VALERO ENERGY CORPORATION The following review of our results of operations and financial condition should be read in conjunction with Item 1A, "RISK FACTORS," and Item 8, "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA," included in this report.
CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report, 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:
• future refining segment margins, including gasoline and distillate margins;
• future ethanol segment margins;
• future renewable diesel segment margins;
• expectations regarding feedstock costs, including crude oil differentials,
and operating expenses;
• anticipated levels of crude oil and refined petroleum product inventories;
• our anticipated level of capital investments, including deferred
turnaround 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 otherfeedstocks 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,
and renewable diesel 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:
• 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;
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• the ability of the members of the
Countries 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 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 RFS) 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, and
renewable diesel;
• rulings, judgments, or settlements in litigation or other legal orregulatory 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
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 Item 1A, "RISK FACTORS" in this report.
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.
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NON-GAAP FINANCIAL MEASURES
The discussions in "OVERVIEW AND OUTLOOK" and "RESULTS OF OPERATIONS" below include references to financial measures that are not defined underU.S. generally accepted accounting principles (GAAP). These non-GAAP financial measures include adjusted operating income (including adjusted operating income for each of our reportable segments) and refining, ethanol, and renewable diesel segment margin. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between years. See the tables in note (f) beginning on page 39 for reconciliations of these non-GAAP financial measures to their most directly comparableU.S. GAAP financial measures. Also in note (f), we disclose the reasons why we believe our use of the non-GAAP financial measures provides useful information.
OVERVIEW AND OUTLOOK
Overview
For 2019, we reported net income attributable to Valero stockholders of$2.4 billion compared to$3.1 billion for 2018, which represents a decrease of$700 million . This decrease is the result of a$569 million decrease in net income and a$131 million increase in net income attributable to noncontrolling interests. The increase in net income attributable to noncontrolling interests is primarily due to a$279 million pre-tax increase in blender's tax credits recognized in 2019 compared to 2018, of which 50 percent is attributable to the holder of the noncontrolling interest, as described in note (a) on page 38. The decrease in net income is primarily due to a decrease of$736 million in operating income between the periods, net of the resulting$177 million decrease in income tax expense.
While operating income decreased by
The
• Refining segment. Refining segment adjusted operating income decreased by
feedstocks and lower throughput volumes, partially offset by improved
distillate margins. This is more fully described on pages 31 and 32.
• Ethanol segment. Ethanol segment adjusted operating income decreased by
expenses (excluding depreciation and amortization expense), partially
offset by higher ethanol prices. This is more fully described on page 33.
• Renewable diesel segment. Renewable diesel segment adjusted operating
income increased by
diesel sales volumes and an increase in the benefit from the blender's tax
credit resulting from an increase in the volume of renewable diesel
blended with petroleum-based diesel in 2019 compared to 2018. This is more
fully described on pages 34 and 35.
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Outlook
Below are several factors that have impacted or may impact our results of operations during the first quarter of 2020: • Distillate margins are expected to begin improving due to an anticipated
increase in global demand as trade war tensions ease and markets comply
with the
specifications, which were effective
expected to remain near current levels.
• Discounts for medium and heavy sour crude oils are expected to remain near
current levels as compliance with the new bunker fuel sulfur
specifications noted above is expected to reduce demand for high sulfur
fuel oils, which compete with sour crude oils as a refining feedstock.
• Ethanol margins are expected to decline as domestic inventory levels rise.
• Renewable diesel segment margins are expected to remain near current levels. • Our refining operations in theU.K. could be adversely affected by Brexit,
which formally occurred on
relationship between the
relationship will continue to follow the EU's rules during a transition
period that is set to expire on
period, the
agreement, which could negatively impact the operations of our
Refinery and our marketing operations in the
the failure to reach any agreement. The ultimate effect of Brexit will
depend on whether an agreement is reached, or on the specific terms of any
agreement that is reached by the U.K. and the EU. See Item 1A "RISK
FACTORS"-Changes in the U.K.'s economic and other relationships with the
EU could adversely affect us.
• Global concern about the coronavirus outbreak could result in lower demand
for and consumption of transportation fuels, which would have a negative
impact on our results of operations.
RESULTS OF OPERATIONS
The following tables, including the reconciliations of non-GAAP financial measures to their most directly comparableU.S. GAAP financial measures in note (f) beginning on page 39, highlight our results of operations, our operating performance, and market reference prices that directly impact our operations. EffectiveJanuary 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 onJanuary 1, 2019 . Also effectiveJanuary 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 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. 26
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2019 Compared to 2018
Financial Highlights by Segment and Total Company
(millions of dollars)
Year Ended December 31, 2019
Corporate
Renewable and
Refining Ethanol Diesel Eliminations Total
Revenues:
Revenues from external customers $ 103,746 $ 3,606 $ 970 $ 2 $ 108,324
Intersegment revenues 18 231 247 (496 ) -
Total revenues 103,764 3,837 1,217 (494 ) 108,324
Cost of sales:
Cost of materials and other (a) 93,371 3,239 360 (494 ) 96,476
Operating expenses (excluding
depreciation and
amortization expense reflected
below) 4,289 504 75 - 4,868
Depreciation and amortization
expense 2,062 90 50 - 2,202
Total cost of sales 99,722 3,833 485 (494 ) 103,546
Other operating expenses (b) 20 1 - - 21
General and administrative expenses
(excluding
depreciation and amortization
expense reflected
below) - - - 868 868
Depreciation and amortization
expense - - - 53 53
Operating income by segment
$ (921 ) 3,836 Other income, net (d) 104 Interest and debt expense, net of capitalized interest (454 ) Income before income tax expense 3,486 Income tax expense 702 Net income 2,784 Less: Net income attributable to noncontrolling interests (a) 362 Net income attributable toValero Energy Corporation stockholders$ 2,422 ________________
See note references on pages 38 through 42.
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Financial Highlights bySegment and Total Company (continued) (millions of dollars) Year Ended December 31, 2018 Corporate Renewable and Refining Ethanol Diesel Eliminations Total Revenues: Revenues from external customers$ 113,093 $ 3,428 $ 508 $ 4$ 117,033 Intersegment revenues 25 210 170 (405 ) - Total revenues 113,118 3,638 678 (401 ) 117,033 Cost of sales: Cost of materials and other (a) 101,866 3,008 262 (404 ) 104,732 Operating expenses (excluding depreciation and amortization expense reflected below) 4,154 470 66 - 4,690 Depreciation and amortization expense 1,910 78 29 - 2,017 Total cost of sales 107,930 3,556 357 (404 ) 111,439 Other operating expenses (b) 45 - - - 45 General and administrative expenses (excluding depreciation and amortization expense reflected below) (c) - - - 925 925 Depreciation and amortization expense - - - 52 52
Operating income by segment
$ (974 ) 4,572 Other income, net (d) 130 Interest and debt expense, net of capitalized interest (470 ) Income before income tax expense 4,232 Income tax expense (e) 879 Net income 3,353 Less: Net income attributable to noncontrolling interests (a) 231 Net income attributable toValero Energy Corporation stockholders$ 3,122 ________________
See note references on pages 38 through 42.
