf Coast region, we processed LLS crude oil, a light sweet crude oil, which sold at a discount of $2.90 per barrel to Brent crude oil during the first quarter of 2014 compared to a premium of $2.49 per barrel during the first quarter of 2013, representing a favorable increase of $5.39 per barrel. Another example is Maya crude oil, which is a sour crude oil, which sold at a discount of $18.44 per barrel to Brent crude oil during the first quarter of 2014 compared to a discount of $9.68 per barrel during the first quarter of 2013, representing a favorable increase of $8.76 per barrel.Therefore, the higher discounts on the light sweet crude oils and the sour crude oils we processed favorably impacted our refining margin. These favorable light sweet crude oil discounts in the U.S. Gulf Coast region were partially offset by the narrowing of the discount of WTI crude oil compared to Brent crude oil processed in our U.S. Mid-Continent region from $18.33 per barrel in the first quarter of 2013 to $9.18 per barrel in the first quarter of 2014, representing an unfavorable decrease of $9.15 per barrel. We estimate that the increase in the discounts for sweet crude oils and sour crude oils that we processed had a positive impact to our refining margin of approximately $160 million and $400 million, respectively, quarter over quarter.

Higher throughput volumes - Refining throughput volumes increased by 135,000 barrels per day in the first quarter of 2014 compared to the first quarter of 2013. We estimate that the increase in refining throughput volumes . . .

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