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," "seek," "potential," "opportunity," "aimed," "considering," "continue," and similar expressions.
These forward-looking statements include, among other things, statements regarding:
•the effect, impact, potential duration or timing, or other implications of the
COVID-19 pandemic, government restrictions in response thereto, variants of the
COVID-19 virus, vaccine distribution and administration levels, economic
activity, and global crude oil production levels, and any expectations we may
have with respect thereto, including with respect to our operations and the
production levels of our assets;
•our expectations with respect to the frequency of large excess costs and
expenses arising out of storms and other weather events, such as Winter Storm
Uri;
•future refining segment margins, including gasoline and distillate margins, and
discounts;
•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;
•expectations regarding the levels of, and timing with respect to, the
production and operations at our refineries and plants;
•our anticipated level of capital investments, including deferred turnaround and
catalyst cost expenditures, capital expenditures for environmental and other
purposes, and joint venture investments, the expected timing applicable to such
capital investments and any related projects, and the effect of those capital
investments on our results of operations;
•our anticipated level of cash distributions or contributions, such as our
dividend payment rate and contributions to our qualified pension plans and other
postretirement benefit plans;
•our ability to meet future cash requirements, whether from funds generated from
our operations or our ability to access financial markets effectively, and our
ability to maintain sufficient liquidity;
•our evaluation of, and expectations regarding, any future activity under our
share repurchase program;
•anticipated trends in the supply of and demand for crude oil and other
feedstocks and refined petroleum products, renewable diesel, and ethanol and
corn related co-products in the regions where we operate, as well as globally;
•expectations regarding environmental, tax, and other regulatory initiatives;
•the effect of general economic and other conditions on refining, renewable
diesel, and ethanol industry fundamentals;
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•expectations regarding adoptions of new, or changes to existing, low-carbon
fuel standards or policies, blending credits, or efficiency standards that
impact demand for renewable fuels; and
•expectations regarding several carbon transition projects, which are in early
development.
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 known and unknown risks and
uncertainties, the ultimate outcomes of which we cannot predict with certainty.
In addition, we based many of these forward-looking statements on assumptions
about future events, the ultimate outcomes of which we cannot predict with
certainty and which may prove to be inaccurate. Accordingly, actual performance
or results may differ materially from the future performance or results that we
have expressed or forecast in the forward-looking statements. Differences
between actual performance or 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 and corn
related co-products;
•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, governmental and societal responses thereto, vaccine
distribution and administration levels, and the adverse impacts of the foregoing
on our business, financial condition, results of operations, and liquidity,
including, but not limited to, our growth, operating costs, supply chain, labor
availability, logistical capabilities, customer demand for our products, and
industry demand generally, margins, production and throughput capacity,
utilization, inventory value, cash position, taxes, the price of our securities
and trading markets with respect thereto, our ability to access capital markets,
and the global economy and financial markets generally;
•acts of terrorism aimed at either our refineries and plants or third-party
facilities that could impair our ability to produce or transport refined
petroleum products, renewable diesel, ethanol, or corn related co-products, or
to receive feedstocks;
•political and economic conditions in nations that produce crude oil or other
feedstocks or consume refined petroleum products, renewable diesel, ethanol or
corn related co-products;
•the ability of the members of the Organization of Petroleum Exporting Countries
(OPEC) to agree on and to maintain crude oil price and production controls;
•the level of consumer demand, consumption and overall economic activity,
including seasonal fluctuations;
•refinery, renewable diesel plant, or ethanol plant overcapacity or
undercapacity;
•our ability to successfully integrate any acquired businesses into our
operations;
•the risk that any divestitures may not provide the anticipated benefits or may
result in unforeseen detriments;
•the actions taken by competitors, including both pricing and adjustments to
refining capacity or renewable fuels production in response to market
conditions;
•the level of competitors' imports into markets that we supply;
•accidents, unscheduled shutdowns, weather events, civil unrest, expropriation
of assets, and other economic, diplomatic, or political events or developments,
terrorism, cyberattacks, or other catastrophes or disruptions affecting our
operations, production facilities, machinery, pipelines and other logistics
assets, equipment, or information systems, or any of the foregoing of our
suppliers, customers, or third-party service providers;
•changes in the cost or availability of transportation or storage capacity for
feedstocks and our products;
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-------------------------------------------------------------------------------- Table of Contents •political pressure and influence of environmental groups and other stakeholders upon policies and decisions related to the production, transportation, storage, refining, processing, marketing, and sales of crude oil or other feedstocks, refined petroleum products, renewable diesel, ethanol, or corn related co-products; •the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles, as well as sentiment and perceptions with respect to GHG emissions more generally; •the levels of government subsidies for, and mandates or other policies with respect to, alternative fuels, alternative-fuel vehicles, and other low-carbon technologies or initiatives; •the volatility in the market price of biofuel credits (primarily RINs needed to comply with theU.S. federal Renewable Fuel Standard (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, rendered and recycled materials, corn, and other feedstocks, refined petroleum products, renewable diesel, and ethanol; •rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage; •legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by governmental authorities, including tariffs and tax and environmental regulations, such as changes to the corporate tax rate, actions implemented under theCalifornia cap-and-trade system and similar programs, changes to volume requirements or other obligations or exemptions under the RFS, and actions arising from theU.S. Environmental Protection Agency's (EPA 's) or other governmental regulation of GHGs, which may adversely affect our business or operations; •changing economic, regulatory, and political environments in the various countries in which we operate or otherwise do business; •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 theU.S. dollar; •the adequacy of capital resources and liquidity, including availability, timing, and amounts of cash flow or our ability to borrow; •the costs, disruption, and diversion of management's attention associated with campaigns and negative publicity commenced by investors, stakeholders, or other interested parties; •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 endedDecember 31, 2020 . 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. 29
-------------------------------------------------------------------------------- Table of Contents NON-GAAP FINANCIAL MEASURES The discussions in "OVERVIEW AND OUTLOOK," "RESULTS OF OPERATIONS," and "LIQUIDITY AND CAPITAL RESOURCES" below include references to financial measures that are not defined underU.S. GAAP. These non-GAAP financial measures include adjusted operating income (loss) (including adjusted operating income (loss) for each of our reportable segments, as applicable); refining, renewable diesel, and ethanol segment margin; and capital investments attributable to Valero. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods and to help assess our cash flows. See the tables in note (c) beginning on page 41 for reconciliations of adjusted operating income (loss) (including adjusted operating income (loss) for each of our reportable segments, as applicable) and refining, renewable diesel, and ethanol segment margin to their most directly comparableU.S. GAAP financial measures. Also in note (c), we disclose the reasons why we believe our use of such non-GAAP financial measures provides useful information. See the table on page 47 for a reconciliation of capital investments attributable to Valero to its most directly comparableU.S. GAAP financial measure. Beginning on page 46, we disclose the reasons why we believe our use of this non-GAAP financial measure provides useful information.
