See Condensed Notes to Consolidated Financial Statements.
See Condensed Notes to Consolidated Financial Statements.
See Condensed Notes to Consolidated Financial Statements.
See Condensed Notes to Consolidated Financial Statements.
See Condensed Notes to Consolidated Financial Statements.
The terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.
We have $260 million of goodwill as of March 31, 2020. All of our goodwill is allocated to one reporting unit, the U.S. Gulf Coast refining region. Our annual test for the impairment of goodwill is performed on October 1 of each year. However, as discussed above, there were adverse changes in the capital and commodity markets that contributed to a significant decline in our common stock price. Despite the decline in our common stock price, we determined our goodwill was 0t impaired. Nonetheless, we will continue to evaluate the economic conditions and their impact on our assumptions.
Inventory Valuation
See Note 4 regarding our $2.5 billion LCM inventory valuation reserve and the estimates used to determine the market value of our inventories.
On January 10, 2019, we completed our acquisition of all of the outstanding publicly held common units of VLP pursuant to a definitive Agreement and Plan of Merger (Merger Agreement, and together with the transactions contemplated thereby, the Merger Transaction) with VLP. Upon completion of the Merger Transaction, each outstanding publicly held common unit was converted into the right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units were automatically canceled and ceased to exist. Upon completion of the Merger Transaction, we paid aggregate merger consideration of $950 million, which was funded with available cash on hand.
Prior to the completion of the Merger Transaction, we consolidated the financial statements of VLP (see Note 8) and reflected noncontrolling interests on our balance sheet for the portion of VLP’s partners’ capital held by VLP’s public common unitholders. Upon completion of the Merger Transaction, VLP became our indirect wholly owned subsidiary and, as a result, we no longer reflect noncontrolling interests on our balance sheet with respect to VLP. In addition, we no longer attribute a portion of VLP’s net income to noncontrolling interests. Because we had a controlling financial interest in VLP before the Merger Transaction and retained our controlling financial interest in VLP after the Merger Transaction, the change in our ownership interest in VLP as a result of the merger was accounted for as an equity transaction. Accordingly, we did not recognize a gain or loss on the Merger Transaction.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories consisted of the following (in millions):
| | | March 31, 2019 |
| December 31, 2018 | March 31, 2020 |
| December 31, 2019 |
Refinery feedstocks | $ | 2,338 |
| | $ | 2,265 |
| $ | 2,016 |
| | $ | 2,399 |
|
Refined petroleum products and blendstocks | 3,572 |
| | 3,653 |
| 3,616 |
| | 4,034 |
|
Renewable diesel feedstocks and products | | 44 |
| | 46 |
|
Ethanol feedstocks and products | 328 |
| | 298 |
| 270 |
| | 260 |
|
Renewable diesel feedstocks and products | 50 |
| | 52 |
| |
Materials and supplies | 266 |
| | 264 |
| 277 |
| | 274 |
|
Inventories before LCM inventory valuation reserve | | 6,223 |
| | 7,013 |
|
LCM inventory valuation reserve | | (2,548 | ) | | — |
|
Inventories | $ | 6,554 |
| | $ | 6,532 |
| $ | 3,675 |
| | $ | 7,013 |
|
AsWe compare the market value of inventories to their cost on an aggregate basis, excluding materials and supplies. In determining the market value of our inventories, we assume that feedstocks are converted into refined products, which requires us to make estimates regarding the refined products expected to be produced from those feedstocks and the conversion costs required to convert those feedstocks into refined products. We also estimate the usual and customary transportation costs required to move the inventory from our plants to the appropriate points of sale. We then apply an estimated selling price to our inventories. If the aggregate market value is less than the aggregate cost, we recognize a loss for the difference in our statements of income. However, to the extent the aggregate market value subsequently increases, we would recognize an increase to the value of our inventories (not to exceed cost) and a gain in our statements of income.
The market value of our last-in, first-out (LIFO) inventory as of March 31, 2019 and2020 fell below our historical LIFO inventory costs. As a result, we recorded an LCM inventory valuation adjustment of $2.5 billion for the three months ended March 31, 2020. The income statement effect differs from the balance sheet reserve due to the foreign currency effect of inventories held for our international operations. As of December 31, 2018,2019, the replacement cost (market value) of last-in, first-out (LIFO)LIFO inventories exceeded their LIFO carrying amounts by $3.5 billion and $1.5 billion, respectively. $2.5 billion.
Our non-LIFO inventories accounted for $1.1 billion and $1.4 billion of our total inventories as of March 31, 20192020 and December 31, 2018.2019, respectively.
General
We have entered into long-term leasing arrangements for the right to use various classes of underlying assets as follows:
| |
• | Pipelines, Terminals, and Tanks includes facilities and equipment used in the storage, transportation, production, and sale of refinery feedstock, refined petroleum product, and corn inventories;
|
| |
• | Marine Transportation includes time charters for ocean-going tankers and coastal vessels;
|
| |
• | Rail Transportation includes railcars and related storage facilities;
|
| |
• | Feedstock Processing Equipment includes machinery, equipment, and various facilities used in our refining, ethanol, and renewable diesel operations;
|
| |
• | Energy and Gases includes facilities and equipment related to industrial gases and power used in our operations; and
|
| |
• | Real Estate includes land and rights-of-way associated with our refineries and pipelines, as well as office facilities.
|
In addition to fixed lease payments, some arrangements contain provisions for variable lease payments. Certain leases for pipelines, terminals, and tanks provide for variable lease payments based on, among other things, throughput volumes in excess of a base amount. Certain marine transportation leases contain provisions for payments that are contingent on usage. Additionally, if the rental increases are not scheduled in the lease, such as an increase based on subsequent changes in the index or rate, those rents are considered variable lease payments. In all instances, variable lease payments are recognized in the period in which the obligation for those payments is incurred.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Lease Costs and Other Supplemental Information
In accordance with Topic 842, ourOur total lease cost comprises costs that are included in our income statement, as well as costs capitalized as part of an item of property, plant, and equipment or inventory. Total lease cost by class of underlying asset was as follows for the three months ended March 31, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pipelines, Terminals, and Tanks | | Transportation | | Feedstock Processing Equipment | | Energy and Gases | | Real Estate | | Total |
| | Marine | | Rail | | | | |
Finance lease cost: | | | | | | | | | | | | | |
Amortization of ROU assets | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | 10 |
|
Interest on lease liabilities | 10 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 11 |
|
Operating lease cost | 47 |
| | 34 |
| | 11 |
| | 7 |
| | 2 |
| | 4 |
| | 105 |
|
Variable lease cost | 18 |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| | 28 |
|
Short-term lease cost | 3 |
| | 14 |
| | — |
| | 6 |
| | — |
| | — |
| | 23 |
|
Sublease income | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | (2 | ) |
Total lease cost | $ | 86 |
| | $ | 57 |
| | $ | 11 |
| | $ | 14 |
| | $ | 4 |
| | $ | 3 |
| | $ | 175 |
|
In accordance with Topic 840, “rental expense, net of sublease rental income” was as follows for the three months ended March 31, 2018 (in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pipelines, Terminals, and Tanks | | Transportation | | Feedstock Processing Equipment | | Energy and Gases | | Real Estate | | Other | | Total |
| | Marine | | Rail | | | | | |
Three months ended March 31, 2020 | | | | | | | | | | | | | | | |
Finance lease cost: | | | | | | | | | | | | | | | |
Amortization of right-of-use (ROU) assets | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 26 |
|
Interest on lease liabilities | 21 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 22 |
|
Operating lease cost | 42 |
| | 39 |
| | 15 |
| | 4 |
| | 2 |
| | 6 |
| | 1 |
| | 109 |
|
Variable lease cost | 16 |
| | 18 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | 36 |
|
Short-term lease cost | 4 |
| | 22 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | 40 |
|
Sublease income | — |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) |
Total lease cost | $ | 105 |
| | $ | 73 |
| | $ | 16 |
| | $ | 22 |
| | $ | 4 |
| | $ | 6 |
| | $ | 1 |
| | $ | 227 |
|
|
| | | |
Minimum rental expense | $ | 129 |
|
Contingent rental expense | 6 |
|
Total rental expense | 135 |
|
Less sublease rental income | 10 |
|
Rental expense, net of sublease rental income | $ | 125 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 | | | | | | | | | | | | | | | |
Finance lease cost: | | | | | | | | | | | | | | | |
Amortization of ROU assets | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 10 |
|
Interest on lease liabilities | 10 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 11 |
|
Operating lease cost | 47 |
| | 34 |
| | 11 |
| | 7 |
| | 2 |
| | 4 |
| | — |
| | 105 |
|
Variable lease cost | 18 |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28 |
|
Short-term lease cost | 3 |
| | 14 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | 23 |
|
Sublease income | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (2 | ) |
Total lease cost | $ | 86 |
| | $ | 57 |
| | $ | 11 |
| | $ | 14 |
| | $ | 4 |
| | $ | 3 |
| | $ | — |
| | $ | 175 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents additional information related to our operating and finance leases as of March 31, 2019 (in millions, except for lease terms and discount rates):
| | | | March 31, 2019 | March 31, 2020 | | December 31, 2019 |
| | Operating Leases | | Finance Leases | Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
Supplemental balance sheet information: | | | | | |
Supplemental balance sheet information | | | | | | | | |
ROU assets, net reflected in the following balance sheet line items: | | | | | | | | | | | |
Property, plant, and equipment, net | | $ | — |
| | $ | 597 |
| $ | — |
| | $ | 2,203 |
| | $ | — |
| | $ | 790 |
|
Deferred charges and other assets, net | | 1,303 |
| | — |
| 1,297 |
| | — |
| | 1,329 |
| | — |
|
Total ROU assets, net | | $ | 1,303 |
| | $ | 597 |
| $ | 1,297 |
| | $ | 2,203 |
| | $ | 1,329 |
| | $ | 790 |
|
| | | | | | | | | | | |
Current lease liabilities reflected in the following balance sheet line items: | | | | | | | | | | | |
Current portion of debt and finance lease obligations | | $ | — |
| | $ | 25 |
| $ | — |
| | $ | 63 |
| | $ | — |
| | $ | 41 |
|
Accrued expenses | | 304 |
| | — |
| 342 |
| | — |
| | 331 |
| | — |
|
Noncurrent lease liabilities reflected in the following balance sheet line items: | | | | | | | | | | | |
Debt and finance lease obligations, less current portion | | — |
| | 581 |
| — |
| | 2,149 |
| | — |
| | 750 |
|
Other long-term liabilities | | 956 |
| | — |
| 928 |
| | — |
| | 959 |
| | — |
|
Total lease liabilities | | $ | 1,260 |
| | $ | 606 |
| $ | 1,270 |
| | $ | 2,212 |
| | $ | 1,290 |
| | $ | 791 |
|
| | | | | | | | | | | |
Other supplemental information: | | | | | |
Other supplemental information | | | | | | | | |
Weighted-average remaining lease term | | 8.3 years |
| | 23.3 years |
| 7.5 years |
| | 22.9 years |
| | 7.7 years |
| | 19.7 years |
|
Weighted-average discount rate | | 5.1 | % | | 5.5 | % | 4.8 | % | | 4.4 | % | | 4.9 | % | | 5.2 | % |
Supplemental cash flow information related to our operating and finance leases is presented in Note 13.
Significant Lease Commencement
We have a 50 percent membership interest in MVP Terminalling, LLC (MVP), an unconsolidated joint venture formed in September 2017 with a subsidiary of Magellan Midstream Partners LP, to construct, own, and operate the Magellan Valero Pasadena marine terminal (MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal upon completion of the initial two phases of construction, whichNoteoccurredin the first quarter of 2020. During the three months ended March 31, 2020, we recognized a finance lease ROU asset and related liability of approximately $1.4 billion in connection with this agreement. The terminaling agreement has an initial term of 12. years with 2 five-year automatic renewals, and year-to-year renewals thereafter.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maturity Analysis
The remaining minimum lease payments due under our long-term leases were as follows (in millions):
| | | March 31, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Operating Leases | | Finance Leases | | Operating Leases | | Capital Leases | Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
2019 (a) | $ | 273 |
| | $ | 51 |
| | $ | 359 |
| | $ | 69 |
| |
2020 | 267 |
| | 65 |
| | 245 |
| | 65 |
| |
2020 (a) | | $ | 302 |
| | $ | 123 |
| | $ | 376 |
| | $ | 88 |
|
2021 | 191 |
| | 63 |
| | 178 |
| | 62 |
| 273 |
| | 164 |
| | 250 |
| | 86 |
|
2022 | 157 |
| | 64 |
| | 146 |
| | 64 |
| 205 |
| | 165 |
| | 194 |
| | 87 |
|
2023 | 131 |
| | 65 |
| | 123 |
| | 65 |
| 170 |
| | 171 |
| | 160 |
| | 91 |
|
2024 | | 133 |
| | 162 |
| | 125 |
| | 82 |
|
Thereafter | 576 |
| | 939 |
| | 514 |
| | 957 |
| 489 |
| | 2,895 |
| | 498 |
| | 1,011 |
|
Total undiscounted lease payments | 1,595 |
| | 1,247 |
| | $ | 1,565 |
| | 1,282 |
| 1,572 |
| | 3,680 |
| | 1,603 |
| | 1,445 |
|
Less amount associated with discounting | 335 |
| | 641 |
| | | | 676 |
| |
Less: Amount associated with discounting | | 302 |
| | 1,468 |
| | 313 |
| | 654 |
|
Total lease liabilities | $ | 1,260 |
| | $ | 606 |
| |
| | $ | 606 |
| $ | 1,270 |
| | $ | 2,212 |
| | $ | 1,290 |
| | $ | 791 |
|
____________________
| |
(a) | The amounts as of March 31, 20192020 are for the remaining nine months of 2019.2020. |
Future Lease Commencement
As described and defined in Note 6, we have a terminaling agreement with MVP to utilize the MVP Terminal upon completion of phase two, which is expected to occur in late 2019. We expect to recognize an ROU asset and lease liability of approximately $1.1 billion in 2020 in connection with this agreement.
Public Debt
During the three months ended March 31, 2019, the following activityoccurred:
| |
• | We issued $1We issued $1.0 billion of 4.00 percent Senior Notes due April 1, 2029. Proceeds from this debt issuance totaled$992 million before deducting the underwriting discount and other debt issuance costs. In April 2019, the proceeds were used to redeem our 6.125 percent Senior Notes due February 1, 2020 (6.125 percent Senior Notes) for $871 million, or 102.48 percent of stated value, which includes an early redemption fee of $21 million that will be reflected in “other income, net” in our statements of income for the three and six months ended June 30, 2019. |
| |
• | In connection with the completion of the Merger Transaction as described in Note 2, Valero entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment, when due, of any amount owed to the holders of VLP’s 4.375 percent Senior Notes due December 15, 2026 and 4.5 percent Senior Notes due March 15, 2028. See Note 15 for condensed consolidating financial statements.
|
During the three months ended March 31, 2018, VLP issued $500 million of 4.5 percent Senior Notes due March 15, 2028. Proceeds from this debt issuance totaled $498$992 million before deducting the underwriting discount and other debt issuance costs. The proceeds were available onlyused to redeem our 6.125 percent Senior Notes due February 1, 2020 (6.125 percent Senior Notes) for $871 million, or 102.48 percent of stated value, which included an early redemption fee of $21 million that is reflected in “other income, net” in our statement of income for the operationsthree months ended March 31, 2019.
In connection with the completion of the Merger Transaction, Valero Energy Corporation, the parent company, entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment, when due, of the following debt issued by VLP, one of its wholly owned subsidiaries, that was outstanding as of March 31, 2020:
| |
◦ | 4.375 percent Senior Notes due December 15, 2026; and |
| |
◦ | 4.5 percent Senior Notes due March 15, 2028. |
Effective March 31, 2020, we early applied the U.S. Securities and wereExchange Commission’s (SEC’s) Final Rule Release No. 33-10762, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities. This rule allows us to cease providing the previously required condensed consolidating financial information in our periodic reports while the senior notes issued by VLP noted above are outstanding,
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
usedas VLP’s reporting obligation was suspended on January 22, 2019 in connection with the completion of the Merger Transaction.
During the three months ended March 31, 2020, there was noissuance or redemption activity related to repay the outstanding balance of $410 million on the VLP Revolver (defined below) and $85our public debt.
On April 16, 2020, we issued $850 million of its notes payable to us, which were eliminated in consolidation.2.700 percent Senior Notes due April 15, 2023 and $650 million of 2.850 percent Senior Notes due April 15, 2025. Proceeds from these debt issuances totaled $1.499 billion before deducting the underwriting discount and other debt issuance costs.
Credit Facilities
Summary of Credit Facilities
We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (amounts in millions and currency in U.S. dollars, except as noted):
| | | | | | March 31, 2019 | | | | March 31, 2020 |
| | Facility Amount | | Maturity Date | | Outstanding Borrowings | | Letters of Credit Issued (b) | | Availability | | Facility Amount | | Maturity Date | | Outstanding Borrowings | | Letters of Credit Issued (a) | | Availability |
Committed facilities: | | | | | | | | | | | | | | | | |
Valero Revolver | | $ | 4,000 |
| | March 2024 | | $ | — |
| | $ | 55 |
| | $ | 3,945 |
| | $ | 4,000 |
| | March 2024 | | $ | — |
| | $ | 34 |
| | $ | 3,966 |
|
Canadian Revolver | | C$ | 150 |
| | November 2019 | | C$ | — |
| | C$ | 5 |
| | C$ | 145 |
| | C$ | 150 |
| | November 2020 | | C$ | — |
| | C$ | 5 |
| | C$ | 145 |
|
Accounts receivable sales facility | | $ | 1,300 |
| | July 2019 | | $ | 100 |
| | n/a |
| | $ | 1,200 |
| | $ | 1,300 |
| | July 2020 | | $ | 400 |
| | n/a |
| | $ | 900 |
|
Letter of credit facility | | $ | 100 |
| | November 2019 | | n/a |
| | $ | — |
| | $ | 100 |
| | $ | 50 |
| | November 2020 | | n/a |
| | $ | — |
| | $ | 50 |
|
Committed facilities of VIE (a): | | | | | | | |
| |
Committed facilities of VIE (b): | | | | | | | | |
|
IEnova Revolver | | $ | 340 |
| | February 2028 | | $ | 132 |
| | n/a |
| | $ | 208 |
| | $ | 510 |
| | February 2028 | | $ | 418 |
| | n/a |
| | $ | 92 |
|
Uncommitted facilities: | | | | | | | | | | | | | | | | |
Letter of credit facilities | | n/a |
| | n/a | | n/a |
| | $ | 408 |
| | n/a |
| | n/a |
| | n/a | | n/a |
| | $ | 118 |
| | n/a |
|
_______________________________
| |
(a) | Letters of credit issued as of March 31, 2020 expire at various times in 2020 through 2021. |
| |
(b) | Creditors of our VIE do not have recourse against us. |
| |
(b) | Letters of credit issued as of March 31, 2019 expire at various times in 2019 through 2020. |
Valero Revolver
In March 2019, we amended our revolving credit facility (the Valero Revolver) to increase the borrowing capacity from $3 billion to $4 billion and to extend the maturity date from November 2020 to March 2024. The Valero Revolver also provides for the issuance of letters of credit of up to $2.4 billion.
VLP Revolver
As of December 31, 2018, VLP had a $750 million senior unsecured revolving credit facility (the VLP Revolver) with a group of lenders that was scheduled to mature in November 2020. However, on January 10, 2019, in connection with the completion of the Merger Transaction as described in Note 2, the VLP Revolver was terminated.
Accounts Receivable Sales Facility
During the three months ended March 31, 2019,2020, we sold and repaid $900$300 million of eligible receivables under our accounts receivable sales facility. As of March 31, 20192020 and December 31, 2018,2019, the variable interest rate on the accounts receivable sales facility was 3.17742.1619 percent and 3.06182.3866 percent, respectively.
In April 2020, the available borrowing capacity under our accounts receivable sales facility decreased due to the reduction in our receivables as a result of the significant decline in product prices. On April 29, 2020, we repaid $400 million of borrowings under the facility and the available capacity to borrow was $512 million.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
IEnova Revolver
During the three months ended March 31, 2020 and 2019, Central Mexico Terminals (as described in Note 8)8) borrowed $70 million and $23 million, respectively, and had no 0repayments under a combined $340$510 million unsecured revolving credit facility (IEnova Revolver) with IEnova (defined in Note 8)8). As of March 31, 20192020 and December 31, 2018,2019, the variable interest rate was 6.4475.595 percent and 6.0465.749 percent, respectively.
364-day Revolving Credit Facility
On April 13, 2020, we entered into an $875 million 364-Day Credit Agreement (the 364-day Revolving Credit Facility) with several lenders. This facility provides for a revolving credit facility in an aggregate principal amount of up to $875 million and matures 364 days from April 13, 2020.
Borrowings under this facility bear interest at the base rate or the eurodollar rate (at our election) plus an applicable rate ranging from 0.150 percent to 1.700 percent, based upon the elected interest rate type and our debt ratings from certain rating agencies. The facility requires us to pay a commitment fee accruing on the daily amount of used and unused commitments of the lenders, also based upon our debt ratings mentioned above. The interest and commitment fees under this facility are payable quarterly. The facility also requires us to pay a customary agency fee to the administrative agent. The facility contains various customary covenants and events of default.
Other Disclosures
“Interest and debt expense, net of capitalized interest” is comprised of the followingas follows (in millions):
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Interest and debt expense | $ | 136 |
| | $ | 139 |
| $ | 145 |
| | $ | 136 |
|
Less capitalized interest | 24 |
| | 18 |
| |
Less: Capitalized interest | | 20 |
| | 24 |
|
Interest and debt expense, net of capitalized interest | $ | 112 |
| | $ | 121 |
| $ | 125 |
| | $ | 112 |
|
| |
6. | COMMITMENTS AND CONTINGENCIES |
Commitments
MVP Terminal
We have a 50 percent membership interest in MVP Terminalling, LLC (MVP), a Delaware limited liability company formed in September 2017 with a subsidiary of Magellan Midstream Partners LP (Magellan), to construct, own, and operate the Magellan Valero Pasadena marine terminal (MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. Construction of phases one and two of the project began in 2017 with a total estimated cost of approximately $840 million, of which we have committed to contribute 50 percent (approximately $420 million). The project could expand up to four phases with a total project cost of approximately $1.4 billion if warranted by additional demand and agreed to by Magellan and us. Since inception, we have contributed $303 million to MVP, of which $56 million was contributed during the three months ended March 31, 2019.
Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal upon completion of phase two, which is expected to occur in late 2019. The terminaling agreement has an initial term of 12 years with two five-year automatic renewals, and year-to-year renewals thereafter.
Prior to our adoption of Topic 842 as described in Note 1, we were considered the accounting owner of the MVP Terminal during the construction period due to our membership interest in MVP and because we determined that the terminaling agreement was a capital lease. Accordingly, as of December 31, 2018, we had recorded an asset of $539 million in property, plant, and equipment representing 100 percent of the construction costs incurred by MVP, as well as capitalized interest incurred by us, and a long-term liability of $292 million payable to Magellan. The amounts recorded for the portion of the construction costs associated with the payable to Magellan were noncash investing and financing items, respectively.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On January 1, 2019, as a result of our adoption of Topic 842, we derecognized the asset and liability related to MVP discussed above and recorded our equity investment in MVP of $247 million, which is included in “deferred charges and other assets, net.” The amounts derecognized are noncash investing and financing items, respectively. As of March 31, 2019, our equity investment in MVP was $303 million.
