VALERO ENERGY CORPORATION CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q, including without limitation our disclosures below under the heading "OVERVIEW AND OUTLOOK," includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words "anticipate," "believe," "expect," "plan," "intend," "scheduled," "estimate," "project," "projection," "predict," "budget," "forecast," "goal," "guidance," "target," "could," "would," "should," "will," "may," "strive," and similar expressions.
These forward-looking statements include, among other things, statements regarding:
• the effect, impact, potential duration or other implications of the
COVID-19 pandemic and global crude oil production levels, and any
expectations we may have with respect thereto;
• future refining segment margins, including gasoline and distillate margins;
• future renewable diesel segment margins;
• future ethanol segment margins;
• expectations regarding feedstock costs, including crude oil differentials,
and operating expenses;
• anticipated levels of crude oil and refined petroleum product inventories
and storage capacity;
• 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, renewable
diesel, and ethanol industry fundamentals.
We based our forward-looking statements on our current expectations, estimates, and projections about ourselves, our industry, and the global economy and financial markets generally. We caution that these statements are not guarantees of future performance or results 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, actual results may differ materially from the future performance or results that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance or results suggested in these forward-looking statements could result from a variety of factors, including the following:
• demand for, and supplies of, refined petroleum products (such as gasoline,
diesel, jet fuel, and petrochemicals), renewable diesel, and ethanol;
• demand for, and supplies of, crude oil and other feedstocks;
• the effects of public health threats, pandemics and epidemics, such as the
COVID-19 pandemic, and the adverse impacts thereof on our business,
financial condition, results of operations, and liquidity, including, but
not limited to, our growth, operating costs, supply chain, labor
availability, logistical capabilities, customer demand for our products,
and industry demand generally, margins, production and throughput
capacity, utilization, inventory value, cash position, taxes, the price of
our securities
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and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally; • acts of terrorism aimed at either our facilities or other facilities that
could impair our ability to produce or transport refined petroleum
products or receive feedstocks;
• political and economic conditions in nations that produce crude oil or
consume refined petroleum products, renewable diesel, or ethanol;
• the ability of the members of the
Countries (OPEC) to agree on and to maintain crude oil price and
production controls;
• the level of consumer demand, including seasonal fluctuations;
• refinery overcapacity or undercapacity;
• our ability to successfully integrate any acquired businesses into our
operations;
• the actions taken by competitors, including both pricing and adjustments
to refining capacity in response to market conditions;
• the level of competitors' imports into markets that we supply;
• accidents, unscheduled shutdowns, weather events, civil unrest, political
events, terrorism, cyberattacks, or other catastrophes or disruptions
affecting our operations, refineries, machinery, pipelines, equipment, or
information systems, or any of the foregoing of our suppliers or
customers;
• changes in the cost or availability of transportation or storage capacity
for feedstocks and refined petroleum products;
• the price, availability, and acceptance of alternative fuels and
alternative-fuel vehicles;
• the levels of government subsidies for alternative fuels;
• the volatility in the market price of biofuel credits (primarily RINs
needed to comply with the U.S. federal Renewable Fuel Standard) and GHG
emission credits needed to comply with the requirements of various GHG
emission programs;
• delay of, cancellation of, or failure to implement planned capital
projects and realize the various assumptions and benefits projected for
such projects or cost overruns in constructing such planned capital
projects;
• earthquakes, hurricanes, tornadoes, and irregular weather, which can
unforeseeably affect the price or availability of natural gas, crude oil,grain and other feedstocks, refined petroleum products, renewable diesel,
and ethanol;
• 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 California cap-and-trade system and similar programs, and the
U.S. Environmental Protection Agency's regulation of GHGs, which may
adversely affect our business or operations;
• changes in the credit ratings assigned to our debt securities and trade
credit;
• changes in currency exchange rates, including the value of the Canadian
dollar, the pound sterling, the euro, the Mexican peso, and the Peruvian
sol relative to the U.S. dollar;
• overall economic conditions, including the stability and liquidity of
financial markets; and
• other factors generally described in the "Risk Factors" section included
in our annual report on Form 10-K for the year ended
that is incorporated by reference herein, as those factors are amended or
supplemented as set forth in the "RISK FACTORS" section included in
ITEM 1A, "RISK FACTORS" in this Form 10-Q.
Any one of these factors, or a combination of these factors, could materially
affect our future results of operations and whether any forward-looking
statements ultimately prove to be accurate. Our forward-looking statements are
not guarantees of future performance, and actual results and future performance
may differ
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materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
NON-GAAP FINANCIAL MEASURES
The discussions in "OVERVIEW AND OUTLOOK" and "RESULTS OF OPERATIONS" below include references to financial measures that are not defined underU.S. GAAP. These non-GAAP financial measures include adjusted operating income (including adjusted operating income for each of our reportable segments, as applicable) and refining, renewable diesel, and ethanol segment margin. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods. See the tables in note (d) beginning on page 57 for reconciliations of these non-GAAP financial measures to their most directly comparableU.S. GAAP financial measures. Also in note (d), we disclose the reasons why we believe our use of the non-GAAP financial measures provides useful information. OVERVIEW AND OUTLOOK Overview Business Operations Update The outbreak of COVID-19 and its development into a pandemic inMarch 2020 has resulted in significant economic disruption globally, including inNorth America andEurope , the primary geographic areas where we operate. In March, governmental authorities around the world took actions, such as stay-at-home orders and other social distancing measures, to slow down the spread of COVID-19 that restricted travel, public gatherings, and the overall level of individual movement and in-person interaction across the globe. These actions have significantly reduced global economic activity and negatively impacted many businesses, including our business. Airlines have dramatically reduced flights and motor vehicle usage has significantly declined at a time when seasonal driving patterns typically result in an increase of consumer demand for gasoline. As a result, there has also been a decline in the demand for, and thus also the market prices of, crude oil and most of our products. In addition, global crude oil production levels did not decline initially despite lower demand and storage capacity constraints for crude oil and refined products, which, duringMarch 2020 and much of the second quarter of 2020, exacerbated the decline in crude oil prices and contributed to an increase in crude oil price volatility. During the latter part of the second quarter of 2020, governmental authorities in various states across theU.S. , particularly those in ourU.S. Gulf Coast andU.S. Mid-Continent regions, began to lift many of the restrictions created by actions taken to slow down the spread of COVID-19, while many governmental authorities in ourU.S. West Coast and North Atlantic regions only recently began taking similar actions. These actions have resulted in an increase in the level of individual movement and travel and, in turn, an increase in the demand and market prices for most of our products relative to lateMarch 2020 . However, many of the states where such restrictions were lifted, and several states where the restrictions have essentially never been lifted (such asCalifornia in ourU.S. West Coast region), have recently experienced a marked increase in the spread of COVID-19 and many governmental authorities in such areas have responded by reimposing certain restrictions they had previously lifted. While this response has not yet significantly impacted the increased level of individual movement associated with the initial lifting of many restrictions, the risk remains that the reimposition of such restrictions that has already occurred, or any further reimposition 40
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of prior restrictions or any imposition of new restrictions that may occur in the future, could each weaken the partial recovery in the demand and market prices for our products, which would negatively affect us.
