Valero Energy Reports 2017 Fourth Quarter and Full Year Results

• Reported net income attributable to Valero stockholders of $2.4 billion, or $5.42 per share, for the fourth quarter and $4.1 billion, or $9.16 per share, for the year.
• Reported adjusted net income attributable to Valero stockholders of $509 million, or $1.16 per share, for the fourth quarter and $2.2 billion, or $4.96 per share, for the year. 
• Invested $641 million of growth and sustaining capital for the fourth quarter and $2.4 billion for the year.
• Commissioned new 200,000 barrels per day Diamond Pipeline and Wilmington cogeneration unit in November.
• Returned $727 million in cash to stockholders through dividends and stock buybacks in the fourth quarter and $2.6 billion in the year.

SAN ANTONIO, Feb. 01, 2018 (GLOBE NEWSWIRE) — Valero Energy Corporation (NYSE:VLO) (“Valero”) today reported net income attributable to Valero stockholders of $2.4 billion, or $5.42 per share, for the fourth quarter of 2017 compared to $367 million, or $0.81 per share, for the fourth quarter of 2016.  Excluding an income tax benefit of $1.9 billion, or $4.26 per share, that resulted from the Tax Cuts and Jobs Act of 2017 (Tax Reform), fourth quarter 2017 adjusted net income attributable to Valero stockholders was $509 million, or $1.16 per share.  For the year ended December 31, 2017, net income attributable to Valero stockholders was $4.1 billion, or $9.16 per share, compared to $2.3 billion, or $4.94 per share for 2016.  Excluding the income tax benefit for 2017 and other adjustments reflected in the accompanying earnings release tables for 2016, adjusted net income attributable to Valero stockholders for 2017 was $2.2 billion, or $4.96 per share, compared to $1.7 billion, or $3.72 per share, for 2016.

“We performed very well this year,” said Joe Gorder, Valero Chairman, President and Chief Executive Officer. “We achieved a number of operational performance records and delivered solid financial results.”

Refining
The refining segment reported $982 million of operating income for the fourth quarter of 2017 compared to $645 million for the fourth quarter of 2016, which has been retrospectively revised to reflect the operating results of Valero Energy Partners LP (NYSE:VLP) as a separate segment consistent with Valero’s current segment presentation.  Fourth quarter 2017 operating income includes $17 million of expenses primarily related to ongoing repairs at certain of the company’s U.S. Gulf Coast refineries to address damage resulting from Hurricane Harvey.  Excluding those repair costs, operating income increased by $354 million, primarily driven by higher distillate and gasoline margins in most regions and wider discounts for domestic sweet crude oils relative to Brent crude oil, partly offset by narrower discounts for medium and heavy sour crude oils versus Brent. 

Refinery throughput capacity utilization was 96 percent, and throughput volumes averaged 3.0 million barrels per day in the fourth quarter of 2017, which is 156,000 barrels per day higher than the fourth quarter of 2016.  The company exported a total of 392,000 barrels per day of gasoline and distillate during the fourth quarter of 2017. 

“Our Port Arthur refinery completed its post-hurricane recovery efforts and resumed normal operations in the fourth quarter,” Gorder, said.

Biofuel blending costs were $311 million in the fourth quarter of 2017, which is $94 million higher than in the fourth quarter of 2016, and $942 million in 2017, which is $193 million higher than in 2016.  The higher cost is mainly due to higher Renewable Identification Number (RIN) prices.

“Looking ahead, we continue to see a favorable fundamental environment, with abundant crude oil supply and strong products demand being supported by global economic growth,” Gorder said.  “We’re also encouraged by the potential benefits to the refining industry from Tax Reform and the reduction in the global limit for fuel oil sulfur.”

Ethanol
The ethanol segment reported $37 million of operating income for the fourth quarter of 2017 compared to $126 million for the fourth quarter of 2016.  The decrease in operating income is attributed primarily to margin pressure resulting from lower ethanol prices.  Ethanol production volumes averaged 4.0 million gallons per day in the fourth quarter of 2017, which is 53,000 gallons per day higher than in the fourth quarter of 2016. 