Central Texas Pipeline
We have committed to a 40 percent undivided interest in a project with a subsidiary of Magellan to jointly build an estimated 130-mile, 20-inch refined petroleum products pipeline with a capacity of up to 150,000 barrels per day from Houston to Hearne, Texas. The pipeline is expected to be completed in the third quarter of 2019. The estimated cost of our 40 percent undivided interest in this pipeline is $170 million. Since inception, expenditures have totaled $81 million, of which $1 million was spent during the three months ended March 31, 2019.
Share Activity
There was no significant share activity during the three months ended March 31, 20192020 and 2018.2019.
Common Stock Dividends
On April 30, 2019,24, 2020, our board of directors declared a quarterly cash dividend of $0.90$0.98 per common share payable on June 4, 20193, 2020 to holders of record at the close of business on May 15, 2019.14, 2020.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| Foreign Currency Translation Adjustment | | Defined Benefit Plans Items | | Total | | Foreign Currency Translation Adjustment | | Defined Benefit Plans Items | | Total |
Balance as of beginning of period | $ | (1,022 | ) | | $ | (485 | ) | | $ | (1,507 | ) | | $ | (507 | ) | | $ | (433 | ) | | $ | (940 | ) |
Other comprehensive income before reclassifications | 153 |
| | — |
| | 153 |
| | 42 |
| | — |
| | 42 |
|
Amounts reclassified from accumulated other comprehensive loss | — |
| | 2 |
| | 2 |
| | — |
| | 6 |
| | 6 |
|
Other comprehensive income | 153 |
| | 2 |
| | 155 |
| | 42 |
| | 6 |
| | 48 |
|
Reclassification of stranded income tax effects of Tax Reform to retained earnings | — |
| | — |
| | — |
| | — |
| | (91 | ) | | (91 | ) |
Balance as of end of period | $ | (869 | ) | | $ | (483 | ) | | $ | (1,352 | ) | | $ | (465 | ) | | $ | (518 | ) | | $ | (983 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| Foreign Currency Translation Adjustment | | Defined Benefit Plans Items | | Gains (Losses) on Cash Flow Hedges | | Total | | Foreign Currency Translation Adjustment | | Defined Benefit Plans Items | | Total |
Balance as of beginning of period | $ | (676 | ) | | $ | (672 | ) | | $ | (3 | ) | | $ | (1,351 | ) | | $ | (1,022 | ) | | $ | (485 | ) | | $ | (1,507 | ) |
Other comprehensive income (loss) before reclassifications | (606 | ) | | — |
| | 21 |
| | (585 | ) | | 153 |
| | — |
| | 153 |
|
Amounts reclassified from accumulated other comprehensive loss | — |
| | 9 |
| | (10 | ) | | (1 | ) | | — |
| | 2 |
| | 2 |
|
Other comprehensive income (loss) | (606 | ) | | 9 |
| | 11 |
| | (586 | ) | | 153 |
| | 2 |
| | 155 |
|
Balance as of end of period | $ | (1,282 | ) | | $ | (663 | ) | | $ | 8 |
| | $ | (1,937 | ) | | $ | (869 | ) | | $ | (483 | ) | | $ | (1,352 | ) |
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
8. | VARIABLE INTEREST ENTITIES |
Consolidated VIEs
We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary. As of March 31, 2019,2020, our significant consolidated VIEs included:
DGD, a joint venture with a subsidiary of Darling Ingredients Inc., which owns and operates a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel; and
Central Mexico Terminals, which is a collective group of three subsidiaries of Infraestructura Energetica Nova, S.A.B. de C.V. (IEnova), a Mexican company and subsidiary of Sempra Energy, a U.S. public company. We have terminaling agreements with Central Mexico Terminals that represent variable interests. We do not have an ownership interest in Central Mexico Terminals.
The VIEs’ assets can only be used to settle their own obligations and the VIEs’ creditors have no recourse to our assets. We do not provide financial guarantees to our VIEs. Although we have provided credit facilities to some of our VIEs in support of their construction or acquisition activities, these transactions are eliminated in consolidation. Our financial position, results of operations, and cash flows are impacted by our consolidated VIEs’ performance, net of intercompany eliminations, to the extent of our ownership interest in each VIE.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present summarized balance sheet information for the significant assets and liabilities of our VIEs, which are included in our balance sheets (in millions).
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
| DGD | | Central Mexico Terminals | | Other | | Total |
Assets | | | | | | | |
Cash and cash equivalents | $ | 85 |
| | $ | 2 |
| | $ | 20 |
| | $ | 107 |
|
Other current assets | 137 |
| | 21 |
| | 68 |
| | 226 |
|
Property, plant, and equipment, net | 584 |
| | 140 |
| | 111 |
| | 835 |
|
Liabilities | | | | | | | |
Current liabilities, including current portion of debt and finance lease obligations | $ | 35 |
| | $ | 157 |
| | $ | 67 |
| | $ | 259 |
|
Debt and finance lease obligations, less current portion | 1 |
| | — |
| | 34 |
| | 35 |
|
Other long-term liabilities | 1 |
| | 38 |
| | 6 |
| | 45 |
|
|
| | | | | | | | | | | | | | | |
| March 31, 2020 |
| DGD | | Central Mexico Terminals | | Other | | Total |
Assets | | | | | | | |
Cash and cash equivalents | $ | 174 |
| | $ | — |
| | $ | 18 |
| | $ | 192 |
|
Other current assets | 635 |
| | 37 |
| | 67 |
| | 739 |
|
Property, plant, and equipment, net | 772 |
| | 454 |
| | 100 |
| | 1,326 |
|
Liabilities | | | | | | | |
Current liabilities, including current portion of debt and finance lease obligations | $ | 63 |
| | $ | 490 |
| | $ | 6 |
| | $ | 559 |
|
Debt and finance lease obligations, less current portion | 1 |
| | — |
| | 27 |
| | 28 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | December 31, 2018 | December 31, 2019 |
| VLP (a) | | DGD | | Central Mexico Terminals | | Other | | Total | DGD | | Central Mexico Terminals | | Other | | Total |
Assets | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 152 |
| | $ | 65 |
| | $ | — |
| | $ | 18 |
| | $ | 235 |
| $ | 85 |
| | $ | — |
| | $ | 25 |
| | $ | 110 |
|
Other current assets | 2 |
| | 112 |
| | 20 |
| | 64 |
| | 198 |
| 567 |
| | 33 |
| | 89 |
| | 689 |
|
Property, plant, and equipment, net | 1,409 |
| | 576 |
| | 156 |
| | 113 |
| | 2,254 |
| 706 |
| | 381 |
| | 105 |
| | 1,192 |
|
Liabilities | | | | | | | | | | | | | | | | |
Current liabilities, including current portion of debt and finance lease obligations | $ | 27 |
| | $ | 28 |
| | $ | 118 |
| | $ | 9 |
| | $ | 182 |
| $ | 66 |
| | $ | 409 |
| | $ | 8 |
| | $ | 483 |
|
Debt and finance lease obligations, less current portion | 990 |
| | — |
| | — |
| | 34 |
| | 1,024 |
| — |
| | — |
| | 31 |
| | 31 |
|
Other long-term liabilities | 1 |
| | — |
| | 3 |
| | 1 |
| | 5 |
| |
____________________
| |
(a) | Prior to the completion of the Merger Transaction with VLP on January 10, 2019 as discussed in Note 2, VLP was a publicly traded master limited partnership that we had determined was a VIE. VLP was formed by us to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. As of December 31, 2018, we owned a 66.2 percent limited partner interest and a 2.0 percent general partner interest in VLP, and public unitholders owned a 31.8 percent limited partner interest. Upon completion of the Merger Transaction, VLP became our indirect wholly owned subsidiary and, as a result, was no longer a VIE.
|
Non-Consolidated VIEs
We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. These non-consolidated VIEs are not material to our financial position or results of operations and are primarily accounted for as equity investments. One of our non-consolidated VIEs is MVP, which is described in Note 6. As of March 31, 2019, our maximum exposure to loss was $303 million, which represents our equity investment in MVP. We have not provided any financial support to MVP other than amounts previously required by our membership interest.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of net periodic benefit cost related to our defined benefit plans were as follows (in millions):
| | | Pension Plans | | Other Postretirement Benefit Plans | Pension Plans | | Other Postretirement Benefit Plans |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Three months ended March 31: | | | | | | | | |
Three months ended March 31 | | | | | | | | |
Service cost | $ | 30 |
| | $ | 34 |
| | $ | 1 |
| | $ | 1 |
| $ | 35 |
| | $ | 30 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 24 |
| | 23 |
| | 3 |
| | 2 |
| 21 |
| | 24 |
| | 2 |
| | 3 |
|
Expected return on plan assets | (42 | ) | | (41 | ) | | — |
| | — |
| (44 | ) | | (42 | ) | | — |
| | — |
|
Amortization of: | | | | | | | | | | | | | | |
Net actuarial (gain) loss | 10 |
| | 16 |
| | (1 | ) | | — |
| 18 |
| | 10 |
| | — |
| | (1 | ) |
Prior service credit | (4 | ) | | (5 | ) | | (2 | ) | | (3 | ) | (5 | ) | | (4 | ) | | (1 | ) | | (2 | ) |
Special charges | — |
| | 2 |
| | 1 |
| | — |
| — |
| | — |
| | — |
| | 1 |
|
Net periodic benefit cost | $ | 18 |
| | $ | 29 |
| | $ | 2 |
| | $ | — |
| $ | 25 |
| | $ | 18 |
| | $ | 2 |
| | $ | 2 |
|
The components of net periodic benefit cost other than the service cost component (i.e., the non-service cost components) are included in “other income, net” in the statements of income.
AsDuring the three months ended March 31, 2020 and 2019, we contributed $12 million and $14 million, respectively, to our pension plans and $4 million to our other postretirement benefit plans during each period.
We previously disclosed in our annual report on Form 10-K for the year ended December 31, 2018,2019 that we planplanned to contribute approximately $35$140 million to our pension plans and $21 million to our other postretirement benefit plans during 2019. During2020. Due to the three months ended March 31, 2019 and 2018,current economic environment, we contributed $14are reconsidering our intent to make a discretionary contribution of up to $100 million and $8 million, respectively, to our qualified U.S. pension plans and $4 million and $4 million, respectively, to our other postretirement benefit plans.plan.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Determination of Quarterly Effective Income Tax Rate
We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to income for the interim period. Given the significant uncertainty with respect to the impact of the COVID-19 outbreak on our business and results of operations, we are not currently able to estimate our annual effective income tax rate for 2020. Therefore, our income tax rate for the three months ended March 31, 2020 is our best estimate of our annual effective income tax rate.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended. The most significant changes affecting us were as follows:
Modification of the limitations previously set by the Tax Cuts and Jobs Act of 2017 by providing that tax net operating losses (NOLs) arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. This provision allows the taxpayer to recover taxes previously paid at a 35 percent federal income tax rate during tax years prior to 2018. In addition, the CARES Act removed the taxable income limitation to allow a tax NOL to fully offset taxable income for tax years beginning before January 1, 2021.
Increased the deductibility of interest expense from 30 percent to 50 percent of adjusted taxable income for 2019 and 2020. Also, a taxpayer can elect to use its 2019 adjusted taxable income in 2020 to determine the deductible amount of interest expense in that year.
We recognized an overall income tax benefit of $616 million for the three months ended March 31, 2020, of which $110 million was attributable to the expected tax NOL carryback provided for under the CARES Act for expected tax NOLs from our current tax year to our 2015 income tax year in which we paid federal income tax at a 35 percent tax rate. In addition, we were not limited in the amount of interest expense we could deduct. The remaining income tax benefit was primarily due to the LCM inventory valuation adjustment that resulted in a tax benefit of $551 million.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
10.11. | EARNINGS (LOSS) PER COMMON SHARE |
Earnings (loss) per common share were computed as follows (dollars and shares in millions, except per share amounts):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Earnings per common share: | | | |
Net income attributable to Valero stockholders | $ | 141 |
| | $ | 469 |
|
Less income allocated to participating securities | 1 |
| | 1 |
|
Net income available to common stockholders | $ | 140 |
| | $ | 468 |
|
| | | |
Weighted-average common shares outstanding | 416 |
| | 431 |
|
| | | |
Earnings per common share | $ | 0.34 |
| | $ | 1.09 |
|
| | | |
Earnings per common share – assuming dilution: | | | |
Net income attributable to Valero stockholders | $ | 141 |
| | $ | 469 |
|
| | | |
Weighted-average common shares outstanding | 416 |
| | 431 |
|
Effect of dilutive securities | 2 |
| | 1 |
|
Weighted-average common shares outstanding – assuming dilution | 418 |
| | 432 |
|
| | | |
Earnings per common share – assuming dilution | $ | 0.34 |
| | $ | 1.09 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Earnings (loss) per common share | | | |
Net income (loss) attributable to Valero stockholders | $ | (1,851 | ) | | $ | 141 |
|
Less: Income allocated to participating securities | 1 |
| | 1 |
|
Net income (loss) available to common stockholders | $ | (1,852 | ) | | $ | 140 |
|
| | | |
Weighted-average common shares outstanding | 408 |
| | 416 |
|
| | | |
Earnings (loss) per common share | $ | (4.54 | ) | | $ | 0.34 |
|
| | | |
Earnings (loss) per common share – assuming dilution | | | |
Net income (loss) attributable to Valero stockholders | $ | (1,851 | ) | | $ | 141 |
|
| | | |
Weighted-average common shares outstanding | 408 |
| | 416 |
|
Effect of dilutive securities | — |
| | 2 |
|
Weighted-average common shares outstanding – assuming dilution | 408 |
| | 418 |
|
| | | |
Earnings (loss) per common share – assuming dilution | $ | (4.54 | ) | | $ | 0.34 |
|
Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan. Dilutive securities include participating securities as well as outstanding stock options granted under our 2011 Omnibus Stock Incentive Plan.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
11.12. | REVENUES AND SEGMENT INFORMATION |
Revenue from Contracts with Customers
Disaggregation of Revenue
Revenue is presented in the table below under “Segment Information” disaggregated by product because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements.
Contract Balances
Contract balances were as follows (in millions):
|
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 | |
Decrease |
Receivables from contracts with customers, included in receivables, net | $ | 2,965 |
| | $ | 5,610 |
| | $ | (2,645 | ) |
Contract liabilities, included in accrued expenses | 19 |
| | 55 |
| | (36 | ) |
19
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivables from Contracts with Customers
Our receivables from contracts with customers are includedis a component of “receivables, net” as presented on the balance sheet. The decrease in “receivables, net” and totaled $5.3 billion and $4.7 billionis described in Note 13.
For the three months ended March 31, 2020, we recognized as revenue $52 million that was included in contract liabilities as of March 31, 2019 and December 31, 2018, respectively.2019.
Remaining Performance Obligations
We have spot and term contracts with customers, the majority of which are spot contracts with no remaining performance obligations. We do not disclose remaining performance obligations for contracts that have terms of one year or less. The transaction price for our remaining term contracts includes a fixed component and variable consideration (i.e., a commodity price), both of which are allocated entirely to a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance obligation. The fixed component is not material and the variable consideration is highly uncertain. Therefore, as of March 31, 2019,2020, we have not disclosed the aggregate amount of the transaction price allocated to our remaining performance obligations.
Segment Information
Effective January 1, 2019, we revised ourWe have 3 reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — refining, renewable diesel, — because of the growing importance of renewable fuels in the market and the growth of our investments in renewable fuels production. The renewable diesel segment includes the operations of DGD, which were transferred from the refining segment on January 1, 2019. Also effective January 1, 2019, we no longer have a VLP segment, and we include the operations of VLP in our refining segment. This change was made because of the Merger Transaction with VLP, as described in Note 2, and the resulting change in how we manage VLP’s operations. We no longer manage VLP as a business but as logistics assets that support the operations of our refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.
We have three reportable segments – refining, ethanol, and renewable diesel.ethanol. Each segment is a strategic business unit that offers different products and services by employing unique technologies and marketing strategies and whose operations and operating performance are managed and evaluated separately. Operating performance is measured based on the operating income generated by the segment, which includes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates. The following is a description of each segment’s business operations.
| |
• | The refining segment includes the operations of our 15 petroleum refineries, the associated marketing activities, and logistics assets that support our refining operations. The principal products |
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
manufactured by our refineries and sold by this segment include gasolines and blendstocks, distillates, and other products.
| |
• | The renewable diesel segment includes the operations of DGD, our consolidated joint venture as discussed in Note 8. The principal product manufactured by DGD and sold by this segment include gasolines and blendstocks, distillates, and other products.is renewable diesel. This segment sells some renewable diesel to the refining segment, which is then sold to that segment’s customers. |
| |
• | The ethanol segment includes the operations of our 14 ethanol plants, the associated marketing activities, and logistics assets that support our ethanol operations. The principal products manufactured by our ethanol plants are ethanol and distillers grains. This segment sells some ethanol to the refining segment for blending into gasoline, which is sold to that segment’s customers as a finished gasoline product. |
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
• | The renewable diesel segment includes the operations of DGD, our consolidated joint venture as discussed in Note 8. The principal product manufactured by DGD and sold by this segment is renewable diesel. This segment sells some renewable diesel to the refining segment, which is then sold to that segment’s customers.
|
Operations that are not included in any of the reportable segments are included in the corporate category.
The following tables reflect information about our operating income (loss) by reportable segment (in millions):
| | | Refining | | Ethanol | | Renewable Diesel | | Corporate and Eliminations | | Total | Refining | | Renewable Diesel | | Ethanol | | Corporate and Eliminations | | Total |
Three months ended March 31, 2019: | | | | | | | | | | |
Three months ended March 31, 2020 | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 23,218 |
| | $ | 793 |
| | $ | 252 |
| | $ | — |
| | $ | 24,263 |
| $ | 20,985 |
| | $ | 306 |
| | $ | 811 |
| | $ | — |
| | $ | 22,102 |
|
Intersegment revenues | 2 |
| | 52 |
| | 51 |
| | (105 | ) | | — |
| 2 |
| | 53 |
| | 64 |
| | (119 | ) | | — |
|
Total revenues | 23,220 |
| | 845 |
| | 303 |
| | (105 | ) | | 24,263 |
| 20,987 |
| | 359 |
| | 875 |
| | (119 | ) | | 22,102 |
|
Cost of sales: | | | | | | | | | | | | | | | | | | |
Cost of materials and other | 21,165 |
| | 694 |
| | 224 |
| | (105 | ) | | 21,978 |
| 19,127 |
| | 130 |
| | 813 |
| | (118 | ) | | 19,952 |
|
LCM inventory valuation adjustment | | 2,414 |
| | — |
| | 128 |
| | — |
| | 2,542 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | 1,071 |
| | 125 |
| | 19 |
| | — |
| | 1,215 |
| 995 |
| | 20 |
| | 109 |
| | — |
| | 1,124 |
|
Depreciation and amortization expense | 503 |
| | 23 |
| | 11 |
| | — |
| | 537 |
| 536 |
| | 11 |
| | 22 |
| | — |
| | 569 |
|
Total cost of sales | 22,739 |
| | 842 |
| | 254 |
| | (105 | ) | | 23,730 |
| 23,072 |
| | 161 |
| | 1,072 |
| | (118 | ) | | 24,187 |
|
Other operating expenses | 2 |
| | — |
| | — |
| | — |
| | 2 |
| 2 |
| | — |
| | — |
| | — |
| | 2 |
|
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — |
| | — |
| | — |
| | 209 |
| | 209 |
| — |
| | — |
| | — |
| | 177 |
| | 177 |
|
Depreciation and amortization expense | — |
| | — |
| | — |
| | 14 |
| | 14 |
| — |
| | — |
| | — |
| | 13 |
| | 13 |
|
Operating income by segment | $ | 479 |
| | $ | 3 |
| | $ | 49 |
| | $ | (223 | ) | | $ | 308 |
| |
Operating income (loss) by segment | | $ | (2,087 | ) | | $ | 198 |
| | $ | (197 | ) | | $ | (191 | ) | | $ | (2,277 | ) |
| | | | | | | | | | | | | | | | | | |
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | Refining | | Ethanol | | Renewable Diesel | | Corporate and Eliminations | | Total | Refining | | Renewable Diesel | | Ethanol | | Corporate and Eliminations | | Total |
Three months ended March 31, 2018: | | | | | | | | | | |
Three months ended March 31, 2019 | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 25,453 |
| | $ | 877 |
| | $ | 108 |
| | $ | 1 |
| | $ | 26,439 |
| $ | 23,218 |
| | $ | 252 |
| | $ | 793 |
| | $ | — |
| | $ | 24,263 |
|
Intersegment revenues | 4 |
| | 46 |
| | 42 |
| | (92 | ) | | — |
| 2 |
| | 51 |
| | 52 |
| | (105 | ) | | — |
|
Total revenues | 25,457 |
| | 923 |
| | 150 |
| | (91 | ) | | 26,439 |
| 23,220 |
| | 303 |
| | 845 |
| | (105 | ) | | 24,263 |
|
Cost of sales: | | | | | | | | | | | | | | | | | | |
Cost of materials and other | 23,164 |
| | 749 |
| | (65 | ) | | (92 | ) | | 23,756 |
| 21,165 |
| | 224 |
| | 694 |
| | (105 | ) | | 21,978 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | 1,011 |
| | 111 |
| | 14 |
| | — |
| | 1,136 |
| 1,071 |
| | 19 |
| | 125 |
| | — |
| | 1,215 |
|
Depreciation and amortization expense | 461 |
| | 18 |
| | 6 |
| | — |
| | 485 |
| 503 |
| | 11 |
| | 23 |
| | — |
| | 537 |
|
Total cost of sales | 24,636 |
| | 878 |
| | (45 | ) | | (92 | ) | | 25,377 |
| 22,739 |
| | 254 |
| | 842 |
| | (105 | ) | | 23,730 |
|
Other operating expenses | 10 |
| | — |
| | — |
| | — |
| | 10 |
| 2 |
| | — |
| | — |
| | — |
| | 2 |
|
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — |
| | — |
| | — |
| | 238 |
| | 238 |
| — |
| | — |
| | — |
| | 209 |
| | 209 |
|
Depreciation and amortization expense | — |
| | — |
| | — |
| | 13 |
| | 13 |
| — |
| | — |
| | — |
| | 14 |
| | 14 |
|
Operating income by segment | $ | 811 |
| | $ | 45 |
| | $ | 195 |
| | $ | (250 | ) | | $ | 801 |
| $ | 479 |
| | $ | 49 |
| | $ | 3 |
| | $ | (223 | ) | | $ | 308 |
|
The following table provides a disaggregation of revenues from external customers for our principal products by reportable segment (in millions).