OVERVIEW AND OUTLOOK
Overview
Business Operations Update The outbreak of COVID-19 and its development into a pandemic inMarch 2020 resulted in significant economic disruption globally as governmental authorities imposed restrictions, such as stay-at-home orders and other social distancing measures, to slow the spread of COVID-19. These actions significantly reduced global economic activity and negatively impacted many businesses, including our business. We experienced a decline in the demand for most of the transportation fuels that we produce and sell, and thus also a decline in the market prices of those products, due to a decrease in the level of individual movement and travel resulting from the restrictions. There was also a decline in the global demand for crude oil, the primary feedstock for the products of our refining segment, resulting in a decline in crude oil prices and production levels. As a result of these factors, we generated a net loss attributable to Valero stockholders in 2020 and our operations generated significantly less cash in 2020 than in prior years. We took a number of actions sinceMarch 2020 to respond to the impacts from the pandemic on our business, such as reducing transportation fuel production at our refineries and ethanol plants to align with demand, deferring certain capital investments, deferring the payment of certain income and indirect taxes as permitted by legislation, and suspending purchases of our common stock under our stock purchase program. We also raised a total of$4.0 billion (before deducting the underwriting discounts and debt issuance costs) through two public debt offerings at attractive rates. The net proceeds from these offerings, along with the cash generated by our operations, allowed us to make most of our planned capital investments, pay dividends in each of the 2020 quarterly periods, and increase our cash and cash equivalents on hand as ofDecember 31, 2020 compared to the prior year end. For the first quarter of 2021, we reported a net loss attributable to Valero stockholders of$704 million . The factor primarily impacting these results was a significant increase in the cost of electricity and natural gas at certain of our refineries and ethanol plants arising out of Winter Storm Uri. We incurred excess energy costs estimated at$579 million , or$467 million after taxes, during the first quarter of 2021. Our results for the first quarter are more fully discussed in "First Quarter Results" below and in "RESULTS OF OPERATIONS" beginning on page 33. 30
-------------------------------------------------------------------------------- Table of Contents While the significant increase in energy costs was an event isolated to the first quarter of 2021, our business showed signs of recovery and improvement in the demand for and market prices of gasoline and diesel, with both factors reaching near pre-pandemic levels inMarch 2021 . Jet fuel demand has seen improved market indicators, such as higher traveler throughput as reported by theTransportation Security Administration , although at a slower pace than other products we produce relative to pre-pandemic levels. These improvements resulted primarily from the lifting or easing of restrictions by many governmental authorities, especially those in ourU.S. Gulf Coast andU.S. Mid-Continent regions, in response to decreasing COVID-19 infection rates and increasing numbers of people receiving COVID-19 vaccines, which were approved by a number of regulators throughout the world in late 2020 and early 2021. While many governmental authorities in areas located in ourU.S. West Coast and NorthAtlantic regions, such asCalifornia ,Canada , and theU.K. , continue to impose restrictions, some of these restrictions have been or are soon expected to be moderately lifted. The ongoing distribution of vaccines may result in the continued lifting of restrictions and may be seen as a key factor in helping to restore public confidence, and thus stimulate and increase economic activity, potentially to pre-pandemic levels; however, the risk remains that the vaccines may not be distributed widely on a timely basis, they may not be effective against new variants of the COVID-19 virus, the distribution of some or all of the vaccines may be paused or withdrawn due to concerns with potential side effects, and/or the level of individuals' willingness to receive a vaccine may not be as strong or as timely as needed. Based on these and other circumstances that cannot be predicted, the broader implications of the pandemic on our results of operations and financial position remain uncertain. The improving, but lingering, impacts of the pandemic on our operations and the negative effects arising out of Winter Storm Uri on the energy costs at certain of our refineries and ethanol plants also impacted our liquidity during the first quarter of 2021. Our operations for the quarter used$52 million of cash largely due to the effect from estimated excess energy costs previously noted, the majority of which were paid by the end of the first quarter. We also made$582 million in capital investments and paid$400 million in dividends during the quarter. As a result, our cash and cash equivalents decreased by$1.0 billion , from$3.3 billion as ofDecember 31, 2020 to$2.3 billion as ofMarch 31, 2021 . We did not issue any debt or make any borrowings under our credit facilities during the first quarter of 2021, and we had$8.0 billion in liquidity1 as ofMarch 31, 2021 . A summary of our cash flows is presented on page 45, and a description of our cash flows and other matters impacting our liquidity and capital resources, including measures we have taken to address the impacts of the COVID-19 pandemic on our liquidity, can be found under "LIQUIDITY AND CAPITAL RESOURCES" on pages 44 through 49. While our business has improved as a result of the increasing demand for and market prices of most of the products that we produce, many uncertainties remain with respect to the pandemic, including its resulting economic effects. Therefore, we are unable to predict the ultimate economic impacts from the pandemic on our business and how quickly national economies can recover once the pandemic subsides, the timing or effectiveness of vaccine distributions or vaccination levels, whether improvements experienced by us so far may reverse, or whether other setbacks may occur. As a result, the adverse impacts of the economic effects of the pandemic on our company may likely continue to be significant. We believe we have proactively responded to many of the known impacts of the pandemic on our business to the extent practicable and we strive to continue to do so, but there can be no assurance that these or other measures will be fully effective.