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Average Market Reference Prices and Differentials
Year Ended December 31,
2019 2018 Change
Refining
Feedstocks (dollars per barrel)
Brent crude oil $ 64.18 $ 71.62 $ (7.44 )
Brent less West Texas Intermediate (WTI) crude
oil 7.15 6.71 0.44
Brent less Alaska North Slope (ANS) crude oil (0.86 ) 0.31
(1.17 )
Brent less LLS crude oil 1.47 1.72 (0.25 )
Brent less Argus Sour Crude Index (ASCI) crude
oil 3.56 5.20 (1.64 )
Brent less Maya crude oil 6.57 9.22 (2.65 )
LLS crude oil 62.71 69.90 (7.19 )
LLS less ASCI crude oil 2.09 3.48 (1.39 )
LLS less Maya crude oil 5.10 7.50 (2.40 )
WTI crude oil 57.03 64.91 (7.88 )
Natural gas (dollars per million British
Thermal Units (MMBtu)) 2.47 3.23 (0.76 )
Products (dollars per barrel)
U.S. Gulf Coast:
Conventional Blendstock of Oxygenate Blending
(CBOB) gasoline less Brent 4.37 4.81 (0.44 )
Ultra-low-sulfur (ULS) diesel less Brent 14.90 14.02 0.88
Propylene less Brent (22.31 ) (2.86 ) (19.45 )
CBOB gasoline less LLS 5.84 6.53 (0.69 )
ULS diesel less LLS 16.37 15.74 0.63
Propylene less LLS (20.84 ) (1.14 ) (19.70 )
U.S. Mid-Continent:
CBOB gasoline less WTI 13.62 13.70 (0.08 )
ULS diesel less WTI 22.77 22.82 (0.05 )
North Atlantic:
CBOB gasoline less Brent 7.20 7.59 (0.39 )
ULS diesel less Brent 17.22 16.29 0.93
U.S. West Coast:
CARBOB 87 gasoline less ANS 16.28 13.05 3.23
CARB diesel less ANS 19.30 18.13 1.17
CARBOB 87 gasoline less WTI 24.29 19.45 4.84
CARB diesel less WTI 27.31 24.53 2.78
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Average Market Reference Prices and Differentials, (continued)
Year Ended December 31,
2019 2018 Change
Ethanol
Chicago Board of Trade (CBOT) corn (dollars per
bushel) $ 3.84 $ 3.68 $ 0.16
New York Harbor (NYH) ethanol (dollars per
gallon) 1.53 1.48 0.05
Renewable diesel
New York Mercantile Exchange ULS diesel
(dollars per gallon) 1.94 2.09 (0.15 )
Biodiesel RIN (dollars per RIN) 0.48 0.53 (0.05 )
California Low-Carbon Fuel Standard (dollars per
metric ton) 196.82 168.24 28.58
CBOT soybean oil (dollars per pound) 0.29 0.30 (0.01 )
Total Company , Corporate, and Other The following table includes selected financial data for the total company, corporate, and other for 2019 and 2018. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 27 and 28, unless otherwise noted. Year Ended December 31, 2019 2018 Change Revenues$ 108,324 $ 117,033 $ (8,709 ) Cost of sales 103,546 111,439 (7,893 ) General and administrative expenses (excluding depreciation and amortization expense) 868 925 (57 ) Operating income 3,836 4,572 (736 ) Adjusted operating income (see note (f) on page 42) 3,699 4,713 (1,014 ) Other income, net 104 130 (26 ) Income tax expense 702 879 (177 ) Net income attributable to noncontrolling interests 362 231 131 Revenues decreased by$8.7 billion in 2019 compared to 2018 primarily due to decreases in refined petroleum product prices associated with sales made by our refining segment. This decline in revenues was partially offset by lower cost of sales of$7.9 billion primarily due to decreases in crude oil and other feedstock costs and a decrease of$57 million in general and administrative expenses (excluding depreciation and amortization expense), resulting in a decrease in operating income of$736 million in 2019 compared to 2018. General and administrative expenses (excluding depreciation and amortization expense) decreased by$57 million in 2019 compared to 2018. This decrease was primarily due to environmental reserve adjustments of$108 million associated with certain non-operating sites in 2018, partially offset by increases in legal and other environmental reserves of$24 million and$12 million , respectively, as well as higher taxes other than income taxes of$8 million and expenses associated with the Merger Transaction with VLP of$7 million . 30
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Adjusted operating income was$3.7 billion in 2019 compared to$4.7 billion in 2018. Details regarding the$1.0 billion decrease in adjusted operating income between the years are discussed by segment below. "Other income, net" decreased by$26 million in 2019 compared to 2018. This decrease was primarily due to lower interest income of$30 million and higher foreign currency transaction losses of$14 million , partially offset by the favorable effect of a$16 million lower charge for the early redemption of debt between the periods. As described in note (d) on page 39, we redeemed debt in both 2019 and 2018 and incurred early redemption charges of$22 million and$38 million , respectively. Income tax expense decreased by$177 million in 2019 compared to 2018 primarily as a result of lower income before income tax expense. Our effective tax rate was 20 percent for 2019 compared to 21 percent for 2018. Net income attributable to noncontrolling interests increased by$131 million in 2019 compared to 2018 primarily due to a$279 million increase in blender's tax credits recognized in 2019 compared to 2018, of which 50 percent is attributable to the holder of the noncontrolling interest, as described in note (a) on page 38. Refining Segment Results The following table includes selected financial and operating data of our refining segment for 2019 and 2018. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 27 and 28, respectively, unless otherwise noted. Year Ended December 31, 2019 2018 Change Revenues$ 103,764 $ 113,118 $ (9,354 ) Cost of sales 99,722 107,930 (8,208 ) Operating income 4,022 5,143 (1,121 ) Adjusted operating income (see note (f) on page 41) 4,040 5,180 (1,140 ) Margin (see note (f) on page 40) 10,391 11,244 (853 ) Operating expenses (excluding depreciation and amortization expense reflected below) 4,289 4,154
135
Depreciation and amortization expense 2,062 1,910
152
Throughput volumes (thousand BPD) (see note (g) on page 42) 2,952 2,986 (34 ) Refining segment revenues decreased by$9.3 billion in 2019 compared to 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$8.2 billion primarily due to decreases in crude oil and other feedstock costs, resulting in a decrease in refining segment operating income of$1.1 billion in 2019 compared to 2018. 31
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Refining segment adjusted operating income also decreased by$1.1 billion in 2019 compared to 2018. The components of this decrease, along with the reasons for the changes in these components, are outlined below.
• Refining segment margin is primarily affected by refined petroleum product
prices and the cost of crude oil and other feedstocks. The market prices
for refined petroleum products generally track the price of benchmark
crude oils, such as Brent, WTI, and ANS. An increase in the differential
between the market price of the refined petroleum products that we sell
and the cost of the reference benchmark crude oil has a favorable impact
on our refining segment margin, while a decline in this differential has a
negative impact on our refining segment margin. Additionally, 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 Brent and other
benchmark crude oils. While we benefit when we process these types ofcrude 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 29 reflects
market reference prices and differentials that we believe had a material
impact on the change in our refining segment margin in 2019 compared to
2018. Refining segment margin decreased by
to 2018 primarily due to the following:
• Lower discounts on crude oils had an unfavorable impact to our refining
segment margin of approximately $628 million .
• Lower discounts on feedstocks other than crude oils, such as natural
gas and residuals, had an unfavorable impact to our refining segment
margin of approximately $360 million .
• A decrease in throughput volumes of 34,000 BPD had an unfavorable
impact to our refining segment margin of approximately $128 million .