The decrease in the demand for refined petroleum products coupled with the decline in the price of crude oil has resulted in a significant decrease in the price of refined petroleum products manufactured by our refining segment. For example, the price of gasoline(a) in theU.S. Gulf Coast region where eight of our 15 refineries are located was$68.82 per barrel at the beginning of 2020, fell to$17.65 per barrel at the end of March (a 74 percent decline), and partially recovered to$46.58 per barrel by the end of June (a 32 percent decline over the six-month period). Another example is the price of diesel(b) in theU.S. Gulf Coast region, which was$81.71 per barrel at the beginning of 2020, fell to$39.18 per barrel at the end of March (a 52 percent decline), and partially recovered to$47.58 per barrel by the end of June (a 42 percent decline over the six-month period). OnJuly 29, 2020 , the prices of gasoline(a) and diesel(b) were$46.44 per barrel and$50.76 per barrel, respectively. The price of ethanol manufactured by our ethanol segment has also decreased due to a decline in demand. Because ethanol is primarily blended into gasoline, ethanol demand declined along with the decline in the demand for gasoline. Demand for renewable diesel, however, has not significantly declined due to continued demand for this low-carbon fuel despite the current economic environment; therefore, our renewable diesel segment has not been impacted as significantly as our refining and ethanol segments. Prices for the products we sell and the feedstocks we purchase impact our revenues, cost of sales, operating income, and liquidity. In addition, a decline in the market prices of products and feedstocks below their carrying values in our inventory results in a writedown in the value of our inventories, and a subsequent recovery in market prices results in a write-up in the value of our inventories to their previous carrying values. These inventory valuation adjustments are referred to as "lower of cost or market (LCM) inventory valuation adjustments" and are described in Note 4 of Condensed Notes to Consolidated Financial Statements. For the second quarter of 2020, we generated operating income of$1.8 billion , which includes a$2.2 billion recovery in the value of our inventories. We wrote down the value of our inventories by$2.5 billion in the first quarter of 2020 due to the significant decline in market prices at that time, but as previously noted, market prices improved during the second quarter resulting in the reversal of all but$294 million of the initial writedown. For the first six months of 2020, we generated an operating loss of$488 million , which includes the$294 million writedown in the value of our inventories. Our operating results for the second quarter and the first six months of 2020, including operating results by segment, are described in the summary below and detailed descriptions can be found under "RESULTS OF OPERATIONS" on pages 45 through 65. Our cash and cash equivalents declined by$264 million during the first six months of 2020, from$2.6 billion as ofDecember 31, 2019 to$2.3 billion as ofJune 30, 2020 . We invested$1.3 billion in our business and returned$948 million to our stockholders primarily through dividends, but also through purchases of our common stock, which, as discussed below, have not occurred under our stock purchase program sincemid-March 2020 . These uses of cash were largely offset by proceeds from a$1.5 billion public debt offering completed inApril 2020 as described in Note 6 of Condensed Notes to Consolidated Financial Statements. In addition, our operations generated net cash of$687 million , which was driven by a decrease in inventory on hand. Even though our cash and cash equivalents on hand declined during the first six months of 2020, we ended the period with$7.7 billion of liquidity(c). A summary of our cash flows is presented on page 66, and a description of our cash flows and other matters impacting our liquidity and capital resources, including measures we have taken or are considering to take to address the impacts of COVID-19 on our liquidity, can be found under "LIQUIDITY AND CAPITAL RESOURCES" on pages 65 through 69. 41
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We responded, and will strive to continue to respond, to the impacts from COVID-19 on our business. We reduced the amount of crude oil processed at most of our refineries in response to the decreased demand for our products, we temporarily idled various gasoline-making units at certain of our refineries to further limit gasoline production, and we took measures to reduce jet fuel production. Eight of our ethanol plants were temporarily idled, and production at our remaining six ethanol plants was reduced earlier this year to address the decreased demand for ethanol. Demand for most of our products partially recovered during the latter part of the second quarter of 2020. As a result, we have increased the production of most of our products and recently restarted the gasoline-making units and four ethanol plants that had been temporarily idled. In addition to these measures, we have addressed our liquidity as outlined below: • We deferred projects representing approximately$400 million of capital
investments that we had expected to make in 2020 related to our refining
and ethanol segments.
• We deferred income and indirect (e.g., value-added taxes (VAT) and motor
fuel taxes) tax payments due in the first six months of 2020 of
approximately $440 million . These deferrals have been provided to
taxpayers under new legislation, such as the CARES Act in the U.S. , andby various taxing authorities under existing legislation. Approximately
40 percent of the deferred payments will be due in the third quarter of
2020, with the remaining amount due in 2021.
• We have not purchased any shares of our common stock under our stock
purchase program since
repurchases when appropriate. We have no obligation to make purchases
under our stock purchase program.
• We entered into a 364-day Revolving Credit Facility on April 13, 2020
with an aggregate principal amount of up to
Note 6 of Condensed Notes to Consolidated Financial Statements. As of
June 30, 2020 and July 29, 2020 , we had no outstanding borrowings under
this facility.
• We extended the maturity date of our accounts receivable sales facility
to
Financial Statements. As of June 30, 2020 and July 29, 2020 , we had no
outstanding borrowings under this facility, and available borrowing
capacity was $666 million as of July 29, 2020 .
Many uncertainties remain with respect to COVID-19, including its resulting
economic effects, and we are unable to predict the ultimate economic impacts
from COVID-19 on our business and how quickly national economies can recover
once the pandemic subsides, or whether any recovery will ultimately experience a
reversal or other setbacks. However, the adverse impacts of the economic effects
on our company have been and will likely continue to be significant. We believe
we have proactively addressed many of the known impacts of COVID-19 to the
extent possible and we will strive to continue to do so, but there can be no
assurance that these or other measures will be fully effective.
____________________
(a) Gasoline prices quoted represent the price of
blendstock of oxygenate blending gasoline.
(b) Diesel prices quoted represent the price of
diesel.
(c) See the components of our liquidity as of
page 65 under "LIQUIDITY AND CAPITAL RESOURCES-Overview."
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Second Quarter Results For the second quarter of 2020, we reported net income attributable to Valero stockholders of$1.3 billion compared to$612 million for the second quarter of 2019, which represents an increase of$641 million . The increase was primarily due to higher operating income of$881 million , partially offset by a$179 million increase in income taxes. The increase in operating income included a$2.2 billion reversal in the LCM inventory valuation adjustment as described in Note 4 of Condensed Notes to Consolidated Financial Statements and in note (b) on page 56. While our operating income increased by$881 million in the second quarter of 2020 compared to the second quarter of 2019, adjusted operating income decreased by$1.4 billion . Adjusted operating income excludes the LCM inventory valuation adjustment and other adjustments reflected in the table in note (d) on page 57.
The
• Refining segment. Refining segment adjusted operating income decreased by
and lower throughput volumes, partially offset by stronger discounts on
crude oils. This is more fully described on pages 49 and 50.
• Renewable diesel segment. Renewable diesel segment adjusted operating
income decreased by
prices and higher feedstock costs, partially offset by a favorable impact
from commodity derivative instruments associated with our price risk
management activities. This is more fully described on page 51.
• Ethanol segment. Ethanol segment adjusted operating income decreased by
partially offset by lower corn prices. This is more fully described on
pages 52 and 53.
First Six Months Results
For the first six months of 2020, we reported a net loss attributable to Valero
stockholders of $598 million compared to net income attributable to Valero
stockholders of $753 million for the first six months of 2019, which represents
a decrease of $1.4 billion . The decrease was primarily due to lower operating
income of $1.7 billion , partially offset by a $488 million decrease in income
taxes.
While our operating income decreased by $1.7 billion in the first six months of
2020 compared to the first six months of 2019, adjusted operating income
decreased by $1.6 billion . Adjusted operating income excludes the adjustments
reflected in the table in note (d) on page 57.
The
• Refining segment. Refining segment adjusted operating income decreased by
and lower throughput volumes, partially offset by higher margins on other
products. This is more fully described on pages 62 and 63.
• Renewable diesel segment. Renewable diesel segment adjusted operating
income increased by
commodity derivative instruments associated with our price risk management
activities and higher renewable diesel sales volumes, partially offset by
lower renewable diesel prices. This is more fully described on pages 63
and 64.
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• Ethanol segment. Ethanol segment adjusted operating income decreased by
This is more fully described on pages 64 and 65.
Outlook
As previously discussed, many uncertainties remain with respect to COVID-19 and the global oil markets, and it is difficult to predict the ultimate economic impacts on us. However, we expect that the adverse impacts will likely continue during the third quarter of 2020, but with the anticipated improvements as noted below. • Gasoline, jet fuel, and diesel prices are expected to improve as a result
of an expected draw in excess product inventories toward historical levels
and a balancing of recovering demand and stabilizing refinery utilization.
