What were the key drivers of Valero's improved financial performance in 2006?

Valero's strong financial performance in 2006 was primarily driven by favorable industry fundamentals, specifically strong "refined product margins" (the spread between refined product prices and crude oil prices) and wide "sour crude oil differentials." The successful integration and operation of the four former Premcor refineries, acquired in September 2005, also significantly contributed to operating income.

How did the Premcor acquisition impact Valero's operations and financials?

The acquisition of Premcor's operations significantly boosted Valero's scale and profitability. The four acquired refineries contributed $2.5 billion to operating income in 2006, representing 31% of Valero's total operating income. This acquisition also increased Valero's throughput capacity and expanded its refining footprint.

What was Valero's strategy for returning capital to shareholders in 2006?

In 2006, Valero actively returned capital to shareholders through a $2 billion stock repurchase program, acquiring approximately 5% of its outstanding shares. Additionally, the company paid dividends totaling $0.30 per common share throughout the year, reflecting a commitment to shareholder value.

Are there any significant legal or environmental matters Valero is currently addressing?

Valero is involved in several legal proceedings, including MTBE litigation and retail fuel temperature litigation, which are being vigorously defended. Environmentally, the company disclosed several notices of violation from the EPA related to its refineries, with proposed penalties, though Valero believes any potential sanctions would not have a material adverse effect on its financial position or results of operations. In early 2007, a fire occurred at the McKee Refinery, leading to a shutdown, but the company did not anticipate a material adverse effect on Q1 2007 results.

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

Summary

Valero Energy Corporation (VLO) reported a strong financial performance for the year ended December 31, 2006, achieving record net income. This growth was driven by favorable industry fundamentals, including strong refined product margins and favorable "sour crude oil differentials." The company benefited significantly from the acquisition of the four former Premcor refineries, which contributed substantially to operating income. Valero also successfully monetized its entire ownership interest in Valero L.P., generating substantial proceeds. The company demonstrated a commitment to shareholder returns through significant share repurchases under a $2 billion program and continued dividend payments. Despite facing some environmental compliance matters and a refinery fire in early 2007, the company maintained a positive outlook for 2007, anticipating continued strong industry fundamentals and operational improvements.

Key Highlights

1Achieved record net income of $5.5 billion for the year ended December 31, 2006, a 52% increase from 2005.
2The Premcor acquisition, completed in September 2005, contributed $2.5 billion to operating income in 2006, representing 31% of the total.
3Monetized the entire ownership interest in Valero L.P. during 2006, generating $880 million in proceeds and a pre-tax gain of $328 million.
4Returned significant capital to shareholders by repurchasing approximately 5% of outstanding shares for $2.0 billion during 2006, alongside dividend payments totaling $0.30 per share.
5The company's common stock outperformed both the S&P 500 and a peer group index over the five-year period ending December 31, 2006, demonstrating strong shareholder value creation.
6Anticipates continued favorable industry fundamentals in 2007, including tightening gasoline supplies due to spring maintenance and the transition to summer-grade specifications, as well as strong demand for low-sulfur distillates.

VALERO ENERGY CORP/TX Annual Report, Year Ended Dec 31, 2006

Summary

Key Highlights

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