• A decrease in the cost of biofuel credits (primarily RINs in the U.S. )
had a favorable impact on our refining segment margin of
See Note 20 of Notes to Consolidated Financial Statements for
additional information on our government and regulatory compliance
programs.
• An increase in distillate margins throughout most of our regions had a
favorable impact to our refining segment margin of approximately
$202 million .
• Refining segment operating expenses (excluding depreciation and
amortization expense) increased by
maintenance costs of
property tax settlements of
$17 million received in 2018 that did not recur in 2019.
• Refining segment depreciation and amortization expense associated with our
cost of sales increased by
turnaround and catalyst amortization expense of
increase in depreciation expense of
projects that were completed and finance leases that commenced in the
latter part of 2018 and early 2019, partially offset by the write-off of
assets that were idled or demolished in 2018 of $15 million .
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Ethanol Segment Results The following table includes selected financial and operating data of our ethanol segment for 2019 and 2018. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 27 and 28, respectively, unless otherwise noted. Year Ended December 31, 2019 2018 Change Revenues$ 3,837 $ 3,638 $ 199 Cost of sales 3,833 3,556 277 Operating income 3 82 (79 ) Adjusted operating income (see note (f) on page 41) 4 82 (78 ) Margin (see note (f) on page 40) 598 630 (32 ) Operating expenses (excluding depreciation and amortization expense reflected below) 504 470 34 Depreciation and amortization expense 90
78 12
Production volumes (thousand gallons per day) (see note (g) on page 42) 4,269 4,109 160
Ethanol segment revenues increased by
Ethanol segment adjusted operating income decreased by
• Ethanol segment margin is primarily affected by ethanol and corn related
co-product prices and the cost of corn. The table on page 30 reflects
market reference prices that we believe had a material impact on the
change in our ethanol segment margin in 2019 compared to 2018. Ethanol
segment margin decreased by
due to the following:
• Higher corn prices had an unfavorable impact to our ethanol segment
margin of approximately $166 million .
• Higher ethanol prices had a favorable impact to our ethanol segment
margin of approximately $123 million .
• Ethanol segment operating expenses (excluding depreciation and
amortization expense) increased by
operate the three plants acquired from Green Plains, Inc. (Green Plains)
in
by our other ethanol plants.
• Ethanol segment depreciation and amortization expense associated with our
cost of sales increased by $12 million primarily due to depreciation
expense associated with the three plants acquired from Green Plains in
November 2018 .
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Renewable Diesel Segment Results The following table includes selected financial and operating data of our renewable diesel segment for 2019 and 2018. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 27 and 28, respectively, unless otherwise noted. Year Ended December 31, 2019 2018 Change Revenues$ 1,217 $ 678 $ 539 Cost of sales 485 357 128 Operating income 732 321 411 Adjusted operating income (see note (f) on page 42) 576 317 259 Margin (see note (f) on page 41) 701 412 289 Operating expenses (excluding depreciation and amortization expense reflected below) 75 66 9 Depreciation and amortization expense 50 29 21 Sales volumes (thousand gallons per day) (see note (g) on page 42) 760 431 329 Renewable diesel segment revenues increased by$539 million in 2019 compared to 2018 primarily due to an increase in renewable diesel sales volumes. This improvement in renewable diesel segment revenues was partially offset by higher cost of sales of$128 million , resulting in an increase in renewable diesel segment operating income of$411 million . Renewable diesel segment adjusted operating income increased by$259 million in 2019 compared to 2018. The components of this increase, along with the reasons for the changes in these components, are outlined below.
• Renewable diesel segment margin increased by
to 2018 primarily due to the following:
• An increase in sales volumes of 329,000 gallons per day, which isprimarily due to the additional production capacity resulting from the
expansion of the DGD Plant completed in the third quarter of 2018, had
a favorable impact to our renewable diesel segment margin of
$162 million .
• An increase in the benefit for the blender's tax credit attributable to
volumes blended during 2019 compared to 2018 had a favorable impact to
our renewable diesel segment margin of $119 million . As more fully
described in note (a) on page 38, blender's tax credits of $275 million
and $156 million were attributable to volumes blended during 2019 and
2018, respectively.
• Renewable diesel segment operating expenses (excluding depreciation and
amortization expense) increased by $9 million , which is primarily
attributable to increased costs resulting from the expansion of the DGD
Plant completed in the third quarter of 2018.
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• Renewable diesel segment depreciation and amortization expense associated
with our cost of sales increased by
turnaround and catalyst amortization expense of $13 million and
depreciation expense associated with the expansion of the DGD Plant
completed in the third quarter of 2018 of $5 million .
2018 Compared to 2017
Financial Highlights by Segment and Total Company
(millions of dollars)
Year Ended December 31, 2018
Corporate
Renewable and
Refining Ethanol Diesel Eliminations Total
Revenues:
Revenues from external customers $ 113,093 $ 3,428 $ 508 $ 4 $ 117,033
Intersegment revenues 25 210 170 (405 ) -
Total revenues 113,118 3,638 678 (401 ) 117,033
Cost of sales:
Cost of materials and other (a) 101,866 3,008 262 (404 ) 104,732
Operating expenses (excluding
depreciation and
amortization expense reflected
below) 4,154 470 66 - 4,690
Depreciation and amortization
expense 1,910 78 29 - 2,017
Total cost of sales 107,930 3,556 357 (404 ) 111,439
Other operating expenses (b) 45 - - - 45
General and administrative expenses
(excluding
depreciation and amortization
expense reflected
below) (c) - - - 925 925
Depreciation and amortization
expense - - - 52 52
Operating income by segment
$ (974 ) 4,572 Other income, net (d) 130 Interest and debt expense, net of capitalized interest (470 ) Income before income tax expense 4,232 Income tax expense (e) 879 Net income 3,353 Less: Net income attributable to noncontrolling interests (a) 231 Net income attributable toValero Energy Corporation stockholders$ 3,122 ________________
See note references on pages 38 through 42.
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Financial Highlights bySegment and Total Company (continued) (millions of dollars) Year Ended December 31, 2017 Corporate Renewable and Refining Ethanol Diesel Eliminations Total Revenues: Revenues from external customers$ 90,258 $ 3,324 $ 393 $ 5$ 93,980 Intersegment revenues 8 176 241 (425 ) - Total revenues 90,266 3,500 634 (420 ) 93,980 Cost of sales: Cost of materials and other 80,160 2,804 498 (425 ) 83,037 Operating expenses (excluding depreciation and amortization expense reflected below) 4,014 443 47 - 4,504 Depreciation and amortization expense 1,824 81 29 - 1,934 Total cost of sales 85,998 3,328 574 (425 ) 89,475 Other operating expenses (b) 61 - - - 61 General and administrative expenses (excluding depreciation and amortization expense reflected below) - - - 829 829 Depreciation and amortization expense - - - 52 52
Operating income by segment
$ (876 ) 3,563 Other income, net 112 Interest and debt expense, net of capitalized interest (468 ) Income before income tax expense 3,207 Income tax benefit (e) (949 ) Net income 4,156 Less: Net income attributable to noncontrolling interests 91 Net income attributable toValero Energy Corporation stockholders$ 4,065 ________________
See note references on pages 38 through 42.