• Sour crude oil discounts are expected to improve with the anticipated
easing of OPEC production cuts.
• Renewable diesel prices and resulting product margins are expected to
improve due to anticipated higher diesel prices.
• Ethanol prices and resulting product margins are expected to improve due
to an expected increase in ethanol demand as domestic gasoline consumption
improves toward historical levels.
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RESULTS OF OPERATIONS
The following tables, including the reconciliations of non-GAAP financial
measures to their most directly comparable
Second Quarter Results -Financial Highlights By Segment and Total Company (millions of dollars) Three Months Ended June 30, 2020 Corporate Renewable and Refining Diesel Ethanol Eliminations Total Revenues: Revenues from external customers$ 9,615 $ 239 $ 543 $ -$ 10,397 Intersegment revenues 2 57 38 (97 ) - Total revenues 9,617 296 581 (97 ) 10,397 Cost of sales: Cost of materials and other (a) 8,539 135 501 (96 ) 9,079 LCM inventory valuation adjustment (b) (2,137 ) - (111 ) - (2,248 ) Operating expenses (excluding depreciation and amortization expense reflected below) 928 20 79 - 1,027 Depreciation and amortization expense 533 12 21 - 566 Total cost of sales 7,863 167 490 (96 ) 8,424 Other operating expenses 3 - - - 3 General and administrative expenses (excluding depreciation and amortization expense reflected below) - - - 169 169 Depreciation and amortization expense - - - 12 12 Operating income by segment$ 1,751 $ 129 $ 91 $ (182 ) 1,789 Other income, net 27 Interest and debt expense, net of capitalized interest (142 ) Income before income tax expense 1,674 Income tax expense 339 Net income 1,335 Less: Net income attributable to noncontrolling interests (a) 82 Net income attributable toValero Energy Corporation stockholders$ 1,253 ___________________
See note references on pages 56 through 60.
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Second Quarter Results -Financial Highlights By Segment and Total Company (continued) (millions of dollars) Three Months Ended June 30, 2019 Corporate Renewable and Refining Diesel Ethanol Eliminations Total Revenues: Revenues from external customers$ 27,746 $ 222 $ 964 $ 1$ 28,933 Intersegment revenues 8 73 53 (134 ) - Total revenues 27,754 295 1,017 (133 ) 28,933 Cost of sales: Cost of materials and other 25,172 189 855 (133 ) 26,083 Operating expenses (excluding depreciation and amortization expense reflected below) 1,026 17 132 - 1,175 Depreciation and amortization expense 518 12 22 - 552 Total cost of sales 26,716 218 1,009 (133 ) 27,810 Other operating expenses 1 - 1 - 2 General and administrative expenses (excluding depreciation and amortization expense reflected below) - - - 199 199 Depreciation and amortization expense - - - 14 14
Operating income by segment
$ (213 ) 908 Other income, net (c) 12 Interest and debt expense, net of capitalized interest (112 ) Income before income tax expense 808 Income tax expense 160 Net income 648 Less: Net income attributable to noncontrolling interests 36 Net income attributable toValero Energy Corporation stockholders$ 612 ___________________
See note references on pages 56 through 60.
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Second Quarter Results -
Average Market Reference Prices and Differentials
Three Months Ended June 30,
2020 2019 Change
Refining
Feedstocks (dollars per barrel)
Brent crude oil $ 33.22 $ 68.33 $ (35.11 )
Brent less West Texas Intermediate (WTI) crude
oil 5.42 8.53 (3.11 )
Brent less Alaska North Slope (ANS) crude oil 2.85 0.15 2.70
Brent less LouisianaLight Sweet (LLS) crude oil 2.95 1.30
1.65
Brent less Argus Sour Crude Index (ASCI) crude oil 4.14 3.44 0.70 Brent less Maya crude oil 9.05 6.23 2.82 LLS crude oil 30.27 67.03 (36.76 ) LLS less ASCI crude oil 1.19 2.14 (0.95 ) LLS less Maya crude oil 6.10 4.93 1.17 WTI crude oil 27.80 59.80 (32.00 ) Natural gas (dollars per million British Thermal Units (MMBtu)) 1.65 2.46
(0.81 )
Product margins (dollars per barrel)U.S. Gulf Coast : Conventional Blendstock of Oxygenate Blending (CBOB) gasoline less Brent 0.51 6.72 (6.21 ) Ultra-low-sulfur (ULS) diesel less Brent 4.89 12.88 (7.99 ) Propylene less Brent (12.71 ) (24.70 ) 11.99 CBOB gasoline less LLS 3.46 8.02 (4.56 ) ULS diesel less LLS 7.84 14.18 (6.34 ) Propylene less LLS (9.76 ) (23.40 ) 13.64U.S. Mid-Continent: CBOB gasoline less WTI 6.19 18.76 (12.57 ) ULS diesel less WTI 11.38 22.51 (11.13 ) North Atlantic: CBOB gasoline less Brent 3.03 10.11 (7.08 ) ULS diesel less Brent 6.94 14.76 (7.82 ) U.S. West Coast: California Reformulated Gasoline Blendstock of Oxygenate Blending (CARBOB) 87 gasoline less ANS 9.43 23.24 (13.81 )California Air Resources Board (CARB) diesel less ANS 10.36 21.10 (10.74 ) CARBOB 87 gasoline less WTI 12.00 31.62 (19.62 ) CARB diesel less WTI 12.93 29.48 (16.55 ) 47
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Second Quarter Results -
Average Market Reference Prices and Differentials, (continued)
Three Months Ended June 30,
2020 2019 Change
Renewable diesel
New York Mercantile Exchange ULS diesel
(dollars per gallon) $ 0.97 $ 1.98 $ (1.01 )
Biodiesel RIN (dollars per RIN) 0.54 0.38 0.16
California Low-Carbon Fuel Standard (dollars per
metric ton) 201.01 188.77 12.24
Chicago Board of Trade (CBOT) soybean oil
(dollars per pound) 0.27 0.28 (0.01 )
Ethanol
CBOT corn (dollars per bushel) 3.23 3.91 (0.68 ) New York Harbor ethanol (dollars per gallon) 1.17
1.54 (0.37 )
Total Company , Corporate, and Other The following table includes selected financial data for the total company, corporate, and other for the second quarter of 2020 and the second quarter of 2019. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 45 and 46, unless otherwise noted. Three Months Ended June 30, 2020 2019 Change Revenues$ 10,397 $ 28,933 $ (18,536 ) Cost of sales (see note (a) on page 56) 8,424 27,810 (19,386 ) LCM inventory valuation adjustment (see note (b) on page 56) (2,248 ) - (2,248 ) Operating expenses (excluding depreciation and amortization expense) 1,027 1,175 (148 ) General and administrative expenses (excluding depreciation and amortization expense) 169 199 (30 ) Operating income 1,789 908 881 Adjusted operating income (loss) (see note (d) on page 57) (456 ) 982 (1,438 ) Income tax expense 339 160
179
Net income attributable to noncontrolling interests 82 36 46 Revenues decreased by$18.5 billion in the second quarter of 2020 compared to the second quarter of 2019 primarily due to decreases in refined petroleum product prices associated with sales made by our refining segment. The decrease in revenues was more than offset by a decrease in cost of sales of$19.4 billion primarily due to decreases in crude oil and other feedstock costs and the$2.2 billion reversal in the LCM inventory valuation adjustment, which resulted in an$881 million increase in operating income, from$908 million in the second quarter of 2019 to$1.8 billion in the second quarter of 2020.
Adjusted operating income decreased by
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amortization expense) associated with our corporate activities, and this decrease is discussed below. The remaining components of the decrease in adjusted operating income are discussed by segment in the segment analysis that follows.