1 See the components of our liquidity as of
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First Quarter Results
For the first quarter of 2021, we reported a net loss attributable to Valero
stockholders of $704 million compared to a net loss attributable to Valero
stockholders of $1.9 billion for the first quarter of 2020. The improvement of
$1.1 billion was primarily due to a lower operating loss of $1.6 billion ,
partially offset by a lower income tax benefit of $468 million . The decrease in
operating loss between the periods included the effect of a $2.5 billion LCM
inventory valuation adjustment in the first quarter of 2020, which is described
in Note 3 of Condensed Notes to Consolidated Financial Statements and in
note (b) on page 41.
While our operating loss decreased by $1.6 billion in the first quarter of 2021
compared to the first quarter of 2020, adjusted operating income decreased by
$895 million . Adjusted operating income excludes the adjustments reflected in
the table in note (c) on page 44.
The
•Refining segment. Refining segment adjusted operating income decreased by$883 million primarily due to estimated excess energy costs arising out of Winter Storm Uri, lower distillate margins, lower throughput volumes, and higher cost of biofuel credits, partially offset by higher gasoline margins. This is more fully described on pages 37 and 38. •Renewable diesel segment. Renewable diesel segment operating income increased by$5 million primarily due to higher renewable diesel prices, partially offset by higher feedstock costs and an unfavorable impact from commodity derivative instruments associated with our price risk management activities. This is more fully described on page 39. •Ethanol segment. Ethanol segment adjusted operating loss decreased by$13 million primarily due to higher ethanol and corn related co-product prices, partially offset by higher corn prices, estimated excess energy costs arising out of Winter Storm Uri, and lower production volumes. This is more fully described on pages 40 and 41.
Outlook
As previously discussed, many uncertainties remain with respect to the COVID-19 pandemic, and while it is difficult to predict the ultimate economic impacts that the pandemic may have on us and how quickly we can recover once the pandemic subsides, we have noted several factors below that have impacted or may impact our results of operations during the second quarter of 2021.
•Gasoline, jet fuel, and diesel prices are expected to continue to improve with industry-wide inventory levels returning to historical levels and continued recovery in product demand.
•Sour crude oil discounts are expected to continue to improve as
•Renewable diesel margins are expected to remain consistent with current levels.
•Ethanol margins are expected to improve as domestic consumption increases.
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RESULTS OF OPERATIONS
The following tables, including the reconciliations of non-GAAP financial
measures to their most directly comparable
First Quarter Results -Financial Highlights By Segment and Total Company (millions of dollars) Three
Months Ended
Corporate
Renewable and
Refining Diesel Ethanol Eliminations Total
Revenues:
Revenues from external customers
$ 985 $ -$ 20,806 Intersegment revenues 3 79 60 (142) - Total revenues 19,472 431 1,045 (142) 20,806 Cost of sales: Cost of materials and other (a) 18,022 187 924 (141) 18,992 Operating expenses (excluding depreciation and amortization expense reflected below) (a) 1,471 29 156 - 1,656 Depreciation and amortization expense 533 12 21 - 566 Total cost of sales 20,026 228 1,101 (141) 21,214 Other operating expenses 38 - - - 38 General and administrative expenses (excluding depreciation and amortization expense reflected below) - - - 208 208 Depreciation and amortization expense - - - 12 12
Operating income (loss) by segment
$ (56) $ (221) (666) Other income, net 45 Interest and debt expense, net of capitalized interest (149) Loss before income tax benefit (770) Income tax benefit (148) Net loss (622) Less: Net income attributable to noncontrolling interests 82 Net loss attributable to Valero Energy Corporation stockholders$ (704)
________________________
See note references on pages 41 through 44.