VLP
The VLP segment reported $80 million of operating income for the fourth quarter of 2017 compared to $70 million for the fourth quarter of 2016.  The increase in operating income is mostly driven by contributions from the Red River pipeline segment, which was acquired in January 2017, and the Port Arthur terminal assets and Parkway Pipeline, which were acquired in November 2017.

Corporate and Other
General and administrative expenses were $238 million in the fourth quarter of 2017 compared to $208 million in the fourth quarter of 2016.  For 2017, general and administrative expenses of $835 million were $120 million higher than in 2016 mainly due to reserve adjustments and a fee related to the termination of an agreement to acquire certain terminals in Northern California owned by Plains All American Pipeline, L.P.  Excluding the income tax benefit related to Tax Reform, the effective tax rate was 30 percent for the fourth quarter of 2017. 

Investing and Financing Activities
Capital investments totaled $641 million in the fourth quarter of 2017, of which $142 million was for turnarounds and catalyst.  For 2017, capital investments totaled $2.4 billion, consisting of $1.3 billion for sustaining the business and $1.1 billion for growth projects. 

Valero returned $727 million to stockholders in the fourth quarter, of which $421 million was for the purchase of 5 million shares of its common stock and the balance was paid as dividends.  In 2017, Valero returned $2.6 billion to stockholders, or 63 percent of adjusted net cash provided by operating activities, consisting of $1.4 billion in stock buybacks and $1.2 billion in dividends.  Net cash provided by operating activities in 2017 was $5.5 billion.  Included in this amount is the favorable impact from a $1.3 billion decrease in working capital.  Excluding the change in working capital, net cash generated was $4.2 billion. 

The company is targeting a total payout ratio between 40 and 50 percent of adjusted net cash provided by operating activities for 2018.  Valero defines total payout ratio as the sum of dividends and stock buybacks divided by net cash provided by operating activities adjusted for changes in working capital. 

“With a lower tax burden in 2018 resulting from Tax Reform, we expect to see a significant benefit to Valero’s net cash provided by operating activities,” commented Gorder.

On January 23, the company announced a 14 percent increase in its quarterly common stock dividend from $0.70 per share to $0.80 per share, payable on March 6, 2018, to holders of record on February 13, 2018.  The Board of Directors also approved an incremental $2.5 billion share repurchase authorization.  Valero has approximately $1.2 billion of repurchase authority available under its previously announced buyback authorization, giving it $3.7 billion available for stock repurchases going forward.

Liquidity and Financial Position
Valero ended the fourth quarter of 2017 with $8.9 billion of total debt and $5.9 billion of cash and temporary cash investments.  The debt to capital ratio, net of $2.0 billion in cash, was 23 percent. 

Strategic Update
The Diamond Pipeline and the Wilmington cogeneration plant both started up in November and are performing as expected.  The 200,000 barrels per day Diamond Pipeline increases Valero’s crude blend quality and supply flexibility, including access to many crude oil grades in Cushing, Oklahoma, for the Memphis refinery.  The Wilmington refinery is benefitting from reduced operating expenses and improved supply reliability for power and steam. 

“We were excited to receive our first barrels of crude oil off the Diamond Pipeline,” said Gorder.  “With current price differentials between WTI and LLS crude oil, our Memphis refinery is enjoying a significant cost advantage versus crude delivered on Capline.”

Valero expects to invest $2.7 billion of capital in 2018, of which $1.0 billion is for growth projects and $1.7 billion is for sustaining the business.  Included in the growth investments is the construction of a new 25,000 barrels per day alkylation unit at the St. Charles refinery, which received final approval from the company’s Board of Directors last week.  Total cost for the alkylation unit is estimated at $400 million, and completion is expected in the second half of 2020. 

Conference Call
Valero’s senior management will hold a conference call at 10 a.m. ET today to discuss this earnings release and to provide an update on operations and strategy.

About Valero
Valero Energy Corporation, through its subsidiaries, is an international manufacturer and marketer of transportation fuels and other petrochemical products.  Valero, a Fortune 50 company based in San Antonio, Texas, with approximately 10,000 employees, is an independent petroleum refiner and ethanol producer, and its assets include 15 petroleum refineries with a combined throughput capacity of approximately 3.1 million barrels per day and 11 ethanol plants with a combined production capacity of 1.4 billion gallons per year.  The petroleum refineries are located in the United States (U.S.), Canada and the United Kingdom (U.K.), and the ethanol plants are located in the Mid-Continent region of the U.S.  In addition, Valero owns the 2 percent general partner interest and a majority limited partner interest in Valero Energy Partners LP, a midstream master limited partnership.  Valero sells its products in both the wholesale rack and bulk markets, and approximately 7,400 outlets carry Valero’s brand names in the U.S., Canada, the U.K. and Ireland.  Please visit www.valero.com for more information.

