01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Valero Energy (VLO) closed 2008 with a sharply weaker earnings profile: operating revenues rose 25% to $119.1 billiona, but the company posted a net loss of $1.13 billion ($2.16 per diluted share), driven primarily by a $4.1 billion pre-tax ($4.0 billion after-tax) goodwill impairment charge recorded in Q4 2008 after market capitalization fell well below book value.
Excluding that non-cash charge, results were pressured by lower refined product margins, particularly gasoline, and by unplanned downtime from a January 2008 Aruba refinery fire and hurricanes Gustav and Ike. Refining segment operating income fell from $7.4 billionb in 2007 to roughly $0.8 billion in 2008, while the Retail segment improved to $369 million on higher fuel margins. Operating cash flow fell to $3.0 billion from $5.3 billion.
Balance sheet and capital allocation remained a focus. Total assets declined to $34.4 billion and stockholders' equity to $15.6 billionc. Management returned cash through a quarterly dividend raised to $0.15 per share from $0.12, repurchased 23.0 million shares for $955 million, and retired $350 million of 9.5% notes.
Capital investment was $3.2 billiond in 2008 and is planned at about $2.7 billion for 2009, including roughly $635 million for environmental projects. Debt and capital lease obligations totaled about $6.6 billion, and the company maintained investment-grade ratings (BBB / Baa2 / BBB), with a $2.5 billion revolver and a $1 billion receivables sales facility.
Management's outlook is cautious: it expects 2009 refined product margins and sour crude differentials to be lower than in 2008 as the economic slowdown depresses demand, and characterizes 2009 as a challenging year. Investors should weigh the non-cash nature of the impairment against weaker margins, the pension plans now underfunded at about 76% of projected obligations, and unresolved litigation and environmental exposures, including MTBE suits and state enforcement actions.
02—Key points
Key Highlights
- Net loss of $1.13 billion ($2.16 per diluted share) in 2008, versus net income of $5.2 billion ($8.88 per share) in 2007, driven by a $4.1 billion pre-tax goodwill impairment charge in Q4 2008.
- Operating revenues rose 25% to $119.1 billion, but refining throughput margin per barrel fell to $10.79 from $12.33 as gasoline margins declined significantly across all regions.
- Refining segment operating income fell to roughly $797 million from $7.4 billion, while Retail operating income rose 48% to $369 million on a $0.055/gallon increase in U.S. fuel margins.
- Operating cash flow dropped to $3.0 billion from $5.3 billion; capital expenditures and deferred turnaround costs totaled $3.2 billion.
- Shareholder returns continued: quarterly dividend raised to $0.15 from $0.12, and 23.0 million shares repurchased for $955 million, with about $3.5 billion of stock purchase authorization remaining.
- Credit ratings remain investment grade (S&P BBB, Moody's Baa2, Fitch BBB, all stable), but management flagged that a downgrade below investment grade would raise borrowing costs.
- Management guided to lower 2009 refined product margins and sour crude differentials, and described 2009 as a challenging year for the refining industry and the company.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Operating Expenses | $112.38B$83.36B | +34.8% |
| Operating Income | $761.00M$6.63B | −88.5% |
| Interest Expense | $451.00M$466.00M | −3.2% |
| Net Income | -$1.13B$5.23B | −121.6% |
| EPS (Basic) | $-2.16$9.24 | −123.4% |
| EPS (Diluted) | $-2.16$8.88 | −124.3% |
| Shares Outstanding (Basic) | 524.00M565.00M | −7.3% |
| Shares Outstanding (Diluted) | 524.00M579.00M | −9.5% |
05—Questions
Frequently Asked Questions
Why did Valero report a net loss in 2008 after earning $5.2 billion in 2007?
The main cause was a $4.1 billion pre-tax ($4.0 billion after-tax) goodwill impairment charge in Q4 2008. Valero's market capitalization fell substantially below its net book value during the financial market disruption, which led management to write off all of its goodwill. The charge is non-cash, but it drove the reported loss of $1.13 billion. Weaker gasoline margins and refinery downtime also reduced operating results.
How did refinery operations perform in 2008?
Refining operating income excluding the impairment fell sharply, to about $4.9 billion for the regions, from $7.4 billion in 2007. Throughput margin per barrel dropped 12% to $10.79. Throughput volumes fell by about 155,000 barrels per day because of the January 2008 Aruba refinery fire, hurricane-related shutdowns, the sale of the Krotz Springs refinery, and planned maintenance. Gasoline margins declined, while distillate margins improved.
What is Valero's outlook for 2009?
Management expects 2009 refined product margins and sour crude oil differentials to be lower than 2008 levels. It expects the economic slowdown to reduce demand for gasoline and distillates, and it expects margins to remain under pressure until demand recovers. Planned 2009 capital investments are about $2.7 billion, including roughly $2.2 billion of capital expenditures, and the company plans about $130 million of pension contributions.
Is Valero's balance sheet and liquidity position at risk?
Valero reported $34.4 billion in total assets, $6.6 billion of debt and capital lease obligations, and $15.6 billion of stockholders' equity at year-end 2008. It had a $2.5 billion revolving credit facility with no borrowings outstanding and a $1 billion accounts receivable sales facility. Its qualified pension plans were about 76% funded against projected obligations at year-end. Management warned that a credit downgrade or illiquid financial markets could raise financing costs or limit access to funds.
What legal and environmental risks does Valero disclose?
Valero faces about 29 MTBE groundwater lawsuits, 21 consumer class actions over retail fuel temperature, and the Rosolowski class action in Illinois, which includes a loss contingency liability. It also faces multiple state and local environmental enforcement actions, including an Ohio penalty demand of $11.1 million and Aruba turnover tax disputes. Environmental capital spending was about $480 million in 2008 and is estimated at $635 million for 2009 and $830 million for 2010.
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