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First Quarter Results -
Financial Highlights By Segment and Total Company (continued)
(millions of dollars)
Three
Months Ended
Corporate
Renewable and
Refining Diesel Ethanol Eliminations Total
Revenues:
Revenues from external customers
$ 811 $ -$ 22,102 Intersegment revenues 2 53 64 (119) - Total revenues 20,987 359 875 (119) 22,102 Cost of sales: Cost of materials and other 19,127 130 813 (118) 19,952 LCM inventory valuation adjustment (b) 2,414 - 128 - 2,542 Operating expenses (excluding depreciation and amortization expense reflected below) 995 20 109 - 1,124 Depreciation and amortization expense 536 11 22 - 569 Total cost of sales 23,072 161 1,072 (118) 24,187 Other operating expenses 2 - - - 2 General and administrative expenses (excluding depreciation and amortization expense reflected below) - - - 177 177 Depreciation and amortization expense - - - 13 13
Operating income (loss) by segment
$ (197) $ (191) (2,277) Other income, net 32 Interest and debt expense, net of capitalized interest (125) Loss before income tax benefit (2,370) Income tax benefit (616) Net loss (1,754) Less: Net income attributable to noncontrolling interests 97 Net loss attributable to Valero Energy Corporation stockholders$ (1,851)
________________________
See note references on pages 41 through 44.
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First Quarter Results -
Average Market Reference Prices and Differentials
Three Months Ended March 31,
2021 2020 Change
Refining
Feedstocks (dollars per barrel)
Brent crude oil $ 61.09 $ 50.90 $ 10.19
Brent less West Texas Intermediate (WTI) crude oil 3.26 4.92 (1.66)
Brent less Alaska North Slope (ANS) crude oil 0.33 (0.50) 0.83
Brent less Louisiana Light Sweet (LLS) crude oil 1.11 2.76 (1.65)
Brent less Argus Sour Crude Index (ASCI) crude oil 2.99 5.01 (2.02)
Brent less Maya crude oil 4.70 9.74 (5.04)
LLS crude oil 59.98 48.14 11.84
LLS less ASCI crude oil 1.88 2.25 (0.37)
LLS less Maya crude oil 3.59 6.98 (3.39)
WTI crude oil 57.84 45.98 11.86
Natural gas (dollars per million British Thermal
Units) 19.66 1.82 17.84
Product margins (dollars per barrel)
U.S. Gulf Coast :
Conventional Blendstock of Oxygenate Blending
(CBOB) gasoline less Brent 10.12 2.37 7.75
Ultra-low-sulfur (ULS) diesel less Brent 10.19 11.26 (1.07)
Propylene less Brent 18.50 (21.04) 39.54
CBOB gasoline less LLS 11.23 5.13 6.10
ULS diesel less LLS 11.30 14.02 (2.72)
Propylene less LLS 19.61 (18.28) 37.89
U.S. Mid-Continent:
CBOB gasoline less WTI 14.82 7.69 7.13
ULS diesel less WTI 17.21 17.31 (0.10)
North Atlantic:
CBOB gasoline less Brent 11.56 4.28 7.28
ULS diesel less Brent 11.89 14.29 (2.40)
U.S. West Coast:
California Reformulated Gasoline Blendstock of
Oxygenate Blending (CARBOB) 87 gasoline less ANS 14.56 7.82 6.74
17.22 (3.08)
CARBOB 87 gasoline less WTI 17.49 13.24 4.25
CARB diesel less WTI 17.07 22.64 (5.57)
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First Quarter Results -
Average Market Reference Prices and Differentials, (continued)
Three Months Ended March 31,
2021 2020 Change
Renewable diesel
New York Mercantile Exchange ULS diesel
(dollars per gallon) $ 1.74 $ 1.55 $ 0.19
Biodiesel RIN (dollars per RIN) 1.18 0.46 0.72
California Low-Carbon Fuel Standard (dollars per
metric ton) 195.30 206.03 (10.73)
0.48 0.30 0.18
Ethanol
CBOT corn (dollars per bushel) 5.39 3.74 1.65 New York Harbor ethanol (dollars per gallon) 1.78 1.33 0.45Total Company , Corporate, and Other The following table includes selected financial data for the total company, corporate, and other for the first quarter of 2021 and 2020. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 33 and 34, unless otherwise noted. Three
Months Ended
2021 2020 Change
Revenues $ 20,806 $ 22,102 $ (1,296)
Cost of sales (see notes (a) and (b) on page 41) 21,214 24,187 (2,973)
Operating expenses (excluding depreciation and
amortization
expense) (see note (a) on page 41) 1,656 1,124 532
General and administrative expenses (excluding
depreciation
and amortization expense) 208 177 31
LCM inventory valuation adjustment (see note (b) on
page 41) - 2,542 (2,542)
Operating loss (666) (2,277) 1,611Adjusted operating income (loss) (see note (c) on page 44)
(628) 267 (895)
Interest and debt expense, net of capitalized interest (149)
(125) (24)
Income tax benefit (148) (616) 468
Revenues decreased by $1.3 billion in the first quarter of 2021 compared to the
first quarter of 2020 primarily due to a decrease in the volume of refined
petroleum products sold by our refining segment. This decrease in revenues,
along with an increase in general and administrative expenses (excluding
depreciation and amortization expense) of $31 million , was more than offset by a
decrease in cost of sales of $3.0 billion , which resulted in a $1.6 billion
decrease in operating loss, from $2.3 billion in the first quarter of 2020 to
$666 million in the first quarter of 2021. The decrease in cost of sales was
primarily due to the effect of the $2.5 billion LCM inventory valuation
adjustment in the first quarter of 2020 and lower production volumes resulting
in lower crude oil and other feedstock costs in the first quarter of 2021,
partially offset by a $532 million increase in operating expenses (excluding
depreciation and amortization expense).