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Refining: | | | | | | |
Gasolines and blendstocks | $ | 9,374 |
| | $ | 10,629 |
| $ | 8,244 |
| | $ | 9,374 |
|
Distillates | 11,917 |
| | 12,550 |
| 10,663 |
| | 11,917 |
|
Other product revenues | 1,927 |
| | 2,274 |
| 2,078 |
| | 1,927 |
|
Total refining revenues | 23,218 |
| | 25,453 |
| 20,985 |
| | 23,218 |
|
Renewable diesel: | | | | |
Renewable diesel | | 306 |
| | 252 |
|
Ethanol: | | | | | | |
Ethanol | 620 |
| | 701 |
| 629 |
| | 620 |
|
Distillers grains | 173 |
| | 176 |
| 182 |
| | 173 |
|
Total ethanol revenues | 793 |
| | 877 |
| 811 |
| | 793 |
|
Renewable diesel: | | | | |
Renewable diesel | 252 |
| | 108 |
| |
Corporate – other revenues | — |
| | 1 |
| |
Revenues | $ | 24,263 |
| | $ | 26,439 |
| $ | 22,102 |
| | $ | 24,263 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by reportable segment were as follows (in millions):
| | | March 31, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Refining | $ | 45,487 |
| | $ | 43,488 |
| $ | 41,465 |
| | $ | 47,067 |
|
Renewable diesel | | 1,632 |
| | 1,412 |
|
Ethanol | 1,718 |
| | 1,691 |
| 1,614 |
| | 1,615 |
|
Renewable diesel | 844 |
| | 787 |
| |
Corporate and eliminations | 4,046 |
| | 4,189 |
| 3,036 |
| | 3,770 |
|
Total assets | $ | 52,095 |
| | $ | 50,155 |
| $ | 47,747 |
| | $ | 53,864 |
|
| |
12.13. | SUPPLEMENTAL CASH FLOW INFORMATION |
In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Decrease (increase) in current assets: | | | | | | |
Receivables, net | $ | (895 | ) | | $ | 145 |
| $ | 3,397 |
| | $ | (895 | ) |
Inventories | 28 |
| | (126 | ) | 627 |
| | 28 |
|
Prepaid expenses and other | 16 |
| | (79 | ) | (437 | ) | | 16 |
|
Increase (decrease) in current liabilities: | | | | | | |
Accounts payable | 1,400 |
| | (322 | ) | (4,222 | ) | | 1,400 |
|
Accrued expenses | (167 | ) | | (131 | ) | (79 | ) | | (167 | ) |
Taxes other than income taxes payable | (263 | ) | | (111 | ) | (241 | ) | | (263 | ) |
Income taxes payable | 11 |
| | (402 | ) | (152 | ) | | 11 |
|
Changes in current assets and current liabilities | $ | 130 |
| | $ | (1,026 | ) | $ | (1,107 | ) | | $ | 130 |
|
Cash flowsChanges in current assets and current liabilities for the three months ended March 31, 2020 were as follows:
the decrease in receivables was due to a decrease in commodity prices in March 2020 compared to December 2019 combined with a decrease in sales volumes;
the decrease in inventories was due to a decrease in commodity prices in March 2020 compared to December 2019 combined with lower inventory levels;
the increase in prepaid expenses and other primarily related to interest andthe recognition of the current portion of the income taxes were as follows (in millions):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Interest paid in excess of amount capitalized, including interest on finance leases | $ | 96 |
| | $ | 127 |
|
Income taxes paid, net | 59 |
| | 552 |
|
tax benefit described in Note 10;
the decrease in accounts payable was due to a decrease in commodity prices in March 2020 compared to December 2019 combined with a decrease in crude oil and other feedstock volumes purchased; and
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the decrease in taxes other than income taxes payable was mainly due to the payment of ad valorem, value-added, and motor fuel taxes.
Changes in current assets and current liabilities for the three months ended March 31, 2019 were as follows:
the increase in receivables was due to an increase in commodity prices in March 2019 compared to December 2018 combined with an increase in sales volumes;
the increase in accounts payable was due to an increase in commodity prices in March 2019 compared to December 2018 combined with an increase in crude oil and other feedstock volumes purchased and the timing of payments of invoices;
the decrease in taxes other than income taxes payable was mainly due to the payment of value-added and ad valorem taxes; and
the decrease in accrued expenses was mainly due to the payment of our annual incentive compensation related to 2018.
Cash flows related to interest and income taxes were as follows (in millions):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Interest paid in excess of amount capitalized, including interest on finance leases | $ | 88 |
| | $ | 96 |
|
Income taxes paid (refunded), net | 121 |
| | (59 | ) |
Supplemental cash flow information related to our operating and finance leases was as follows (in millions):
|
| | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Operating Leases | | Finance Leases |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows | | $ | 107 |
| | $ | 11 |
|
Financing cash flows | | — |
| | 6 |
|
ROU assets obtained in exchange for new lease liabilities (a) | | 1,430 |
| | 2 |
|
Changes in lease balances resulting from lease modifications | | (26 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows | $ | 106 |
| | $ | 22 |
| | $ | 107 |
| | $ | 11 |
|
Financing cash flows | — |
| | 15 |
| | — |
| | 6 |
|
Changes in lease balances resulting from new and modified leases (a) | 92 |
| | 1,441 |
| | 1,404 |
| | 2 |
|
___________________
| |
(a) | Includes noncashNoncash activity offor the three months ended March 31, 2020 primarily includes $1.4 billion for a finance lease ROU asset and related liability recognized in connection with the terminaling agreement with MVP described in Note 5. Noncash activity for the three months ended March 31, 2019 included $1.3 billion for operating lease ROU assets for operating leasesand related liabilities recorded on January 1, 2019 upon adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842.842, “Leases.” |
Noncash investing and financing activities during the three months ended March 31, 2019 also included the derecognition of the property, plant, and equipment and long-term liability related to previous owner accounting and the recognition of our investment in joint venture associated with a build-to-suit lease arrangement as described in Note 6.
There were no significant noncash investing and financing activities during the three months ended March 31, 2018.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were no significant noncash investing and financing activities during the three months ended March 31, 2020, except as noted in the table above.
Noncash investing and financing activities during the three months ended March 31, 2019 included the derecognition of the property, plant, and equipment and the related long-term liability associated with a build-to-suit lease arrangement with respect to the MVP Terminal, and the subsequent recognition of our investment in MVP, in addition to the activities noted in the table above.
| |
13.14. | FAIR VALUE MEASUREMENTS |
Recurring Fair Value Measurements
The following tables present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of March 31, 20192020 and December 31, 20182019.
We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the following tables on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
| | | March 31, 2019 | March 31, 2020 |
| | | Total Gross Fair Value | | Effect of Counter- party Netting | | Effect of Cash Collateral Netting | | Net Carrying Value on Balance Sheet | | Cash Collateral Paid or Received Not Offset | | | Total Gross Fair Value | | Effect of Counter- party Netting | | Effect of Cash Collateral Netting | | Net Carrying Value on Balance Sheet | | Cash Collateral Paid or Received Not Offset |
| Fair Value Hierarchy | | Fair Value Hierarchy | |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | |
Assets: | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | |
Commodity derivative contracts | $ | 638 |
| | $ | — |
| | $ | — |
| | $ | 638 |
| | $ | (560 | ) | | $ | (30 | ) | | $ | 48 |
| | $ | — |
| $ | 4,252 |
| | $ | — |
| | $ | — |
| | $ | 4,252 |
| | $ | (4,162 | ) | | $ | (73 | ) | | $ | 17 |
| | $ | — |
|
Foreign currency contracts | 3 |
| | — |
| | — |
| | 3 |
| | n/a |
| | n/a |
| | 3 |
| | n/a |
| 2 |
| | — |
| | — |
| | 2 |
| | n/a |
| | n/a |
| | 2 |
| | n/a |
|
Investments of certain benefit plans | 61 |
| | — |
| | 9 |
| | 70 |
| | n/a |
| | n/a |
| | 70 |
| | n/a |
| 62 |
| | — |
| | 9 |
| | 71 |
| | n/a |
| | n/a |
| | 71 |
| | n/a |
|
Total | $ | 702 |
| | $ | — |
| | $ | 9 |
| | $ | 711 |
| | $ | (560 | ) | | $ | (30 | ) | | $ | 121 |
| |
| $ | 4,316 |
| | $ | — |
| | $ | 9 |
| | $ | 4,325 |
| | $ | (4,162 | ) | | $ | (73 | ) | | $ | 90 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | |
| | | | | |
| | | |
Liabilities | | | | | | | |
| | | | | |
| | |
Commodity derivative contracts | $ | 573 |
| | $ | — |
| | $ | — |
| | $ | 573 |
| | $ | (560 | ) | | $ | (13 | ) | | $ | — |
| | $ | (47 | ) | $ | 4,468 |
| | $ | — |
| | $ | — |
| | $ | 4,468 |
| | $ | (4,162 | ) | | $ | (306 | ) | | $ | — |
| | $ | (13 | ) |
Environmental credit obligations | — |
| | 17 |
| | — |
| | 17 |
| | n/a |
| | n/a |
| | 17 |
| | n/a |
| — |
| | 43 |
| | — |
| | 43 |
| | n/a |
| | n/a |
| | 43 |
| | n/a |
|
Physical purchase contracts | — |
| | 6 |
| | — |
| | 6 |
| | n/a |
| | n/a |
| | 6 |
| | n/a |
| — |
| | 10 |
| | — |
| | 10 |
| | n/a |
| | n/a |
| | 10 |
| | n/a |
|
Foreign currency contracts | 20 |
| | — |
| | — |
| | 20 |
| | n/a |
| | n/a |
| | 20 |
| | n/a |
| 72 |
| | — |
| | — |
| | 72 |
| | n/a |
| | n/a |
| | 72 |
| | n/a |
|
Total | $ | 593 |
| | $ | 23 |
| | $ | — |
| | $ | 616 |
| | $ | (560 | ) | | $ | (13 | ) | | $ | 43 |
| |
| $ | 4,540 |
| | $ | 53 |
| | $ | — |
| | $ | 4,593 |
| | $ | (4,162 | ) | | $ | (306 | ) | | $ | 125 |
| |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | December 31, 2018 | December 31, 2019 |
| | | Total Gross Fair Value | | Effect of Counter- party Netting | | Effect of Cash Collateral Netting | | Net Carrying Value on Balance Sheet | | Cash Collateral Paid or Received Not Offset | | | Total Gross Fair Value | | Effect of Counter- party Netting | | Effect of Cash Collateral Netting | | Net Carrying Value on Balance Sheet | | Cash Collateral Paid or Received Not Offset |
| Fair Value Hierarchy | | Fair Value Hierarchy | |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | |
Assets: | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | |
Commodity derivative contracts | $ | 2,792 |
| | $ | — |
| | $ | — |
| | $ | 2,792 |
| | $ | (2,669 | ) | | $ | (34 | ) | | $ | 89 |
| | $ | — |
| $ | 617 |
| | $ | — |
| | $ | — |
| | $ | 617 |
| | $ | (612 | ) | | $ | — |
| | $ | 5 |
| | $ | — |
|
Foreign currency contracts | 4 |
| | — |
| | — |
| | 4 |
| | n/a |
| | n/a |
| | 4 |
| | n/a |
| 27 |
| | — |
| | — |
| | 27 |
| | n/a |
| | n/a |
| | 27 |
| | n/a |
|
Investments of certain benefit plans | 60 |
| | — |
| | 9 |
| | 69 |
| | n/a |
| | n/a |
| | 69 |
| | n/a |
| 65 |
| | — |
| | 9 |
| | 74 |
| | n/a |
| | n/a |
| | 74 |
| | n/a |
|
Total | $ | 2,856 |
| | $ | — |
| | $ | 9 |
| | $ | 2,865 |
| | $ | (2,669 | ) | | $ | (34 | ) | | $ | 162 |
| |
| $ | 709 |
| | $ | — |
| | $ | 9 |
| | $ | 718 |
| | $ | (612 | ) | | $ | — |
| | $ | 106 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Commodity derivative contracts | $ | 2,681 |
| | $ | — |
| | $ | — |
| | $ | 2,681 |
| | $ | (2,669 | ) | | $ | (12 | ) | | $ | — |
| | $ | (136 | ) | $ | 668 |
| | $ | — |
| | $ | — |
| | $ | 668 |
| | $ | (612 | ) | | $ | (56 | ) | | $ | — |
| | $ | (84 | ) |
Environmental credit obligations | — |
| | 13 |
| | — |
| | 13 |
| | n/a |
| | n/a |
| | 13 |
| | n/a |
| — |
| | 2 |
| | — |
| | 2 |
| | n/a |
| | n/a |
| | 2 |
| | n/a |
|
Physical purchase contracts | — |
| | 5 |
| | — |
| | 5 |
| | n/a |
| | n/a |
| | 5 |
| | n/a |
| — |
| | 3 |
| | — |
| | 3 |
| | n/a |
| | n/a |
| | 3 |
| | n/a |
|
Foreign currency contracts | 1 |
| | — |
| | — |
| | 1 |
| | n/a |
| | n/a |
| | 1 |
| | n/a |
| 10 |
| | — |
| | — |
| | 10 |
| | n/a |
| | n/a |
| | 10 |
| | n/a |
|
Total | $ | 2,682 |
| | $ | 18 |
| | $ | — |
| | $ | 2,700 |
| | $ | (2,669 | ) | | $ | (12 | ) | | $ | 19 |
| |
|
| $ | 678 |
| | $ | 5 |
| | $ | — |
| | $ | 683 |
| | $ | (612 | ) | | $ | (56 | ) | | $ | 15 |
| |
|
|
A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:
| |
• | Commodity derivative contracts consist primarily of exchange-traded futures, which are used to reduce the impact of price volatility on our results of operations and cash flows as discussed in Note 14. These contracts are measured at fair value using the market approach. Exchange-traded futures are valuedCommodity derivative contracts consist primarily of exchange-traded futures, which are used to reduce the impact of price volatility on our results of operations and cash flows as discussed in Note 15. These contracts are measured at fair value using a market approach based on quoted prices from the commodity exchange and are categorized in Level 1 of the fair value hierarchy. |
Physical purchase contracts represent the fair value of fixed-price corn purchase contracts. The fair values of these purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.
Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The plan assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The plan assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign currency contracts consist of foreign currency exchange and purchase contracts and foreign currency swap agreements related to our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of our operations. These contracts are valued based on quoted prices from theforeign currency exchange rates and are categorized in Level 1 of the fair value hierarchy.
| |
• | Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily Renewable Identification Numbers (RINs) in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California Global Warming Solutions Act (the California cap-and-trade system, also known as AB 32) and similar programs (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using thea market approach based on quoted prices from an independent pricing service. |
There were no transfers into or out of Level 3 for assets and liabilities held as of March 31, 20192020 and December 31, 20182019 that were measured at fair value on a recurring basis.
There was no significant activity during the three months ended March 31, 20192020 and 20182019 related to the fair value amounts categorized in Level 3 as of March 31, 20192020 and December 31, 2018.2019.
Nonrecurring Fair Value Measurements
There were no0 assets or liabilities that were measured at fair value on a nonrecurring basis as of March 31, 20192020 and December 31, 20182019.
Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the following table along with their associated fair values (in millions):
| | | | March 31, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
| Fair Value Hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Fair Value Hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | | | |
Financial assets | | | | | | | | | |
Cash and cash equivalents | Level 1 | | $ | 2,777 |
| | $ | 2,777 |
| | $ | 2,982 |
| | $ | 2,982 |
| Level 1 | | $ | 1,515 |
| | $ | 1,515 |
| | $ | 2,583 |
| | $ | 2,583 |
|
Financial liabilities: | | | | | | | | | |
Financial liabilities | | | | | | | | | |
Debt (excluding finance leases) | Level 2 | | 9,511 |
| | 10,617 |
| | 8,503 |
| | 8,986 |
| Level 2 | | 9,248 |
| | 9,261 |
| | 8,881 |
| | 10,583 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
14.15. | PRICE RISK MANAGEMENT ACTIVITIES |
General
We are exposed to market risks primarily related to the volatility in the price of commodities, foreign currency exchange rates, and the price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note 13)14), as summarized below under “Fair Values of Derivative Instruments,Instruments.” with changes in fair value recognized currently in income. The effect of these derivative instruments on our income and other comprehensive income (loss) is summarized below under “Effect of Derivative Instruments on Income.Income and Other Comprehensive Income (Loss).”
Risk Management Activities by Type of Risk
Commodity Price Risk
We are exposed to market risks related to the volatility in the price of crude oil, refined petroleum products (primarily gasoline and distillate),renewable diesel, grain (primarily corn), soybean oil,renewable diesel feedstocks, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, such as futures and options. Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.
We primarily use commodity derivative instruments as economic hedges, which are not designated as hedging instruments, and we use fair value and cash flow hedges from time to time. We had no commodity derivative instruments outstanding as of March 31, 2019 and 2018, and no activity during the three months ended March 31, 2019 and 2018 that were designated as fair value or cash floweconomic hedges.
Our objectives for holding economic hedges are to (i) manage price volatility in certain feedstock and refined petroleum product inventories and fixed-price purchase contracts, and (ii) lock in the priceentering into each type of forecasted feedstock, refined petroleum product, or natural gas purchases and refined petroleum product sales at existing market prices that we deem favorable.hedge is described below.
| |
• | Cash flow hedges – The objective of our cash flow hedges is to lock in the price of forecasted (i) feedstock, refined petroleum product, or natural gas purchases, or (ii) refined petroleum product or renewable diesel sales at existing market prices that we deem favorable. |
| |
• | Economic hedges – Our objectives for holding economic hedges are to (i) manage price volatility in certain feedstock and refined petroleum product inventories and fixed-price purchase contracts, and (ii) lock in the price of forecasted feedstock, refined petroleum product,or natural gas purchases, or refined petroleum product or renewable diesel sales at existing market prices that we deem favorable. |
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 2019,2020, we had the following outstanding commodity derivative instruments that were used as cash flow hedges and economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except corn contracts that are presented in thousands of bushels).
| | | | Notional Contract Volumes by Year of Maturity | Notional Contract Volumes by Year of Maturity |
Derivative Instrument | | 2019 | | 2020 | |
| | 2020 | | 2021 |
Derivatives designated as cash flow hedges | | | | |
Renewable diesel: | | | | |
Futures – long | | 1,627 |
| | — |
|
Futures – short | | 2,317 |
| | — |
|
| | | | |
Derivatives designated as economic hedges | | | | |
Crude oil and refined petroleum products: | | | | | | | |
Futures – long | | 123,087 |
| | 3,856 |
| 126,944 |
| | 56 |
|
Futures – short | | 130,923 |
| | 5,456 |
| 126,954 |
| | 56 |
|
Options – long | | 21,000 |
| | — |
| 800 |
| | — |
|
Options – short | | 21,000 |
| | — |
| 800 |
| | — |
|
Corn: | | | | | | | |
Futures – long | | 19,005 |
| | 1,275 |
| 52,160 |
| | — |
|
Futures – short | | 43,770 |
| | 3,515 |
| 64,335 |
| | 50 |
|
Physical contracts – long | | 23,726 |
| | 2,238 |
| 15,731 |
| | 549 |
|
Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions related to our international operations that are denominated in currencies other than the local (functional) currencies of our operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency contracts. These contracts are not designated as hedging instruments for accounting purposes and therefore are classified as economic hedges. As of March 31, 2019,2020, we had foreign currency contracts to purchase $418$220 million of U.S. dollars $1.7and $2.5 billion of U.S. dollar equivalent Canadian dollars, and $300 million of U.S. dollar equivalent pounds sterling. The majority ofdollars. Of these commitments, $1.2 billionmatured on or before April 30, 2019.24, 2020 and the remaining $1.5 billion will mature by June 15, 2020.
Environmental Compliance Program Price Risk
We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. Certain of these programs require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. The cost of meeting our obligations under these compliance programs was $91$112 million and $20691 million for the three months ended March 31, 20192020 and 2018,2019, respectively. These amounts are reflected in cost of materials and other.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Values of Derivative Instruments
The following tables provide information about the fair values of our derivative instruments as of March 31, 20192020 and December 31, 20182019 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 1314 for additional information related to the fair values of our derivative instruments.
As indicated in Note 1314, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The following tables, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.
| | | Balance Sheet Location | | March 31, 2019 | | December 31, 2018 | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
| | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
Derivatives not designated as hedging instruments: | | | | | | | | | |
Derivatives designated as hedging instruments | | | | | | | | | |
Commodity contracts | | Receivables, net | | $ | 86 |
| | $ | 45 |
| | $ | 9 |
| | $ | 20 |
|
| | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | |
Commodity contracts | Receivables, net | | $ | 638 |
| | $ | 573 |
| | $ | 2,792 |
| | $ | 2,681 |
| Receivables, net | | $ | 4,166 |
| | $ | 4,423 |
| | $ | 608 |
| | $ | 648 |
|
Physical purchase contracts | Inventories | | — |
| | 6 |
| | — |
| | 5 |
| Inventories | | — |
| | 10 |
| | — |
| | 3 |
|
Foreign currency contracts | Receivables, net | | 3 |
| | — |
| | 4 |
| | — |
| Receivables, net | | 2 |
| | — |
| | 27 |
| | — |
|
Foreign currency contracts | Accrued expenses | | — |
| | 20 |
| | — |
| | 1 |
| Accrued expenses | | — |
| | 72 |
| | — |
| | 10 |
|
Total | | $ | 641 |
| | $ | 599 |
| | $ | 2,796 |
| | $ | 2,687 |
| | $ | 4,168 |
| | $ | 4,505 |
| | $ | 635 |
| | $ | 661 |
|
Market Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.
Effect of Derivative Instruments on Income and Other Comprehensive Income (Loss)
The following table provides information about the gain or loss recognized in income and other comprehensive income (loss) due to fair value adjustments of our cash flow hedges (in millions).
|
| | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Location of Gain (Loss) Recognized in Income on Derivatives | | Three Months Ended March 31, |
2020 | | 2019 |
Commodity contracts: | | | | | | |
Gain recognized in other comprehensive income (loss) on derivatives | | | | $ | 55 |
| | $ | — |
|
Gain reclassified from accumulated other comprehensive loss into income | | Revenues | | 26 |
| | — |
|
For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three months ended March 31, 2020 and 2019. For the three months ended March 31, 2020, cash flow hedges primarily related to forward sales of renewable diesel and we estimate that $18 million of the deferred after-tax gain as of March 31, 2020 will be reclassified into revenuesover the next 12 months as a result of hedged transactions that are forecasted to occur. For the three months ended March 31, 2020 and 2019, there were no amounts reclassified from accumulated other comprehensive loss into income as a result of the discontinuance of cash flow hedge accounting. The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2020 and 2019 are described in Note 7.
The following table provides information about the gain (loss) recognized in income on our derivative instruments of our economic hedges and our foreign currency hedges and the line items in the statements of income in which such lossesgains (losses) are reflected (in millions).
| | | | Location of Gain (Loss) Recognized in Income on Derivatives | | Three Months Ended March 31, | |
2019 | | 2018 | |
Derivatives not designated as hedging instruments: | | | | | |
Derivatives Not Designated as Hedging Instruments | | | Location of Gain (Loss) Recognized in Income on Derivatives | | Three Months Ended March 31, |
| 2020 | | 2019 |
Commodity contracts | | | Revenues | | $ | (8 | ) | | $ | — |
|
Commodity contracts | | | Cost of materials and other | | (152 | ) | | (71 | ) |
Commodity contracts | | Cost of materials and other | | $ | (71 | ) | | $ | (12 | ) | | Operating expenses (excluding depreciation and amortization expense) | | (2 | ) | | — |
|
Foreign currency contracts | | Cost of materials and other | | (9 | ) | | (3 | ) | | Cost of materials and other | | 49 |
| | (9 | ) |
Foreign currency contracts | | Other income, net | | 7 |
| | — |
| | Other income, net | | (165 | ) | | 7 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
15. | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
In connection with the completion of the Merger Transaction as described in Note 2, Valero Energy Corporation, the parent company, entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment, when due, of the following debt issued by Valero Energy Partners LP, an indirect wholly owned subsidiary of Valero Energy Corporation, that was outstanding as of March 31, 2019:
•4.375 percent Senior Notes due December 15, 2026, and
•4.5 percent Senior Notes due March 15, 2028.
