10-QPeriod: Q3 FY2003

VALERO ENERGY CORP/TX Quarterly Report for Q3 Ended Sep 30, 2003

Filed November 14, 2003For Securities:VLO

Summary

Valero Energy Corp. (VLO) reported strong financial performance for the nine months ended September 30, 2003, with net income soaring to $489.9 million compared to $2.5 million in the prior year period. This dramatic improvement was driven by a significant increase in operating revenues, up 36% to $28.5 billion, primarily fueled by higher refined product prices and increased throughput volumes across its refining operations. The acquisition of the St. Charles Refinery in July 2003 contributed to the expanded operational capacity. Key operational drivers included a substantial increase in the refining segment's operating income, which more than doubled year-over-year, benefiting from wider gasoline and distillate margins and improved sour crude oil discounts. The retail segment also demonstrated robust growth, with operating income nearly doubling, driven by higher fuel margins and volumes. Despite increased administrative expenses and capital expenditures related to environmental compliance and refinery upgrades, Valero's liquidity remains strong, supported by substantial cash flows from operations and prudent debt management.

Key Highlights

  • 1Net income for the nine months ended September 30, 2003, was $489.9 million, a significant increase from $2.5 million in the same period of 2002.
  • 2Operating revenues increased by 36% to $28.5 billion for the nine months ended September 30, 2003, driven by higher product prices and volumes.
  • 3The refining segment's operating income surged to $1.06 billion for the nine months ended September 30, 2003, up from $338 million in the prior year, due to improved throughput margins and volumes.
  • 4The company successfully acquired the St. Charles Refinery in July 2003, adding to its operational capacity.
  • 5Retail operating income saw substantial growth, increasing to $168.5 million for the nine months ended September 30, 2003, from $81.8 million in the prior year, driven by higher fuel margins.
  • 6Net cash provided by operating activities was $1.15 billion for the nine months ended September 30, 2003, a significant improvement from $67.6 million in the prior year, indicating strong operational cash generation.
  • 7The company's effective management of its Valero L.P. investment resulted in a shift to the equity method of accounting, impacting goodwill and reporting.

Frequently Asked Questions

The primary driver for the significant increase in net income was a substantial rise in operating revenues, primarily due to higher refined product prices and increased throughput volumes across Valero's refining and retail operations. The acquisition of the St. Charles Refinery also contributed to this growth.

The acquisition of the St. Charles Refinery, completed in July 2003, contributed to increased throughput volumes and operating revenues. It also increased refining operating expenses and depreciation, but overall positively impacted the company's financial performance in the latter half of the reporting period.

Valero anticipates typical seasonal trends with increasing distillate margins and decreasing gasoline margins as winter approaches. However, strong gasoline margins are expected to persist due to upcoming regulatory changes and lower production. Sour crude oil discounts are also expected to widen slightly.

Valero utilizes derivative commodity instruments, including swaps, futures, and options, to manage its exposure to price volatility. These are employed for fair value hedges, cash flow hedges, economic hedges, and trading purposes.