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Average Market Reference Prices and Differentials
Year Ended December 31,
2018 2017 Change
Refining
Feedstocks (dollars per barrel) Brent crude oil$ 71.62 $ 54.82 $ 16.80 Brent less WTI crude oil 6.71 3.92 2.79 Brent less ANS crude oil 0.31 0.26 0.05 Brent less LLS crude oil 1.72 0.69 1.03 Brent less ASCI crude oil 5.20 4.18 1.02 Brent less Maya crude oil 9.22 7.74 1.48 LLS crude oil 69.90 54.13 15.77 LLS less ASCI crude oil 3.48 3.49 (0.01 ) LLS less Maya crude oil 7.50 7.05 0.45 WTI crude oil 64.91 50.90 14.01
Natural gas (dollars per MMBtu) 3.23 2.98 0.25
Products (dollars per barrel)U.S. Gulf Coast : CBOB gasoline less Brent 4.81 10.50 (5.69 ) ULS diesel less Brent 14.02 13.26 0.76 Propylene less Brent (2.86 ) 0.48 (3.34 ) CBOB gasoline less LLS 6.53 11.19 (4.66 ) ULS diesel less LLS 15.74 13.95 1.79 Propylene less LLS (1.14 ) 1.17 (2.31 )U.S. Mid-Continent: CBOB gasoline less WTI 13.70 15.65 (1.95 ) ULS diesel less WTI 22.82 18.50 4.32 North Atlantic: CBOB gasoline less Brent 7.59 12.57 (4.98 ) ULS diesel less Brent 16.29 14.75 1.54 U.S. West Coast: CARBOB 87 gasoline less ANS 13.05 18.12 (5.07 ) CARB diesel less ANS 18.13 17.11 1.02 CARBOB 87 gasoline less WTI 19.45 21.78 (2.33 ) CARB diesel less WTI 24.53 20.77 3.76 37
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Average Market Reference Prices and Differentials, (continued)
Year Ended December 31,
2018 2017 Change
Ethanol
CBOT corn (dollars per bushel) $ 3.68 $ 3.59 $ 0.09
NYH ethanol (dollars per gallon) 1.48 1.56 (0.08 )
Renewable diesel New York Mercantile Exchange ULS diesel (dollars per gallon) 2.09 1.66 0.43 Biodiesel RIN (dollars per RIN) 0.53 1.01 (0.48 ) California Low-Carbon Fuel Standard (dollars per metric ton) 168.24 89.26 78.98 CBOT soybean oil (dollars per pound) 0.30 0.33 (0.03 ) ________________
The following notes relate to references on pages 25 through 36 and pages 43 through 46.
(a) Cost of materials and other for the years ended
includes a benefit of
blender's tax credit. The benefit recognized in 2019 is attributable to
volumes blended during 2019 and 2018 and was recognized in
because the
law in that month. The benefit recognized in 2018 is attributable to volumes
blended during 2017 and was recognized in
legislation authorizing the credit was passed and signed into law in that
month.
The $449 million and $170 million pre-tax benefits are attributable to volumes
blended during the three years and are reflected in our reportable segments as
follows (in millions):
Renewable
Refining Diesel Total
Periods to which blender's tax credit is attributable
2019 blender's tax credit $ 16 $ 275 $ 291
2018 blender's tax credit 2 156 158
Total recognized in 2019 $ 18 $ 431 $ 449
2017 blender's tax credit $ 10 $ 160 $ 170
Total recognized in 2018 $ 10 $ 160 $ 170
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Adjustments to reflect the blender's tax credits in the period during which the volumes were blended are as follows (in millions):
Year Ended December 31,
2019 2018 2017
Refining segment
Total blender's tax credit recognized in period
presented $ 18 $ 10 $ -
Less: Amount properly reflected in the period
associated with volumes blended 16 2 10
Adjustment to reflect blender's tax credit in
proper period
for the refining segment (see note (f)) 2 8 (10 )
Renewable diesel segment
Total blender's tax credit recognized in period
presented 431 160 -
Less: Amount properly reflected in the period
associated with volumes blended 275 156 160
Adjustment to reflect blender's tax credit in
proper period
for the renewable diesel segment (see note (f)) 156 4 (160 )
Total adjustment to reflect blender's tax
credit in proper
period (see note (f)) $ 158 $ 12 $ (170 ) Of the
(b) Other operating expenses reflects expenses that are not associated with our
cost of sales and primarily includes costs to repair, remediate, and restore
our facilities to normal operations following a non-operating event, such as
a natural disaster or a major unplanned outage.
(c) General and administrative expenses (excluding depreciation and amortization
expense) for the year ended
non-operating sites.
(d) "Other income, net" for the years ended
6.125 percent senior notes due
the early redemption of
(e) On
benefit of
estimate of the impact of Tax Reform. We finalized our estimates during the
year ended December 31, 2018 and recorded an income tax benefit of
$12 million during the period.
(f) We use certain financial measures (as noted below) that are not defined under
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 comparableU.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 comparableU.S. GAAP measures nor should they be considered in isolation or as a substitute for an analysis of our results of operations as reported underU.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. 39
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Non-GAAP financial measures are as follows: • Refining margin is defined as refining operating income adjusted to
reflect the blender's tax credit in the proper period, and excluding
operating expenses (excluding depreciation and amortization expense),
depreciation and amortization expense, and other operating expenses, as
reflected in the table below.
Year Ended December 31,
2019 2018 2017
Reconciliation of refining operating income
to refining margin
Refining operating income $ 4,022 $ 5,143 $ 4,207
Exclude:
Blender's tax credit (see note (a)) 2 8 (10 ) Operating expenses (excluding depreciation and amortization expense) (4,289 ) (4,154 ) (4,014 ) Depreciation and amortization expense (2,062 ) (1,910 ) (1,824 ) Other operating expenses (see note (b)) (20 ) (45 ) (61 ) Refining margin$ 10,391 $ 11,244 $ 10,116 • Ethanol margin is defined as ethanol operating income excluding
operating expenses (excluding depreciation and amortization expense),
depreciation and amortization expense, and other operating expenses, as
reflected in the table below.
Year Ended December 31,
2019 2018 2017
Reconciliation of ethanol operating income
to ethanol margin
Ethanol operating income $ 3 $ 82 $ 172
Exclude:
Operating expenses (excluding depreciation and amortization expense) (504 ) (470 ) (443 ) Depreciation and amortization expense (90 ) (78 ) (81 ) Other operating expenses (see note (b)) (1 ) - - Ethanol margin$ 598 $ 630 $ 696 40
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• Renewable diesel margin is defined as renewable diesel operating income
adjusted to reflect the blender's tax credit in the proper period, and
excluding operating expenses (excluding depreciation and amortization
expense) and depreciation and amortization expense, as reflected in the
table below.
Year Ended December 31,
2019 2018 2017
Reconciliation of renewable diesel operating
income to renewable diesel margin
Renewable diesel operating income $ 732 $ 321 $ 60
Exclude:
Blender's tax credit (see note (a)) 156 4 (160 )
Operating expenses (excluding depreciation
and
amortization expense) (75 ) (66 ) (47 )
Depreciation and amortization expense (50 ) (29 ) (29 )
Renewable diesel margin $ 701 $ 412 $ 296 • Adjusted refining operating income is defined as refining segment
operating income adjusted to reflect the blender's tax credit in the
proper period and excluding other operating expenses, as reflected in
the table below.