General and administrative expenses (excluding depreciation and amortization expense) decreased by$30 million in the second quarter of 2020 compared to the second quarter of 2019 primarily due to lower advertising expenses of$16 million and a decrease in taxes other than income taxes of$14 million . Income tax expense increased by$179 million in the second quarter of 2020 compared to the second quarter of 2019 primarily as a result of higher income before income tax expense. The increase in income tax expense was partially offset by an income tax benefit in the second quarter of 2020 of$7 million associated with the carryback of an expected tax NOL from our current tax year to our 2015 tax year, in which we paid federal income tax at a 35 percent tax rate, as allowed by the CARES Act. See Note 10 in Condensed Notes to Consolidated Financial Statements for additional details. Our effective tax rate was 20 percent for the second quarter of 2020 and the second quarter of 2019. Net income attributable to noncontrolling interests increased by$46 million in the second quarter of 2020 compared to the second quarter of 2019 primarily due to higher earnings associated with DGD. Refining Segment Results The following table includes selected financial and operating data of our refining segment for the second quarter of 2020 and the second quarter of 2019. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 45 and 46, respectively, unless otherwise noted. Three Months Ended June 30, 2020 2019 Change Operating income$ 1,751 $ 1,037 $ 714 Adjusted operating income (loss) (see note (d) on page 58) (383 )
1,042 (1,425 )
Refining margin (see note (d) on page 59)$ 1,078 $ 2,586 $ (1,508 ) Operating expenses (excluding depreciation and amortization expense reflected below) 928 1,026 (98 ) Depreciation and amortization expense 533 518 15 Throughput volumes (thousand barrels per day) (see note (e) on page 60) 2,321 2,968 (647 ) Refining segment operating income increased by$714 million in the second quarter of 2020; however, refining segment adjusted operating income, which excludes the adjustments in the table in note (d) on page 58, decreased by$1.4 billion in the second quarter of 2020 compared to the second quarter of 2019. The components of the decrease, along with the reasons for the changes in those components, are outlined below.
• Refining segment margin decreased by
2020 compared to the second quarter of 2019.
Refining segment margin is primarily affected by the prices of the refined petroleum products that we sell and the cost of crude oil and other feedstocks (primarily residual fuel oil and vacuum gas
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oil) that we process. The market prices for refined petroleum products generally track the price of benchmark crude oils, such as Brent, WTI, and ANS; therefore, our refining segment margin is affected by our ability to purchase and process crude oils and other feedstocks that are priced at a discount to the benchmark crude oils. While we benefit when we process these types of crude oils and other feedstocks, that benefit will vary as the discount increases or decreases. Increases in these discounts have 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 47 reflects market reference prices and differentials that we believe had a material impact on the change in our refining segment margin in the second quarter of 2020 compared to the second quarter of 2019.
The decrease in refining segment margin was primarily due to the following:
• A decrease in gasoline margins had an unfavorable impact of
approximately $826 million .
• A decrease in distillate (primarily diesel) margins had an
unfavorable impact of approximately $723 million .
• A decrease in throughput volumes of 647,000 barrels per day had an
unfavorable impact of approximately $564 million . As noted in
"OVERVIEW AND OUTLOOK-Overview-Business Operations Update" on
pages 40 through 42, we reduced the amount of crude oilprocessed at
our refineries and limited the production of gasoline and jet fuel
at certain of our refineries late in the first quarter of 2020 and
into the beginning of the second quarter of 2020. However, demand
for most of our products partially recovered during the latter part
of the second quarter of 2020 and, as a result, we have increased
the production of most of our products and restarted the
gasoline-making units that had been temporarily idled at certain of
our refineries.
• Higher discounts on crude oils had a favorable impact of
approximately $435 million .
• Higher discounts on other feedstocks had a favorable impact of
approximately $177 million .
• Refining segment operating expenses (excluding depreciation and
amortization expense) decreased by $98 million primarily due to lower
natural gas and electricity costs of $50 million , lower chemical and
catalyst costs of $22 million , and lower maintenance expenses of
$17 million .
• Refining segment depreciation and amortization expense associated with our
cost of sales increased by
depreciation expense associated with capital projects that were completed
and finance leases that commenced in the latter half of 2019 and the first
half of 2020.
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Renewable Diesel Segment Results The following table includes selected financial and operating data of our renewable diesel segment for the second quarter of 2020 and the second quarter of 2019. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 45 and 46, respectively, unless otherwise noted. Three Months Ended June 30, 2020 2019 Change Operating income$ 129 $ 77 $ 52 Adjusted operating income (see note (d) on page 58) 129 145 (16 ) Renewable diesel margin (see note (d) on page 60)$ 161 $ 174 $ (13 ) Operating expenses (excluding depreciation and amortization expense reflected below) 20 17 3 Depreciation and amortization expense 12 12 - Sales volumes (thousand gallons per day) (see note (e) on page 60) 795 769 26 Renewable diesel segment operating income increased by$52 million in the second quarter of 2020; however, renewable diesel segment adjusted operating income, which excludes the adjustment in the table in note (d) on page 58, decreased by$16 million in the second quarter of 2020 compared to the second quarter of 2019. The decrease was primarily due to lower renewable diesel segment margin. Renewable diesel segment margin decreased by$13 million in the second quarter of 2020 compared to the second quarter of 2019. Renewable diesel segment margin is primarily affected by the price of the renewable diesel that we sell and the cost of the feedstocks that we process. The table on page 48 reflects market reference prices that we believe had a material impact on the change in our renewable diesel segment margin in the second quarter of 2020 compared to the second quarter of 2019.
The decrease in renewable diesel segment margin was primarily due to the following:
• Lower renewable diesel prices had an unfavorable impact of approximately
$24 million .
• An increase in the cost of the feedstocks we process had an unfavorable
impact of approximately $14 million .
• Price risk management activities had a favorable impact of
recognized a hedge gain of $19 million in the second quarter of 2020
compared to a hedge loss of $1 million in the second quarter of 2019.
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Ethanol Segment Results The following table includes selected financial and operating data of our ethanol segment for the second quarter of 2020 and the second quarter of 2019. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 45 and 46, respectively, unless otherwise noted. Three Months Ended June 30, 2020 2019 Change Operating income$ 91 $ 7 $ 84 Adjusted operating income (loss) (see note (d) on page 59) (20 ) 8 (28 ) Ethanol margin (see note (d) on page 60)$ 80 $ 162 $ (82 ) Operating expenses (excluding depreciation and amortization expense reflected below) 79 132 (53 ) Depreciation and amortization expense 21 22 (1 ) Production volumes (thousand gallons per day) (see note (e) on page 60) 2,316 4,533 (2,217 ) Ethanol segment operating income increased by$84 million in the second quarter of 2020; however, ethanol segment adjusted operating income, which excludes the adjustments in the table in note (d) on page 59, decreased by$28 million in the second quarter of 2020 compared to the second quarter of 2019. The components of the decrease, along with the reasons for the changes in those components, are outlined below.
• Ethanol segment margin decreased by
2020 compared to the second quarter of 2019.
Ethanol segment margin is primarily affected by prices of the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 48 reflects market reference prices that we believe had a material impact on the change in our ethanol segment margin in the second quarter of 2020 compared to the second quarter of 2019.
The decrease in ethanol segment margin was primarily due to the following:
• Lower ethanol prices had an unfavorable impact of approximately$98 million . • A decrease in production volumes of 2.2 million gallons per day had an unfavorable impact of approximately$80 million . As noted in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update" on pages 40 through 42, as a result of the economic disruption from COVID-19, eight of our ethanol plants were temporarily idled and production was reduced at our remaining six ethanol plants late in the first quarter of 2020 and into the beginning of the second quarter of 2020. However, demand for ethanol began to recover during the latter part of the second quarter of 2020 and, as a result, we have increased production and restarted four of the plants that had been temporarily idled.
