What drove Valero's record 2004 earnings?

Management attributes the increase primarily to the best refined product margins and sour crude oil discounts in the company's history. Refining throughput margin per barrel rose 45% to $7.44, and throughput volumes rose about 18% with the St. Charles and Aruba acquisitions. Refining operating income increased $1.9 billion to $3.2 billion.

How did the Aruba and St. Charles acquisitions affect results?

The Aruba Refinery, acquired in March 2004, contributed about $290 million of 2004 operating income and processes heavy sour crude. The St. Charles Refinery, acquired in July 2003, generated about $335 million of operating income in 2004 after a full year of ownership. Both expanded the company's ability to process lower-cost sour crude.

What are the main legal and environmental risks for investors?

The Unocal patent suit seeks a royalty on reformulated gasoline and treble damages; Valero believes it has strong defenses, but an adverse outcome could be material and cannot be estimated. About 63 MTBE groundwater cases are pending, and an adverse result across many of them could be material. Valero also expects an EPA Section 114 settlement requiring significant capital spending, and it estimates about $2 billion for Tier II fuel-standard compliance through 2008.

How is Valero's balance sheet and cash position?

The balance sheet improved significantly. Debt-to-capitalization (net of cash) fell to 30.7% from about 40%. Cash and temporary investments rose to $864 million, and operating cash flow was $2.96 billion. Stockholders' equity increased to $7.8 billion, and the company retired about $317 million of treasury stock purchases during the year, though it made no repurchases under its $400 million authorized program.

What is management's 2005 outlook?

Management expects sour crude discounts to stay wide and refined product margins to remain favorable, supported by global demand exceeding capacity and tighter fuel specifications abroad. Throughput is expected to rise about 100,000 BPD, with capital investment of about $2.0 billion, of which roughly $1.7 billion is capital expenditures. The filing notes that these forward-looking statements are subject to the risks listed in the report, including crude price volatility, refinery outages, and regulatory changes.

VLO 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 14, 2005. Cited figures are marked; the original filing is the authoritative source.

Valero Energy (NYSE: VLO) closed 2004 as its most profitable year on record, with operating revenues of $54.6 billion^a (up 44%), operating income of $2.98 billion (up from $1.22 billion), and net income of $1.80 billion, or $6.53 per diluted share (up 156% from $2.55).

Management attributes the results to the best refined product margins and sour crude oil discounts in company history. Refining throughput margin per barrel rose to $7.44^b from $5.13, and throughput volumes rose about 18% to 2.16 million barrels per day, helped by the St. Charles Refinery (acquired July 2003) and the Aruba Refinery (acquired March 2004 for $465 million plus working capital). Retail results were weaker, with segment operating income down to $175 million from $212 million, mainly because U.S. fuel margins were squeezed by rising crude prices.

Balance sheet and cash generation strengthened materially. Operating cash flow reached $2.96 billion^c, and the debt-to-capitalization ratio (net of cash) fell to 30.7% from about 40%. Stockholders' equity grew to $7.8 billion from $5.7 billion, aided by a $406 million common stock offering.

Management expects 2005 to remain favorable, with wide sour crude discounts, a full year of Aruba operations, and throughput up about 100,000 BPD, and plans roughly $2.0 billion^d of 2005 capital investment. Key risks flagged in the filing include a pending FTC/Unocal patent dispute that could have a material effect if resolved adversely, MTBE groundwater litigation (63 cases), an expected EPA Section 114 settlement with significant capital requirements, and roughly $2 billion of Tier II gasoline and diesel compliance spending through 2008. Hedging losses of about $231 million on distillate forward sales also weighed on 2004 margins and are expected to be recognized in 2005.

02—Key points

Key Highlights

Record 2004 results: operating revenues $54.6B (+44%), operating income $2.98B (+144%), net income $1.80B, diluted EPS $6.53 (vs. $2.55 in 2003).
Refining throughput margin rose to $7.44/bbl from $5.13/bbl, driven by record refined product margins and wide sour crude discounts; refining segment operating income reached $3.2B.
Aruba Refinery acquisition (March 2004, $465M plus working capital) contributed about $290M of 2004 operating income; St. Charles contributed about $335M.
Debt-to-capitalization (net of cash) improved to 30.7% from about 40%, supported by $3.0B of operating cash flow and a $406M equity offering.
Retail segment operating income fell to $175M from $212M as U.S. fuel margins were pressured by crude price increases that could not be fully passed through.
Outlook for 2005 is favorable: throughput expected to rise about 100,000 BPD and capital investment of about $2.0B is planned, including roughly $900M for environmental projects.
Principal legal and regulatory exposures include the Unocal patent suit (potentially material if adverse), 63 MTBE cases, and an anticipated EPA Section 114 settlement requiring capital improvements at most refineries.

03—Questions

Frequently Asked Questions

What drove Valero's record 2004 earnings?
Management attributes the increase primarily to the best refined product margins and sour crude oil discounts in the company's history. Refining throughput margin per barrel rose 45% to $7.44, and throughput volumes rose about 18% with the St. Charles and Aruba acquisitions. Refining operating income increased $1.9 billion to $3.2 billion.
How did the Aruba and St. Charles acquisitions affect results?
The Aruba Refinery, acquired in March 2004, contributed about $290 million of 2004 operating income and processes heavy sour crude. The St. Charles Refinery, acquired in July 2003, generated about $335 million of operating income in 2004 after a full year of ownership. Both expanded the company's ability to process lower-cost sour crude.
What are the main legal and environmental risks for investors?
The Unocal patent suit seeks a royalty on reformulated gasoline and treble damages; Valero believes it has strong defenses, but an adverse outcome could be material and cannot be estimated. About 63 MTBE groundwater cases are pending, and an adverse result across many of them could be material. Valero also expects an EPA Section 114 settlement requiring significant capital spending, and it estimates about $2 billion for Tier II fuel-standard compliance through 2008.
How is Valero's balance sheet and cash position?
The balance sheet improved significantly. Debt-to-capitalization (net of cash) fell to 30.7% from about 40%. Cash and temporary investments rose to $864 million, and operating cash flow was $2.96 billion. Stockholders' equity increased to $7.8 billion, and the company retired about $317 million of treasury stock purchases during the year, though it made no repurchases under its $400 million authorized program.
What is management's 2005 outlook?
Management expects sour crude discounts to stay wide and refined product margins to remain favorable, supported by global demand exceeding capacity and tighter fuel specifications abroad. Throughput is expected to rise about 100,000 BPD, with capital investment of about $2.0 billion, of which roughly $1.7 billion is capital expenditures. The filing notes that these forward-looking statements are subject to the risks listed in the report, including crude price volatility, refinery outages, and regulatory changes.

04—Continue

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