Valero Contacts
Investors:
John Locke, Vice President – Investor Relations, 210-345-3077
Karen Ngo, Senior Manager – Investor Relations, 210-345-4574
Tom Mahrer, Manager – Investor Relations, 210-345-1953

Media:
Lillian Riojas, Director – Media Relations and Communications, 210-345-5002

Safe-Harbor Statement
Statements contained in this release that state the company’s or management’s expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  The words “believe,” “expect,” “should,” “estimates,” “intend,” “targeting,” and other similar expressions identify forward-looking statements.  It is important to note that actual results could differ materially from those projected in such forward-looking statements based on numerous factors, including those outside of the company’s control, such as delays in construction timing and other factors.  For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see Valero’s annual reports on Form 10-K, quarterly reports on Form 10-Q and our other reports filed with the SEC and on Valero’s website at www.valero.com, and VLP’s annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and on VLP’s website at www.valeroenergypartners.com.

Use of Non-GAAP Financial Information
This earnings release and the accompanying earnings release tables include references to financial measures that are not defined under U.S. generally accepted accounting principles (GAAP). These non-GAAP measures include adjusted net income attributable to Valero stockholders, adjusted earnings per common share – assuming dilution, adjusted operating income, refining margin, ethanol margin, and adjusted net cash provided by operating activities.  We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods.  See the accompanying earnings release tables for a reconciliation of non-GAAP measures to their most directly comparable U.S. GAAP measures. In note (g) to the earnings release tables, we disclose the reasons why we believe our use of these non-GAAP financial measures provides useful information.

See Notes to Earnings Release Tables.

See Operating Highlights by Segment.
See Notes to Earnings Release Tables.

See Operating Highlights by Segment.
See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

See Notes to Earnings Release Tables.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO EARNINGS RELEASE TABLES

(a) During the year ended December 31, 2016, we recorded a change in our lower of cost or market inventory valuation reserve that was established on December 31, 2015, resulting in a noncash benefit of $747 million ($697 million and $50 million attributable to our refining and ethanol segments, respectively). 

(b) Other operating expenses reflects expenses that are not associated with our cost of sales. Other operating expenses for the three months and year ended December 31, 2017 primarily includes costs incurred at certain of our United States (U.S.) Gulf Coast refineries and certain VLP assets due to damage associated with Hurricane Harvey. 

(c) Effective October 1, 2016, we (i) transferred ownership of all of our assets in Aruba, other than certain hydrocarbon inventories and working capital, to Refineria di Aruba N.V., an entity wholly-owned by the Government of Aruba (GOA), (ii) settled our obligations under various agreements with the GOA, including agreements that required us to dismantle our leasehold improvements under certain conditions, and (iii) sold the working capital of our Aruba operations, including hydrocarbon inventories, to the GOA, CITGO Aruba Refining N.V., and CITGO Petroleum Corporation. We refer to this transaction as the “Aruba Disposition.”

In June 2016, we recognized an asset impairment loss of $56 million representing all of the remaining carrying value of the long-lived assets of our crude oil and refined product terminal and transshipment facility in Aruba.

In September 2016 and in connection with the Aruba Disposition, our U.S. subsidiaries cancelled all outstanding debt obligations owed to them by our Aruba subsidiaries, which resulted in the recognition by us of an income tax benefit in the U.S. of $42 million during the year ended December 31, 2016.

(d) On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (Tax Reform) was enacted, resulting in the remeasurement of our U.S. deferred taxes and the recognition of a liability for taxes on the deemed repatriation of our foreign earnings and profits. Under U.S. generally accepted accounting principles (GAAP), we are required to recognize the effect of the Tax Reform in the period of enactment. As a result, we recognized a $1.9 billion income tax benefit in December 2017, which represents the estimated impact of Tax Reform. This estimate may be refined in future periods as further information becomes available. 