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Adjusted operating income decreased by $895 million , from $267 million of
adjusted operating income in the first quarter of 2020 to an adjusted operating
loss of $628 million in the first quarter of 2021. The $895 million decrease
includes a $31 million increase in general and administrative expenses
(excluding depreciation and amortization expense) associated with our corporate
activities, and this increase is discussed below. The remaining components of
the decrease in adjusted operating income are discussed by segment in the
segment analyses that follow.
General and administrative expenses (excluding depreciation and amortization
expense) increased by $31 million in the first quarter of 2021 compared to the
first quarter of 2020 primarily due to an increase in certain employee
compensation expenses of $23 million and higher advertising expenses of
$7 million .
"Interest and debt expense, net of capitalized interest" increased by
Income tax benefit decreased by$468 million in the first quarter of 2021 compared to the first quarter of 2020 primarily as a result of a lower loss before income tax benefit. Our effective tax rate was 19 percent for the first quarter of 2021 compared to 26 percent for the first quarter of 2020. The effective tax rate for the first quarter of 2020 was impacted by theU.S. federal tax NOL for 2020, which was carried back to 2015 when theU.S. federal statutory rate was 35 percent, as described in Note 8 of Condensed Notes to Consolidated Financial Statements. Refining Segment Results The following table includes selected financial and operating data of our refining segment for the first quarter of 2021 and 2020. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 33 and 34, respectively, unless otherwise noted. Three Months Ended March 31, 2021 2020 Change Operating loss$ (592) $ (2,087) $ 1,495 Adjusted operating income (loss) (see note (c) on page 43) (554) 329 (883) Refining margin (see note (c) on page 42)$ 1,450 $ 1,860 $ (410) Operating expenses (excluding depreciation and amortization expense reflected below) (see note (a) on page 41) 1,471 995 476 Depreciation and amortization expense 533 536 (3) Throughput volumes (thousand barrels per day) (see note (d) on page 44) 2,410 2,824 (414) Refining segment operating loss decreased by$1.5 billion in the first quarter of 2021; however, refining segment adjusted operating income, which excludes the adjustments in the table in note (c) on page 43, decreased by$883 million in the first quarter of 2021 compared to the first quarter of 2020. The 37 -------------------------------------------------------------------------------- Table of Contents components of this decrease, along with the reasons for the changes in those components, are outlined below.
•Refining segment margin decreased by
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 35 reflects market reference prices and differentials that we believe had a material impact on the change in our refining segment margin in the first quarter of 2021 compared to the first quarter of 2020.
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$280 million . •A decrease in throughput volumes of 414,000 barrels per day had an unfavorable impact of$249 million . As noted in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update" on pages 30 through 31, the COVID-19 pandemic resulted in global economic disruption and a significant decline in the demand for the transportation fuels we produce, and as a result, we reduced production of transportation fuel products beginning late in the first quarter of 2020. We have since increased the production of most of our products to align with improvements in demand, which reached near pre-pandemic levels inMarch 2021 . •An increase in the cost of biofuel credits (primarily RINs in theU.S. ) had an unfavorable impact of$248 million . See Note 13 of Condensed Notes to Consolidated Financial Statements for additional information on our government and regulatory compliance program.
•Lower discounts on feedstocks other than crude oil had an unfavorable impact of
approximately
•Estimated excess energy costs arising out of Winter Storm Uri had an
unfavorable impact of
•An increase in gasoline margins had a favorable impact of approximately
•Refining segment operating expenses (excluding depreciation and amortization
expense) increased by
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Renewable Diesel Segment Results
The following table includes selected financial and operating data of our
renewable diesel segment for the first quarter of 2021 and 2020. The selected
financial data is derived from the Financial Highlights by Segment and Total
Company tables on pages 33 and 34, respectively, unless otherwise noted.
Three
Months Ended
2021 2020 Change
Operating income $ 203 $
198
Renewable diesel margin (see note (c) on page 42)
229 $ 15
Operating expenses (excluding depreciation and
amortization
expense reflected below) 29 20 9
Depreciation and amortization expense 12 11 1
Sales volumes (thousand gallons per day) (see note
(d)
on page 44) 867 867 -
Renewable diesel segment operating income increased by
Renewable diesel segment margin increased by$15 million in the first quarter of 2021 compared to the first quarter of 2020. 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 36 reflects market reference prices that we believe had a material impact on the change in our renewable diesel segment margin in the first quarter of 2021 compared to the first quarter of 2020.