• Lower corn prices had a favorable impact of approximately
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• Ethanol segment operating expenses (excluding depreciation and
amortization expense) decreased by
energy costs of $23 million , lower chemical and catalyst costs of
$17 million , and lower maintenance expenses of $8 million .
First Six Months Results -
Financial Highlights By Segment and Total Company
(millions of dollars)
Six Months Ended June 30, 2020
Corporate
Renewable and
Refining Diesel Ethanol Eliminations Total
Revenues:
Revenues from external customers $ 30,600 $ 545 $ 1,354 $ - $ 32,499
Intersegment revenues 4 110 102 (216 ) -
Total revenues 30,604 655 1,456 (216 ) 32,499
Cost of sales:
Cost of materials and other (a) 27,666 265 1,314 (214 ) 29,031
LCM inventory valuation adjustment
(b) 277 - 17 - 294
Operating expenses (excluding
depreciation and
amortization expense reflected
below) 1,923 40 188 - 2,151
Depreciation and amortization
expense 1,069 23 43 - 1,135
Total cost of sales 30,935 328 1,562 (214 ) 32,611
Other operating expenses 5 - - - 5
General and administrative expenses
(excluding
depreciation and amortization
expense reflected
below) - - - 346 346
Depreciation and amortization
expense - - - 25 25
Operating income (loss) by segment
$ (373 ) (488 ) Other income, net 59 Interest and debt expense, net of capitalized interest (267 ) Loss before income tax benefit (696 ) Income tax benefit (277 ) Net loss (419 ) Less: Net income attributable to noncontrolling interests (a) 179 Net loss attributable toValero Energy Corporation stockholders$ (598 ) ___________________
See note references on pages 56 through 60.
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First Six Months Results -Financial Highlights By Segment and Total Company (continued) (millions of dollars) Six Months Ended June 30, 2019 Corporate Renewable and Refining Diesel Ethanol Eliminations Total Revenues: Revenues from external customers$ 50,964 $ 474 $ 1,757 $ 1$ 53,196 Intersegment revenues 10 124 105 (239 ) - Total revenues 50,974 598 1,862 (238 ) 53,196 Cost of sales: Cost of materials and other 46,337 413 1,549 (238 ) 48,061 Operating expenses (excluding depreciation and amortization expense reflected below) 2,097 36 257 - 2,390 Depreciation and amortization expense 1,021 23 45 - 1,089 Total cost of sales 49,455 472 1,851 (238 ) 51,540 Other operating expenses 3 - 1 - 4 General and administrative expenses (excluding depreciation and amortization expense reflected below) - - - 408 408 Depreciation and amortization expense - - - 28 28
Operating income by segment
$ (436 ) 1,216 Other income, net (c) 34 Interest and debt expense, net of capitalized interest (224 ) Income before income tax expense 1,026 Income tax expense 211 Net income 815 Less: Net income attributable to noncontrolling interests 62 Net income attributable toValero Energy Corporation stockholders$ 753 ___________________
See note references on pages 56 through 60.
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First Six Months Results -
Average Market Reference Prices and Differentials
Six Months Ended June 30,
2020 2019 Change
Refining
Feedstocks (dollars per barrel) Brent crude oil$ 42.06 $ 66.08 $ (24.02 ) Brent less WTI crude oil 5.17 8.73 (3.56 ) Brent less ANS crude oil 1.18 (0.27 ) 1.45 Brent less LLS crude oil 2.85 1.38 1.47 Brent less ASCI crude oil 4.58 3.17 1.41 Brent less Maya crude oil 9.40 5.64 3.76 LLS crude oil 39.21 64.70 (25.49 ) LLS less ASCI crude oil 1.73 1.79 (0.06 ) LLS less Maya crude oil 6.55 4.26 2.29 WTI crude oil 36.89 57.35 (20.46 )
Natural gas (dollars per MMBtu) 1.74 2.66 (0.92 )
Product margins (dollars per barrel)U.S. Gulf Coast : CBOB gasoline less Brent 1.44 3.44 (2.00 ) ULS diesel less Brent 8.08 13.94 (5.86 ) Propylene less Brent (16.88 ) (22.67 ) 5.79 CBOB gasoline less LLS 4.29 4.82 (0.53 ) ULS diesel less LLS 10.93 15.32 (4.39 ) Propylene less LLS (14.03 ) (21.29 ) 7.26U.S. Mid-Continent: CBOB gasoline less WTI 6.94 14.23 (7.29 ) ULS diesel less WTI 14.35 23.70 (9.35 ) North Atlantic: CBOB gasoline less Brent 3.66 5.68 (2.02 ) ULS diesel less Brent 10.62 16.10 (5.48 ) U.S. West Coast: CARBOB 87 gasoline less ANS 8.63 15.49 (6.86 ) CARB diesel less ANS 13.79 18.65 (4.86 ) CARBOB 87 gasoline less WTI 12.62 24.49 (11.87 ) CARB diesel less WTI 17.78 27.65 (9.87 ) 55
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First Six Months Results -
Average Market Reference Prices and Differentials, (continued)
Six Months Ended June 30,
2020 2019 Change
Renewable diesel
New York Mercantile Exchange ULS diesel
(dollars per gallon) $ 1.26 $ 1.96 $ (0.70 )
Biodiesel RIN (dollars per RIN) 0.50 0.44 0.06
California Low-Carbon Fuel Standard (dollars per
metric ton) 203.52 191.49 12.03
CBOT soybean oil (dollars per pound) 0.29 0.29 -
Ethanol
CBOT corn (dollars per bushel) 3.49 3.82 (0.33 ) NYH ethanol (dollars per gallon) 1.25
1.49 (0.24 )
The following notes relate to references on pages 45 through 54 and 61 through 65.
(a) Cost of materials and other for the three and six months ended
includes a benefit of
the blender's tax credit attributable to volumes blended during those
periods. The legislation authorizing the credit through
passed and signed into law in
applied retroactively to volumes blended during 2019 (2019 blender's tax
credit). The entire 2019 blender's tax credit was recognized by us in
attributable to volumes blended during the three and six months ended
June 30, 2019 was $72 million and $149 million , respectively.
The above mentioned pre-tax benefits are attributable to our reportable segments
and stockholders as follows:
Periods to which Blender's Tax Credit is Attributable
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reportable segments to which
blender's
tax credit is attributable
Refining $ 4 $ 4 $ 4 $ 9
Renewable diesel 72 68 151 140
Total $ 76 $ 72 $ 155 $ 149
Interests to which blender's tax
credit is
attributable
Valero Energy Corporation
stockholders $ 40 $ 38 $ 79 $ 79
Noncontrolling interest 36 34 76 70
Total $ 76 $ 72 $ 155 $ 149 (b) The market value of our inventories accounted for under the last-in,
first-out (LIFO) method fell below their historical cost on an aggregate
basis as of
valuation adjustment of
LIFO inventories improved as of
prices, which resulted in a reversal of
adjustment
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recorded in the three months endedMarch 31, 2020 . Consequently, our results of operations for the six months endedJune 30, 2020 reflect a net LCM inventory valuation adjustment of$294 million . Of the$2.2 billion benefit recognized in the three months endedJune 30, 2020 ,$2.1 billion and$111 million is attributable to our refining and ethanol segments, respectively. Of the$294 million adjustment recognized in the six months endedJune 30, 2020 ,$277 million and$17 million is attributable to our refining and ethanol segments, respectively.
(c) "Other income, net" for the three and six months ended
a $22 million charge from the early redemption of $850 million of our
6.125 percent Senior Notes due February 1, 2020 .
(d) 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.