Year Ended December 31,
2019 2018 2017
Reconciliation of refining operating income
to adjusted refining operating income
Refining operating income $ 4,022 $ 5,143 $ 4,207
Exclude:
Blender's tax credit (see note (a)) 2 8 (10 )
Other operating expenses (see note (b)) (20 ) (45 ) (61 )
Adjusted refining operating income $ 4,040 $ 5,180 $ 4,278
• Adjusted ethanol operating income is defined as ethanol segment
operating income excluding other operating expenses as reflected in the
table below.
Year Ended December 31,
2019 2018 2017
Reconciliation of ethanol operating income
to adjusted ethanol operating income
Ethanol operating income $ 3 $ 82 $ 172
Exclude:
Other operating expenses (see note (b)) (1 ) - -
Adjusted ethanol operating income $ 4 $ 82 $ 172
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• Adjusted renewable diesel operating income is defined as renewable
diesel segment operating income adjusted to reflect the blender's tax
credit in the proper period, as reflected in the table below.
Year Ended December 31,
2019 2018 2017
Reconciliation of renewable diesel operating
income to adjusted renewable diesel
operating income
Renewable diesel operating income $ 732 $ 321 $ 60
Exclude:
Blender's tax credit (see note (a)) 156 4 (160 )
Adjusted renewable diesel operating income $ 576 $ 317 $ 220 • Adjusted operating income is defined as total company operating income
adjusted to reflect the blender's tax credit in the proper period, and
excluding other operating expenses and environmental reserve
adjustments associated with certain non-operating sites, as reflected
in the table below.
Year Ended December 31,
2019 2018 2017
Reconciliation of total company operating
income to adjusted operating income
Total company operating income $ 3,836 $ 4,572 $ 3,563
Exclude:
Blender's tax credit (see note (a)) 158 12 (170 )
Other operating expenses (see note (b)) (21 ) (45 ) (61 )
Environmental reserve adjustments (see note
(c)) - (108 ) -
Adjusted operating income $ 3,699 $ 4,713 $ 3,794 (g) We use throughput volumes, production volumes, and sales volumes for the
refining segment, ethanol segment, and renewable diesel segment,
respectively, due to their general use by others who operate facilities
similar to those included in our segments.
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Total Company , Corporate, and Other The following table includes selected financial data for the total company, corporate, and other for 2018 and 2017. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 35 and 36, unless otherwise noted. Year Ended December 31, 2018 2017 Change Revenues$ 117,033 $ 93,980 $ 23,053 Cost of sales 111,439 89,475 21,964 General and administrative expenses (excluding depreciation and amortization expense) 925 829 96 Operating income 4,572 3,563 1,009 Adjusted operating income (see note (f) on page 42) 4,713 3,794 919 Other income, net 130 112 18 Income tax expense (benefit) 879 (949 ) 1,828 Net income attributable to noncontrolling interests 231 91 140 Revenues increased by$23.1 billion in 2018 compared to 2017 primarily due to increases in refined petroleum product prices associated with sales made by our refining segment. This improvement in revenues was partially offset by higher cost of sales of$22.0 billion primarily due to increases in crude oil and other feedstock costs, and an increase of$96 million in general and administrative expenses (excluding depreciation and amortization expense), resulting in an increase in operating income of$1.0 billion in 2018 compared to 2017. General and administrative expenses (excluding depreciation and amortization expense) increased by$96 million in 2018 compared to 2017. This increase was primarily due to environmental reserve adjustments of$108 million associated with certain non-operating sites in 2018, partially offset by expenses incurred in 2017 associated with the termination of the acquisition of certain assets from Plains All American Pipeline, L.P. of$16 million . Adjusted operating income was$4.7 billion in 2018 compared to$3.8 billion in 2017. Details regarding the$919 million increase in adjusted operating income between the years are discussed by segment below.
"Other income, net" increased by
Income tax expense increased by$1.8 billion in 2018 compared to 2017 primarily due to the effect from a$1.9 billion income tax benefit in 2017 resulting from Tax Reform, as described in note (e) on page 39. Excluding the effect of Tax Reform from 2017, the effective tax rate for 2017 was 28 percent compared to 21 percent for 2018. The decrease in our effective tax rate is primarily due to the reduction in theU.S. statutory income tax rate from 35 percent to 21 percent effectiveJanuary 1, 2018 as a result of Tax Reform.
Net income attributable to noncontrolling interests increased by
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of which
Refining Segment Results The following table includes selected financial and operating data of our refining segment for 2018 and 2017. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 35 and 36, respectively, unless otherwise noted. Year Ended December 31, 2018 2017 Change Revenues$ 113,118 $ 90,266 $ 22,852 Cost of sales 107,930 85,998 21,932 Operating income 5,143 4,207 936 Adjusted operating income (see note (f) on page 41) 5,180 4,278
902
Margin (see note (f) on page 40) 11,244 10,116
1,128
Operating expenses (excluding depreciation and amortization expense reflected below) 4,154 4,014
140
Depreciation and amortization expense 1,910 1,824 86 Throughput volumes (thousand BPD) (see note (g) on page 42) 2,986 2,940 46 Refining segment revenues increased by$22.9 billion in 2018 compared to 2017 primarily due to increases in refined petroleum product prices. This improvement in refining segment revenues was partially offset by higher cost of sales of$21.9 billion primarily due to increases in crude oil and other feedstock costs, resulting in an increase in refining segment operating income of$936 million in 2018 compared to 2017. Refining segment adjusted operating income increased by$902 million in 2018 compared to 2017. The components of this increase, along with the reasons for the changes in these components, are outlined below.
• Refining segment margin is primarily affected by refined petroleum product
prices and the cost of crude oil and other feedstocks. The market prices
for refined petroleum products generally track the price of benchmark
crude oils, such as Brent, WTI, and ANS. An increase in the differential
between the market price of the refined petroleum products that we sell
and the cost of the reference benchmark crude oil has a favorable impact
on our refining segment margin, while a decline in this differential has a
negative impact on our refining segment margin. Additionally, 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 Brent and other
benchmark crude oils. While we benefit when we process these types ofcrude 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 37 reflects
market reference prices and differentials that we believe had a material
impact on the change in our refining segment margin in 2018 compared to
2017. Refining segment margin increased by
to 2017, primarily due to the following:
• An increase in distillate margins throughout all of our regions had a
favorable impact to our refining segment margin of approximately
$1.3 billion .
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• Higher discounts on crude oils had a favorable impact to our refining
segment margin of approximately $561 million .
• A decrease in the cost of biofuel credits (primarily RINs in the
had a favorable impact to our refining segment margin of
See Note 20 of Notes to Consolidated Financial Statements for
additional information on our government and regulatory compliance
programs.
• An increase in throughput volumes of 46,000 BPD had a favorable impact
to our refining segment margin of approximately $153 million .
• A decrease in gasoline margins throughout all of our regions had anunfavorable impact to our refining segment margin of approximately
$1.3 billion . • Refining segment operating expenses (excluding depreciation and
amortization expense) increased by
employee-related expenses of
in 2017 for our
and higher chemicals and catalyst costs of $15 million .
• Refining segment depreciation and amortization expense associated with our
cost of sales increased by $86 million primarily due to an increase in
depreciation expense of $44 million associated with capital projects that
were completed in the latter part of 2017 and early 2018 and higher
refinery turnaround and catalyst amortization expense of
along with the write-off of assets that were idled or demolished in 2018
of $15 million .