The increase in renewable diesel segment margin was primarily due to the following:
•Higher renewable diesel prices had a favorable impact of approximately
•An increase in the cost of the feedstocks we process had an unfavorable impact
of approximately
•Price risk management activities had an unfavorable impact of$49 million . We recognized a hedge loss of$23 million in the first quarter of 2021 compared to a hedge gain of$26 million in the first quarter of 2020. 39 -------------------------------------------------------------------------------- Table of Contents Ethanol Segment Results The following table includes selected financial and operating data of our ethanol segment for the first quarter of 2021 and 2020. The selected financial data is derived from the Financial Highlights bySegment and Total Company tables on pages 33 and 34, respectively, unless otherwise noted. Three Months Ended March 31, 2021 2020 Change Operating loss$ (56) $ (197) $ 141 Adjusted operating loss (see note (c) on page 43) (56) (69) 13 Ethanol margin (see note (c) on page 43)$ 121 $ 62 $ 59 Operating expenses (excluding depreciation and amortization expense reflected below) (see note (a) on page 41) 156 109 47 Depreciation and amortization expense 21 22 (1) Production volumes (thousand gallons per day) (see note (d) on page 44) 3,562 4,103 (541) Ethanol segment operating loss decreased by$141 million in the first quarter of 2021; however, ethanol segment adjusted operating loss, which excludes the adjustment in the table in note (c) on page 43, decreased by$13 million in the first quarter of 2021 compared to the first quarter of 2020. The components of this decrease, along with the reasons for the changes in those components, are outlined below.
•Ethanol segment margin increased by
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 36 reflects market reference prices that we believe had a material impact on the change in our ethanol segment margin in the first quarter of 2021 compared to the first quarter of 2020.
The increase in ethanol segment margin was primarily due to the following:
•Higher ethanol prices had a favorable impact of approximately
•Higher prices on the co-products that we produce, primarily distillers grains,
had a favorable impact of approximately
•Higher corn prices had an unfavorable impact of approximately
•A decrease in production volumes of 541,000 gallons per day had an unfavorable impact of approximately$24 million . As noted in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update" on pages 30 through 31, the COVID-19 pandemic resulted in global economic disruption and a significant decline in demand for ethanol, and as a result, we reduced production beginning late in the first quarter of 2020. We have since increased the production of ethanol at most of our plants to align with improvements in demand. 40 -------------------------------------------------------------------------------- Table of Contents •Ethanol segment operating expenses (excluding depreciation and amortization expense) increased by$47 million primarily due to estimated excess energy costs arising out of Winter Storm Uri of$54 million (see note (a) on page 41), partially offset by lower chemical and catalyst costs of$6 million . ________________________ The following notes relate to references on pages 30 through 41. (a)Inmid-February 2021 , many of our refineries and plants were impacted to varying extents by the severe cold, utility disruptions, and higher energy costs arising out of Winter Storm Uri. The higher energy costs resulted from an increase in the prices of natural gas and electricity that significantly exceeded rates that we consider normal, such as the average rates we incurred the month preceding the storm. As a result, our operating loss for the three months endedMarch 31, 2021 includes estimated excess energy costs of$579 million . The above-mentioned pre-tax estimated excess energy charge is reflected in our statement of income line items and attributable to our reportable segments as follows (in millions): Renewable Refining Diesel Ethanol Total Cost of materials and other$ 47 $ - $ -$ 47 Operating expenses (excluding depreciation and amortization expense) 478 - 54 532 Total estimated excess energy costs$ 525 $ -$ 54 $ 579 (b)The market value of our inventories accounted for under the LIFO method fell below their historical cost on an aggregate basis as ofMarch 31, 2020 . As a result, we recorded an LCM inventory valuation adjustment of$2.5 billion inMarch 2020 . Of the$2.5 billion adjustment,$2.4 billion and$128 million are attributable to our refining and ethanol segments, respectively.
(c)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 our adjusted operating income measures (including for our refining and ethanol segments) 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. We believe our refining margin, renewable diesel margin, and ethanol margin, as applicable, are important measures of the relevant segment's operating and financial performance because, with respect to such segment, 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. 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. 41
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Non-GAAP measures are as follows:
•Refining margin is defined as refining segment operating 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.
Three Months Ended
March 31,
2021 2020Reconciliation of refining operating loss
to refining margin
Refining operating loss
Adjustments:
LCM inventory valuation adjustment (see note (b))
- 2,414
Operating expenses (excluding depreciation and
amortization expense) (see note (a)) 1,471 995 Depreciation and amortization expense 533 536 Other operating expenses 38 2 Refining margin$ 1,450 $ 1,860 •Renewable diesel margin is defined as renewable diesel segment operating income excluding operating expenses (excluding depreciation and amortization expense) and depreciation and amortization expense, as reflected in the table below. Three Months Ended March 31, 2021 2020 Reconciliation of renewable diesel operating income to renewable diesel margin Renewable diesel operating income$ 203 $ 198 Adjustments: Operating expenses (excluding depreciation and amortization expense) 29 20 Depreciation and amortization expense 12 11 Renewable diesel margin$ 244 $ 229 42
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•Ethanol margin is defined as ethanol segment operating loss excluding the LCM
inventory valuation adjustment, operating expenses (excluding depreciation and
amortization expense), and depreciation and amortization expense, as reflected
in the table below.
Three Months Ended
March 31,
2021 2020
Reconciliation of ethanol operating loss
to ethanol margin
Ethanol operating loss $ (56) $ (197)
Adjustments:
LCM inventory valuation adjustment (see note (b)) - 128
Operating expenses (excluding depreciation and
amortization expense) (see note (a)) 156 109
Depreciation and amortization expense 21 22
Ethanol margin $ 121 $ 62 •Adjusted refining operating income (loss) is defined as refining segment operating loss excluding the LCM inventory valuation adjustment and other operating expenses, as reflected in the table below.
