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Valero Energy Annual Report, Year Ended Dec 31, 2005

Filing Date
Filed March 1, 2006
Period End
December 31, 2005
Security
VLO
In the record · 2016–202610-K1110-Q338-K138

VLO filed 11 annual reports (10-K), 33 quarterly reports (10-Q) and 138 current reports (8-K) between 2016 and 2026.

  1. FY2016 annual report10-K · Feb ’17Feb ’17
  2. Leadership change8-K · Dec ’19Dec ’19
  3. Material agreement8-K · Nov ’21Nov ’21
  4. Leadership change8-K · Oct ’25Oct ’25

01—Abstract

Summary

Summary of the 10-K filed March 1, 2006. Cited figures are marked; the original filing is the authoritative source.

Valero Energy (VLO) closed 2005 at a record earnings level, with net income of $3.59 billiona, or $6.10 per diluted share, up roughly 99% from $1.8 billion ($3.27) in 2004.

Operating revenues rose 50% to $82.2 billionb and operating income climbed 83% to $5.46 billion. The results were driven primarily by the refining segment, whose operating income more than doubled to $5.8 billion on a 50% increase in throughput margin to $11.14 per barrel. Management attributes the strength to tight distillate supply, hurricane-related disruptions on the Gulf Coast, and wide sour crude discounts, which the company says persisted into early 2006.

The Premcor Acquisition, completed September 1, 2005, was the defining corporate event. Valero issued 85 million shares and paid $3.4 billionc in cash to add four refineries with roughly 800,000 barrels per day of capacity, lifting total throughput capacity to about 3.3 million barrels per day across 18 refineries. Premcor contributed approximately $810 million of operating income in the final four months of 2005.

Debt-to-capitalization (net of cash) fell to 24.8% from 30.7%, and stockholders' equity nearly doubled to $15.05 billiond, though the acquisition brings significant integration work and internal-control remediation in 2006. Investors should weigh the cyclical nature of this earnings base against several forward-looking items: 2006 capital investments of about $3.4 billion, roughly $1.3 billion of environmental compliance spending, a pending change in revenue recognition under EITF 04-13 that will reduce reported revenue (though not operating income), the pending conversion of preferred stock on July 1, 2006, and pending litigation including the MTBE cases and a $80.1 million compensatory plus $40 million punitive jury verdict in the Rosolowski matter, which management says it will appeal.

02—Key points

Key Highlights

  1. Record 2005 results: net income of $3.59 billion ($6.10 diluted EPS) versus $1.80 billion ($3.27) in 2004; operating revenues of $82.2 billion (+50%).
  2. Refining operating income rose to $5.8 billion from $3.2 billion, with throughput margin per barrel up 50% to $11.14.
  3. Premcor Acquisition (Sept. 1, 2005) added four refineries of about 800,000 BPD, contributing roughly $810 million of operating income in the final four months of 2005.
  4. Balance sheet strengthened: debt-to-capitalization (net of cash) fell to 24.8% from 30.7%; stockholders' equity rose to $15.05 billion from $7.80 billion.
  5. 2006 capital investment plan of about $3.4 billion, including roughly $3.0 billion of capital expenditures ($1.3 billion environmental) and about $400 million of deferred turnaround and catalyst costs.
  6. Management outlook remains positive for 2006 gasoline and low-sulfur diesel margins, with wide sour crude discounts expected to persist; January 2006 Gulf Coast margins were well above five-year averages.
  7. Legal and environmental exposure includes 66 MTBE suits and a $120 million Rosolowski jury verdict (under appeal), plus EPA and state enforcement actions; the EPA Section 114 settlement requires about $785 million of environmental projects through 2012.

03—Questions

Frequently Asked Questions

  1. What drove Valero's sharp increase in earnings in 2005?

    Stronger refining fundamentals were the primary driver. Distillate margins roughly doubled or tripled across regions, sour crude discounts widened more than 30%, and Gulf Coast refinery disruptions from Hurricanes Katrina and Rita tightened supply in the third and fourth quarters. Operating income from refining rose $2.6 billion, and the four Premcor refineries added about $810 million after acquisition.

  2. How much did the Premcor acquisition cost, and how is it financed?

    Valero paid $3.4 billion in cash, funded from available cash and a $1.5 billion five-year bank term loan that was fully repaid by year-end 2005. It also issued 85 million common shares, recorded at $3.2 billion, plus stock options with a fair value of $595 million, and assumed Premcor debt with a fair value of $1.9 billion. Total purchase price excluding unrestricted cash was about $6.1 billion, and the acquisition generated $2.5 billion of goodwill.

  3. What are the key risks to the outlook for 2006?

    Refining margins are historically volatile and depend on crude costs, product supply and demand, imports, and refinery utilization. Other risks include the effects of MTBE elimination on gasoline supply, environmental compliance costs (about $1.3 billion in 2006 for environmental capital), the integration of Premcor, and litigation outcomes. Revenue will also fall in 2006 as EITF 04-13 requires netting of buy/sell arrangements, though management expects no effect on operating or net income.

  4. What is the capital return and balance sheet position?

    Valero repurchased 13 million shares for $571 million in 2005 to meet employee plan obligations, paid $106 million in common and preferred dividends, and raised the quarterly common dividend to $0.05 (then $0.06 declared for March 2006). The $400 million repurchase program announced in 2001 had no shares repurchased in 2005. At year-end, the company had $2.5 billion of committed revolving credit capacity and $3.5 billion of securities registered under its shelf.

04—Continue

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