10-QPeriod: Q2 FY2005

VALERO ENERGY CORP/TX Quarterly Report for Q2 Ended Jun 30, 2005

Filed August 9, 2005For Securities:VLO

Summary

Valero Energy Corporation (VLO) reported strong financial performance for the second quarter and the first six months of 2005, driven by favorable refining margins and increased throughput volumes. Operating revenues saw a significant increase, with net income for the second quarter rising 34% year-over-year to $847 million ($3.06 per share), and for the first six months increasing 57% to $1.4 billion ($4.97 per share). This growth was primarily attributed to wider sour crude oil discounts and strong distillate margins, which offset slightly lower gasoline margins compared to the exceptionally high levels in the prior year. The company also announced a significant development with a proposed merger with Premcor Inc., expected to close by the end of the third quarter of 2005, which will expand its refining capacity. Operationally, Valero maintained high refinery utilization rates, with total throughput volumes increasing despite scheduled maintenance and the sale of the Denver Refinery. The company is also making substantial investments in environmental projects, with capital expenditures for these initiatives projected to be significant through 2008. Valero's balance sheet reflects increased assets and liabilities, with total assets growing to $21.6 billion. The company appears well-positioned financially, with sufficient liquidity and plans to fund ongoing operations and strategic initiatives, including the Premcor acquisition.

Key Highlights

  • 1Net income for Q2 2005 was $847 million ($3.06 per diluted share), a 34% increase year-over-year.
  • 2Net income for the first six months of 2005 was $1.38 billion ($4.97 per diluted share), a 57% increase year-over-year.
  • 3Operating income increased significantly in the refining segment due to wider sour crude oil discounts and strong distillate margins.
  • 4Announced a proposed merger with Premcor Inc., expected to close by the end of Q3 2005, which will add significant refining capacity.
  • 5Total assets grew to $21.64 billion as of June 30, 2005, up from $19.39 billion at year-end 2004, driven by higher inventories and property, plant, and equipment.
  • 6Capital expenditures for environmental projects are expected to be substantial, with approximately $1 billion spent through June 30, 2005, and an estimated $2.3 billion required through 2008.
  • 7The company is making significant investments in environmental projects, including a $785 million settlement with the EPA and DOJ to reduce emissions.

Frequently Asked Questions

Valero reported net income of $847 million, or $3.06 per diluted share, for the second quarter of 2005. This represents a 34% increase compared to $633 million, or $2.28 per diluted share, in the second quarter of 2004. The strong performance was driven by higher operating income in the refining segment, benefiting from favorable refining margins and increased throughput.

Valero's profitability is significantly influenced by the spread between refined product prices and crude oil costs (refined product margin) and the discount on sour crude oil compared to sweet crude oil. In Q2 2005, wider sour crude oil discounts and strong distillate margins were key contributors, more than offsetting slightly lower gasoline margins compared to the record highs of the prior year.

Valero announced a proposed merger with Premcor Inc. on April 25, 2005. The transaction has been approved by the boards of directors of both companies, and Premcor's shareholders were scheduled to vote on it in August 2005. The merger is expected to close by the end of the third quarter of 2005 and will significantly expand Valero's refining capacity.

Valero plans substantial investments in environmental projects, with approximately $1 billion already spent through June 30, 2005, and an estimated $2.3 billion required through 2008 to meet Tier II gasoline and diesel standards. Additionally, the company has a settlement with the EPA and DOJ requiring approximately $785 million in environmental projects through 2012. Valero expects total capital investments for 2005 to be around $2.2 billion.