Non-GAAP measures are as follows:
• Adjusted operating income (loss) is defined as total company operating
income (loss) adjusted to reflect the 2019 blender's tax credit in the
proper period, and excluding the LCM inventory valuation adjustment and
other operating expenses, as reflected in the table below. We believe
adjusted operating income (loss) is an important measure of our
operating and financial performance because it excludes items that are
not indicative of our core operating performance.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of total company operating
income
to adjusted operating income (loss)
Total company operating income (loss) $ 1,789 $ 908 $ (488 ) $ 1,216
Adjustments:
2019 blender's tax credit (see note (a)) - 72 - 149
LCM inventory valuation adjustment (see
note (b)) (2,248 ) - 294 -
Other operating expenses 3 2 5 4
Adjusted operating income (loss)
(189 ) $ 1,369
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• Adjusted refining operating income (loss) is defined as refining
segment operating income (loss) adjusted to reflect the 2019 blender's
tax credit in the proper period, and excluding the LCM inventory
valuation adjustment and other operating expenses, as reflected in the
table below. We believe adjusted refining operating income (loss) is animportant 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.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of refining operating
income (loss)
to adjusted refining operating income
(loss)
Refining operating income (loss) $ 1,751 $ 1,037 $ (336 ) $ 1,516
Adjustments:
2019 blender's tax credit (see note (a)) - 4 - 9
LCM inventory valuation adjustment (see
note (b)) (2,137 ) - 277 -
Other operating expenses 3 1 5 3
Adjusted refining operating income (loss)
(54 )$ 1,528 • Adjusted renewable diesel operating income is defined as renewable
diesel segment operating income adjusted to reflect the 2019 blender's
tax credit in the proper period, as reflected in the table below. We
believe adjusted renewable diesel operating income is an important
measure of our renewable diesel segment's operating and financial
performance because it excludes items that are not indicative of that
segment's core operating performance.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of renewable diesel
operating income
to adjusted renewable diesel operating
income
Renewable diesel operating income $ 129 $ 77 $ 327 $ 126
Adjustment:
2019 blender's tax credit (see note (a)) - 68 - 140
Adjusted renewable diesel operating
income $ 129 $ 145 $ 327 $ 266
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• Adjusted ethanol operating income (loss) is defined as ethanol segment
operating income (loss) adjusted to exclude the LCM inventory valuation
adjustment and other operating expenses, as reflected in the table
below.We believe adjusted ethanol operating income (loss) 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.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of ethanol operating
income (loss)
to adjusted ethanol operating income
(loss)
Ethanol operating income (loss) $ 91 $ 7 $ (106 ) $ 10
Adjustments:
LCM inventory valuation adjustment (see
note (b)) (111 ) - 17 -
Other operating expenses - 1 - 1
Adjusted ethanol operating income (loss)
$ (89 ) $ 11
• Refining margin is defined as refining operating income (loss) adjusted
to reflect the 2019 blender's tax credit in the proper period, and
excluding the LCM inventory valuation adjustment, operating expenses
(excluding depreciation and amortization expense), depreciation and
amortization expense, and other operating expenses, as reflected in the
table below. 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.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of refining operating
income (loss)
to refining margin
Refining operating income (loss) $ 1,751 $ 1,037 $ (336 ) $ 1,516
Adjustments:
2019 blender's tax credit (see note (a)) - 4 - 9
LCM inventory valuation adjustment (see
note (b)) (2,137 ) - 277 -
Operating expenses (excluding
depreciation and
amortization expense) 928 1,026 1,923 2,097
Depreciation and amortization expense 533 518 1,069 1,021
Other operating expenses 3 1 5 3
Refining margin $ 1,078 $ 2,586 $ 2,938 $ 4,646
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• Renewable diesel margin is defined as renewable diesel operating income
adjusted to reflect the 2019 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. We believe renewable diesel margin is an
important measure of our renewable diesel segment's operating and
financial performance as it is the most comparable measure to theindustry's market reference product margins, which are used by industry
analysts, investors, and others to evaluate our performance.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of renewable diesel
operating income
to renewable diesel margin
Renewable diesel operating income $ 129 $ 77 $ 327 $ 126
Adjustments:
2019 blender's tax credit (see note (a)) - 68 - 140
Operating expenses (excluding
depreciation and
amortization expense) 20 17 40 36
Depreciation and amortization expense 12 12 23 23
Renewable diesel margin $ 161 $ 174 $ 390 $ 325 • Ethanol margin is defined as ethanol operating income (loss) excluding
the LCM inventory valuation adjustment, operating expenses (excluding
depreciation and amortization expense), depreciation and amortization
expense, and other operating expenses, as reflected in the table below.
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.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Reconciliation of ethanol operating
income (loss)
to ethanol margin
Ethanol operating income (loss) $ 91 $ 7 $ (106 ) $ 10
Adjustments:
LCM inventory valuation adjustment (see
note (b)) (111 ) - 17 -
Operating expenses (excluding
depreciation and
amortization expense) 79 132 188 257
Depreciation and amortization expense 21 22 43 45
Other operating expenses - 1 - 1
Ethanol margin $ 80 $ 162 $ 142 $ 313 (e) We use throughput volumes, sales volumes, and production volumes for the
refining segment, renewable diesel segment, and ethanol segment,
respectively, due to their general use by others who operate facilities
similar to those included in our segments.
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Total Company , Corporate, and Other The following table includes selected financial data for the total company, corporate, and other for the first six months of 2020 and the first six months of 2019. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 53 and 54, unless otherwise noted. Six Months Ended June 30, 2020 2019 Change Revenues$ 32,499 $ 53,196 $ (20,697 ) Cost of materials and other (see note (a) on page 56) 29,031 48,061 (19,030 ) LCM inventory valuation adjustment (see note (b) on page 56) 294 -
294
Operating expenses (excluding depreciation and amortization expense) 2,151 2,390 (239 ) General and administrative expenses (excluding depreciation and amortization expense) 346 408 (62 ) Operating income (loss) (488 ) 1,216 (1,704 ) Adjusted operating income (loss) (see note (d) on page 57) (189 ) 1,369 (1,558 ) Income tax expense (benefit) (277 ) 211 (488 ) Net income attributable to noncontrolling interests 179 62 117 Revenues decreased by$20.7 billion in the first six months of 2020 compared to the first six months of 2019 primarily due to decreases in refined petroleum product prices associated with sales made by our refining segment. The decrease in revenues, along with the$294 million LCM inventory valuation adjustment in the first six months of 2020, was partially offset by a decrease in cost of materials and other of$19.0 billion primarily due to decreases in crude oil and other feedstock costs, lower operating expenses (excluding depreciation and amortization expense) of$239 million , and a decrease in general and administrative expenses (excluding depreciation and amortization expense) of$62 million , which resulted in a$1.7 billion decrease in operating income, from$1.2 billion of operating income in the first six months of 2019 to an operating loss of$488 million in the first six months of 2020. Adjusted operating income decreased by$1.6 billion , from$1.4 billion of operating income in the first six months of 2019 to an operating loss of$189 million in the first six months of 2020. The$1.6 billion decrease includes the$62 million decrease in general and administrative expenses (excluding depreciation and amortization expense) associated with our corporate activities, and this decrease is discussed below. The remaining components of the decrease in adjusted operating income are discussed by segment in the segment analysis that follows. General and administrative expenses (excluding depreciation and amortization expense) decreased by$62 million in the first six months of 2020 compared to the first six months of 2019 primarily due to lower advertising expenses of$22 million , a decrease in taxes other than income taxes of$16 million , and the effect of expenses incurred in first six months of 2019 associated with the Merger Transaction with VLP of$7 million and environmental reserve adjustments related to certain non-operating sites of$6 million . Income tax expense decreased$488 million in the first six months of 2020 compared to the first six months of 2019 primarily as a result of lower income before income tax expense. In addition, the decrease in income tax expense was impacted by an income tax benefit in the first six months of 2020 of$117 million associated with the carryback of an expected tax NOL. Excluding the$117 million benefit attributable to the expected tax carryback NOL, our effective tax rate was 23 percent for the first six months of 2020, which is consistent with the 21 percent effective tax rate for the first six months of 2019. 61
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Net income attributable to noncontrolling interests increased by$117 million in the first six months of 2020 compared to the first six months of 2019 primarily due to higher earnings associated with DGD. Refining Segment Results The following table includes selected financial and operating data of our refining segment for the first six months of 2020 and the first six months of 2019. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 53 and 54, respectively, unless otherwise noted. Six Months Ended June 30, 2020 2019 Change Operating income (loss)$ (336 ) $ 1,516 $ (1,852 ) Adjusted operating income (loss) (see note (d) on page 58) (54 ) 1,528
(1,582 )
Refining margin (see note (d) on page 59)
$ (1,708 ) Operating expenses (excluding depreciation and amortization expense reflected below) 1,923 2,097 (174 ) Depreciation and amortization expense 1,069 1,021 48 Throughput volumes (thousand barrels per day) (see note (e) on page 60) 2,573 2,917 (344 ) Refining segment operating income decreased by$1.9 billion in the first six months of 2020; however, refining segment adjusted operating income, which excludes the adjustments in the table in note (d) on page 58, decreased by$1.6 billion in the first six months of 2020 compared to the first six months of 2019. The components of this decrease, along with the reasons for the changes in those components, are outlined below.