Ethanol Segment Results
The following table includes selected financial and operating data of our
ethanol segment for 2018 and 2017. The selected financial data is derived from
the Financial Highlights by Segment and Total Company tables on pages 35 and 36,
respectively, unless otherwise noted.
Year Ended December 31,
2018 2017 Change
Revenues $ 3,638 $ 3,500 $ 138
Cost of sales 3,556 3,328 228
Operating income 82 172 (90 )
Margin (see note (f) on page 40) 630 696 (66 )
Operating expenses (excluding depreciation and
amortization expense reflected below) 470 443 27
Depreciation and amortization expense 78 81
(3 )
Production volumes (thousand gallons per day) (see note (g) on page 42) 4,109 3,972 137 Ethanol segment revenues increased by$138 million in 2018 compared to 2017 primarily due to an increase in ethanol sales volumes. This improvement in ethanol segment revenue was outweighed by higher cost of sales of$228 million , resulting in a decrease in ethanol segment operating income of$90 million in 2018 45
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compared to 2017. The components of this decrease, along with the reasons for the changes in these components, are outlined below.
• Ethanol segment margin is primarily affected by ethanol and corn related
co-product prices and the cost of corn. The table on page 38 reflects
market reference prices that we believe had a material impact on the
change in our ethanol segment margin in 2018 compared to 2017. Ethanol
segment margin decreased by
due to the following:
• Lower ethanol prices had an unfavorable impact to our ethanol segment
margin of approximately $159 million .
• Higher corn prices had an unfavorable impact to our ethanol segment
margin of approximately $36 million .
• Higher prices of the corn related co-products that we produced had a
favorable impact to our ethanol segment margin of approximately
$101 million .
• Higher production volumes of 137,000 gallons per day had a favorable
impact to our ethanol segment margin of approximately
• Ethanol segment operating expenses (excluding depreciation and
amortization expense) increased by
operate the three plants acquired from Green Plains in November 2018 of
$14 million and higher chemicals and catalysts costs of $8 million
incurred by our other ethanol plants.
Renewable Diesel Segment Results
The following table includes selected financial and operating data of our
renewable diesel segment for 2018 and 2017. The selected financial data is
derived from the Financial Highlights by Segment and Total Company tables on
pages 35 and 36, respectively, unless otherwise noted.
Year Ended December 31,
2018 2017 Change
Revenues $ 678 $ 634 $ 44
Cost of sales 357 574 (217 )
Operating income 321 60 261
Adjusted operating income (see note (f) on page 42) 317 220 97
Margin (see note (f) on page 41) 412 296 116
Operating expenses (excluding depreciation and
amortization expense reflected below) 66 47 19
Depreciation and amortization expense 29 29 -
Sales volumes (thousand gallons per day) (see note (g) on page 42) 431 440 (9 ) Renewable diesel segment revenues increased by$44 million in 2018 compared to 2017 primarily due to higher renewable diesel sales prices. This improvement in renewable diesel segment revenues, along with 46
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a decrease in total cost of sales of
Renewable diesel segment adjusted operating income increased by$97 million in 2018 compared to 2017. The components of this increase, along with the reasons for the changes in these components are outlined below.
• Renewable diesel segment margin increased by
to 2017 primarily due to the following:
• An increase in renewable diesel prices in 2018 had a favorable impact
to our renewable diesel segment margin of $60 million .
• Price risk management activities had a favorable impact to our
renewable diesel segment margin of $40 million . We recognized a hedge
gain of $29 million in 2018 from commodity derivative instruments
associated with our price risk management activities compared to a loss
of $11 million in 2017.
• Renewable diesel segment operating expenses (excluding depreciation and
amortization expense) increased by
higher chemical and catalyst costs of $10 million and increased costs
resulting from the expansion of the DGD Plant completed in the third
quarter of 2018 of $3 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
$ 3,966 Canadian Revolver 112 Accounts receivable sales facility 1,200 Letter of credit facility 50 Total available borrowing capacity 5,328 Cash and cash equivalents(a) 2,473 Total liquidity$ 7,801 ___________________
(a) Excludes$110 million of cash and cash equivalents related to our variable interest entities (VIEs) that is available for use only by our VIEs. 47
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Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 9 of Notes to Consolidated Financial Statements.
Cash Flows
Components of our cash flows are set forth below (in millions):
Year Ended
2019 2018 2017
Cash flows provided by (used in): Operating activities$ 5,531 $ 4,371 $ 5,482 Investing activities (3,001 ) (3,928 ) (2,382 ) Financing activities (2,997 ) (3,168 ) (2,272 ) Effect of foreign exchange rate changes on cash 68 (143 )
206
Net increase (decrease) in cash and cash equivalents
Cash Flows for the Year EndedDecember 31, 2019 Our operations generated$5.5 billion of cash in 2019, driven primarily by net income of$2.8 billion , noncash charges to income of$2.5 billion , and a positive change in working capital of$294 million . Noncash charges included$2.3 billion of depreciation and amortization expense and$234 million of deferred income tax expense. See "RESULTS OF OPERATIONS" for further discussion of our operations. The change in our working capital is detailed in Note 18 of Notes to Consolidated Financial Statements. The source of cash resulting from the$294 million change in working capital was mainly due to: • an increase of$1.5 billion in accounts payable due to an increase in commodity prices inDecember 2019 compared toDecember 2018 combined with
an increase in crude oil volumes purchased and the timing of payments of
invoices;
• a decrease of
decrease in income taxes receivable resulting from a refund of
combined audit related to our
2011;
• an increase of
from higher pre-tax income in the fourth quarter of 2019; partially offset
by
• an increase of
in commodity prices in
with an increase in sales volumes, and (ii) a receivable of
for the blender's tax credit attributable to volumes blended during 2019
and 2018; and
• an increase of
prices in
inventory levels.
The
• fund
Investments" on page 50, of which
capital investments by DGD;
• fund
• acquire undivided interests in pipeline and terminal assets for
• redeem our 6.125 percent Senior Notes for
of stated value);
• purchase common stock for treasury of
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• pay common stock dividends of
• acquire all of the outstanding publicly held common units of VLP for
$950 million ; and
• pay distributions to noncontrolling interests of
In addition, during the year endedDecember 31, 2019 , we sold and repaid$900 million of eligible receivables under our accounts receivable sales facility. Cash Flows for the Year EndedDecember 31, 2018 Our operations generated$4.4 billion of cash in 2018, driven primarily by net income of$3.4 billion and noncash charges to income of$2.3 billion , partially offset by a negative change in working capital of$1.3 billion . Noncash charges included$2.1 billion of depreciation and amortization expense and$203 million of deferred income tax expense. See "RESULTS OF OPERATIONS" for further discussion of our operations. The change in our working capital is detailed in Note 18 of Notes to Consolidated Financial Statements. The use of cash resulting from the$1.3 billion change in working capital was mainly due to:
• an increase of
sales volumes, partially offset by a decrease in commodity prices;
• an increase of
levels;
• a decrease of
from (i) $527 million of payments in early 2018 related to 2017 tax
liabilities and (ii) $181 million of payments in late 2018 that will be
applied to 2019 tax liabilities;
• a decrease of
payments on our environmental compliance program obligations; partially
offset by
• an increase of $304 million in accounts payable due to an increase in
crude oil and other feedstock volumes purchased, partially offset by a
decrease in commodity prices.