The following condensed consolidating financial information is provided as an alternative to providing separate financial statements for Valero Energy Partners LP, which has no independent assets or operations. The financial position, results of operations, and cash flows of Valero Energy Partners LP’s wholly owned subsidiaries are included in “Other Non-Guarantor Subsidiaries.” The accounts for all companies reflected herein are presented using the equity method of accounting for investments in subsidiaries.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Balance Sheet
March 31, 2019
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
ASSETS |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 1,167 |
| | $ | — |
| | $ | 1,610 |
| | $ | — |
| | $ | 2,777 |
|
Receivables, net | — |
| | — |
| | 8,289 |
| | — |
| | 8,289 |
|
Receivables from affiliates | 4,277 |
| | — |
| | 11,315 |
| | (15,592 | ) | | — |
|
Inventories | — |
| | — |
| | 6,554 |
| | — |
| | 6,554 |
|
Prepaid expenses and other | 451 |
| | — |
| | 409 |
| | — |
| | 860 |
|
Total current assets | 5,895 |
| | — |
| | 28,177 |
| | (15,592 | ) | | 18,480 |
|
Property, plant and equipment, at cost | — |
| | — |
| | 42,388 |
| | — |
| | 42,388 |
|
Accumulated depreciation | — |
| | — |
| | (13,980 | ) | | — |
| | (13,980 | ) |
Property, plant and equipment, net | — |
| | — |
| | 28,408 |
| | — |
| | 28,408 |
|
Investment in affiliates | 35,820 |
| | 2,348 |
| | 392 |
| | (38,560 | ) | | — |
|
Deferred charges and other assets, net | 513 |
| | — |
| | 4,694 |
| | — |
| | 5,207 |
|
Total assets | $ | 42,228 |
|
| $ | 2,348 |
|
| $ | 61,671 |
|
| $ | (54,152 | ) |
| $ | 52,095 |
|
LIABILITIES AND EQUITY |
Current liabilities: | | | | | | | | | |
Current portion of debt and finance lease obligations | $ | 849 |
| | $ | — |
| | $ | 261 |
| | $ | — |
| | $ | 1,110 |
|
Accounts payable | 2 |
| | — |
| | 10,003 |
| | — |
| | 10,005 |
|
Accounts payable to affiliates | 10,358 |
| | 957 |
| | 4,277 |
| | (15,592 | ) | | — |
|
Accrued expenses | 152 |
| | 7 |
| | 613 |
| | — |
| | 772 |
|
Taxes other than income taxes payable | — |
| | — |
| | 961 |
| | — |
| | 961 |
|
Income taxes payable | 34 |
| | — |
| | 31 |
| | — |
| | 65 |
|
Total current liabilities | 11,395 |
| | 964 |
| | 16,146 |
| | (15,592 | ) | | 12,913 |
|
Debt and finance lease obligations, less current portion | 7,091 |
| | 990 |
| | 925 |
| | — |
| | 9,006 |
|
Deferred income tax liabilities | — |
| | 2 |
| | 4,865 |
| | — |
| | 4,867 |
|
Other long-term liabilities | 1,963 |
| | — |
| | 1,567 |
| | — |
| | 3,530 |
|
Equity: | | | | | | | | |
|
|
Stockholders’ equity: | | | | | | | | |
Common stock | 7 |
| | — |
| | 1 |
| | (1 | ) | | 7 |
|
Additional paid-in capital | 6,802 |
| | — |
| | 9,754 |
| | (9,754 | ) | | 6,802 |
|
Treasury stock, at cost | (14,958 | ) | | — |
| | — |
| | — |
| | (14,958 | ) |
Retained earnings | 30,810 |
| | — |
| | 28,911 |
| | (28,911 | ) | | 30,810 |
|
Partners’ equity | — |
| | 392 |
| | — |
| | (392 | ) | | — |
|
Accumulated other comprehensive loss | (1,352 | ) | | — |
| | (968 | ) | | 968 |
| | (1,352 | ) |
Total stockholders’ equity | 21,309 |
| | 392 |
| | 37,698 |
| | (38,090 | ) | | 21,309 |
|
Noncontrolling interests | 470 |
| | — |
| | 470 |
| | (470 | ) | | 470 |
|
Total equity | 21,779 |
| | 392 |
| | 38,168 |
| | (38,560 | ) | | 21,779 |
|
Total liabilities and equity | $ | 42,228 |
| | $ | 2,348 |
| | $ | 61,671 |
| | $ | (54,152 | ) | | $ | 52,095 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Balance Sheet
December 31, 2018
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
ASSETS |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 291 |
| | $ | 152 |
| | $ | 2,539 |
| | $ | — |
| | $ | 2,982 |
|
Receivables, net | — |
| | — |
| | 7,345 |
| | — |
| | 7,345 |
|
Receivables from affiliates | 4,369 |
| | 2 |
| | 11,025 |
| | (15,396 | ) | | — |
|
Inventories | — |
| | — |
| | 6,532 |
| | — |
| | 6,532 |
|
Prepaid expenses and other | 466 |
| | — |
| | 355 |
| | (5 | ) | | 816 |
|
Total current assets | 5,126 |
| | 154 |
| | 27,796 |
| | (15,401 | ) | | 17,675 |
|
Property, plant and equipment, at cost | — |
| | — |
| | 42,473 |
| | — |
| | 42,473 |
|
Accumulated depreciation | — |
| | — |
| | (13,625 | ) | | — |
| | (13,625 | ) |
Property, plant and equipment, net | — |
| | — |
| | 28,848 |
| | — |
| | 28,848 |
|
Investment in affiliates | 36,101 |
| | 2,267 |
| | 299 |
| | (38,667 | ) | | — |
|
Long-term notes receivable from affiliates | 285 |
| | — |
| | — |
| | (285 | ) | | — |
|
Deferred charges and other assets, net | 572 |
| | 1 |
| | 3,059 |
| | — |
| | 3,632 |
|
Total assets | $ | 42,084 |
| | $ | 2,422 |
| | $ | 60,002 |
| | $ | (54,353 | ) | | $ | 50,155 |
|
LIABILITIES AND EQUITY |
Current liabilities: | | | | | | | | | |
Current portion of debt and finance lease obligations | $ | — |
| | $ | — |
| | $ | 238 |
| | $ | — |
| | $ | 238 |
|
Accounts payable | 14 |
| | — |
| | 8,580 |
| | — |
| | 8,594 |
|
Accounts payable to affiliates | 10,188 |
| | 837 |
| | 4,370 |
| | (15,395 | ) | | — |
|
Accrued expenses | 155 |
| | 7 |
| | 468 |
| | — |
| | 630 |
|
Accrued expenses to affiliates | — |
| | 1 |
| | — |
| | (1 | ) | | — |
|
Taxes other than income taxes payable | — |
| | — |
| | 1,213 |
| | — |
| | 1,213 |
|
Income taxes payable | 53 |
| | 1 |
| | — |
| | (5 | ) | | 49 |
|
Total current liabilities | 10,410 |
| | 846 |
| | 14,869 |
| | (15,401 | ) | | 10,724 |
|
Debt and finance lease obligations, less current portion | 6,955 |
| | 990 |
| | 926 |
| | — |
| | 8,871 |
|
Long-term notes payable to affiliates | — |
| | 285 |
| | — |
| | (285 | ) | | — |
|
Deferred income taxes | — |
| | 2 |
| | 4,960 |
| | — |
| | 4,962 |
|
Other long-term liabilities | 1,988 |
| | — |
| | 879 |
| | — |
| | 2,867 |
|
Equity: | | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock | 7 |
| | — |
| | 1 |
| | (1 | ) | | 7 |
|
Additional paid-in capital | 7,048 |
| | — |
| | 9,754 |
| | (9,754 | ) | | 7,048 |
|
Treasury stock, at cost | (14,925 | ) | | — |
| | — |
| | — |
| | (14,925 | ) |
Retained earnings | 31,044 |
| | — |
| | 28,646 |
| | (28,646 | ) | | 31,044 |
|
Partners’ equity | — |
| | 299 |
| | — |
| | (299 | ) | | — |
|
Accumulated other comprehensive loss | (1,507 | ) | | — |
| | (1,097 | ) | | 1,097 |
| | (1,507 | ) |
Total stockholders’ equity | 21,667 |
| | 299 |
| | 37,304 |
| | (37,603 | ) | | 21,667 |
|
Noncontrolling interests | 1,064 |
| | — |
| | 1,064 |
| | (1,064 | ) | | 1,064 |
|
Total equity | 22,731 |
| | 299 |
| | 38,368 |
| | (38,667 | ) | | 22,731 |
|
Total liabilities and equity | $ | 42,084 |
| | $ | 2,422 |
| | $ | 60,002 |
| | $ | (54,353 | ) | | $ | 50,155 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Income
Three Months Ended March 31, 2019
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Revenues | $ | — |
| | $ | — |
| | $ | 24,263 |
| | $ | — |
| | $ | 24,263 |
|
Cost of sales: | | | | | | | | | |
Cost of materials and other | — |
| | — |
| | 21,978 |
| | — |
| | 21,978 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | — |
| | — |
| | 1,215 |
| | — |
| | 1,215 |
|
Depreciation and amortization expense | — |
| | — |
| | 537 |
| | — |
| | 537 |
|
Total cost of sales | — |
| | — |
| | 23,730 |
| | — |
| | 23,730 |
|
Other operating expenses | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
General and administrative expenses (excluding depreciation and amortization expense reflected below) | 1 |
| | — |
| | 208 |
| | — |
| | 209 |
|
Depreciation and amortization expense | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
Operating income (loss) | (1 | ) |
| — |
|
| 309 |
|
| — |
|
| 308 |
|
Equity in earnings of subsidiaries | 264 |
| | 82 |
| | 90 |
| | (436 | ) | | — |
|
Other income, net | 54 |
| | — |
| | 147 |
| | (179 | ) | | 22 |
|
Interest and debt expense, net of capitalized interest | (232 | ) | | (15 | ) | | (44 | ) | | 179 |
| | (112 | ) |
Income before income tax expense | 85 |
| | 67 |
| | 502 |
| | (436 | ) | | 218 |
|
Income tax expense (benefit) | (82 | ) | | — |
| | 133 |
| | — |
| | 51 |
|
Net income | 167 |
| | 67 |
| | 369 |
| | (436 | ) | | 167 |
|
Less: Net income attributable to noncontrolling interests | 26 |
| | — |
| | 23 |
| | (23 | ) | | 26 |
|
Net income attributable to stockholders | $ | 141 |
| | $ | 67 |
| | $ | 346 |
| | $ | (413 | ) | | $ | 141 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Income
Three Months Ended March 31, 2018
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Revenues | $ | — |
| | $ | — |
| | $ | 26,439 |
| | $ | — |
| | $ | 26,439 |
|
Cost of sales: | | | | | | | | | |
Cost of materials and other | — |
| | — |
| | 23,756 |
| | — |
| | 23,756 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | — |
| | — |
| | 1,136 |
| | — |
| | 1,136 |
|
Depreciation and amortization expense | — |
| | — |
| | 485 |
| | — |
| | 485 |
|
Total cost of sales | — |
| | — |
| | 25,377 |
| | — |
| | 25,377 |
|
Other operating expenses | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
General and administrative expenses (excluding depreciation and amortization expense reflected below) | 1 |
| | — |
| | 237 |
| | — |
| | 238 |
|
Depreciation and amortization expense | — |
| | — |
| | 13 |
| | — |
| | 13 |
|
Operating income (loss) | (1 | ) |
| — |
|
| 802 |
|
| — |
| | 801 |
|
Equity in earnings of subsidiaries | 720 |
| | 78 |
| | 163 |
| | (961 | ) | | — |
|
Other income, net | 69 |
| | — |
| | 151 |
| | (169 | ) | | 51 |
|
Interest and debt expense, net of capitalized interest | (218 | ) | | (12 | ) | | (60 | ) | | 169 |
| | (121 | ) |
Income before income tax expense | 570 |
| | 66 |
| | 1,056 |
| | (961 | ) | | 731 |
|
Income tax expense (benefit) | (12 | ) | | — |
| | 161 |
| | — |
| | 149 |
|
Net income | 582 |
|
| 66 |
|
| 895 |
|
| (961 | ) |
| 582 |
|
Less: Net income attributable to noncontrolling interests | 113 |
| | — |
| | 97 |
| | (97 | ) | | 113 |
|
Net income attributable to stockholders | $ | 469 |
|
| $ | 66 |
|
| $ | 798 |
|
| $ | (864 | ) |
| $ | 469 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2019
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net income | $ | 167 |
| | $ | 67 |
| | $ | 369 |
| | $ | (436 | ) | | $ | 167 |
|
Other comprehensive income: | | | | | | | | | |
Foreign currency translation adjustment | 155 |
| | — |
| | 159 |
| | (159 | ) | | 155 |
|
Net gain on pension and other postretirement benefits | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
Other comprehensive income before income tax expense | 158 |
| | — |
| | 159 |
| | (159 | ) | | 158 |
|
Income tax expense related to items of other comprehensive income | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Other comprehensive income | 157 |
| | — |
| | 159 |
| | (159 | ) | | 157 |
|
Comprehensive income | 324 |
| | 67 |
| | 528 |
| | (595 | ) | | 324 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | 28 |
| | — |
| | 28 |
|
Comprehensive income attributable to stockholders | $ | 324 |
| | $ | 67 |
| | $ | 500 |
| | $ | (595 | ) | | $ | 296 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Comprehensive Income
Three Months Ended March 31, 2018
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net income | $ | 582 |
| | $ | 66 |
| | $ | 895 |
| | $ | (961 | ) | | $ | 582 |
|
Other comprehensive income: | | | | | | | | | |
Foreign currency translation adjustment | 45 |
| | — |
| | 45 |
| | (45 | ) | | 45 |
|
Net gain on pension and other postretirement benefits | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
Other comprehensive income before income tax expense | 53 |
| | — |
| | 45 |
| | (45 | ) | | 53 |
|
Income tax expense related to items of other comprehensive income | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Other comprehensive income | 51 |
| | — |
| | 45 |
| | (45 | ) | | 51 |
|
Comprehensive income | 633 |
|
| 66 |
|
| 940 |
|
| (1,006 | ) |
| 633 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | 116 |
| | — |
| | 116 |
|
Comprehensive income attributable to stockholders | $ | 633 |
| | $ | 66 |
| | $ | 824 |
| | $ | (1,006 | ) | | $ | 517 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2019
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net cash provided by (used in) operating activities | $ | (21 | ) | | $ | (14 | ) | | $ | 1,069 |
| | $ | (157 | ) | | $ | 877 |
|
Cash flows from investing activities: | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (444 | ) | | — |
| | (444 | ) |
Deferred turnaround and catalyst costs | — |
| | — |
| | (219 | ) | | — |
| | (219 | ) |
Investments in joint ventures | — |
| | — |
| | (63 | ) | | — |
| | (63 | ) |
Capital expenditures of certain VIEs | — |
| | — |
| | (19 | ) | | — |
| | (19 | ) |
Acquisitions of undivided interests | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Intercompany investing activities | 307 |
| | 2 |
| | (148 | ) | | (161 | ) | | — |
|
Other investing activities, net | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Net cash provided by (used in) investing activities | 307 |
| | 2 |
| | (895 | ) | | (161 | ) | | (747 | ) |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from debt issuances and borrowings (excluding borrowings of certain VIEs) | 992 |
| | — |
| | 900 |
| | — |
| | 1,892 |
|
Proceeds from borrowings of certain VIEs | — |
| | — |
| | 23 |
| | — |
| | 23 |
|
Repayments of debt and finance lease obligations | — |
| | — |
| | (907 | ) | | — |
| | (907 | ) |
Intercompany financing activities | 27 |
| | (64 | ) | | (124 | ) | | 161 |
| | — |
|
Purchases of common stock for treasury | (36 | ) | | — |
| | — |
| | — |
| | (36 | ) |
Common stock dividends | (375 | ) | | — |
| | (81 | ) | | 81 |
| | (375 | ) |
Acquisition of VLP publicly held common units | — |
| | — |
| | (950 | ) | | — |
| | (950 | ) |
Distributions to unitholders of VLP | — |
| | (76 | ) | | — |
| | 76 |
| | — |
|
Other financing activities, net | (18 | ) | | — |
| | (7 | ) | | — |
| | (25 | ) |
Net cash provided by (used in) financing activities | 590 |
| | (140 | ) | | (1,146 | ) | | 318 |
| | (378 | ) |
Effect of foreign exchange rate changes on cash | — |
| | — |
| | 43 |
| | — |
| | 43 |
|
Net increase (decrease) in cash and cash equivalents | 876 |
|
| (152 | ) |
| (929 | ) |
| — |
| | (205 | ) |
Cash and cash equivalents at beginning of period | 291 |
| | 152 |
| | 2,539 |
| | — |
| | 2,982 |
|
Cash and cash equivalents at end of period | $ | 1,167 |
| | $ | — |
| | $ | 1,610 |
| | $ | — |
| | $ | 2,777 |
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2018
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation | | Valero Energy Partners LP | | Other Non- Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net cash provided by (used in) operating activities | $ | (356 | ) | | $ | (10 | ) | | $ | 560 |
| | $ | (56 | ) | | $ | 138 |
|
Cash flows from investing activities: | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (356 | ) | | — |
| | (356 | ) |
Deferred turnaround and catalyst costs | — |
| | — |
| | (220 | ) | | — |
| | (220 | ) |
Investments in joint ventures | — |
| | — |
| | (55 | ) | | — |
| | (55 | ) |
Capital expenditures of certain VIEs | — |
| | — |
| | (28 | ) | | — |
| | (28 | ) |
Acquisitions of undivided interests | — |
| | — |
| | (85 | ) | | — |
| | (85 | ) |
Intercompany investing activities | 163 |
| | 92 |
| | (488 | ) | | 233 |
| | — |
|
Other investing activities, net | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
Net cash provided by (used in) investing activities | 163 |
| | 92 |
| | (1,240 | ) | | 233 |
| | (752 | ) |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from debt issuances and borrowings | — |
| | 498 |
| | — |
| | — |
| | 498 |
|
Repayments of debt and finance lease obligations | — |
| | (410 | ) | | (5 | ) | | — |
| | (415 | ) |
Intercompany financing activities | 491 |
| | (88 | ) | | (170 | ) | | (233 | ) | | — |
|
Purchases of common stock for treasury | (320 | ) | | — |
| | — |
| | — |
| | (320 | ) |
Common stock dividends | (345 | ) | | — |
| | (17 | ) | | 17 |
| | (345 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
Distributions to unitholders of VLP | — |
| | (50 | ) | | — |
| | 39 |
| | (11 | ) |
Other financing activities, net | 5 |
| | (3 | ) | | (14 | ) | | — |
| | (12 | ) |
Net cash used in financing activities | (169 | ) | | (53 | ) | | (174 | ) | | (177 | ) | | (573 | ) |
Effect of foreign exchange rate changes on cash | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Net increase (decrease) in cash and cash equivalents | (362 | ) |
| 29 |
|
| (859 | ) |
| — |
| | (1,192 | ) |
Cash and cash equivalents at beginning of period | 1,746 |
| | 42 |
| | 4,062 |
| | — |
| | 5,850 |
|
Cash and cash equivalents at end of period | $ | 1,384 |
| | $ | 71 |
| | $ | 3,203 |
| | $ | — |
| | $ | 4,658 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q, including without limitation our disclosures below under the heading “OVERVIEW AND OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “scheduled,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “will,” “may,” and similar expressions.
These forward-looking statements include, among other things, statements regarding:
the effect, impact, potential duration or other implications of the recent outbreak of COVID-19 and global crude oil production levels, and any expectations we may have with respect thereto;
future refining segment margins, including gasoline and distillate margins;
future ethanolrenewable diesel segment margins;
future renewable dieselethanol segment margins;
expectations regarding feedstock costs, including crude oil differentials, and operating expenses;
anticipated levels of crude oil and refined petroleum product inventories;inventories and storage capacity;
our anticipated level of capital investments, including deferred costs for refinery turnaroundsturnaround and catalyst cost expenditures, capital expenditures for environmental and other purposes, and joint venture investments, and the effect of those capital investments on our results of operations;
anticipated trends in the supply of and demand for crude oil and other feedstocks and refined petroleum products in the regions where we operate, as well as globally;
expectations regarding environmental, tax, and other regulatory initiatives; and
the effect of general economic and other conditions on refining, ethanol,renewable diesel, and renewable dieselethanol industry fundamentals.
We based our forward-looking statements on our current expectations, estimates, and projections about ourselves and our industry. We caution that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:
demand for, and supplies of, refined petroleum products (such as gasoline, diesel, jet fuel, and petrochemicals), renewable diesel, and ethanol;
demand for, and supplies of, crude oil and other feedstocks;
the effects of public health threats, pandemics and epidemics, such as the recent outbreak of COVID-19, and the adverse impacts thereof on our business, financial condition, results of operations, and liquidity, including, but not limited to, our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand for our products, and industry demand generally, margins, production and throughput capacity, utilization, inventory value, cash position, taxes, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally;
acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined petroleum products or receive feedstocks;
political and economic conditions in nations that produce crude oil or consume refined petroleum products;
demand for, and supplies of, refined petroleum products (such as gasoline, diesel, jet fuel, and petrochemicals), ethanol, and renewable diesel;
demand for, and supplies of, crude oil and other feedstocks;
the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree on and to maintain crude oil price and production controls;
the level of consumer demand, including seasonal fluctuations;
refinery overcapacity or undercapacity;
our ability to successfully integrate any acquired businesses into our operations;
the actions taken by competitors, including both pricing and adjustments to refining capacity in response to market conditions;
the level of competitors’ imports into markets that we supply;
accidents, unscheduled shutdowns, or other catastrophes affecting our refineries, machinery, pipelines, equipment, and information systems, or those of our suppliers or customers;
changes in the cost or availability of transportation or storage capacity for feedstocks and refined petroleum products;
the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;
the levels of government subsidies for alternative fuels;
the volatility in the market price of biofuel credits (primarily RINs needed to comply with the U.S. federal Renewable Fuel Standard) and GHG emission credits needed to comply with the requirements of various GHG emission programs;
delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;
earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil, grain and other feedstocks, refined petroleum products, ethanol,renewable diesel, and renewable diesel;ethanol;
rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by governmental authorities, including tariffs and tax and environmental regulations, such as those implemented under the California cap-and-trade system (also known as AB 32) and similar programs, and the U.S. EPA’sEnvironmental Protection Agency’s regulation of GHGs, which may adversely affect our business or operations;
changes in the credit ratings assigned to our debt securities and trade credit;
changes in currency exchange rates, including the value of the Canadian dollar, the pound sterling, the euro, the Mexican peso, and the Peruvian sol relative to the U.S. dollar;
overall economic conditions, including the stability and liquidity of financial markets; and
other factors generally described in the “Risk Factors” section included in our annual report on Form 10-K for the year ended December 31, 20182019 that is incorporated by reference herein.herein, as those factors are amended or supplemented as set forth in the “RISK FACTORS” section included in ITEM 1A, “RISK FACTORS” in this Form 10-Q.
Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
NON-GAAP FINANCIAL MEASURES
The discussions in “OVERVIEW AND OUTLOOK” and “RESULTS OF OPERATIONS” below include references to financial measures that are not defined under U.S. GAAP. These non-GAAP financial measures include adjusted net income attributable to Valero stockholders, adjusted operating income (including adjusted operating income for each of our reportable segments, as applicable), and refining, ethanol,renewable diesel, and renewable dieselethanol segment margin. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods. See the accompanying financial tables in “RESULTS OF OPERATIONS” and note (c) to the accompanying tablesbeginning on page 41 for reconciliations of these non-GAAP financial measures to thetheir most directly comparable U.S. GAAP financial measures. Also in note (c),
we disclose the reasons why we believe our use of the non-GAAP financial measures provides useful information.
OVERVIEW AND OUTLOOK
Overview
Business Operations Update
The recent outbreak of COVID-19 and its development into a pandemic in March 2020 has resulted in significant economic disruption globally, including in North America and Europe, the primary geographic areas where we operate. Governmental authorities around the world have taken actions, such as stay-at-home orders and other social distancing measures, to prevent the spread of COVID-19 that has restricted travel, public gatherings, and the overall level of individual movement and in-person interaction across the globe.
This has, in turn, significantly reduced global economic activity and negatively impacted many businesses. Airlines have dramatically reduced flights and motor vehicle usage has significantly declined at a time when seasonal driving patterns typically result in an increase of consumer demand for gasoline. As a result, there has also been a decline in the demand for, and thus also the market prices of, crude oil, and most of our products, particularly gasoline, jet fuel, and ethanol. In addition, global crude oil production levels have not declined despite lower demand and storage capacity constraints for crude oil and refined products, which has exacerbated the decline in crude oil prices and has contributed to an increase in crude oil price volatility.
The decrease in the demand for refined petroleum products coupled with the decline in the price of crude oil has resulted in a significant decrease in the price of refined petroleum products manufactured by our refining segment. For example, the price of gasoline(a) in the U.S. Gulf Coast region where eight of our 15 refineries are located was $68.82 per barrel at the beginning of 2020, fell to $58.84 per barrel by the beginning of March, and was $17.65 per barrel at the end of March. This represents a 74 percent decline during the first quarter with most of that decline occurring in the latter half of March as travel and related restrictions started to impact demand for gasoline and as crude oil prices declined. Another example is the price of diesel(b) in the U.S. Gulf Coast region, which was $81.71 per barrel at the beginning of 2020, fell to $62.10 per barrel by the beginning of March, and was $39.18 per barrel at the end of March. This represents a 52 percent decline during the first quarter. The decrease in the price of diesel was not as significant as the decrease in the price of gasoline because it is the primary fuel used by industry and essential businesses, including the critical logistics infrastructure to move and transport goods produced by those businesses. On April 28, 2020, the price of gasoline(a) had improved to $22.74 per barrel, but the price of diesel(b) had declined to $23.21 per barrel as a result of decreased demand.
The price of ethanol manufactured by our ethanol segment has also decreased due to a decline in demand. Because ethanol is primarily blended into gasoline, ethanol demand has declined along with the decline in the demand for gasoline. Demand for renewable diesel is consistent with the demand for diesel as a whole; therefore, our renewable diesel segment has not been impacted as significantly as our refining and ethanol segments.
Prices for the products we sell and the feedstocks we purchase impact our revenues, cost of sales, operating income, and liquidity. In addition, a decline in the market prices of products and feedstocks below their carrying values in our inventory results in a writedown in the value of our inventories. For the first quarter of 2020, we generated an operating loss of $2.3 billion, which includes a $2.5 billion loss in the value of our inventories. Our operating results for the first quarter of 2020, including operating results by segment, are described in the summary below and detailed descriptions can be found under “RESULTS OF OPERATIONS” on pages 38 through 48.
Our liquidity has also been impacted by the decline in the market prices for our products because the amount of cash generated by our product sales has declined more rapidly than the amount of cash used to pay for our crude oil purchases. While this relationship is not abnormal or unusual in our business where daily product sales follow the market prices on that day, the negative impact on our cash position is more significant when the market prices decline rapidly as they did in the latter half of March. For the first quarter of 2020, net cash used by our operating activities was $49 million, which was negatively impacted by an $825 million use of cash(c) as a result of rapidly falling market prices. Overall, our cash and cash equivalents declined by $1.1 billion during the first quarter of 2020, from $2.6 billion as of December 31, 2019 to $1.5 billion as of March 31, 2020. In addition to the net use of cash by our operating activities, we invested $705 million in our business and returned $548 million to our stockholders through dividends and purchases of our common stock. Even though our cash and cash equivalents on hand declined during the first quarter of 2020, we ended the quarter with $6.3 billion of liquidity(d). A summary of our cash flows is presented on page 50, and a description of our cash flows and other matters impacting our liquidity and capital resources, including measures we have taken or are considering to take, can be found under “LIQUIDITY AND CAPITAL RESOURCES” on pages 49 through 52.
We are actively responding to the impacts from these matters on our business. We have reduced the amount of crude oil processed at most of our refineries in response to the decreased demand for our products, we have temporarily idled various gasoline-making units at certain of our refineries to further limit gasoline production, and we have taken measures to reduce jet fuel production. Eight of our ethanol plants are temporarily idled, and we reduced the amount of ethanol produced at our remaining six ethanol plants to address the decreased demand for ethanol. In addition to these measures, we have addressed our liquidity as outlined below:
| |
• | We deferred projects representing approximately $400 million of capital investments that we had expected to make in 2020 related to our refining and ethanol segments. |
| |
• | We deferred approximately $100 million of income and indirect (e.g., value-added taxes (VAT) and motor fuel taxes) tax payments due in the first quarter of 2020,and we plan, to the extent possible, to defer additional income and indirect tax payments due in the second quarter of 2020. These deferrals have been provided to taxpayers under new legislation, such as the CARES Act in the U.S., and by various taxing authorities under existing legislation. Some of the deferred payments will be due in the third quarter of 2020, with the majority of the remaining amount due in 2021. |
We have not purchased any shares of our common stock under our stock purchase program since mid-March 2020, and we will evaluate the timing of repurchases when appropriate. We have no obligation to make purchases under our stock purchase program.
| |
• | We entered into a364-day Revolving Credit Facility on April 13, 2020 with an aggregate principal amount of up to $875 million as described in Note 6 of Condensed Notes to Consolidated Financial Statements. |
| |
• | We completed a $1.5 billion public debt offering on April 16, 2020 and issued $850 million of 2.700 percent Senior Notes due April 15, 2023 and $650 million of 2.850 percent Senior Notes due April 15, 2025, as described in Note 6 of Condensed Notes to Consolidated Financial Statements. |
Many uncertainties remain with respect to COVID-19, including its resulting economic effects, and we are unable to predict the ultimate economic impacts from COVID-19 on our business and how quickly national economies can recover once the pandemic subsides. However, the adverse impact of the economic effects on our company have been and will likely continue to be significant. We believe we have proactively addressed many of the known impacts of COVID-19 to the extent possible and we will strive to continue to do so, but there can be no assurance that these or other measures will be fully effective.
____________________
| |
(a) | Gasoline prices quoted represent the price of U.S. Gulf Coast conventional blendstock of oxygenate blending gasoline. |
| |
(b) | Diesel prices quoted represent the price of U.S. Gulf Coast ultra-low sulfur diesel. |
| |
(c) | Represents the net cash flow change in “receivables, net” and accounts payable during the first quarter of 2020. See Note 13 of Condensed Notes to Consolidated Financial Statements. |
| |
(d) | See the components of our liquidity as of March 31, 2020 in the table on page 49 under “LIQUIDITY AND CAPITAL RESOURCES—Overview.” |
First Quarter Results
For the first quarter of 2020, we reported a net loss attributable to Valero stockholders of $1.9 billion compared to net income attributable to Valero stockholders of $141 million compared to $469 million for the first quarter of 2018,2019, which represents a decrease of $328 million.$2.0 billion. This decrease is primarily due to lower operating income of $2.6 billion, partially offset by a $415$667 million decrease in net income partially offset by an $87 million decrease in net income attributable to noncontrolling interests.taxes. The decrease in netoperating income attributable to noncontrolling interests is primarily due to a $2.5 billion loss in the recognitionvalue of a blender’s tax creditour inventory.
While our operating income decreased by $2.6 billion in the first quarter of 2018 of which $80 million is attributable to the holder of the noncontrolling interest, as described in note (a) to the accompanying tables. The decrease in net income was primarily driven by a decrease in operating income between the periods, net of the resulting decrease in income tax expense, as described below.
Operating income for the first quarter of 2019 was $308 million compared to $801 million for the first quarter of 2018, which represents a decrease of $493 million. Excluding the adjustments to operating income reflected in the tables on page 47, adjusted operating income decreased $383 million in the first quarter of 20192020 compared to the first quarter of 2018.2019, adjusted operating income only decreased by $120 million. Adjusted operating income excludes the adjustments reflected in the table in note (c) on page 44.
The $383$120 million decrease in adjusted operating income is primarily due to the following:
| |
• | Refining segment. Refining segment adjusted operating income decreased by $330$157 million primarily due to lower gasolineweaker discounts on crude oils and a decrease in distillate margins, partially offset by higher crude oil discounts and lower cost of biofuel credits.improved gasoline margins. This is more fully described on pages 53 through 55. |
| |
• | Ethanol segment. Ethanol segment operating income decreased by $42 million primarily due to lower ethanol prices coupled with higher corn prices. This is more fully described on pages 5546 and 56.47.
|
| |
• | Renewable diesel segment. Renewable diesel segment adjusted operating income increased by $14$77 million primarily due to higher sales volumes, partially offset by hedge losses ona favorable impact from commodity derivative instruments associated with our price risk management activities and lower co-product prices.higher renewable diesel sales volumes. This is more fully described on page 56. |
| |
• | Corporatepages 47 and eliminations. Adjusted corporate and eliminations increased by $25 million primarily due to expenses in the first quarter of 2019 associated with the Merger Transaction with VLP, an increase in legal reserves, and higher employee related expenses. This is more fully described on page 57.48.
|
Outlook
Below are several factors that have impacted or may impact our results of operations during the second quarter of 2019:
Gasoline margins are expected to improve as demand strengthens with the upcoming summer driving season. Distillate margins are expected to remain near current levels.
Medium and heavy sour crude oil discounts are expected to remain weaker than their five-year averages as supplies of sour crude oils available in the market remain suppressed.
| |
• | Ethanol segment. Ethanol segment adjusted operating income decreased by $72 million primarily due to higher corn prices and lower ethanol prices. This is more fully described on page 48. |
Sweet
Outlook
As previously discussed, many uncertainties remain with respect to COVID-19 and the global oil markets, and it is difficult to predict the ultimate economic impacts on us. However, we expect that the adverse impacts will likely continue during the second quarter of 2020 as noted below.
Gasoline, jet fuel, and diesel prices and resulting product margins are expected to remain weak until global demand begins to recover.
Sour crude oil discounts are expected to narrow slightly as U.S. Gulf Coast refiners increase sweet crude oil consumption to offset the loss of mediumsustained low prices and heavy sour crude oilannounced OPEC cuts limit supply while exportand demand for sweet crude oil remains strong. Inland sweet crude oil differentials are expected to remain wideimproves with higher production and limited pipeline capacity to transport crude oil out of the Permian Basin and other producing regions; however, these differentials will likely experience increased volatility as the announced start-up or potential delay of new pipeline capacity influences short-term market dynamics.
Ethanol margins are expected to improve as domestic gasoline demand strengthens.increasing refinery utilization.
Renewable diesel prices and resulting product margins may decline modestly due to lower diesel prices.
Ethanol prices and resulting product margins are expected to remain consistent with current levels.weak until gasoline demand begins to recover.
RESULTS OF OPERATIONS
The following tables, including the reconciliations of non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures in note (c) beginning on page 41, highlight our results of operations, our operating performance, and market reference prices and margins that directly impact our operations. In addition, these tables include financial measures that are not defined under U.S. GAAP and represent non-GAAP financial measures. These non-GAAP financial measures are reconciled to their most comparable U.S. GAAP financial measures and include adjusted net income attributable to Valero Energy Corporation stockholders, adjusted operating income (including adjusted operating income for each of our reportable segments, as applicable), and refining, ethanol, and renewable diesel segment margin. In note (c) to these tables, we disclose the reasons why we believe our use of non-GAAP financial measures provides useful information.
Effective January 1, 2019, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — renewable diesel — because of the growing importance of renewable fuels in the market and the growth of our investments in renewable fuels production. The renewable diesel segment includes the operations of DGD, which were transferred from the refining segment on January 1, 2019. Also effective January 1, 2019, we no longer have a VLP segment, and we include the operations of VLP in our refining segment. This change was made because of the Merger Transaction with VLP, as described in Note 2 of Condensed Notes to Consolidated Financial Statements, and the resulting change in how we manage VLP’s operations. We no longer manage VLP as a business but as logistics assets that support the operations of our refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.
Financial Highlights By Segment and Total Company
(millions of dollars)
| | | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2020 |
| Refining | | Ethanol | | Renewable Diesel | | Corporate and Eliminations | | Total | Refining | | Renewable Diesel | | Ethanol | | Corporate and Eliminations | | Total |
Revenues: | | | | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 23,218 |
| | $ | 793 |
| | $ | 252 |
| | $ | — |
| | $ | 24,263 |
| $ | 20,985 |
| | $ | 306 |
| | $ | 811 |
| | $ | — |
| | $ | 22,102 |
|
Intersegment revenues | 2 |
| | 52 |
| | 51 |
| | (105 | ) | | — |
| 2 |
| | 53 |
| | 64 |
| | (119 | ) | | — |
|
Total revenues | 23,220 |
| | 845 |
| | 303 |
| | (105 | ) | | 24,263 |
| 20,987 |
| | 359 |
| | 875 |
| | (119 | ) | | 22,102 |
|
Cost of sales: | | | | | | | | | | | | | | | | | | |
Cost of materials and other(a) | 21,165 |
| | 694 |
| | 224 |
| | (105 | ) | | 21,978 |
| 19,127 |
| | 130 |
| | 813 |
| | (118 | ) | | 19,952 |
|
LCM inventory valuation adjustment (b) | | 2,414 |
| | — |
| | 128 |
| | — |
| | 2,542 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | 1,071 |
| | 125 |
| | 19 |
| | — |
| | 1,215 |
| 995 |
| | 20 |
| | 109 |
| | — |
| | 1,124 |
|
Depreciation and amortization expense | 503 |
| | 23 |
| | 11 |
| | — |
| | 537 |
| 536 |
| | 11 |
| | 22 |
| | — |
| | 569 |
|
Total cost of sales | 22,739 |
| | 842 |
| | 254 |
| | (105 | ) | | 23,730 |
| 23,072 |
| | 161 |
| | 1,072 |
| | (118 | ) | | 24,187 |
|
Other operating expenses | 2 |
| | — |
| | — |
| | — |
| | 2 |
| 2 |
| | — |
| | — |
| | — |
| | 2 |
|
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — |
| | — |
| | — |
| | 209 |
| | 209 |
| — |
| | — |
| | — |
| | 177 |
| | 177 |
|
Depreciation and amortization expense | — |
| | — |
| | — |
| | 14 |
| | 14 |
| — |
| | — |
| | — |
| | 13 |
| | 13 |
|
Operating income by segment | $ | 479 |
| | $ | 3 |
| | $ | 49 |
| | $ | (223 | ) | | 308 |
| |
Operating income (loss) by segment | | $ | (2,087 | ) | | $ | 198 |
| | $ | (197 | ) | | $ | (191 | ) | | (2,277 | ) |
Other income, net | | | | | | | | | 22 |
| | | | | | | | | 32 |
|
Interest and debt expense, net of capitalized interest | | | | | | | | | (112 | ) | | | | | | | | | (125 | ) |
Income before income tax expense | | | | | | | | | 218 |
| |
Income tax expense | | | | | | | | | 51 |
| |
Net income | | | | | | | | | 167 |
| |
Less: Net income attributable to noncontrolling interests | | | | | | | | | 26 |
| |
Net income attributable to Valero Energy Corporation stockholders | | | | | | | | | $ | 141 |
| |
Loss before income tax benefit | | | | | | | | | | (2,370 | ) |
Income tax benefit | | | | | | | | | | (616 | ) |
Net loss | | | | | | | | | | (1,754 | ) |
Less: Net income attributable to noncontrolling interests (a) | | | | | | | | | | 97 |
|
Net loss attributable to Valero Energy Corporation stockholders | | | | | | | | | | $ | (1,851 | ) |
___________________
See note references on pages 41 through 44.
Financial Highlights By Segment and Total Company (continued)
(millions of dollars)
| | | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2019 |
| Refining | | Ethanol | | Renewable Diesel | | Corporate and Eliminations | | Total | Refining | | Renewable Diesel | | Ethanol | | Corporate and Eliminations | | Total |
Revenues: | | | | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 25,453 |
| | $ | 877 |
| | $ | 108 |
| | $ | 1 |
| | $ | 26,439 |
| $ | 23,218 |
| | $ | 252 |
| | $ | 793 |
| | $ | — |
| | $ | 24,263 |
|
Intersegment revenues | 4 |
| | 46 |
| | 42 |
| | (92 | ) | | — |
| 2 |
| | 51 |
| | 52 |
| | (105 | ) | | — |
|
Total revenues | 25,457 |
| | 923 |
| | 150 |
| | (91 | ) | | 26,439 |
| 23,220 |
| | 303 |
| | 845 |
| | (105 | ) | | 24,263 |
|
Cost of sales: | | | | | | | | | | | | | | | | | | |
Cost of materials and other (a) | 23,164 |
| | 749 |
| | (65 | ) | | (92 | ) | | 23,756 |
| 21,165 |
| | 224 |
| | 694 |
| | (105 | ) | | 21,978 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | 1,011 |
| | 111 |
| | 14 |
| | — |
| | 1,136 |
| 1,071 |
| | 19 |
| | 125 |
| | — |
| | 1,215 |
|
Depreciation and amortization expense | 461 |
| | 18 |
| | 6 |
| | — |
| | 485 |
| 503 |
| | 11 |
| | 23 |
| | — |
| | 537 |
|
Total cost of sales | 24,636 |
| | 878 |
| | (45 | ) | | (92 | ) | | 25,377 |
| 22,739 |
| | 254 |
| | 842 |
| | (105 | ) | | 23,730 |
|
Other operating expenses | 10 |
| | — |
| | — |
| | — |
| | 10 |
| 2 |
| | — |
| | — |
| | — |
| | 2 |
|
General and administrative expenses (excluding depreciation and amortization expense reflected below) (b) | — |
| | — |
| | — |
| | 238 |
| | 238 |
| — |
| | — |
| | — |
| | 209 |
| | 209 |
|
Depreciation and amortization expense | — |
| | — |
| | — |
| | 13 |
| | 13 |
| — |
| | — |
| | — |
| | 14 |
| | 14 |
|
Operating income by segment | $ | 811 |
| | $ | 45 |
| | $ | 195 |
| | $ | (250 | ) | | 801 |
| $ | 479 |
| | $ | 49 |
| | $ | 3 |
| | $ | (223 | ) | | 308 |
|
Other income, net | | | | | | | | | 51 |
| | | | | | | | | 22 |
|
Interest and debt expense, net of capitalized interest | | | | | | | | | (121 | ) | | | | | | | | | (112 | ) |
Income before income tax expense | | | | | | | | | 731 |
| | | | | | | | | 218 |
|
Income tax expense | | | | | | | | | 149 |
| | | | | | | | | 51 |
|
Net income | | | | | | | | | 582 |
| | | | | | | | | 167 |
|
Less: Net income attributable to noncontrolling interests (a) | | | | | | | | | 113 |
| | | | | | | | | 26 |
|
Net income attributable to Valero Energy Corporation stockholders | | | | | | | | | $ | 469 |
| | | | | | | | | $ | 141 |
|
___________________
See note references on pages 5141 through 53.44.
Financial Highlights By Segment and Total Company (continued)
(millions of dollars)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Reconciliation of net income attributable to Valero Energy Corporation stockholders to adjusted net income attributable to Valero Energy Corporation stockholders (c) | | | |
Net income attributable to Valero Energy Corporation stockholders | $ | 141 |
| | $ | 469 |
|
Exclude adjustments: | | | |
2017 blender’s tax credit attributable to Valero Energy Corporation stockholders (a) | — |
| | 90 |
|
Income tax expense related to the 2017 blender’s tax credit | — |
| | (11 | ) |
2017 blender’s tax credit attributable to Valero Energy Corporation stockholders, net of taxes | — |
| | 79 |
|
Environmental reserve adjustment (b) | — |
| | (52 | ) |
Income tax benefit related to environmental reserve adjustment | — |
| | 11 |
|
Environmental reserve adjustment, net of taxes | — |
| | (41 | ) |
Total adjustments | — |
| | 38 |
|
Adjusted net income attributable to Valero Energy Corporation stockholders | $ | 141 |
| | $ | 431 |
|
___________________
See note references on pages 51 through 53.
Financial Highlights By Segment and Total Company (continued)
(millions of dollars)
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 |
| Refining | | Ethanol | | Renewable Diesel | | Corporate and Eliminations | | Total |
Reconciliation of operating income to adjusted operating income (c) | | | | | | | | | |
Operating income by segment (see page 44) | $ | 479 |
| | $ | 3 |
| | $ | 49 |
| | $ | (223 | ) | | $ | 308 |
|
Exclude: | | | | | | | | | |
Other operating expenses | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
Adjusted operating income | $ | 481 |
| | $ | 3 |
| | $ | 49 |
| | $ | (223 | ) | | $ | 310 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| Refining | | Ethanol | | Renewable Diesel | | Corporate and Eliminations | | Total |
Reconciliation of operating income to adjusted operating income (c) | | | | | | | | | |
Operating income by segment (see page 45) | $ | 811 |
| | $ | 45 |
| | $ | 195 |
| | $ | (250 | ) | | $ | 801 |
|
Exclude: | | | | | | | | | |
Other operating expenses | (10 | ) | | — |
| | — |
| | — |
| | (10 | ) |
2017 blender’s tax credit (a) | 10 |
| | — |
| | 160 |
| | — |
| | 170 |
|
Environmental reserve adjustment (b) | — |
| | — |
| | — |
| | (52 | ) | | (52 | ) |
Adjusted operating income | $ | 811 |
| | $ | 45 |
| | $ | 35 |
| | $ | (198 | ) | | $ | 693 |
|
___________________
See note references on pages 51 through 53.
Refining Segment Operating Highlights
(millions of dollars, except per barrel amounts)
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 |
| 2018 | | Change |
Throughput volumes (thousand barrels per day (BPD)) | | | | | |
Feedstocks: | | | | | |
Heavy sour crude oil | 410 |
| | 482 |
| | (72 | ) |
Medium/light sour crude oil | 338 |
| | 408 |
| | (70 | ) |
Sweet crude oil | 1,476 |
| | 1,344 |
| | 132 |
|
Residuals | 145 |
| | 222 |
| | (77 | ) |
Other feedstocks | 153 |
| | 119 |
| | 34 |
|
Total feedstocks | 2,522 |
| | 2,575 |
| | (53 | ) |
Blendstocks and other | 343 |
| | 356 |
| | (13 | ) |
Total throughput volumes | 2,865 |
| | 2,931 |
| | (66 | ) |
| | | | | |
Yields (thousand BPD) | | | | | |
Gasolines and blendstocks | 1,397 |
| | 1,401 |
| | (4 | ) |
Distillates | 1,089 |
| | 1,109 |
| | (20 | ) |
Other products (d) | 406 |
| | 458 |
| | (52 | ) |
Total yields | 2,892 |
| | 2,968 |
| | (76 | ) |
| | | | | |
Operating statistics (e) | | | | | |
Refining margin (c) | $ | 2,055 |
| | $ | 2,283 |
| | $ | (228 | ) |
Adjusted refining operating income (see page 47) (c) | $ | 481 |
| | $ | 811 |
| | $ | (330 | ) |
Throughput volumes (thousand BPD) | 2,865 |
| | 2,931 |
| | (66 | ) |
| | | | | |
Refining margin per barrel of throughput | $ | 7.97 |
| | $ | 8.65 |
| | $ | (0.68 | ) |
Less: | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) per barrel of throughput | 4.15 |
| | 3.83 |
| | 0.32 |
|
Depreciation and amortization expense per barrel of throughput | 1.96 |
| | 1.74 |
| | 0.22 |
|
Adjusted refining operating income per barrel of throughput | $ | 1.86 |
| | $ | 3.08 |
| | $ | (1.22 | ) |
___________________
See note references on pages 51 through 53.