• Refining segment margin decreased by
of 2020 compared to the first six months of 2019.
Refining segment margin is primarily affected by the prices of the refined petroleum products that we sell and the cost of crude oil and other feedstocks that we process. The table on page 55 reflects market reference prices and differentials that we believe had a material impact on the change in our refining segment margin in the first six months of 2020 compared to the first six months of 2019.
The decrease in refining segment margin was primarily due to the following:
• A decrease in distillate (primarily diesel) margins had an
unfavorable impact of approximately $930 million .
• A decrease in gasoline margins had an unfavorable impact of
approximately $611 million .
• A decrease in throughput volumes of 344,000 barrels per day had an
unfavorable impact of $550 million . As noted in "OVERVIEW AND
OUTLOOK-Overview-Business Operations Update" on pages 40through 42,
we reduced the amount of crude oil processed at our refineries and
limited the production of gasoline and jet fuel at certain of our
refineries late in the first quarter of 2020 and into the beginning
of the second quarter of 2020. However, demand for most of our
products partially recovered during the latter part of the second
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quarter of 2020 and, as a result, we have increased the production of most of
our products and restarted the gasoline-making units that had been temporarily
idled at certain of our refineries.
• Higher margins on other products had a favorable impact of
approximately $464 million .
• Refining segment operating expenses (excluding depreciation and
amortization expense) decreased by
natural gas and electricity costs of
catalyst costs of $38 million , and lower maintenance expenses of
$19 million .
• Refining segment depreciation and amortization expense associated with our
cost of sales increased by
depreciation expense associated with capital projects that were completed
and finance leases that commenced in the latter half of 2019 and the first
half of 2020.
Renewable Diesel Segment Results
The following table includes selected financial and operating data of our
renewable diesel segment for the first six months of 2020 and the first six
months of 2019. The selected financial data is derived from the Financial
Highlights by Segment and Total Company tables on pages 53 and 54, respectively,
unless otherwise noted.
Six Months Ended June 30,
2020 2019 Change
Operating income $ 327 $ 126 $ 201
Adjusted operating income (see note (d) on page
58) 327 266 61
Renewable diesel margin (see note (d) on page
60) $ 390 $ 325 $ 65
Operating expenses (excluding depreciation and
amortization
expense reflected below) 40 36 4
Depreciation and amortization expense 23 23 -
Sales volumes (thousand gallons per day) (see
note (e)
on page 60) 831 780 51
Renewable diesel segment operating income increased by $201 million in the first
six months of 2020; however, renewable diesel segment adjusted operating income,
which excludes the adjustment in the table in note (d) on page 58, increased by
$61 million in the first six months of 2020 compared to the first six months of
2019. The increase was primarily due to higher renewable diesel segment margin.
Renewable diesel segment margin increased by $65 million in the first six months
of 2020 compared to the first six months of 2019. Renewable diesel segment
margin is primarily affected by the price of the renewable diesel that we sell
and the cost of the feedstocks that we process. The table on page 56 reflects
market reference prices that we believe had a material impact on the change in
our renewable diesel segment margin in the second quarter of 2020 compared to
the second quarter of 2019.
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The increase in renewable diesel segment margin was primarily due to the following:
• Price risk management activities had a favorable impact of
recognized a hedge gain of $45 million in the first six months of 2020
compared to a hedge loss of $27 million in the first six months of 2019.
• An increase in sales volumes of 51,000 gallons per day had a favorable
impact of $13 million .
• Lower renewable diesel prices had an unfavorable impact of approximately
$23 million . Ethanol Segment Results The following table includes selected financial and operating data of our ethanol segment for the first six months of 2020 and the first six months of 2019. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 53 and 54, respectively, unless otherwise noted. Six Months Ended June 30, 2020 2019 Change Operating income (loss)$ (106 ) $ 10 $ (116 ) Adjusted operating income (loss) (see note (d) on page 59) (89 ) 11 (100 ) Ethanol margin (see note (d) on page 60)$ 142 $ 313 $ (171 ) Operating expenses (excluding depreciation and amortization expense reflected below) 188 257 (69 ) Depreciation and amortization expense 43 45 (2 ) Production volumes (thousand gallons per day) (see note (e) on page 60) 3,210 4,376 (1,166 ) Ethanol segment operating income decreased by$116 million in the first six months of 2020; however, ethanol segment adjusted operating income, which excludes the adjustment in the table in note (d) on page 59, decreased by$100 million in the first six months of 2020 compared to the first six months of 2019. The components of this decrease, along with the reasons for the changes in those components, are outlined below.
• Ethanol segment margin decreased by
of 2020 compared to the first six months of 2019.
Ethanol segment margin is primarily affected by prices of the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 56 reflects market reference prices that we believe had a material impact on the change in our ethanol segment margin in the first six months of 2020 compared to the first six months of 2019.
The decrease in ethanol segment margin was primarily due to the following:
• Lower ethanol prices had an unfavorable impact of approximately$141 million . • A decrease in production volumes of 1.2 million gallons per day had an unfavorable impact of approximately$53 million . As noted in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update" on pages 40 through 42, as a result of the economic disruption 64
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from COVID-19, eight of our ethanol plants were temporarily idled and production
was reduced at our remaining six ethanol plants late in the first quarter of
2020 and into the beginning of the second quarter of 2020. However, demand for
ethanol began to recover during the latter part of the second quarter of 2020
and, as a result, we have increased production and restarted four of the plants
that had been temporarily idled.
• Ethanol segment operating expenses (excluding depreciation and
amortization expense) decreased by $69 million primarily due to lower
energy costs of $37 million , lower chemicals and catalyst costs of
$16 million , and lower maintenance expenses of $8 million .
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the six months endedJune 30, 2020 , our liquidity was negatively impacted by the significant economic effects resulting from the COVID-19 pandemic as described in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update." Even though we generated$687 million of cash from operating activities during the first six months of 2020, the amount of cash generated was negatively impacted by lower earnings and a use of cash to fund working capital, which resulted from the rapid decline in the market prices of refined petroleum products and crude oil that occurred during March andApril 2020 . The amount of cash generated during that time by our product sales declined more rapidly than the amount of cash used to pay for our crude oil purchases. While this relationship is not abnormal or unusual in our business where daily product sales follow market prices on that day, the negative impact on our cash position is more significant when the market prices decline rapidly. Market prices began recovering in May andJune 2020 , but they have not recovered to the level prior to the COVID-19 pandemic and the recovery has been gradual. We have taken a number of actions to address the current economic environment and its impact on our liquidity, most notably the issuance of$1.5 billion in public debt inApril 2020 , which is described in Note 6 of Condensed Notes to Consolidated Financial Statements. We have taken other actions to address our liquidity and those actions are described in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update" on pages 40 through 42 and in the discussion of matters impacting our liquidity and capital resources below.