The
• fund
self-funded capital investments by DGD;
• fund
• fund (i)
in Note 2 of Notes to Consolidated Financial Statements) in
(ii)
2018; and (iii)
• acquire undivided interests in pipeline and terminal assets for
• redeem our 9.375 percent Senior Notes for
of stated value);
• make payments on debt and finance lease obligations of
which
under VLP's $750 million senior unsecured revolving credit facility (the
VLP Revolver);
• retire
• purchase common stock for treasury of
• pay common stock dividends of
• pay distributions to noncontrolling interests of
Cash Flows for the Year EndedDecember 31, 2017 Our operations generated$5.5 billion of cash in 2017. Net income of$4.2 billion , net of the$1.9 billion noncash benefit from Tax Reform and other noncash charges of$2.1 billion , and a positive change in working 49
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capital of$1.3 billion were the primary drivers of the cash generated by our operations in 2017. Other noncash charges included$2.0 billion of depreciation and amortization expense. See "RESULTS OF OPERATIONS" for further discussion of our operations. The Tax Reform benefit and the change in our working capital are detailed in Notes 15 and 18, respectively, of Notes to Consolidated Financial Statements. The source of cash resulting from the$1.3 billion change in working capital was mainly due to:
• an increase of
an increase in commodity prices;
• an increase of $489 million in income taxes payable resulting from
deferring the payment of our fourth quarter 2017 estimated taxes to
January 2018 , as allowed by tax relief authorization from the IRS ;
partially offset by
• an increase of
increase in commodity prices; and
• an increase of
combined with an increase in commodity prices.
The
• fund
self-funded capital investments by DGD;
• fund
• acquire an undivided interest in crude system assets for
• purchase common stock for treasury of
• pay common stock dividends of
• pay distributions to noncontrolling interests of
• increase available cash on hand by
Capital Investments
Our operations, especially those of our refining segment, are highly capital
intensive. Each of our refineries comprises a large base of property assets,
consisting of a series of interconnected, highly integrated and interdependent
crude oil processing facilities and supporting logistical infrastructure
(Units), and these Units are improved continuously. The cost of improvements,
which consist of the addition of new Units and betterments of existing Units,
can be significant. We have historically acquired our refineries at amounts
significantly below their replacement costs, whereas our improvements are made
at full replacement value. As such, the costs for improving our refinery assets
increase over time and are significant in relation to the amounts we paid to
acquire our refineries. We plan for these improvements by developing a
multi-year capital program that is updated and revised based on changing
internal and external factors.
We make improvements to our refineries in order to maintain and enhance their
operating reliability, to meet environmental obligations with respect to
reducing emissions and removing prohibited elements from the products we
produce, or to enhance their profitability. Reliability and environmental
improvements generally do not increase the throughput capacities of our
refineries. Improvements that enhance refinery profitability may increase
throughput capacity, but many of these improvements allow our refineries to
process different types of crude oil and to refine crude oil into products with
higher market values. Therefore, many of our improvements do not increase
throughput capacity significantly.
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We consider capital investments to include the following:
• Capital expenditures for purchases of, additions to, and improvements in
our property, plant, and equipment, including those made by DGD 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 DGD, manage its capital projects and expenditures. We do not include the capital expenditures of our 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. We expect to make capital investments of approximately$2.5 billion in 2020. Approximately 60 percent of those investments are for sustaining the business and 40 percent are for growth strategies. However, we continuously evaluate our capital budget and make changes as conditions warrant. This capital investment estimate excludes potential strategic acquisitions, including acquisitions of undivided interests. Other Matters Impacting Liquidity and Capital Resources Stock Purchase Program OnJanuary 23, 2018 , our board of directors authorized the 2018 Program for the purchase of our outstanding common stock. As ofDecember 31, 2019 , we had$1.5 billion remaining available for purchase under the 2018 Program with no expiration date. We have no obligation to make purchases under this program. Pension Plan Funding We plan to contribute approximately$140 million to our pension plans and$21 million to our other postretirement benefit plans during 2020. See Note 13 of Notes to Consolidated Financial Statements for a discussion of our employee benefit plans. 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. See Note 8 of Notes to Consolidated Financial Statements for disclosure of our environmental liabilities. Tax Matters We take tax positions in our tax returns from time to time that may not be ultimately allowed by the relevant taxing authority. When we take such positions, we evaluate the likelihood of sustaining those positions and determine the amount of tax benefit arising from such positions, if any, that should be recognized in our financial statements. Tax benefits not recognized by us are recorded as a liability for unrecognized tax benefits, which represents our potential future obligation to various taxing authorities if the tax positions are not sustained. As ofDecember 31, 2019 , our liability for unrecognized tax benefits, excluding related interest and penalties, was$868 million . Of this amount,$525 million is associated with refund claims associated with taxes paid 51
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on incentive payments received from theU.S. federal government for blending biofuels into refined petroleum products. We recorded a tax refund receivable of$525 million in connection with our refund claims, but we also recorded a liability for unrecognized tax benefits of$525 million due to the complexity of this matter and uncertainties with respect to sustaining these refund claims. Therefore, our financial position, results of operations, and liquidity will not be negatively impacted if we are unsuccessful in sustaining these refund claims. The remaining liability for unrecognized tax benefits, excluding related interest and penalties, of$343 million represents our potential future obligations to various taxing authorities if the tax positions associated with that liability are not sustained.
Details about our liability for unrecognized tax benefits, along with other information about our unrecognized tax benefits, are included in Note 15 of Notes to Consolidated Financial Statements.
Cash Held by Our International Subsidiaries As ofDecember 31, 2019 ,$1.5 billion of our cash and cash equivalents was held by our international subsidiaries. Cash held by our international subsidiaries can be repatriated to us without anyU.S. federal income tax consequences as a result of the deemed repatriation provisions of Tax Reform, but certain other taxes may apply, including, but not limited to, withholding taxes imposed by certain international jurisdictions andU.S. state income taxes. Therefore, there is a cost to repatriate cash held by certain of our international subsidiaries to us, but we believe that such amount is not material to our 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. 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.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any transactions, agreements, or other contractual arrangements that would result in off-balance sheet liabilities.
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CONTRACTUAL OBLIGATIONS
Our contractual obligations as of
Payments Due by Year
2020 2021 2022 2023 2024 Thereafter Total
Debt and finance
lease obligations
(a) $ 541 $ 103 $ 93 $ 110 $ 82 $ 9,485 $ 10,414
Debt obligations -
interest payments 464 462 455 449 449 3,947 6,226
Operating lease
liabilities (b) 376 250 194 160 125 498 1,603Purchase obligations 14,284 1,906 1,644 1,565 1,519
3,558 24,476
Other long-term
liabilities (c) - 160 168 200 215 2,185 2,928
Total $ 15,665 $ 2,881 $ 2,554 $ 2,484 $ 2,390 $ 19,673 $ 45,647 ______________________________
(a) Debt obligations exclude amounts related to unamortized discounts and debt
issuance costs. Finance lease obligations include related interest expense.
Debt obligations due in 2020 include
under the IEnova Revolver (as defined and described in Note 9 of Notes to
Consolidated Financial Statements) for the construction of terminals in
Mexico by Central Mexico Terminals (as defined and described in Note 12 ofNotes to Consolidated Financial Statements). The IEnova Revolver is only
available to the operations of Central Mexico Terminals, and its creditors do
not have recourse against us.