Ethanol Segment Operating Highlights
(millions of dollars, except per gallon amounts)
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 | | Change |
Operating statistics (e) | | | | | |
Ethanol margin (c) | $ | 151 |
| | $ | 174 |
| | $ | (23 | ) |
Ethanol operating income | $ | 3 |
| | $ | 45 |
| | $ | (42 | ) |
Production volumes (thousand gallons per day) | 4,217 |
| | 4,113 |
| | 104 |
|
| | | | | |
Ethanol margin per gallon of production | $ | 0.40 |
| | $ | 0.47 |
| | $ | (0.07 | ) |
Less: | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) per gallon of production | 0.33 |
| | 0.30 |
| | 0.03 |
|
Depreciation and amortization expense per gallon of production | 0.06 |
| | 0.05 |
| | 0.01 |
|
Ethanol operating income per gallon of production | $ | 0.01 |
| | $ | 0.12 |
| | $ | (0.11 | ) |
Renewable Diesel Segment Operating Highlights
(millions of dollars, except per gallon amounts)
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 | | Change |
Operating statistics (e) | | | | | |
Renewable diesel margin (c) | $ | 79 |
| | $ | 55 |
| | $ | 24 |
|
Adjusted renewable diesel operating income | $ | 49 |
| | $ | 35 |
| | $ | 14 |
|
Sales volumes (thousand gallons per day) | 790 |
| | 371 |
| | 419 |
|
| | | | | |
Renewable diesel margin per gallon of sales | $ | 1.11 |
| | $ | 1.64 |
| | $ | (0.53 | ) |
Less: | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) per gallon of sales | 0.26 |
| | 0.43 |
| | (0.17 | ) |
Depreciation and amortization expense per gallon of sales | 0.16 |
| | 0.19 |
| | (0.03 | ) |
Adjusted renewable diesel operating income per gallon of sales | $ | 0.69 |
| | $ | 1.02 |
|
| $ | (0.33 | ) |
___________________
See note references on pages 51 through 53.
Average Market Reference Prices and Differentials
(dollars per barrel, except as noted)
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Refining | | | | | | | | | | |
Feedstocks (dollars per barrel) | | | | | | | | | | |
Brent crude oil | $ | 63.82 |
| | $ | 67.16 |
| | $ | (3.34 | ) | $ | 50.90 |
| | $ | 63.82 |
| | $ | (12.92 | ) |
Brent less West Texas Intermediate (WTI) crude oil | 8.94 |
| | 4.29 |
| | 4.65 |
| 4.92 |
| | 8.94 |
| | (4.02 | ) |
Brent less Alaska North Slope (ANS) crude oil | (0.68 | ) | | 0.20 |
| | (0.88 | ) | (0.50 | ) | | (0.68 | ) | | 0.18 |
|
Brent less Louisiana Light Sweet (LLS) crude oil | 1.45 |
| | 1.38 |
| | 0.07 |
| 2.76 |
| | 1.45 |
| | 1.31 |
|
Brent less Argus Sour Crude Index (ASCI) crude oil | 2.89 |
| | 4.88 |
| | (1.99 | ) | 5.01 |
| | 2.89 |
| | 2.12 |
|
Brent less Maya crude oil | 5.04 |
| | 9.46 |
| | (4.42 | ) | 9.74 |
| | 5.04 |
| | 4.70 |
|
LLS crude oil | 62.37 |
| | 65.78 |
| | (3.41 | ) | 48.14 |
| | 62.37 |
| | (14.23 | ) |
LLS less ASCI crude oil | 1.44 |
| | 3.50 |
| | (2.06 | ) | 2.25 |
| | 1.44 |
| | 0.81 |
|
LLS less Maya crude oil | 3.59 |
| | 8.08 |
| | (4.49 | ) | 6.98 |
| | 3.59 |
| | 3.39 |
|
WTI crude oil | 54.88 |
| | 62.87 |
| | (7.99 | ) | 45.98 |
| | 54.88 |
| | (8.90 | ) |
| | | | | | | | | | |
Natural gas (dollars per million British Thermal Units (MMBtu)) | 2.86 |
| | 3.19 |
| | (0.33 | ) | 1.82 |
| | 2.86 |
| | (1.04 | ) |
| | | | | | | | | | |
Products (dollars per barrel, unless otherwise noted) | | | | | | |
Product margins (dollars per barrel) | | | | | | |
U.S. Gulf Coast: | | | | | | | | | | |
Conventional Blendstock of Oxygenate Blending (CBOB) gasoline less Brent | 0.16 |
| | 7.28 |
| | (7.12 | ) | 2.37 |
| | 0.16 |
| | 2.21 |
|
Ultra-low-sulfur (ULS) diesel less Brent | 14.99 |
| | 13.78 |
| | 1.21 |
| 11.26 |
| | 14.99 |
| | (3.73 | ) |
Propylene less Brent | (20.64 | ) | | (6.82 | ) | | (13.82 | ) | (21.04 | ) | | (20.64 | ) | | (0.40 | ) |
CBOB gasoline less LLS | 1.61 |
| | 8.66 |
| | (7.05 | ) | 5.13 |
| | 1.61 |
| | 3.52 |
|
ULS diesel less LLS | 16.44 |
| | 15.16 |
| | 1.28 |
| 14.02 |
| | 16.44 |
| | (2.42 | ) |
Propylene less LLS | (19.19 | ) | | (5.44 | ) | | (13.75 | ) | (18.28 | ) | | (19.19 | ) | | 0.91 |
|
U.S. Mid-Continent: | | | | | | | | | | |
CBOB gasoline less WTI | 9.69 |
| | 13.47 |
| | (3.78 | ) | 7.69 |
| | 9.69 |
| | (2.00 | ) |
ULS diesel less WTI | 24.89 |
| | 19.83 |
| | 5.06 |
| 17.31 |
| | 24.89 |
| | (7.58 | ) |
North Atlantic: | | | | | | | | | | |
CBOB gasoline less Brent | 1.25 |
| | 8.88 |
| | (7.63 | ) | 4.28 |
| | 1.25 |
| | 3.03 |
|
ULS diesel less Brent | 17.43 |
| | 15.95 |
| | 1.48 |
| 14.29 |
| | 17.43 |
| | (3.14 | ) |
U.S. West Coast: | | | | | | | | | | |
California Reformulated Gasoline Blendstock of Oxygenate Blending (CARBOB) 87 gasoline less ANS | 7.73 |
| | 13.27 |
| | (5.54 | ) | 7.82 |
| | 7.73 |
| | 0.09 |
|
California Air Resources Board (CARB) diesel less ANS | 16.20 |
| | 17.28 |
| | (1.08 | ) | 17.22 |
| | 16.20 |
| | 1.02 |
|
CARBOB 87 gasoline less WTI | 17.35 |
| | 17.36 |
| | (0.01 | ) | 13.24 |
| | 17.35 |
| | (4.11 | ) |
CARB diesel less WTI | 25.82 |
| | 21.37 |
| | 4.45 |
| 22.64 |
| | 25.82 |
| | (3.18 | ) |
Average Market Reference Prices and Differentials, (continued)
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | | Change | |
Ethanol | | | | | | |
New York Harbor (NYH) corn crush (dollars per gallon) | $ | 0.09 |
| | $ | 0.19 |
| | $ | (0.10 | ) | |
Chicago Board of Trade (CBOT) corn (dollars per bushel) | 3.73 |
| | 3.66 |
| | 0.07 |
| |
NYH Ethanol (dollars per gallon) | 1.44 |
| | 1.52 |
| | (0.08 | ) | |
| | | | | | 2020 | | 2019 | | Change |
Renewable diesel | | | | | | | | | | |
New York Mercantile Exchange ULS diesel (dollars per gallon) | 1.94 |
| | 1.98 |
| | (0.04 | ) | $ | 1.55 |
| | $ | 1.94 |
| | $ | (0.39 | ) |
Biodiesel Renewable Identification Number (RIN) (dollars per RIN) | 0.51 |
| | 0.78 |
| | (0.27 | ) | 0.46 |
| | 0.51 |
| | (0.05 | ) |
California Low-Carbon Fuel Standard (dollars per metric ton) | 194.21 |
| | 136.12 |
| | 58.09 |
| 206.03 |
| | 194.21 |
| | 11.82 |
|
CBOT soybean oil (dollars per pound) | 0.29 |
| | 0.32 |
| | (0.03 | ) | |
Chicago Board of Trade (CBOT) soybean oil (dollars per pound) | | 0.30 |
| | 0.29 |
| | 0.01 |
|
| | | | | | |
Ethanol | | | | | | |
CBOT corn (dollars per bushel) | | 3.74 |
| | 3.73 |
| | 0.01 |
|
New York Harbor ethanol (dollars per gallon) | | 1.33 |
| | 1.44 |
| | (0.11 | ) |
The following notes relate to references on pages45 34 through 49.48.
| |
(a) | Cost of materials and other for the three months ended March 31, 20182020 includes a benefit of $170$79 million forrelated to the biodiesel blender’s tax credit attributable to volumes blended during 2017.that period, all of which is related to our renewable diesel segment. The benefit was recognized in February 2018 because the U.S. legislation authorizing the credit through December 31, 2022 was passed and signed into law in December 2019, and that month. Oflegislation also applied retroactively to volumes blended during 2019 (2019 blender’s tax credit). The entire 2019 blender’s tax credit was recognized by us in December 2019 because the $170law was enacted in that month, but the benefit attributable to volumes blended during the three months ended March 31, 2019 was $77 million, pre-tax benefit, $10of which $5 million and $160$72 million are included inrelates to our refining and renewable diesel segments, respectively, and consequently, $80million is attributable to noncontrolling interest and $90million is attributable to Valero Energy Corporation stockholders.respectively. |
Of the $77 million benefit related to the three months ended March 31, 2019, $41 million is attributable to Valero Energy Corporation stockholders, with the remaining amount attributable to noncontrolling interest.
| |
(b) | GeneralThe market value of our inventories as of March 31, 2020 fell below their historical cost on an aggregate basis, excluding materials and administrative expenses (excluding depreciationsupplies. As a result, we recorded an LCM inventory valuation adjustment of $2.5 billion ($2.0 billion after tax) in March 2020. Of the $2.5 billion adjustment, $2.4 billion and amortization expense) for the three months ended March31, 2018 includes a charge of $52$128 million for an environmental reserve adjustment associated with certain non-operating sites. is attributable to our refining and ethanol segments, respectively. |
| |
(c) | We use certain financial measures (as noted below) that are not defined under U.S. GAAP and are considered to be non-GAAP measures. |
We have defined these non-GAAP measures and believe they are useful to the external users of our financial statements, including industry analysts, investors, lenders, and rating agencies. We believe these measures are useful to assess our ongoing financial performance because, when reconciled to their most comparable U.S. GAAP measures, they provide improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These non-GAAP measures should not be considered as alternatives to their most comparable U.S. GAAP measures nor should they be considered in isolation or as a substitute for an analysis of our results of operations as reported under U.S. GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures used by other companies because we may define them differently, which diminishes their utility.
Non-GAAP measures are as follows:
| |
◦ | Adjusted net income attributable to Valero Energy Corporation stockholders is defined as net income attributable to Valero Energy Corporation stockholders excluding the items noted below, along with their related income tax effect. We have excluded these items because we believe that they are not indicative of our core operating performance and that their exclusion results in an important measure of our ongoing financial performance to better assess our underlying business results and trends. The basis for our belief with respect to each excluded item is provided below.
|
| |
▪ | 2017 blender’s tax credit attributable to Valero Energy Corporation stockholders – The blender’s
|
tax credit is attributable to volumes blended during 2017 and is not related to 2018 activities, see note (a).
| |
▪ | Environmental reserve adjustment – The environmental reserve adjustment is attributable to sites that were shut down by prior owners and subsequently acquired by us (referred to by us as non-operating sites), see note (b).
|
| |
◦ | Refining margin is defined as refining operating income excluding(loss) adjusted to reflect the 20172019 blender’s tax credit (see note (a)),in the proper period, and excluding the LCM inventory valuation adjustment, operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected below. |
| |
◦ | Ethanol margin is defined as ethanol operating income excluding operating expenses (excluding depreciation and amortization expense) and depreciation and amortization expense, as reflected below.
(excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below. | | | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | Reconciliation of refining operating income (loss) to refining margin | | | | Refining operating income (loss) | $ | (2,087 | ) | | $ | 479 |
| Adjustments: | | | | 2019 blender’s tax credit (see note (a)) | — |
| | 5 |
| LCM inventory valuation adjustment (see note (b)) | 2,414 |
| | — |
| Operating expenses (excluding depreciation and amortization expense) | 995 |
| | 1,071 |
| Depreciation and amortization expense | 536 |
| | 503 |
| Other operating expenses | 2 |
| | 2 |
| Refining margin | $ | 1,860 |
| | $ | 2,060 |
|
|
| |
◦ | Renewable diesel margin is defined as renewable diesel operating income excludingadjusted to reflect the 20172019 blender’s tax credit (see note (a)),in the proper period, and excluding operating expenses (excluding depreciation and amortization expense) and depreciation and amortization expense, as reflected in the table below. |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Reconciliation of renewable diesel operating income to renewable diesel margin | | | |
Renewable diesel operating income | $ | 198 |
| | $ | 49 |
|
Adjustments: | | | |
2019 blender’s tax credit (see note (a)) | — |
| | 72 |
|
Operating expenses (excluding depreciation and amortization expense) | 20 |
| | 19 |
|
Depreciation and amortization expense | 11 |
| | 11 |
|
Renewable diesel margin | $ | 229 |
| | $ | 151 |
|
| |
◦ | Ethanol margin is defined as ethanol operating income (loss) excluding the LCM inventory valuation adjustment, operating expenses (excluding depreciation and amortization expense), and depreciation and amortization expense, as reflected in the table below. |
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Refining | | Ethanol | | Renewable Diesel |
Reconciliation of operating income to segment margin | | | | | | |
Operating income | | $ | 479 |
| | $ | 3 |
| | $ | 49 |
|
Exclude: | | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) | | (1,071 | ) | | (125 | ) | | (19 | ) |
Depreciation and amortization expense | | (503 | ) | | (23 | ) | | (11 | ) |
Other operating expenses | | (2 | ) | | — |
| | — |
|
Segment margin | | $ | 2,055 |
|
| $ | 151 |
| | $ | 79 |
|
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
| | Refining | | Ethanol | | Renewable Diesel |
Reconciliation of operating income to segment margin | | | | | | |
Operating income | | $ | 811 |
| | $ | 45 |
| | $ | 195 |
|
Exclude: | | | | | | |
2017 blender’s tax credit | | 10 |
| | — |
| | 160 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | | (1,011 | ) | | (111 | ) | | (14 | ) |
Depreciation and amortization expense | | (461 | ) | | (18 | ) | | (6 | ) |
Other operating expenses | | (10 | ) | | — |
| | — |
|
Segment margin | | $ | 2,283 |
|
| $ | 174 |
| | $ | 55 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Reconciliation of ethanol operating income (loss) to ethanol margin | | | |
Ethanol operating income (loss) | $ | (197 | ) | | $ | 3 |
|
Adjustments: | | | |
LCM inventory valuation adjustment (see note (b)) | 128 |
| | — |
|
Operating expenses (excluding depreciation and amortization expense) | 109 |
| | 125 |
|
Depreciation and amortization expense | 22 |
| | 23 |
|
Ethanol margin | $ | 62 |
| | $ | 151 |
|
| |
◦ | Adjusted refining operating incomeis defined as refining segment operating income excluding(loss) adjusted to reflect the 20172019 blender’s tax credit received in 2018 (see note (a))the proper period and excluding the LCM inventory valuation adjustment and other operating expenses.expenses, as reflected in the table below. |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Reconciliation of refining operating income (loss) to adjusted refining operating income | | | |
Refining operating income (loss) | $ | (2,087 | ) | | $ | 479 |
|
Adjustments: | | | |
2019 blender’s tax credit (see note (a)) | — |
| | 5 |
|
LCM inventory valuation adjustment (see note (b)) | 2,414 |
| | — |
|
Other operating expenses | 2 |
| | 2 |
|
Adjusted refining operating income | $ | 329 |
| | $ | 486 |
|
| |
◦ | Adjusted renewable diesel operating income is defined as renewable diesel segment operating income excludingadjusted to reflect the 20172019 blender’s tax credit (see note (a)).in the proper period, as reflected in the table below. |
| |
◦ | Adjusted corporate and eliminations is defined as corporate and eliminations excluding the environmental reserve adjustment associated with certain non-operating sites (see note (b)). | | | | | | | | | | Three Months Ended March 31, | | 2020 | | 2019 | Reconciliation of renewable diesel operating income to adjusted renewable diesel operating income | | | | Renewable diesel operating income | $ | 198 |
| | $ | 49 |
| Adjustment: | | | | 2019 blender’s tax credit (see note (a)) | — |
| | 72 |
| Adjusted renewable diesel operating income | $ | 198 |
| | $ | 121 |
|
|
| |
(d) | Other products primarily includes petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt. |
| |
(e)◦ | Valero uses certainAdjusted ethanol operating statistics (as noted below)income (loss) is defined as ethanol segment operating income (loss) adjusted to evaluate performance between comparable periods. Different companies may calculate themexclude the LCM inventory valuation adjustment, as reflected in different ways.the table below. |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Reconciliation of ethanol operating income (loss) to adjusted ethanol operating income (loss) | | | |
Ethanol operating income (loss) | $ | (197 | ) | | $ | 3 |
|
Adjustment: | | | |
LCM inventory valuation adjustment (see note (b)) | 128 |
| | — |
|
Adjusted ethanol operating income (loss) | $ | (69 | ) | | $ | 3 |
|
| |
◦ | Adjusted operating income is defined as total company operating income (loss) adjusted to reflect the 2019 blender’s tax credit in the proper period, and excluding the LCM inventory valuation adjustment and other operating expenses, as reflected in the table below. |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Reconciliation of total company operating income to adjusted operating income | | | |
Total company operating income (loss) | $ | (2,277 | ) | | $ | 308 |
|
Adjustments: | | | |
2019 blender’s tax credit (see note (a)) | — |
| | 77 |
|
LCM inventory valuation adjustment (see note (b)) | 2,542 |
| | — |
|
Other operating expenses | 2 |
| | 2 |
|
Adjusted operating income | $ | 267 |
| | $ | 387 |
|
| |
(d) | We use throughput volumes, sales volumes, and production volumes for the refining segment, renewable diesel segment, and ethanol segment, respectively, due to their general use by others who operate facilities similar to those included in our segments. |
Refining segment margin per barrel of throughput and adjusted refining segment operating income per barrel of throughput represents refining segment margin and adjusted refining segment operating income (each as defined in note (c) above) divided by throughput volumes. Ethanol segment margin per gallon of production and ethanol segment operating income per gallon of production represent ethanol segment margin (as defined in note (c) above) and ethanol segment operating income divided by production volumes. Renewable diesel segment margin per gallon of sales and adjusted renewable diesel segment operating income per gallon of sales represent renewable diesel segment margin and adjusted renewable diesel segment operating income (each as defined in note (c) above) divided by sales volumes.
Throughput, production, and sales volumes are calculated by multiplying throughput, production, and sales volumes per day (as provided in the accompanying tables) by the number
Total Company, Corporate, and Other
The following table includes selected financial data for the total company, corporate, and other for the first quarter of 2020 and the first quarter of 2019. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 38 and 39, unless otherwise noted.
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | Change |
Revenues | $ | 22,102 |
| | $ | 24,263 |
| | $ | (2,161 | ) |
Cost of materials and other (see note (a) on page 41) | 19,952 |
| | 21,978 |
| | (2,026 | ) |
LCM inventory valuation adjustment (see note (b) on page 41) | 2,542 |
| | — |
| | 2,542 |
|
Operating expenses (excluding depreciation and amortization expense) | 1,124 |
| | 1,215 |
| | (91 | ) |
General and administrative expenses (excluding depreciation and amortization expense) | 177 |
| | 209 |
| | (32 | ) |
Operating income (loss) | (2,277 | ) | | 308 |
| | (2,585 | ) |
Adjusted operating income (see note (c) on page 44) | 267 |
| | 387 |
| | (120 | ) |
Income tax expense (benefit) | (616 | ) | | 51 |
| | (667 | ) |
Net income attributable to noncontrolling interests | 97 |
| | 26 |
| | 71 |
|
Revenues decreased by $2.2 billion in the first quarter of 20192020 compared to the first quarter of 20182019 primarily due to decreases in refined petroleum product prices associated with sales made by our refining segment. This declinedecrease in revenues, along with a $2.5 billion loss in the value of our inventory in the first quarter of 2020, was partially offset by lowera decrease in cost of salesmaterials and other of $1.6$2.0 billion primarily due to decreases in crude oil and other feedstock costs, lower operating expenses (excluding depreciation and amortization expense) of $91 million, and a decrease of $29 million in general and administrative expenses (excluding depreciation and amortization expense), of $32 million, resulting in a $2.6 billion decrease in operating income, from $308 million of $493operating income in the first quarter of 2019 to an operating loss of $2.3 billion in the first quarter of 2020.
Adjusted operating income decreased by $120 million, from $387 million in the first quarter of 2019 to $267 million in the first quarter of 2020. The $120 million decrease includes the $32 million decrease in general and administrative expenses (excluding depreciation and amortization expense) associated with our corporate activities, and this decrease is discussed below. The remaining components of the decrease are discussed by segment in the segment analysis that follows.
General and administrative expenses (excluding depreciation and amortization expense) decreased by $32 million in the first quarter of 2020 compared to the first quarter of 2018.
Excluding2019 primarily due to a decrease in certain employee compensation expenses of $12 million, lower advertising expenses of $7 million, and the adjustments to operating income reflected in the tables on page 47, adjusted operating income decreased by $383 millioneffect of expenses incurred in the first quarter of 2019 compared toassociated with the first quarter of 2018. Details regarding the $383 million decrease in adjusted operating income between the periods are discussed by segment below.
“Other income, net” decreased $29 million in the first quarter of 2019 compared to the first quarter of 2018 primarily due to foreign currency transaction losses of $13 million and lower interest incomeMerger Transaction with VLP of $7 million.
Income tax expense decreased $98$667 million in the first quarter of 20192020 compared to the first quarter of 20182019 primarily as a result of lower income before income tax expense. Our effectiveIn addition, the decrease in income tax expense was impacted by an income tax benefit of $110 million associated with the carryback of an expected tax NOL from our current tax year to our 2015 tax year, in which we paid federal income tax at a 35 percent tax rate, was 23 percentas allowed by the CARES Act. See Note 10 in Notes to Condensed Consolidated Financial Statements for the first quarter of 2019 compared to 20 percent for the first quarter of 2018.additional details. Excluding the tax$110 million benefit related to the 2017 blender’s tax credit recognized in early 2018, the effective tax rate was 22 percent for the first quarter of 2018.