Our Liquidity
Our liquidity consisted of the following as of
$ 3,967 364-day Revolving Credit Facility 875 Canadian Revolver(a) 105 Accounts receivable sales facility 726 Letter of credit facility 50 Total available borrowing capacity 5,723 Cash and cash equivalents(b) 1,972 Total liquidity$ 7,695 _____________________
(a) The amount for our Canadian Revolver is shown in
forth in the summary of our credit facilities in Note 6 of Condensed
Notes to Consolidated Financial Statements, the availability under our
Canadian Revolver as of June 30, 2020 in Canadian dollars was
C$143 million .
(b) Excludes $347 million of cash and cash equivalents related to our VIEs
that is available for use only by our VIEs.
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Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 6 of Condensed Notes to Consolidated Financial Statements.
InJuly 2020 , we extended the maturity date of our accounts receivable sales facility toJuly 2021 and decreased the facility amount from$1.3 billion to$1.0 billion . As ofJuly 29, 2020 , the amount available to us under this credit facility was$666 million . We believe that cash provided by operations, along with cash from our public debt offering inApril 2020 and available borrowings under our credit facilities, is sufficient to fund our ongoing operating requirements and other commitments. We expect that, to the extent necessary, we can raise additional cash through equity or debt financings in the public and private capital markets or the arrangement of additional credit facilities. However, there can be no assurances regarding the availability of any future financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us. Cash Flows Components of our cash flows are set forth below (in millions): Six Months Ended June 30, 2020 2019 Cash flows provided by (used in): Operating activities$ 687 $ 2,394 Investing activities (1,339 ) (1,555 ) Financing activities: Borrowings 1,962 1,962 Other financing activities (1,527 ) (3,787 ) Financing activities 435 (1,825 )
Effect of foreign exchange rate changes on cash (47 ) 37
Net decrease in cash and cash equivalents
Cash Flows for the Six Months EndedJune 30, 2020 In the first six months of 2020, we used$264 million of our cash on hand,$687 million of cash generated by our operations, and$2.0 billion in borrowings to make$1.3 billion of investments in our business and fund$1.5 billion of other financing activities. The borrowings are described in Note 6 of Condensed Notes to Consolidated Financial Statements. As previously noted, our operations generated$687 million of cash in the first six months of 2020, which was negatively impacted by an unfavorable change in working capital of$478 million . The change in working capital was affected primarily by a$1.3 billion use of cash(a) resulting from the rapid decline in market prices of refined petroleum products and crude oil as a result of the negative economic effects of COVID-19 that impacted our receivables and accounts payable, partially offset by a$1.1 billion source of cash driven by a reduction in inventory volumes on hand, which we intend to restore by year end. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 13 of Condensed Notes to Consolidated Financial Statements. In addition, see "RESULTS OF OPERATIONS" for an analysis of our net loss. 66
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Investments in our business of$1.3 billion consisted of$1.2 billion in capital investments, as defined below, of which$187 million related to self-funded capital investments by DGD, and$143 million of capital expenditures of VIEs other than DGD. Other financing activities of$1.5 billion consisted primarily of$801 million in dividends,$432 million of payments of debt and finance lease obligations,$147 million for the purchase of common stock for treasury, and$127 million to pay distributions to noncontrolling interests.
____________________
(a) Represents the net cash flow change in "receivables, net" of
(which excludes the impact from the collection of
blender's tax credit receivable) and accounts payable of
the the six months ended
Cash Flows for the Six Months EndedJune 30, 2019 In the first six months of 2019, we used$949 million of cash on hand,$2.4 billion of cash generated by our operations, and$2.0 billion in borrowings to make$1.6 billion of investments in our business and fund$3.8 billion of other financing activities. The borrowings are described in Note 6 of Condensed Notes to Consolidated Financial Statements. As previously noted, our operations generated$2.4 billion of cash in the first six months of 2019, which was favorably impacted by a positive change in working capital of$413 million . Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 13 of Condensed Notes to Consolidated Financial Statements. In addition, see "RESULTS OF OPERATIONS" for an analysis of our net income. Investments in our business of$1.6 billion consisted of$1.5 billion in capital investments, as defined below, of which$52 million is related to self-funded capital investments by DGD, and$69 million of capital expenditures of VIEs other than DGD. Other financing activities of$3.8 billion consisted primarily of$1.8 billion of payments of debt and finance lease obligations,$950 million to acquire all of the outstanding publicly held common units of VLP,$751 million in dividends, and$248 million for the purchase of common stock for treasury. Capital Investments Due to the current negative economic environment, we have deferred approximately$400 million of capital investments for 2020 related to our refining and ethanol segments. As a result, we now expect to incur approximately$2.1 billion for capital investments during 2020, but this deferral does not impact our intent to satisfy all required safety, environmental, and regulatory capital commitments. We will continue to evaluate our capital investments as changes to the current economic environment occur.
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.
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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. Other Matters Impacting Liquidity and Capital Resources Stock Purchase Program As ofJune 30, 2020 , we had$1.4 billion available for purchase under our stock purchase program, which has no expiration date. We have not purchased any shares of our common stock under our stock purchase program sincemid-March 2020 , and we will evaluate the timing of repurchases when appropriate. We have no obligation to make purchases under this program. Pension Plan Funding We previously disclosed in our annual report on Form 10-K for the year endedDecember 31, 2019 that we planned to contribute approximately$140 million to our pension plans and$21 million to our other postretirement benefit plans during 2020. Due to the current economic environment, we are reconsidering our intent to make a discretionary contribution of up to$100 million to our qualifiedU.S. pension plan. Environmental Matters Our operations are subject to extensive environmental regulations by governmental authorities relating to the discharge of materials into the environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of gasolines and distillates. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades in any of our operating facilities could require material additional expenditures to comply with environmental laws and regulations. Tax Matters Under recently passed legislation, such as the CARES Act in theU.S. , and existing legislation, we deferred approximately$440 million of income and indirect (e.g., VAT and motor fuel taxes) tax payments due in the first and second quarters of 2020. Approximately 40 percent of the deferred payments will be due in the third quarter of 2020, with the remaining amount due in 2021. Cash Held by Our International Subsidiaries As ofJune 30, 2020 ,$1.4 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 the Tax Cuts and Jobs Act of 2017, 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 including the uncertainties concerning COVID-19 and volatility in the global oil markets. However, we believe that our portfolio of accounts receivable is sufficiently diversified 68
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to the extent necessary to minimize potential credit risk. Historically, we have not had any significant problems collecting our accounts receivable.
CONTRACTUAL OBLIGATIONS
As ofJune 30, 2020 , our contractual obligations included debt, finance lease obligations, operating lease obligations, purchase obligations, and other long-term liabilities. In the ordinary course of business, we had lease and debt-related activities during the six months endedJune 30, 2020 as described in Notes 5 and 6, respectively, of Condensed Notes to Consolidated Financial Statements. In addition, certain of our purchase obligations, primarily related to crude oil and other feedstock supply arrangements, declined during the first six months of 2020 as a result of the decrease in crude oil and feedstock prices that occurred during the period because of the current economic conditions. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the six months endedJune 30, 2020 . 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 ofJune 30, 2020 , all of our ratings on our senior unsecured debt, including debt of one of our wholly owned subsidiaries that is guaranteed by us, are at or above investment grade level as follows: 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.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting estimates are included in our annual report on Form 10-K for the year endedDecember 31, 2019 . As ofJune 30, 2020 , the following accounting policy is included as it involves estimates that are considered critical due to the level of subjectivity and judgment involved, as well as the impact on our financial position and results of operations. We believe that all of our estimates are reasonable. Estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining our estimates are not practicable due to the number of assumptions and contingencies involved, and the wide range of possible outcomes. Impairment of Long-Lived Assets andGoodwill Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which 69
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the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value. As ofJune 30, 2020 , we determined there was no impairment of our long-lived assets or goodwill as discussed in Note 2 of Condensed Notes to Consolidated Financial Statements.
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