01—Abstract
Summary
Summary of the 10-K filed March 2, 1998. Cited figures are marked; the original filing is the authoritative source.
Valero Energy Corporation's first annual report as a standalone public company (fiscal 1997) reflects a transformative year.
On July 31, 1997, Valero was spun off from Valero Energy (Energy), which merged its natural gas business with PG&E. The company then owned and operated four Gulf Coast refineries with roughly 530,000 BPD of combined throughput capacity, following the May 1, 1997 acquisition of Basis Petroleum (Texas City, Houston and Krotz Springs refineries) for approximately $470 milliona. Revenue more than doubled to $5.76 billion (from $2.76 billion), and income from continuing operations rose to $111.8 million, or $2.16 per share, from $22.5 million a year earlier.
Net income was $96.1 millionb after a $15.7 million loss from discontinued natural gas operations. The headline figures are flattered by the acquisition, which contributed about $84 million to operating income for May through December. Per-barrel economics weakened: average throughput margin fell to $4.64 from $5.29, and the Q4 1997 result was modest at $12.4 million.
Management expects a moderate improvement in refining margins over the next few years, and plans a roughly 140,000 BPD capacity expansion costing $250c-275 million, mostly in 1999. Capital spending guidance for 1998 is $175-225 million. Balance sheet and liquidity are solid but more levered after the deal.
Long-term debt is $430 milliond, the debt-to-capitalization ratio is 32.3%, and about $558 million was available under an $835 million revolver. Investors should also note the quarterly dividend was cut from $0.13 to $0.08 after the spin-off, and that Valero retains indemnity exposure in the Teco pipeline lawsuit and depends on the Salomon indemnity for pre-acquisition environmental and superfund liabilities. Feedstock risk is concentrated: about 57% of requirements are under term contracts, and a Saudi resid supply reduction is expected.
02—Key points
Key Highlights
- Revenue rose 109% to $5.76 billion in 1997, driven by the May 1997 Basis Petroleum acquisition and a 116% increase in average daily sales volumes to 630 MBD.
- Income from continuing operations was $111.8 million ($2.16 per basic share), up from $22.5 million in 1996; diluted EPS from continuing operations was $2.03.
- Operating capacity is about 530,000 BPD across four Gulf Coast refineries (Corpus Christi, Texas City, Houston, Krotz Springs), making Valero the largest independent refiner on the Gulf Coast.
- Average throughput margin per barrel declined to $4.64 from $5.29 in 1996, though average operating cost per barrel fell to $2.78 from $3.29.
- Dividend was reduced to $0.08 per quarter post-spin-off, from $0.13 previously; total 1997 dividends were $0.42 per share.
- Debt-to-capitalization ratio was 32.3% at year-end, with $430 million of long-term debt and about $558 million available under the $835 million revolving credit facility.
- A $250-275 million capacity expansion (about 140,000 BPD) is planned for early to mid-2000, with most spending in 1999; 1998 capital investment guidance is $175-225 million.
03—Questions
Frequently Asked Questions
Why are Valero's 1997 results not comparable to 1996?
The May 1, 1997 Basis Petroleum acquisition added three refineries (about 340,000 BPD of capacity after upgrades) and a wholesale marketing business. Revenue, sales volumes and operating income all increased sharply as a result. The Basis contribution to operating income was about $84 million for May through December, so the 1997 base is not representative of the prior year's standalone business.
What is the status of the spin-off and the discontinued operations?
Energy spun off Valero to its shareholders on July 31, 1997, and merged its natural gas services business with PG&E. Valero keeps the refining and marketing business. Results from the natural gas business for January through July 1997 are shown as discontinued operations, a $15.7 million after-tax loss. Valero also paid Energy a $210 million dividend before the spin-off, and has agreed to indemnify Energy for 50% of a Teco pipeline judgment up to $30 million, and 100% above that.
What are the main risks to earnings?
Earnings depend on Gulf Coast refining margins, crude and resid price differentials, and refined product prices. Valero's feedstock is heavily dependent on imports and term contracts, with about 57% of requirements under term agreements. A reduction in Saudi Arabian resid supply from Ras Tanura is expected as new conversion units start up in 1998. Additional capacity from a planned Good Hope, Louisiana refinery could pressure margins. Regulatory risk is also significant, including the California MTBE initiatives and the Unocal patent royalty exposure, though management believes it is manageable.
How strong is the balance sheet after the acquisition?
Total assets rose to $2.49 billion from $1.99 billion. Long-term debt is $430 million and short-term debt is $122 million. The debt-to-capitalization ratio is 32.3%, and the company was in compliance with all covenants at year-end. Interest coverage (EBITDA to interest expense) improved to 7.1x from 4.0x. Management believes operations and committed facilities are sufficient to fund requirements.
Has the company's dividend policy changed?
Yes. Energy paid $0.13 per quarter in the first half of 1997. After the spin-off, Valero paid $0.08 per quarter for the last two quarters of 1997 and declared $0.08 for the first quarter of 1998. The Board sets dividends quarterly based on earnings and cash flow, and the company does not guarantee the current level will continue.
04—Continue