Net income attributable to noncontrolling interests decreased $87 million in the first quarter of 2019 compared to the first quarter of 2018 primarily due to the recognition of a blender’s tax credit in the first quarter of 2018 of which $80 million is attributable to the holder of the noncontrolling interest, as described in note (a) to the accompanying tables.
Refining Segment Results
Refining segment revenues decreased $2.2 billion in the first quarter of 2019 compared to the first quarter of 2018 primarily due to decreases in refined petroleum product prices. This decline in refining segment revenues was partially offset by lower cost of sales of $1.9 billion due primarily to decreases in crude oil and other feedstock costs, resulting in a decrease in refining segment operating income of $332 million in the first quarter of 2019 compared to the first quarter of 2018.expected tax NOL carryback,
Excludingour effective tax rate was 21 percent for the adjustmentsfirst quarter of 2020, which is consistent with the 23 percent effective tax rate for the first quarter of 2019.
Net income attributable to refining segment operating income reflected in the tables on page 47, refining segment adjusted operating income decreased $330noncontrolling interests increased by $71 million in the first quarter of 20192020 compared to the first quarter of 2018.2019 primarily due to higher earnings associated with DGD.
Refining Segment Results
The following table includes selected financial and operating data of our refining segment for the first quarter of 2020 and the first quarter of 2019. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 38 and 39, respectively, unless otherwise noted.
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | Change |
Operating income (loss) | $ | (2,087 | ) | | $ | 479 |
| | $ | (2,566 | ) |
Adjusted operating income (see note (c) on page 43) | 329 |
| | 486 |
| | (157 | ) |
| | | | | |
Refining margin (see note (c) on page 42) | $ | 1,860 |
| | $ | 2,060 |
| | $ | (200 | ) |
Operating expenses (excluding depreciation and amortization expense reflected below) | 995 |
| | 1,071 |
| | (76 | ) |
Depreciation and amortization expense | 536 |
| | 503 |
| | 33 |
|
| | | | | |
Throughput volumes (thousand barrels per day) (see note (d) on page 44) | 2,824 |
| | 2,865 |
| | (41 | ) |
Refining segment operating income decreased by $2.6 billion in the first quarter of 2020; however, refining segment adjusted operating income, which excludes the adjustments in the table in note (c) on page 43, decreased by $157 million in the first quarter of 2020 compared to the first quarter of 2019. The components of this decrease, along with the reasons for the changes in thesethose components, are outlined below.
Refining segment margin as defined in note (c) to the accompanying tables, decreased $228by $200 million in the first quarter of 20192020 compared to the first quarter of 20182019.
Refining segment margin is primarily affected by the prices of the refined petroleum products that we sell and the cost of crude oil and other feedstocks that we process. The market prices for refined petroleum products generally track the price of benchmark crude oils, such as Brent, WTI, and ANS; therefore, our refining segment margin is affected by our ability to purchase and process crude oils and other feedstocks that are priced at a discount to the benchmark crude oils. While we benefit when we process these types of crude oils and other feedstocks, that benefit will vary as the discount widens or narrows. Improvement in these discounts has a favorable impact on our refining segment margin as it lowers our cost of materials; whereas lower discounts result in higher cost of materials, which has a negative impact on our refining segment margin. The table on page 40 reflects market reference prices and differentials that we believe had a material impact on the change in our refining segment margin in the first quarter of 2020 compared to the first quarter of 2019.
The decrease in refining segment margin is primarily due to the following:
| |
•◦ | Decrease in gasoline margins. We experienced a decrease in gasoline margins throughout all our regions during the first quarter of 2019 compared to the first quarter of 2018. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast CBOB gasoline was $0.16 per barrel for the first quarter of 2019 compared to $7.28 per barrel for the first quarter of 2018, representing an unfavorable decrease of $7.12 per barrel. Another example is the Brent-based benchmark reference margin for North Atlantic CBOB gasoline, which was $1.25 per barrel for the first quarter of 2019 compared to $8.88 per barrel for the first quarter of 2018, representing an unfavorable decrease of $7.63 per barrel. We estimate that the decrease in gasoline margins per barrel in the first quarter of 2019 compared to the first quarter of 2018Lower discounts on crude oils had an unfavorable impact to our refining segment margin of approximately $762$434 million.
|
| |
• | Lower discounts on other feedstocks. In addition to crude oil, we utilize other feedstocks, such as natural gas and residuals, in certain of our refining processes. We benefit when we process these other feedstocks that are priced at a discount to Brent crude oil. While we benefitted from processing these types of feedstocks during the first three months of 2019, that benefit declined compared to the first three months of 2018. We estimate that the reduction in the discounts for the other feedstocks that we processed during the first three months of 2019 had an unfavorable impact to our refining segment margin of approximately $69 million.
|
| |
• | Lower throughput volumes. Refining throughput volumes decreased by 66,000 BPD in the first quarter of 2019. We estimate that the decrease in refining throughput volumes had an unfavorable impact on our refining segment margin of approximately $51 million.
|
| |
• | Higher discounts on crude oils. The market prices for refined petroleum products generally track the price of Brent crude oil, which is a benchmark crude oil, and we benefit when we process crude oils that are priced at a discount to Brent crude oil. We benefitted from processing these types of crude oils during the first quarter of 2019 and that benefit improved compared to the first quarter of 2018. For example, WTI crude oil, a light sweet crude oil, sold at an $8.94 per barrel discount to Brent crude oil for the first quarter of 2019 compared to a $4.29 per barrel discount for the first quarter of 2018, representing a favorable increase of $4.65 per barrel. We estimate that the increase in the discounts for the crude oils we processed during the first quarter of 2019 compared to the first quarter of 2018 had a favorable impact to our refining segment margin of approximately $430 million.
|
| |
• | Lower costs of biofuel credits. As described in Note 14 of Condensed Notes to Consolidated Financial Statements, we purchase biofuel credits in order to meet our biofuel blending obligation under various government and regulatory compliance programs. The cost of these credits (primarily RINs in the U.S.) was $91 million in the first quarter of 2019 compared to $206 million in the first quarter of 2018, a decrease of $115 million.
|
| |
• | Increase in distillate margins. We experienced an increase in distillate margins during the first quarter of 2019 compared to the first quarter of 2018. For example, the Brent-based benchmark reference
|
| |
◦ | A decrease in distillate (primarily diesel) margins had an unfavorable impact of approximately $139 million. |
margin for U.S. Gulf Coast ULS diesel was $14.99 per barrel for the first quarter of 2019 compared to $13.78 per barrel for the first quarter of 2018, representing a favorable increase of $1.21 per barrel. Another example is the WTI-based benchmark reference margin for U.S. Mid-Continent ULS diesel which was $24.89 per barrel for the first quarter of 2019 compared to $19.83 per barrel for the first quarter of 2018, representing a favorable increase of $5.06 per barrel. We estimate that the increase in distillate margins per barrel in the first quarter of 2019 compared to the first quarter of 2018 had a favorable impact to our refining segment margin of approximately $91 million.
| |
◦ | An increase in gasoline margins throughout most of our regions had a favorable impact of approximately $362 million despite the economic disruption from COVID-19 described in“OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 34 through 36, because the impact of that disruption on our gasoline margins did not occur until late in the first quarter of 2020. |
Refining segment operating expenses (excluding depreciation and amortization expense) increased$60decreased by $76 million primarily due to an increase in maintenance expenditures of $27 millionlower natural gas and an environmental reserve adjustment of $4 million in the first quarter of 2019, along with a sales and use tax refund of $7 million and a favorable property tax settlement of $6 million received in the first quarter of 2018.electricity costs.
Refining segment depreciation and amortization expense associated with our cost of sales increased $42by $33 million primarily due to an increase in refinery turnaround and catalyst amortization expense of $27 million and an increase in depreciation expense associated with capital projects that were completed and finance leases that commenced in 2018the latter half of $8 million.2019 and the first quarter of 2020.
EthanolRenewable Diesel Segment Results
EthanolThe following table includes selected financial and operating data of our renewable diesel segment revenues decreasedfor the first quarter of 2020 and the first quarter of 2019. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 38 and 39, respectively, unless otherwise noted.
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | Change |
Operating income | $ | 198 |
| | $ | 49 |
| | $ | 149 |
|
Adjusted operating income (see note (c) on page 43) | 198 |
| | 121 |
| | 77 |
|
| | | | | |
Renewable diesel margin (see note (c) on page 42) | $ | 229 |
| | $ | 151 |
| | $ | 78 |
|
Operating expenses (excluding depreciation and amortization expense reflected below) | 20 |
| | 19 |
| | 1 |
|
Depreciation and amortization expense | 11 |
| | 11 |
| | — |
|
| | | | |
|
Sales volumes (thousand gallons per day) (see note (d) on page 44) | 867 |
| | 790 |
| | 77 |
|
Renewable diesel segment operating income increased by $149 million in the first quarter of 2020; however, renewable diesel segment adjusted operating income, which excludes the adjustment in the table in note (c) on page 43, increased by $77 million in the first quarter of 2020 compared to the first quarter of 2019. The components of this increase, along with the reasons for the changes in those components, are outlined below.
Renewable diesel segment margin increased by $78 million in the first quarter of 20192020 compared to the first quarter of 20182019 primarily due to a decrease in ethanol prices, partially offset by the revenue contribution associated with three ethanol plants acquired from Green Plains Inc. (Green Plains) on November 15, 2018. This declinefollowing:
| |
◦ | Price risk management activities had a favorable impact of $52 million. We recognized a hedge gain of $26 million in the first quarter of 2020 compared to a hedge loss of $26 million in the first quarter of 2019. |
| |
◦ | The increase in sales volumes of 77,000 gallons per day had a favorable impact of $17 million. |
Ethanol Segment Results
The following table includes selected financial and operating data of our ethanol segment revenue was partially offsetfor the first quarter of 2020 and the first quarter of 2019. The selected financial data is derived from the Financial Highlights by lower cost of sales of $36 million, resulting in a decrease in ethanolSegment and Total Company tables on pages 38 and 39, respectively, unless otherwise noted.
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | Change |
Operating income (loss) | $ | (197 | ) | | $ | 3 |
| | $ | (200 | ) |
Adjusted operating income (loss) (see note (c) on page 44) | (69 | ) | | 3 |
| | (72 | ) |
| | | | | |
Ethanol margin (see note (c) on page 43) | $ | 62 |
| | $ | 151 |
| | $ | (89 | ) |
Operating expenses (excluding depreciation and amortization expense reflected below) | 109 |
| | 125 |
| | (16 | ) |
Depreciation and amortization expense | 22 |
| | 23 |
| | (1 | ) |
| | | | | |
Production volumes (thousand gallons per day) (see note (d) on page 44) | 4,103 |
| | 4,217 |
| | (114 | ) |
Ethanol segment operating income of $42decreased by $200 million in the first quarter of 20192020; however, ethanol segment adjusted operating income, which excludes the adjustment in the table in note (c) on page 44, decreased by $72 million in the first quarter of 2020 compared to the first quarter of 2018.2019. The components of this decrease, along with the reasons for the changes in thesethose components, are outlined below.
Ethanol segment margin as defined in note (c) to the accompanying tables, decreased $23by $89 million in the first quarter of 20192020 compared to the first quarter of 20182019.
Ethanol segment margin is primarily affected by prices of the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 41 reflects market reference prices that we believe had a material impact on the change in our ethanol segment margin in the first quarter of 2020 compared to the first quarter of 2019.
The decrease in ethanol segment margin is primarily due to the following:
| |
•◦ | Lower ethanolHigher corn prices. Ethanol prices were lower in primarily due to unfavorable location differentials during the first quarter of 2019 compared to the first quarter2020 had an adverse impact of 2018 primarily due to an increase in domesticapproximately $47 million.
|
| |
◦ | Lower ethanol production. For example, the NYH ethanol price was $1.44 per gallon for the first quarter of 2019 compared to $1.52 per gallon for the first quarter of 2018, representing an unfavorable decrease of $0.08 per gallon. We estimate that the decrease in the price of ethanolprices had an unfavorable impact to our ethanol segment margin of approximately $17$47 million. |
| |
• | Higher corn prices. Corn prices were higher in the first quarter of 2019 compared to the first quarter of 2018. For example, the CBOT corn price was $3.73 per bushel for the first quarter of 2019 compared to $3.66 per bushel for the first quarter of 2018, representing an unfavorable increase of $0.07 per bushel. We estimate that the increase in the price of corn had an unfavorable impact to our ethanol segment margin of approximately $4 million.
|
Ethanol segment operating expenses (excluding depreciation and amortization expense) increased $14decreased by $16 million primarily due to costs to operate the three plants acquired from Green Plains in November 2018 of $24 million, partially offset by lower chemicals and catalyst expenses of $5 million, and lower maintenance expenses of $3 million.natural gas costs.
55LIQUIDITY AND CAPITAL RESOURCES
Overview
During the three months ended March 31, 2020, our liquidity was impacted by the decline in the market prices for our products. The amount of cash generated by our product sales declined more rapidly than the amount of cash used to pay for our crude oil purchases. While this relationship is not abnormal or unusual in our business where daily product sales follow market prices on that day, the negative impact on our cash position is more significant when the market prices decline rapidly as they did in the latter half of March 2020. As a result, we borrowed $300 million under our accounts receivable sales facility. Overall, our liquidity declined by $1.5 billion during the first quarter of 2020, from $7.8 billion as of December 31, 2019 to $6.3 billion as of March 31, 2020. Our response to the current economic environment and its impact on our liquidity is more fully described in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 34 through 36 and in the discussion of matters impacting our liquidity and capital resources below.
Our Liquidity
Our liquidity consisted of the following as of March 31, 2020 (in millions):
|
| | | | |
Available borrowing capacity from committed facilities: | | |
Valero Revolver | | $ | 3,966 |
|
Canadian Revolver | | 103 |
|
Accounts receivable sales facility | | 900 |
|
Letter of credit facility | | 50 |
|
Total available borrowing capacity | | 5,019 |
|
Cash and cash equivalents(a) | | 1,323 |
|
Total liquidity | | $ | 6,342 |
|
___________________
| |
(a) | Excludes $192 millionof cash and cash equivalents related to our VIEs that is available for use only by our VIEs. |
Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 6 of Condensed Notes to Consolidated Financial Statements.
In April 2020, the available borrowing capacity under our accounts receivable sales facility decreased due to the reduction in our receivables as a result of the significant decline in product prices. On April 29, 2020, we repaid $400 million of borrowings under the facility and the available capacity to borrow was $512 million. Because of the negative impact on our business of the current economic environment, we entered into a 364-day Revolving Credit Facility with an aggregate principal amount of up to $875 million on April 13, 2020, as described in Note 6 of Condensed Notes to Consolidated Financial Statements. In addition, on April 16, 2020, we issued $850 million of 2.700 percent Senior Notes due April 15, 2023 and $650 million of 2.850 percent Senior Notes due April 15, 2025, as described in Note 6 of Condensed Notes to Consolidated Financial Statements. Proceeds from these debt issuances totaled $1.499 billion before deducting the underwriting discount and other debt issuance costs.
We believe that cash provided by operations, along with cash from our recent public debt offering and available borrowings under our credit facilities, is sufficient to fund our ongoing operating requirements and other commitments. As of April 29, 2020, the amounts available to us under our credit facilities as discussed above remain the same. We expect that, to the extent necessary, we can raise additional cash through equity
Ethanol segment depreciation and amortization expense associated with our cost of sales increased $5 million primarily due to depreciation expense associated with the three plants acquired from Green Plains in November 2018.
Renewable Diesel Segment Results
Renewable diesel segment revenues increased $153 million in the first quarter of 2019 compared to the first quarter of 2018 primarily due to an increase in renewable diesel sales volumes. This improvement in renewable diesel segment revenues was outweighed by higher cost of sales of $299 million primarily due to the benefit of $160 million related to the 2017 blender’s tax credit recognized in the first quarter of 2018, as described in note (a) to the accompanying tables, and incremental costs attributable to the expanded production capacity of the plant, resulting in a decrease in renewable diesel segment operating income of $146 million in the first quarter of 2019 compared to the first quarter of 2018.
Excluding the 2017 blender’s tax credit recognized in the first quarter of 2018 reflected in the table on page 47, renewable diesel segment adjusted operating income increased $14 million in the first quarter of 2019 compared to the first quarter of 2018. The components of this increase, along with the reasons for the changes in these components, are outlined below.
Renewable diesel segment margin, as defined in note (c) to the accompanying tables, increased $24 million in the first quarter of 2019 compared to the first quarter of 2018 primarily due to the following:
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• | Higher sales volumes. Renewable diesel segment margin was favorably impacted by increased sales volumes of 419,000 gallons per day in the first quarter of 2019 compared to the first quarter of 2018 primarily due to the additional production capacity resulting from the expansion of the DGD plant in the third quarter of 2018. We estimate that the increase in sales volumes had a favorable impact to our renewable diesel segment margin of approximately $60 million.
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• | Price risk management activities. We recognized a hedge loss of $26 million in the first quarter of 2019 from commodity derivative instruments associated with our price risk management activities compared to a gain of $1 million in the first quarter of 2018, representing an unfavorable impact to our renewable diesel segment margin of $27 million.
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• | Lower co-product prices. We produce a variety of co-products, such as naphtha and pentane, and the prices we receive are influenced by natural gasoline prices. Natural gasoline prices were lower in the first quarter of 2019 compared to the first quarter of 2018 due to a decrease in demand, resulting in an unfavorable decrease in the prices we received for the co-products we produced. We estimate that the decrease in co-product prices had an unfavorable impact to our renewable diesel segment margin of approximately $7 million.
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Renewable diesel segment operating expenses (excluding depreciation and amortization expense) increased $5 million, which is attributable to the increase in the production of renewable diesel in the first quarter of 2019 compared to the first quarter of 2018 resulting from the expansion of the DGD plant in the third quarter of 2018.
Renewable diesel segment depreciation and amortization expense associated with our cost of sales increased $5 million primarily due to depreciation expense associated with the expansion of the DGD plant in the third quarter of 2018.
Corporate and Eliminations
Corporate and eliminations, which consists primarily of general and administrative expenses and related depreciation and amortization expense, decreased by $27 million in the first quarter of 2019 compared to the first quarter of 2018. Excluding the environmental reserve adjustment of $52 million in the first quarter of 2018 reflected in the table on page 47, adjusted corporate and eliminations increased by $25 million primarily due to expenses in the first quarter of 2019 associated with the Merger Transaction with VLP of $7 million, which is more fully described in Note 2 of Condensed Notes to Consolidated Financial Statements, an increase in legal reserves of $7 million, and higher employee related expenses of $6 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We believe that we have sufficient funds from operations and from borrowings under our credit facilities to fund our ongoing operating requirements and other commitments. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings in the public and private capital markets or the arrangement of additional credit facilities. However, there can be no assurances regarding the availability of any future financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us.
Our liquidity consisted of the following as of March 31, 2019 (in millions):
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| | | | |
Available borrowing capacity from committed facilities: | | |
Valero Revolver | | $ | 3,945 |
|
Canadian Revolver | | 109 |
|
Accounts receivable sales facility | | 1,200 |
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Letter of credit facility | | 100 |
|
Total available borrowing capacity | | 5,354 |
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Cash and cash equivalents(a) | | 2,670 |
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Total liquidity | | $ | 8,024 |
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___________________
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(a) | Excludes $107 million of cash and cash equivalents related to our VIEs that is available for use only by our VIEs. |
Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 5 of Condensed Notes to Consolidated Financial Statements.
Cash Flows Summary
Components of our cash flows are set forth below (in millions):
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Cash flows provided by (used in): | | | | | | |
Operating activities | $ | 877 |
| | $ | 138 |
| $ | (49 | ) | | $ | 877 |
|
Investing activities | (747 | ) | | (752 | ) | (757 | ) | | (747 | ) |
Financing activities | (378 | ) | | (573 | ) | (195 | ) | | (378 | ) |
Effect of foreign exchange rate changes on cash | 43 |
| | (5 | ) | (67 | ) | | 43 |
|
Net decrease in cash and cash equivalents | $ | (205 | ) | | $ | (1,192 | ) | $ | (1,068 | ) | | $ | (205 | ) |
Cash Flows for the Three Months Ended March 31,2019 2020
In the first quarter of 2020, we used $1.0 billion of our cash on hand and $370 million of borrowings to fund our operations by $49 million, make $757 million of investments in our business, and fund $565 million ($195 million, net of borrowings) of financing activities. The borrowings are described in Note 6 of Condensed Notes to Consolidated Financial Statements.
Our operations typically generate positive net cash flows; however, in the first quarter of 2020, we used $49 million of cash to fund our operations due primarily to a negative change in our working capital of $1.1 billion. While we incurred a net loss of $1.8 billion in the first quarter of 2020, that net loss was driven by $3.0 billion of noncash charges consisting of $582 million of depreciation and amortization expense and the $2.5 billion LCM inventory valuation adjustment. The negative change in working capital was largely the result of rapidly falling market prices for the products that we sell. Cash generated by our product sales is typically greater than the cash we use to pay for crude oil and other feedstocks that we process and other costs that we incur. However, because daily product sales follow the market prices on that day, rapid increases or decreases in product market prices can significantly impact our working capital positively or negatively, respectively. As discussed in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update,” market prices declined rapidly in the latter half of March 2020 and this rapid decline resulted in a significant use of cash to pay for our crude oil and other feedstock purchases that were purchased earlier in the quarter before market prices for those feedstocks declined. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, can be found in Note 13 of Condensed Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of our net loss.
Investments in our business of $757 million consisted of $705 million in capital investments, as defined below, of which $78 million related to self-funded capital investments by DGD, and $62 million of capital expenditures of VIEs other than DGD.
Financing activities of $565 million consisted primarily of $401 million in dividends, $147 million for the purchase of common stock for treasury, and $15 million of payments of debt and finance lease obligations.
Cash Flows for the Three Months Ended March 31, 2019
In the first quarter of 2019, our operations generated $877 million of cash, and we used that cash, along with $1.0 billion in borrowings and $205 million of our cash on hand, to make $747 million of investments in our business and fund $1.4 billion ($378 million, net of borrowings) of financing activities. The borrowings are described in Note 6 of Condensed Notes to Consolidated Financial Statements.
As previously noted, our operations generated $877 million of cash in the first three monthsquarter of 2019, driven primarily by net income of $167 million, noncash charges to income of $529 million (consisting primarily of $551 million of depreciation and amortization expense), and a positive change in working capital of $130 million. Noncash charges included $551 millionDetails regarding the components of depreciation and amortization expense, partially offset by a $22 million deferred income tax benefit. See “RESULTS OF OPERATIONS” for further discussion of our operations. Thethe change in our working capital, is detailedalong with the reasons for the changes in those components, can be found in Note 1213 of Condensed Notes to Consolidated Financial Statements. The source of cash resulting from the $130 million change in working capital was mainly due to:
In addition, see “RESULTS OF OPERATIONS” for an increase in accounts payable due to an increase in commodity prices combined with an increase in crude oil volumes purchased and the timing of payments of invoices; partially offset by
an increase in receivables resulting from an increase in commodity prices combined with an increase in sales volumes;
a decrease in taxes other than income taxes payable mainly due to the payment of value-added and ad valorem taxes; and
a decrease in accrued expenses mainly due to the paymentanalysis of our annual incentive compensation related to 2018.net income.
