How much did Valero earn in 2006 and how does that compare with prior years?

Valero reported 2006 net income of $5.463 billion, or $8.64 per diluted share, up from $3.590 billion ($6.10 per diluted share) in 2005 and $1.804 billion ($3.27 per diluted share) in 2004. Management described 2006 as the highest net income in the company's history.

What drove the increase in profitability?

Refining operating income rose to $8.47 billion from $5.90 billion, driven by higher throughput volumes (including the four former Premcor refineries), a $1.15 per barrel increase in throughput margin, and strong gasoline and distillate margins. Wide sour crude differentials, which benefit Valero's sour-crude-heavy slate, also contributed. The $328 million gain on the Valero GP Holdings sale further boosted pre-tax income.

What is the impact of the McKee Refinery fire?

A February 16, 2007 fire in the propane deasphalting unit shut the entire 170,000 BPD McKee Refinery as of the filing date. Valero did not yet have a restart date but did not expect a material adverse effect on first-quarter 2007 results. The filing does not quantify the full repair cost or downtime.

How is Valero returning capital to shareholders and what are its capital spending plans?

In 2006, Valero bought back 34.6 million shares for $2.0 billion under a new $2 billion program authorized in October 2006, and paid $184 million in common and preferred dividends. The quarterly dividend was raised to $0.12 per share for 2007. For 2007, Valero expects about $3.5 billion in capital investments, including roughly $3.1 billion of capital expenditures (about $800 million for environmental projects) and about $400 million of deferred turnaround and catalyst costs.

What are the major legal and regulatory risks?

The filing discloses 73 MTBE contamination lawsuits, with trials scheduled for 2008 in some cases, and eight consumer class actions over retail fuel temperature practices. Environmental enforcement matters include penalties proposed by EPA, state air agencies, and the TCEQ, though most individually are small. Valero also faces a Aruba turnover tax from 2007 that it is contesting through arbitration. A 2006 Rosolowski verdict was largely vacated, and Valero does not expect a material effect from it.

VLO 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 26, 2007. Cited figures are marked; the original filing is the authoritative source.

Valero Energy (VLO) closed 2006 with record results: net income of $5.463 billion^a (up 52% from $3.590 billion in 2005) and diluted EPS of $8.64 (vs. $6.10).

Operating income rose 47% to $8.01 billion^b, driven by a $2.57 billion increase in refining operating income to $8.47 billion. Throughput rose 19% to about 2.96 million barrels per day, helped by the four former Premcor refineries acquired in September 2005, and refining throughput margin improved to $12.29 per barrel from $11.14. Retail operating income was modest at $182 million.

Results were supported by strong gasoline and distillate margins, wide sour crude differentials, and a $328 million^c pre-tax gain from selling the remaining interest in Valero GP Holdings (which held the general partner of Valero L.P.). The balance sheet strengthened. Cash rose to $1.59 billion, debt fell to about $5.05 billion, and stockholders' equity grew to $18.6 billion.

Valero repurchased $2.0 billion^d of stock, roughly 5% of shares outstanding, under a new $2 billion program, and it raised its quarterly dividend to $0.12 for 2007. Management expects 2007 capital investments of about $3.5 billion, including roughly $800 million for environmental projects, and forecasts continued positive gasoline and diesel margins.

Key risks flagged in the filing include a February 16, 2007 fire that shut the McKee Refinery, an exploration of strategic alternatives for the Lima Refinery, MTBE and retail fuel temperature litigation, environmental enforcement matters, and Aruba's new turnover tax. Refining margins are volatile, and earnings are sensitive to crude differentials and refinery uptime.

02—Key points

Key Highlights

Record 2006 net income of $5.46 billion, up 52% year over year; diluted EPS of $8.64 versus $6.10 in 2005.
Operating revenues of $91.8 billion (up 12%); operating income of $8.0 billion (up 47%), with refining contributing $8.47 billion.
Refining throughput margin rose to $12.29 per barrel from $11.14, and throughput volumes increased 19% to about 2.96 million BPD, aided by the former Premcor refineries.
$328 million pre-tax gain from selling the entire Valero GP Holdings interest, which generated $880 million of proceeds.
Returned capital through $2.0 billion of share repurchases (about 5% of shares outstanding) and a dividend increase to $0.12 per quarter for 2007.
Strong balance sheet at year-end: cash of $1.6 billion, debt reduced to about $5.0 billion, and stockholders' equity of $18.6 billion.
Key risks: the McKee Refinery shutdown after a February 2007 fire, the planned strategic review of the Lima Refinery, MTBE and fuel temperature litigation, and Aruba turnover tax exposure.

03—Questions

Frequently Asked Questions

How much did Valero earn in 2006 and how does that compare with prior years?
Valero reported 2006 net income of $5.463 billion, or $8.64 per diluted share, up from $3.590 billion ($6.10 per diluted share) in 2005 and $1.804 billion ($3.27 per diluted share) in 2004. Management described 2006 as the highest net income in the company's history.
What drove the increase in profitability?
Refining operating income rose to $8.47 billion from $5.90 billion, driven by higher throughput volumes (including the four former Premcor refineries), a $1.15 per barrel increase in throughput margin, and strong gasoline and distillate margins. Wide sour crude differentials, which benefit Valero's sour-crude-heavy slate, also contributed. The $328 million gain on the Valero GP Holdings sale further boosted pre-tax income.
What is the impact of the McKee Refinery fire?
A February 16, 2007 fire in the propane deasphalting unit shut the entire 170,000 BPD McKee Refinery as of the filing date. Valero did not yet have a restart date but did not expect a material adverse effect on first-quarter 2007 results. The filing does not quantify the full repair cost or downtime.
How is Valero returning capital to shareholders and what are its capital spending plans?
In 2006, Valero bought back 34.6 million shares for $2.0 billion under a new $2 billion program authorized in October 2006, and paid $184 million in common and preferred dividends. The quarterly dividend was raised to $0.12 per share for 2007. For 2007, Valero expects about $3.5 billion in capital investments, including roughly $3.1 billion of capital expenditures (about $800 million for environmental projects) and about $400 million of deferred turnaround and catalyst costs.
What are the major legal and regulatory risks?
The filing discloses 73 MTBE contamination lawsuits, with trials scheduled for 2008 in some cases, and eight consumer class actions over retail fuel temperature practices. Environmental enforcement matters include penalties proposed by EPA, state air agencies, and the TCEQ, though most individually are small. Valero also faces a Aruba turnover tax from 2007 that it is contesting through arbitration. A 2006 Rosolowski verdict was largely vacated, and Valero does not expect a material effect from it.

04—Continue

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