(e) The income tax benefit for the three months ended December 31, 2017 includes an income tax benefit associated with Tax Reform (see note (d) above). Excluding this effect, income tax expense was $227 million, resulting in an effective tax rate of 29.8%. The variation in the customary relationship between income tax expense and income before income tax expense for all periods presented is due primarily to earnings from our international operations that are taxed at statutory rates that are lower than in the U.S. In addition, for the year ended December 31, 2016, the variation is due to the recognition of an income tax benefit in the U.S. in connection with the Aruba Disposition (see note (c) above). 

(f) Effective January 1, 2017, 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 — VLP. The results of the VLP segment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment. Comparable prior period information for our refining segment (as well as that segment’s U.S. Gulf Coast and U.S. Mid-Continent regions) and VLP segment has been retrospectively adjusted to reflect our current segment presentation. 

(g) We use certain financial measures (as noted below) in the earnings release tables and accompanying earnings release 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 lower of cost or market inventory valuation adjustment, its related income tax effect, the asset impairment loss, the income tax benefit on the Aruba Disposition, and the Tax Reform income tax benefit. We believe that these items are not indicative of our core operating performance and that their exclusion results in an important measure for our ongoing financial performance to better assess our underlying business results and trends.
• Adjusted earnings per common share – assuming dilution is defined as adjusted net income attributable to Valero Energy Corporation stockholders divided by the number of weighted-average shares outstanding in the applicable period, assuming dilution.
• Refining margin is defined as refining operating income excluding the lower of cost or market inventory valuation adjustment, operating expenses (excluding depreciation and amortization expense), other operating expenses, depreciation and amortization expense, and the asset impairment loss. We believe refining margin is an important measure of our refining segment’s operating and financial performance as it is the most comparable measure to the industry’s market reference product margins, which are used by industry analysts, investors, and others to evaluate our performance.
• Ethanol margin is defined as ethanol operating income excluding the lower of cost or market inventory valuation adjustment, operating expenses (excluding depreciation and amortization expense), and depreciation and amortization expense. We believe ethanol margin is an important measure of our ethanol segment’s operating and financial performance as it is the most comparable measure to the industry’s market reference product margins, which are used by industry analysts, investors, and others to evaluate our performance.
• Adjusted refining operating income is defined as refining segment operating income excluding other operating expenses, the lower of cost or market inventory valuation adjustment, and the asset impairment loss. We believe adjusted refining operating income is an important measure of our refining segment’s operating and financial performance because it excludes items that are not indicative of that segment’s core operating performance.
• Adjusted ethanol operating income is defined as ethanol operating income excluding the lower of cost or market inventory valuation adjustment. We believe this is an important measure of our ethanol segment’s operating and financial performance because it excludes items that are not indicative of that segment’s core operating performance.
• Adjusted VLP operating income is defined as VLP operating income excluding other operating expenses. We believe this is an important measure of our VLP segment’s operating and financial performance because it excludes items that are not indicative of that segment’s core operating performance.

(h) The refining segment regions reflected herein contain the following refineries: U.S. Gulf Coast– Corpus Christi East, Corpus Christi West, Houston, Meraux, Port Arthur, St. Charles, Texas City, and Three Rivers Refineries; U.S. Mid-Continent– Ardmore, McKee, and Memphis Refineries; North Atlantic– Pembroke and Quebec City Refineries; and U.S. West Coast– Benicia and Wilmington Refineries.

(i) Primarily includes petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt.

(j) Valero uses certain operating statistics (as noted below) in the earnings release tables and the accompanying earnings release to evaluate performance between comparable periods. Different companies may calculate them in different ways.

All per barrel of throughput and per gallon of production amounts are calculated by dividing the associated dollar amount by the throughput volumes, production volumes, pipeline transportation throughput volumes, or terminaling throughput volumes for the period, as applicable.

Throughput volumes, production volumes, pipeline transportation throughput volumes, and terminaling throughput volumes are calculated by multiplying throughput volumes per day, production volumes per day, pipeline transportation throughput volumes per day, and terminaling throughput volumes per day (as provided in the accompanying tables), respectively, by the number of days in the applicable period.