What was Valero's financial performance in 2002 compared to 2001?

Valero's operating revenues increased significantly in 2002 to $26.98 billion from $14.99 billion in 2001, largely driven by the acquisition of Ultramar Diamond Shamrock Corporation (UDS). However, net income decreased substantially to $91.5 million ($0.83 per diluted share) in 2002 from $563.6 million ($8.83 per diluted share) in 2001. This decline was primarily due to lower refining margins and increased operating costs following the UDS acquisition.

What are the key investments and strategic changes Valero is undertaking?

Valero is investing heavily in environmental compliance, with approximately $1 billion earmarked for capital investments in 2003, including $500 million for environmental projects to meet new sulfur content standards for gasoline and diesel. Strategically, Valero is reducing its ownership in Valero L.P. from about 73% to 49%, which will stop the consolidation of Valero L.P. into Valero's financial statements. Valero is also consolidating its retail brands and rebranding many locations to the Valero or Diamond Shamrock brands.

What are the major risks and legal matters Valero is facing?

Valero faces significant risks related to the volatility of crude oil and refined product prices, and refinery operating costs. Legally, Valero is involved in a patent infringement lawsuit with Unocal, which is currently stayed due to PTO reexamination proceedings. Valero is also defending against MTBE contamination lawsuits in New York and California, and various environmental proceedings at its refineries. The company believes it has strong defenses or that any adverse outcomes will not be material to its financial position.

How is Valero managing its debt and liquidity?

As of December 31, 2002, Valero had $4.5 billion in long-term debt. The company's debt-to-capitalization ratio was 50.4%. Valero believes it has sufficient funds from operations and access to capital markets and bank financing to meet its ongoing operating requirements. The company also has committed lines of credit totaling $1.5 billion.

VLO 10-K FY2002 Annual Report — Revenue, Net Income, EPS

Summary

Valero Energy Corporation's 2002 10-K filing highlights a significant year of integration and operational adjustments following the acquisition of Ultramar Diamond Shamrock Corporation (UDS) at the end of 2001. While operating revenues saw a substantial increase to nearly $27 billion, driven by the expanded asset base, net income decreased to $91.5 million ($0.83 per diluted share) compared to $563.6 million ($8.83 per diluted share) in 2001. This decline was primarily attributed to lower refining margins across all regions, particularly impacted by reduced sour crude oil discounts and higher refinery operating costs due to increased throughput volumes and turnaround activities. The company is making significant capital investments, estimated at approximately $1 billion for 2003, to address upcoming environmental regulations, notably the Tier II gasoline and diesel standards, which require substantial sulfur content reduction. Valero is also actively managing its debt, which stood at $4.5 billion in long-term debt as of year-end 2002, and is undergoing a strategic reduction of its ownership in Valero L.P. to approximately 49% to cease its consolidation.

Key Highlights

1Valero reported operating revenues of $26.98 billion for 2002, a substantial increase from $15.0 billion in 2001, largely due to the UDS acquisition.

2Net income for 2002 declined to $91.5 million ($0.83/share) from $563.6 million ($8.83/share) in 2001, primarily due to lower refining margins and increased operating costs.

3Refining segment operating income decreased significantly to $642.4 million in 2002 from $1,160.8 million in 2001, driven by reduced crude oil discounts and lower product margins.

4The company plans capital expenditures of approximately $1 billion in 2003, with a significant portion ($500 million) allocated to environmental projects, including compliance with Tier II sulfur content standards.

5Valero is reducing its ownership stake in Valero L.P. from approximately 73% to 49%, which will result in Valero L.P. no longer being consolidated.

6The company faces significant legal proceedings, including a patent infringement lawsuit from Unocal and several MTBE contamination cases, although Valero believes it has strong defenses or that potential outcomes will not be materially adverse.

7As of December 31, 2002, Valero had $4.5 billion in long-term debt, and its debt-to-capitalization ratio was 50.4%.

VALERO ENERGY CORP/TX Annual Report, Year Ended Dec 31, 2002

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