The $877Investments in our business of $747 million consisted of cash generated by our operations, along with (i) $1.9 billion in proceeds from debt issuances and borrowings and $23 million in proceeds from borrowings of certain VIEs (as discussed in Note 5 of Condensed Notes to Consolidated Financial Statements) and (ii) $205 million from available cash on hand, were used mainly to:
fund $726 million in capital investments, as defined below, of which include$13 million is related to self-funded capital expenditures, deferred turnaroundinvestments by DGD, and catalyst costs, and investments in joint ventures;
fund $19 million of capital expenditures of certain VIEs;VIEs other than DGD.
make payments on debt and finance lease obligationsFinancing activities of $907$1.4 billion consisted primarily of $950 million primarily related to the repayment of $900 million on borrowings under our accounts receivable sales facility;
purchase common stock for treasury of $36 million;
pay common stock dividends of $375 million; and
acquire all of the outstanding publicly held common units of VLP, $375 million in dividends, and $36 million for $950 million.the purchase of common stock for treasury.
Cash Flows forIn addition, during the Three Months Endedthree months ended March 31, 2018
Our operations generated $1382019, we sold and repaid $900 million of casheligible receivables under our accounts receivable sales facility.
Capital Investments
Due to the current negative economic environment described in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 34 through 36 , we have deferred approximately $400 million of capital investments for 2020 related to our refining and ethanol segments. As a result, we now expect to incur approximately $2.1 billion for capital investments during 2020, but this deferral does not impact our intent to satisfy all required safety, environmental, and regulatory capital commitments. We will continue to evaluate our capital investments as changes to the first three monthscurrent economic environment occur.
We consider capital investments to include the following:
Capital expenditures for purchases of, 2018, driven primarilyadditions to, and improvements in our property, plant, and equipment, including those made by net incomeDGD but excluding other VIEs;
Deferred turnaround and catalyst cost expenditures, including those made by DGD; and
Investments in unconsolidated joint ventures.
We include DGD’s capital expenditures and deferred turnaround and catalyst cost expenditures in capital investments because we, as operator of $582 million, noncash charges to incomeDGD, manage its capital projects and expenditures. We do not include the capital expenditures of $500 million, partially offset by a negative changeour other consolidated VIEs in capital investments because we do not operate those VIEs. In addition, we do not include expenditures for acquisitions and acquisitions of undivided interests in capital investments.
in working capitalOther Matters Impacting Liquidity and Capital Resources
Stock Purchase Program
As of $1.1 billion. Noncash charges included $498 million of depreciation and amortization expense and $2 million of deferred income tax expense. See “RESULTS OF OPERATIONS”March 31, 2020, we had $1.4 billion available for further discussionpurchase under our stock purchase program, which has no expiration date. We have not purchased any shares of our operations. The change incommon stock under our working capital is detailed in Note 12 of Condensed Notes to Consolidated Financial Statements. The use of cash resulting from the $1.1 billion change in working capital was mainly due to:
a decrease in accounts payable primarily as a result ofstock purchase program since mid-March 2020, and we will evaluate the timing of payments of invoices;repurchases when appropriate. We have no obligation to make purchases under this program.
a decrease in income taxes payable resulting from the January 2018 payment of our fourth quarter 2017 estimated taxes that were previously deferred, as allowed by tax relief authorization from the Internal Revenue Service (IRS);Pension Plan Funding
a decrease in accrued expenses mainly due to the payment of our annual incentive compensation related to 2017;
a decrease in taxes other than income taxes payable mainly due to the payment of excise and ad valorem taxes; and
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• | an increasein inventory, mainly due to an increase in commodity prices; partially offset by
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a decrease in receivables primarily as a result of the timing of collections of receivables.
The $138 million of cash generated by our operations, along with (i) $498 million in proceeds from the issuance of VLP’s 4.5 percent Senior Notes (that were available only to the operations of VLP, as discussed in Note 5 of Condensed Notes to Consolidated Financial Statements) and (ii) $1.2 billion from available cash on hand, were used mainly to:
fund $631 million in capital investments, which include capital expenditures, deferred turnaround and catalyst costs, and investments in joint ventures;
acquire undivided interests in pipeline and terminal assets for $85 million;
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• | make payments on debt and finance lease obligations of $415 million, of which $410 million related to the repayment of all outstanding borrowings under the VLP Revolver;
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purchase common stock for treasury of $320 million; and
pay common stock dividends of $345 million.
Capital Investments
AsWe previously disclosed in our annual report on Form 10-K for the year ended December 31, 2018, we expect to incur approximately $2.5 billion for capital investments during 2019 and also 2020. Capital investments include capital expenditures, turnaround and catalyst costs, and investments in joint ventures. Capital expenditures include the capital expenditures of our consolidated subsidiaries and consolidated VIEs in which we hold an ownership interest. Our capital investments consist of approximately 60 percent for sustaining capital and 40 percent for growth strategies. This capital investment estimate excludes potential strategic acquisitions, including acquisitions of undivided interests. We continuously evaluate our capital budget and make changes as conditions warrant.
In addition to our capital investments noted above, we separately reflect in our statements of cash flows the capital expenditures of certain VIEs that we consolidate even though we do not hold an ownership interest in them. These expenditures are not included in our $2.5 billion estimate of capital investments for 2019 or 2020. See Note 8 of Condensed Notes to Consolidated Financial Statements for a description of our VIEs.
Other Matters Impacting Liquidity and Capital Resources
Stock Purchase Program
On January 23, 2018, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding common stock (the 2018 program) with no expiration date. As of March 31, 2019, we had
$2.2 billion remaining available for purchase under the 2018 Program. We have no obligation to make purchases under this program.
Pension Plan Funding
As previously disclosed in our annual report on Form 10-K for the year ended December 31, 2018, we planplanned to contribute approximately $35$140 million to our pension plans and $21 million to our other postretirement benefit plans during 2019.2020. Due to the current economic environment, we are reconsidering our intent to make a discretionary contribution of up to $100 million to our qualified U.S. pension plan.
Environmental Matters
Our operations are subject to extensive environmental regulations by governmental authorities relating to the discharge of materials into the environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of gasolines and distillates. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades in any of our operating facilities could require material additional expenditures to comply with environmental laws and regulations.
Tax Matters
The IRS has ongoing audits related to ourUnder recently passed legislation, such as the CARES Act in the U.S. federal, and existing legislation, we deferred approximately $100 million of income and indirect (e.g., VAT and motor fuel taxes) tax returns from 2012 through 2015. Duringpayments due in the first quarter of 2019,2020, and we settledplan, to the combined audit relatedextent possible, to our U.S. federaldefer additional income and indirect tax returns for 2010 and 2011 and will receive a refundpayments due in the second quarter of $320 million, plus interest, associated with this audit. We did not have a significant change to our uncertain tax positions upon the settlement2020. Some of the 2010 and 2011 combined audit. We believe thatdeferred payments will be due in the ultimate settlementthird quarter of our 2012 through 2015 audits will not be material to our financial position, results2020, with the majority of operations, or liquidity.
the remaining amount due in 2021.
Cash Held by Our International Subsidiaries
As of DecemberMarch 31, 2017, the accumulated earnings2020, $985 million of our cash and profits ofcash equivalents was held by our international subsidiaries. Cash held by our international subsidiaries not previously distributed were included in our computationcan be repatriated to us without any U.S. federal income tax consequences as a result of the one-time deemed repatriation tax liability associated with the enactmentprovisions of the Tax Cuts and Jobs Act of 2017, (Tax Reform). Because of the deemed repatriation of these accumulated earnings and profits, there are no longer any U.S. federal income tax consequences associated with the repatriation of any of the $1.5 billion of cash and cash equivalents held by our international subsidiaries as of March 31, 2019. However,but certain countries in which our international subsidiaries are organized imposeother taxes may apply, including, but not limited to, withholding taxes on cash distributed outside of those countries. We have accrued for withholding taxes on the portion of theimposed by certain international jurisdictions and U.S. state income taxes. Therefore, there is a cost to repatriate cash held by onecertain of our international subsidiaries to us, but we believe that we have deemedsuch amount is not material to be permanently reinvested in our operations in that country. The remaining cash held by that subsidiary, as well as our other international subsidiaries, will be permanently reinvested in our operations in those countries.financial position or liquidity.
Concentration of Customers
Our operations have a concentration of customers in the refining industry and customers who are refined petroleum product wholesalers and retailers. These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions.conditions including the uncertainties concerning COVID-19 and volatility in the global oil markets. However, we believe that our portfolio of accounts receivable is sufficiently diversified to the extent necessary to minimize potential credit risk. Historically, we have not had any significant problems collecting our accounts receivable.
CONTRACTUAL OBLIGATIONS
As of March 31, 2019,2020, our contractual obligations included debt, finance lease obligations, operating lease obligations, purchase obligations, and other long-term liabilities. In the ordinary course of business, we had lease and debt-related activities during the three months ended March 31, 2020 as described in Notes 5 and 6 of Condensed Notes to Consolidated Financial Statements. In addition, certain of our purchase obligations, primarily related to crude oil and other feedstock supply arrangements, declined during the first quarter of 2020 as a result of the decrease in crude oil and feedstock prices that occurred during the latter half of March 2020 as a result of current economic conditions, along with lower volume commitments. There were no materialchanges outside the ordinary course of business with respect to our contractual obligations during the three months ended March 31, 2019. However, in the ordinary course of business,2020.
On April 13, 2020, we had various debt-related activities during the three months ended March 31, 2019 and in April 2019entered into a 364-day Revolving Credit Facility with several lenders as described in Note 6 of Condensed Notes to Consolidated Financial Statements. This facility provides for a revolving credit facility in an aggregate principal amount of up to $875 million and matures 364 days from April 13, 2020.
On April 16, 2020, we issued $850 million of 2.700 percent Senior Notes due April 15, 2023 and $650 million of 2.850 percent Senior Notes due April 15, 2025, as described in Note 56 of Condensed Notes to Consolidated Financial Statements.
Our debt and financing agreements do not have rating agency triggers that would automatically require us to post additional collateral. However, in the event of certain downgrades of our senior unsecured debt by the ratings agencies, the cost of borrowings under some of our bank credit facilities and other arrangements wouldmay increase. As of March 31, 2019,2020, all of our ratings on our senior unsecured debt, including debt of one of our wholly owned subsidiaries that is guaranteed by us, are at or above investment grade level as follows:
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| | |
Rating Agency | | Rating |
Moody’s Investors Service | | Baa2 (stable outlook) |
Standard & Poor’s Ratings Services | | BBB (stable outlook) |
Fitch Ratings | | BBB (stable outlook) |
Subsequent to the debt issuances of senior notes in April 2020 described in “LIQUIDITY AND CAPITAL RESOURCES—Our Liquidity,” each of our rating agencies assigned ratings on the new senior unsecured debt consistent with their previous ratings.
We cannot provide assurance that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell, or hold our securities. Each rating should be evaluated independently of any other rating. Any future reduction below investment grade or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing and the cost of such financings.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates. As of March 31, 2019, there were no significant changes to our critical accounting policies that involvedOur critical accounting estimates since the dateare included in our annual report on Form 10‑K10-K for the year ended December 31, 2018 was filed.2019. As of March 31, 2020, the following accounting policy is included as it involves estimates that are considered critical due to the level of subjectivity and judgment involved, as well as the impact on our financial position and results of operations. We believe that all of our estimates are reasonable. Estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining our estimates are not practicable due to the number of assumptions and contingencies involved, and the wide range of possible outcomes.
Impairment of Long-Lived Assets and Goodwill
Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.
As of March 31, 2020, we completed an impairment analysis of certain of our long-lived assets and goodwill and determined they were not impaired, as discussed in Note 2 of Condensed Notes to Consolidated Financial Statements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
COMMODITY PRICE RISK
We are exposed to market risks related to the volatility in the price of crude oil, refined petroleum products (primarily gasoline and distillate), renewable diesel, grain (primarily corn), soybean oil,renewable diesel feedstocks, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures and options to manage the volatility of:
inventories and firm commitments to purchase inventories generally for amounts by which our current year inventory levels (determined on a LIFO basis) differ from our previous year-end LIFO inventory levels,levels; and
forecasted feedstock and refined petroleum product purchases, refined petroleum product sales, renewable diesel sales, or natural gas purchases, and corn purchases to lock in the price of those forecasted transactions at existing market prices that we deem favorable.
Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.
The following sensitivity analysis includes all of our derivative instruments entered into for purposes other than trading with which we have market risk (in millions):
| | | March 31, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Gain (loss) in fair value resulting from: | | | | | | |
10% increase in underlying commodity prices | $ | (71 | ) | | $ | 2 |
| $ | (8 | ) | | $ | (39 | ) |
10% decrease in underlying commodity prices | 61 |
| | (6 | ) | 7 |
| | 38 |
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See Note 1415 of Condensed Notes to Consolidated Financial Statements for notional volumes associated with these derivative contracts as of March 31, 2019.2020.
COMPLIANCE PROGRAM PRICE RISK
We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. As of March 31, 20192020 and December 31, 2018,2019, the amount of gain or loss in the fair value of derivative instruments that would have resulted from a 10 percent increase or decrease in the underlying price of the contracts was not material. See Note 1415 of Condensed Notes to Consolidated Financial Statements for a discussion about these compliance programs.
INTEREST RATE RISK
The following table provides information about our debt instruments (dollars in millions), the fair values of which are sensitive to changes in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented.
| | | March 31, 2019 | March 31, 2020 |
| Expected Maturity Dates | | | | | Expected Maturity Dates | | | | |
| Remainder of 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | There- after | | Total (a) | | Fair Value | Remainder of 2020 (a) | | 2021 | | 2022 | | 2023 | | 2024 | | There- after | | Total (b) | | Fair Value |
Fixed rate | $ | 850 |
| | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 8,474 |
| | $ | 9,334 |
| | $ | 10,346 |
| $ | — |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,474 |
| | $ | 8,485 |
| | $ | 8,411 |
|
Average interest rate | 6.1 | % | | — | % | | 5 | % | | — | % | | — | % | | 5.2 | % | | 5.3 | % | | | — | % | | 5.0 | % | | — | % | | — | % | | — | % | | 5.2 | % | | 5.2 | % | | |
Floating rate (b) | $ | 236 |
| | $ | 5 |
| | $ | 5 |
| | $ | 5 |
| | $ | 20 |
| | $ | — |
| | $ | 271 |
| | $ | 271 |
| |
Floating rate (c) | | $ | 822 |
| | $ | 5 |
| | $ | 5 |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 850 |
| | $ | 850 |
|
Average interest rate | 5.0 | % | | 4.5 | % | | 4.5 | % | | 4.5 | % | | 4.5 | % | | — | % | | 5.0 | % | | | 3.9 | % | | 4.2 | % | | 4.2 | % | | 4.2 | % | | — | % | | — | % | | 3.9 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | December 31, 2019 |
| Expected Maturity Dates | | | | | Expected Maturity Dates | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | There- after | | Total (a) | | Fair Value | 2020 (a) | | 2021 | | 2022 | | 2023 | | 2024 | | There- after | | Total (b) | | Fair Value |
Fixed rate | $ | — |
| | $ | 850 |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 7,474 |
| | $ | 8,334 |
| | $ | 8,737 |
| $ | — |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,474 |
| | $ | 8,485 |
| | $ | 10,099 |
|
Average interest rate | — | % | | 6.1 | % | | 5 | % | | — | % | | — | % | | 5.4 | % | | 5.5 | % | | | — | % | | 5.0 | % | | — | % | | — | % | | — | % | | 5.2 | % | | 5.2 | % | | |
Floating rate (b) | $ | 214 |
| | $ | 5 |
| | $ | 5 |
| | $ | 5 |
| | $ | 20 |
| | $ | — |
| | $ | 249 |
| | $ | 249 |
| |
Floating rate (c) | | $ | 453 |
| | $ | 6 |
| | $ | 6 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | 484 |
| | $ | 484 |
|
Average interest rate | 4.6 | % | | 4.7 | % | | 4.7 | % | | 4.7 | % | | 4.7 | % | | — | % | | 4.6 | % | | | 5.0 | % | | 4.5 | % | | 4.5 | % | | 4.5 | % | | — | % | | — | % | | 5.0 | % | | |
____________________
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(a) | As of March 31, 2020 and December 31, 2019, our floating rate debt includes $418 million and $348 million, respectively, associated with borrowings under the IEnova Revolver for the construction of terminals in Mexico by Central Mexico Terminals. The IEnova Revolver is only available to the operations of Central Mexico Terminals, and its creditors do not have recourse against us. |
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(b) | Excludes unamortized discounts and debt issuance costs. |
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(b)(c) | As of March 31, 20192020 and December 31, 2018,2019, we had an interest rate swap associated with $39$32 million and $40$36 million, respectively, of our floating rate debt resulting in an effective interest rate of 3.85 percent as of each of those reporting dates. The fair value of the swap was immaterial for all periods presented. |
FOREIGN CURRENCY RISK
As of March 31, 20192020, we had foreign currency contracts to purchase $418$220 million of U.S. dollars $1.7and $2.5 billion of U.S. dollar equivalent Canadian dollars,dollars. Of these commitments, $1.2 billionmatured on or before April 24, 2020 and $300 million of U.S. dollar equivalent pounds sterling.the remaining $1.5 billion will mature by June 15, 2020. Our market risk was minimal on thesethe contracts as the majority of themthat matured on or before April 30, 2019.24, 2020 and the contracts that will mature by June 15, 2020.
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ITEM 4. | CONTROLS AND PROCEDURES |
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(a) | Evaluation of disclosure controls and procedures. |
Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of March 31, 2019.2020.
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(b) | Changes in internal control over financial reporting. |
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
The information below describesThere have been no new proceedings or material developments in proceedings that we previously reported in our annual report on Form 10-K for the year ended December 31, 2018.
Environmental Enforcement Matters
While it is not possible to predict the outcome of the following environmental proceedings, if any one or more of them were decided against us, we believe that there would be no material effect on our financial position, results of operations, or liquidity. We are reporting these proceedings to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings will result in monetary sanctions of $100,000 or more.
Bay Area Air Quality Management District (BAAQMD) and Solano County Department of Resource Management Certified Unified Program Agency (Solano County) (Benicia Refinery). We have received multiple Violation Notices (VNs) issued by the BAAQMD related to an upset of the Flue Gas Scrubber (FGS) at our Benicia Refinery. In the aggregate, we reasonably believe penalties for these VNs may be in excess of $100,000. We are working with the BAAQMD to resolve these VNs. We have also received a draft Consent Order (Docket AEO-2019-103) from Solano County related to the FGS incident. The draft Consent Order assesses proposed penalties of $242,840. We are working with Solano County to resolve this matter.
BAAQMD (Benicia Refinery). In our annual report on Form 10-K for the year ended December 31, 2018, we reported that we had multiple outstanding VNs issued by the BAAQMD. These VNs are for various alleged air regulation and air permit violations at our Benicia Refinery and asphalt plant. We continue to work with the BAAQMD to resolve these VNs.
Attorney General of the State of Texas (Texas AG) (Corpus Christi Asphalt Plant). We have received a letter and draft Agreed Final Judgment from the Texas AG related to a contaminated water backflow incident that occurred at the Valero Corpus Christi Asphalt Plant. The draft Agreed Final Judgment assesses proposed penalties in the amount of $1,300,000. We are working with the Texas AG to resolve this matter.
Texas Commission on Environmental Quality (TCEQ) (Corpus Christi Refinery). We have received a proposed Agreed Order from the TCEQ in the amount of $167,550, for inspection and permit violations related to third party tanks located at our Corpus Christi Refinery that we operate. We are working with the TCEQ to resolve this matter.2019.
There have been no changes from the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2018.2019, as supplemented by the risk factor included in our current report on Form 8-K filed with the SEC on April 13, 2020. However, to the extent COVID-19 adversely affects our business, financial condition, results of operation, and liquidity, it may also have the effect of heightening many of the other risks described in such risk factors.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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(a) | Unregistered Sales of Equity Securities. Not applicable. |
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(b) | Use of Proceeds. Not applicable. |
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(c) | Issuer Purchases of Equity Securities. The following table discloses purchases of shares of our common stock made by us or on our behalf during the first quarter of 2019.2020. |
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Not Purchased as Part of Publicly Announced Plans or Programs (a) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (b) |
January 2019 | | 17,551 |
| | $ | 78.34 |
| | 17,551 |
| | — |
| | $2.2 billion |
February 2019 | | 379 |
| | $ | 83.95 |
| | 379 |
| | — |
| | $2.2 billion |
March 2019 | | 395,665 |
| | $ | 86.44 |
| | 2,429 |
| | 393,236 |
| | $2.2 billion |
Total | | 413,595 |
| | $ | 86.09 |
| | 20,359 |
| | 393,236 |
| | $2.2 billion |
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Not Purchased as Part of Publicly Announced Plans or Programs (a) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (b) |
January 2020 | | 220,940 |
| | $ | 89.47 |
| | 220,940 |
| | — |
| | $1.5 billion |
February 2020 | | 640,511 |
| | $ | 77.08 |
| | 556,003 |
| | 84,508 |
| | $1.5 billion |
March 2020 | | 1,246,416 |
| | $ | 62.08 |
| | 373 |
| | 1,246,043 |
| | $1.4 billion |
Total | | 2,107,867 |
| | $ | 69.51 |
| | 777,316 |
| | 1,330,551 |
| | $1.4 billion |
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(a) | The shares reported in this column represent purchases settled in the first quarter of 20192020 relating to (i) our purchases of shares in open-market transactions to meet our obligations under stock-based compensation plans and (ii) our purchases of shares from our employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock, and other stock compensation transactions in accordance with the terms of our stock-based compensation plans. |
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(b) | On January 23, 2018, we announced that our board of directors authorized our purchase of up to $2.5 billion of our outstanding common stock (2018 Program), with no expiration date. As of March 31, 2019,2020, we had $2.2$1.4 billion remaining available for purchase under the 2018 Program. We have not purchased any shares of our common stock under the 2018 Program since mid-March 2020, and we will evaluate the timing of repurchases when appropriate. We have no obligation to make purchases under the 2018 Program. |
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Exhibit No. | | Description |
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| | Fourth Amended and Restated$875,000,000 364-Day Revolving Credit Agreement, dated as of March 19, 2019,April 13, 2020, among Valero, Energy Corporation, as Borrower; JPMorgan Chase Bank, N.A., as Administrative Agent; and the lenders named therein–incorporated by reference to Exhibit 10.1 to Valero’s Current Report on Form 8-K dated March 19, 2019, and filed March 19, 2019April 13, 2020 (SEC File No. 1-13175)001-13175). |
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***101101.INS | | Inline XBRL Instance Document–the instance document does not appear in the Interactive Data FilesFile because its XBRL tags are embedded within the Inline XBRL document. |
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***101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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***101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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***101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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***101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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***101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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***104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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*** | Submitted electronically herewith. |
Certain agreements relating to our long-term debt have not been filed as exhibits as permitted by paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K since the total amount of securities authorized under any such agreements do not exceed 10 percent of our total consolidated assets. Upon request, we will furnish to the SEC all constituent agreements defining the rights of holders of our long-term debt not filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | VALERO ENERGY CORPORATION (Registrant) |
| By: | /s/ Donna M. Titzman |
| | Donna M. Titzman |
| | Executive Vice President and |
| | Chief Financial Officer |
| | (Duly Authorized Officer and Principal |
| | Financial and Accounting Officer) |
Date: May 7, 2019April 29, 2020