Three Months Ended
March 31,
2021 2020Reconciliation of refining operating loss
to adjusted refining operating income (loss)
Refining operating loss $ (592) Adjustments:
LCM inventory valuation adjustment (see note (b)) - 2,414
Other operating expenses 38 2
Adjusted refining operating income (loss) $ (554) $ 329
•Adjusted ethanol operating loss is defined as ethanol segment operating loss
excluding the LCM inventory valuation adjustment, as reflected in the table
below.
Three Months Ended
March 31,
2021 2020
Reconciliation of ethanol operating loss
to adjusted ethanol operating loss
Ethanol operating loss $ (56) $ (197)
Adjustments:
LCM inventory valuation adjustment (see note (b)) - 128
Adjusted ethanol operating loss $ (56) $ (69)
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•Adjusted operating income (loss) is defined as total company operating loss
excluding the LCM inventory valuation adjustment and other operating expenses,
as reflected in the table below.
Three Months Ended
March 31,
2021 2020Reconciliation of total company operating loss
to adjusted operating income (loss)
Total company operating loss $ (666) $ (2,277)
Adjustments:
Other operating expenses 38 2
LCM inventory valuation adjustment (see note (b)) - 2,542
Adjusted operating income (loss) $ (628) $ 267 (d)We use throughput volumes, sales volumes, and production volumes for the refining segment, renewable diesel segment, and ethanol segment, respectively, due to their general use by others who operate facilities similar to those included in our segments.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the first quarter of 2021, our liquidity was negatively impacted by the ongoing impacts of the COVID-19 pandemic and the negative effects arising out of Winter Storm Uri on energy costs at certain of our refineries and ethanol plants duringmid-February 2021 , as described in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update." The actions that we took throughout 2020, and have continued to take in 2021, to respond to the impacts from the pandemic on our business improved our liquidity position. Among the actions taken were the deferral of certain capital investments, the deferral of certain income and indirect tax payments, and the suspension of share repurchases. See discussion of these deferrals and the suspension of share repurchases and their impact on our liquidity in 2021 within the discussion of matters impacting our liquidity and capital resources below.
In
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 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.
On
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Our Liquidity
Our liquidity consisted of the following as of March 31, 2021 (in millions):
Available borrowing capacity from committed facilities(a):
Valero Revolver $ 3,882
364-day Revolving Credit Facility(b) 875
Canadian Revolver(c) 116
Accounts receivable sales facility 1,000
Letter of credit facility 50
Total available borrowing capacity 5,923
Cash and cash equivalents(d) 2,044
Total liquidity $ 7,967 ________________________
(a)Excludes the committed facilities of our VIEs. (b)The 364-day Revolving Credit Facility matured onApril 12, 2021 and was not renewed. (c)The amount for our Canadian Revolver is shown inU.S. dollars. As set forth in the summary of our credit facilities in Note 4 of Condensed Notes to Consolidated Financial Statements, the availability under our Canadian Revolver as ofMarch 31, 2021 in Canadian dollars wasC$145 million . (d)Excludes$210 million of cash and cash equivalents related to our VIEs that is available for use only by our VIEs.
Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 4 of Condensed Notes to Consolidated Financial Statements.
Cash Flows
Components of our cash flows are set forth below (in millions):
Three Months Ended
March 31,
2021 2020
Cash flows provided by (used in):
Operating activities $ (52) $(49)
Investing activities (580) (757)
Financing activities:
Borrowings 8 370
Other financing activities (447) (565)
Financing activities (439) (195)
Effect of foreign exchange rate changes on cash 12 (67)
Net decrease in cash and cash equivalents
Cash Flows for the Three Months EndedMarch 31, 2021 In the first quarter of 2021, we used$1.1 billion of our cash on hand to fund our operations by$52 million , make$580 million of investments in our business, and fund$447 million of other financing activities. Our operations typically generate positive net cash flows; however, in the first quarter of 2021, we used$52 million of cash to fund our operations that was largely driven by a significant increase in energy costs at certain of our refineries and ethanol plants due to effects arising out of Winter Storm Uri, as described 45
-------------------------------------------------------------------------------- Table of Contents in "OVERVIEW AND OUTLOOK-Overview-Business Operations Update," partially offset by noncash charges to income of$339 million , and a positive change in working capital of$184 million . Noncash charges included$578 million of depreciation and amortization expense, partially offset by a$239 million deferred income tax benefit. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 11 of Condensed Notes to Consolidated Financial Statements. In addition, see "RESULTS OF OPERATIONS" for an analysis of our net loss. Our investing activities of$580 million consisted of$582 million in capital investments, as defined below, of which$154 million related to self-funded capital investments by DGD, and$26 million was related to capital expenditures of VIEs other than DGD. Other financing activities of$447 million consisted primarily of$400 million in dividend payments,$31 million of payments of debt and finance lease obligations, and$14 million for the purchase of common stock for treasury in connection with stock-based compensation plans.