(b) Operating lease liabilities include related interest expense.
(c) Other long-term liabilities exclude amounts related to the long-term portion
of operating lease liabilities that are separately presented above.
Debt and Finance Lease Obligations Our debt and finance lease obligations are described in Notes 9 and 5, respectively, of 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 may increase. As ofDecember 31, 2019 , all of our ratings on our senior unsecured debt, including debt guaranteed by us, are at or above investment grade level as follows: Rating Agency Rating Moody's Investors Service Baa2 (stable outlook)
Standard & Poor's Ratings Services BBB (stable outlook) Fitch Ratings
BBB (stable outlook)
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.
Debt Obligations - Interest Payments
Interest payments for our debt obligations as described in Note 9 of Notes to
Consolidated Financial Statements are the expected payments based on information
available as of December 31, 2019 .
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Operating Lease Liabilities Our operating lease liabilities arise from leasing arrangements for the right to use various classes of underlying assets as described in Note 5 of Notes to Consolidated Financial Statements. Operating lease liabilities are recognized for leasing arrangements with terms greater than one year and are not reduced by minimum lease payments to be received by us under subleases. Purchase Obligations A purchase obligation is an enforceable and legally binding agreement to purchase goods or services that specifies significant terms, including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum, or variable price provisions, and (iii) the approximate timing of the transaction. We have various purchase obligations under certain crude oil and other feedstock supply arrangements, industrial gas supply arrangements (such as hydrogen supply arrangements), natural gas supply arrangements, and various throughput, transportation and terminaling agreements. We enter into these contracts to ensure an adequate supply of feedstock and utilities and adequate storage capacity to operate our refineries and ethanol plants. Substantially all of our purchase obligations are based on market prices or adjustments based on market indices. Certain of these purchase obligations include fixed or minimum volume requirements, while others are based on our usage requirements. The purchase obligation amounts shown in the preceding table include both short- and long-term obligations and are based on (i) fixed or minimum quantities to be purchased and (ii) fixed or estimated prices to be paid based on current market conditions. Other Long-Term Liabilities Our other long-term liabilities are described in Note 8 of Notes to Consolidated Financial Statements. For purposes of reflecting amounts for other long-term liabilities in the preceding table, we made our best estimate of expected payments for each type of liability based on information available as ofDecember 31, 2019 .
NEW ACCOUNTING PRONOUNCEMENTS
As discussed in Note 1 of Notes to Consolidated Financial Statements, certain new financial accounting pronouncements became effectiveJanuary 1, 2020 , or will become effective in the future. The effect on our financial statements upon adoption of these pronouncements is discussed in the above-referenced note.
CRITICAL ACCOUNTING POLICIES INVOLVING CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following summary provides further information about our critical accounting policies that involve critical accounting estimates, and should be read in conjunction with Note 1 of Notes to Consolidated Financial Statements, which summarizes our significant accounting policies. The following accounting policies involve 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. Unless otherwise noted, estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining our estimates is not practicable due to the number of assumptions and contingencies involved, and the wide range of possible outcomes. Unrecognized Tax Benefits We take tax positions in our tax returns from time to time that may not be ultimately allowed by the relevant taxing authority. When we take such positions, we evaluate the likelihood of sustaining those positions and determine the amount of tax benefit arising from such positions, if any, that should be recognized in our financial statements. Tax benefits not recognized by us are recorded as a liability for unrecognized tax 54
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benefits, which represents our potential future obligation to various taxing authorities if the tax positions are not sustained.
The evaluation of tax positions and the determination of the benefit arising from such positions that are recognized in our financial statements requires us to make significant judgments and estimates based on an analysis of complex tax laws and regulations and related interpretations. These judgments and estimates are subject to change due to many factors, including the progress of ongoing tax audits, case law, and changes in legislation.
Details of our liability for unrecognized tax benefits, along with other information about our unrecognized tax benefits, are included in Note 15 of Notes to Consolidated Financial Statements.
Environmental Matters Our operations are subject to extensive environmental regulations by governmental authorities relating primarily to the discharge of materials into the environment, waste management, and pollution prevention measures. Future legislative action and regulatory initiatives could result in changes to required operating permits, additional remedial actions, or increased capital expenditures and operating costs that cannot be assessed with certainty at this time. Accruals for environmental liabilities are based on best estimates of probable undiscounted future costs over a 20-year time period using currently available technology and applying current regulations, as well as our own internal environmental policies. However, environmental liabilities are difficult to assess and estimate due to uncertainties related to the magnitude of possible remediation, the timing of such remediation, and the determination of our obligation in proportion to other parties. Such estimates are subject to change due to many factors, including the identification of new sites requiring remediation, changes in environmental laws and regulations and their interpretation, additional information related to the extent and nature of remediation efforts, and potential improvements in remediation technologies.
The amount of our accruals for environmental matters are included in Note 8 of Notes to Consolidated Financial Statements.
Pension and Other Postretirement Benefit Obligations We have significant pension and other postretirement benefit liabilities and costs that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, future compensation increases, and health care cost trend rates. These assumptions are disclosed and described in Note 13 of Notes to Consolidated Financial Statements. Changes in these assumptions are primarily influenced by factors outside of our control. For example, the discount rate assumption represents a yield curve comprised of various long-term bonds that have an average rating of double-A when averaging all available ratings by the recognized rating agencies, while the expected return on plan assets is based on a compounded return calculated assuming an asset allocation that is representative of the asset mix in our pension plans. To determine the expected return on plan assets, we utilized a forward-looking model of asset returns. The historical geometric average return over the 10 years prior toDecember 31, 2019 was 9.41 percent. The actual return on assets for the years endedDecember 31, 2019 , 2018, and 2017 was 23.44 percent, (5.53) percent, and 19.31 percent, respectively. These assumptions can have a significant effect on the amounts reported in our financial statements. 55
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The following sensitivity analysis shows the effects on the projected benefit obligation as ofDecember 31, 2019 and net periodic benefit cost for the year endingDecember 31, 2020 (in millions): Other Pension Postretirement Benefits Benefits Increase in projected benefit obligation resulting from: Discount rate decrease of 0.25% $ 134 $ 10 Compensation rate increase of 0.25% 17
n/a
Increase in expense resulting from: Discount rate decrease of 0.25% 12 - Expected return on plan assets decrease of 0.25% 6
n/a
Compensation rate increase of 0.25% 4
n/a
Our net periodic benefit cost is determined using the spot-rate approach. Under this approach, our net periodic benefit cost is impacted by the spot rates of the corporate bond yield curve used to calculate our liability discount rate. If the yield curve were to flatten entirely and our liability discount rate remained unchanged, our net periodic benefit cost would increase by$16 million for pension benefits and$2 million for other postretirement benefits in 2020.
See Note 13 of Notes to Consolidated Financial Statements for a discussion of our pension and other postretirement benefit obligations.
Inventory Valuation
The cost of our inventories is principally determined under the last-in,
first-out (LIFO) method using the dollar-value LIFO approach. Our LIFO
inventories are carried at the lower of cost or market value and our non-LIFO
inventories are carried at the lower of cost or net realizable value. The market
value of our LIFO inventories is determined based on the net realizable value of
the inventories.
We 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 cost, we recognize a
loss for the difference in our statements of income.
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