Cash Flows for the Three Months Ended
Our operations typically generate positive net cash flows; however, in the first quarter of 2020, we used$49 million of cash to fund our operations due primarily to a negative change in working capital of$1.1 billion . While we incurred a net loss of$1.8 billion in the first quarter of 2020, that net loss was driven by$3.0 billion of noncash charges consisting of$582 million of depreciation and amortization expense and the$2.5 billion LCM inventory valuation adjustment. The negative change in working capital was largely the result of rapidly falling market prices for the products that we sell. Cash generated by our product sales is typically greater than the cash we use to pay for crude oil and other feedstocks that we process and other costs that we incur. However, because daily product sales follow the market prices on that day, rapid increases or decreases in product market prices can significantly impact our working capital positively or negatively, respectively. Market prices declined rapidly in the latter half ofMarch 2020 and this rapid decline resulted in a significant use of cash to pay for our crude oil and other feedstock purchases that were purchased earlier in the quarter before market prices for those feedstocks declined. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 11 of Condensed Notes to Consolidated Financial Statements. In addition, see "RESULTS OF OPERATIONS" for an analysis of our net loss. Our investing activities of$757 million consisted of$767 million in capital investments, as defined below, of which$78 million related to self-funded capital investments by DGD, and$62 million was related to capital expenditures of VIEs other than DGD.
Other financing activities of
Capital Investments
Our capital investments include capital expenditures, deferred turnaround and
catalyst cost expenditures, and investments in unconsolidated joint ventures.
Capital investments attributable to Valero, which is a
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non-GAAP financial measure, reflects our net share of capital investments and is
defined as all capital expenditures, deferred turnaround and catalyst cost
expenditures, and investments in unconsolidated joint ventures presented in our
consolidated statements of cash flows, excluding the portion of DGD's capital
investments attributable to our joint venture partner and all of the capital
expenditures of other VIEs.
We are a 50/50 joint venture partner in DGD and consolidate DGD's financial
statements; as a result, all of DGD's net cash provided by operating activities
(or operating cash flow) is included in our consolidated net cash provided by
operating activities. DGD's partners use DGD's operating cash flow (excluding
changes in its current assets and current liabilities) to fund its capital
investments rather than distribute all of that cash to themselves. Because DGD's
operating cash flow is effectively attributable to each partner, only 50 percent
of DGD's capital investments should be attributed to our net share of capital
investments. We also exclude the capital expenditures of our other consolidated
VIEs because we do not operate those VIEs. We believe capital investments
attributable to Valero is an important measure because it more accurately
reflects our capital investments.
Capital investments attributable to Valero should not be considered as an
alternative to capital investments, its most comparable U.S. GAAP measure, nor
should it be considered in isolation or as a substitute for an analysis of our
cash flows as reported under U.S. GAAP. In addition, this non-GAAP measure may
not be comparable to similarly titled measures used by other companies because
we may define it differently, which may diminish its utility.
Three Months Ended
March 31,
2021 2020
Reconciliation of capital investments
to capital investments attributable to Valero
Capital expenditures (excluding VIEs) $ 160 $ 299
Capital expenditures of VIEs:
DGD 153 74
Other VIEs 26 62
Deferred turnaround and catalyst cost expenditures
(excluding VIEs) 230 309
Deferred turnaround and catalyst cost expenditures
of DGD 1 4
Investments in unconsolidated joint ventures 12 19
Capital investments 582 767
Adjustments:
DGD's capital investments attributable to our joint
venture partner (77) (39)
Capital expenditures of other VIEs (26) (62)
Capital investments attributable to Valero $ 479 $ 666
As previously disclosed in our annual report on Form 10-K for the year ended
December 31, 2020 , we expect to incur $2.0 billion for capital investments
attributable to Valero during 2021. Approximately 60 percent of the capital
investments attributable to Valero are for sustaining the business and
40 percent are for growth strategies, over half of which is allocated to
expanding the renewable diesel business. However, we continuously evaluate our
capital budget and make changes as conditions warrant. The
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capital investment estimate for 2021 includes $200 million of the approximately
$500 million of capital investments that were deferred in 2020 and excludes
strategic acquisitions, if any.
Other Matters Impacting Liquidity and Capital Resources
Stock Purchase Program
As of March 31, 2021 , 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 since mid-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
As previously disclosed in our annual report on Form 10-K for the year ended
December 31, 2020 , we plan to contribute approximately $128 million to our
pension plans and $22 million to our other postretirement benefit plans during
2021.
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
refineries or plants could require material additional expenditures to comply
with environmental laws and regulations.
Tax Matters
Under deferrals provided by recently passed legislation, such as the CARES Act
in the U.S. and by various taxing authorities under other existing legislation,
we deferred approximately $250 million of income and indirect (e.g., VAT and
motor fuel taxes) tax payments that were due in 2020. Of this amount,
approximately 90 percent will be paid in 2021 and 10 percent in 2022. No
deferred payments were made in the first quarter of 2021.
Cash Held by Our International Subsidiaries
As of March 31, 2021 , $1.3 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 any U.S. federal income tax consequences, but
certain other taxes may apply, including, but not limited to, withholding taxes
imposed by certain international jurisdictions and U.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 the COVID-19 pandemic and volatility in the global oil markets.
However, we believe that our portfolio of accounts receivable is sufficiently
diversified to the extent necessary to minimize potential credit risk.
Historically, we have not had any significant problems collecting our accounts
receivable.
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-------------------------------------------------------------------------------- Table of Contents Contractual Obligations As ofMarch 31, 2021 , 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 debt-related activities during the three months endedMarch 31, 2021 , as described in Note 4 of Condensed Notes to Consolidated Financial Statements. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the three months endedMarch 31, 2021 .
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. As ofMarch 31, 2021 , there were no significant changes to our critical accounting estimates since the date our annual report on Form 10-K for the year endedDecember 31, 2020 was filed.
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