Form 10-Q VALERO ENERGY CORP/TX For: Sep 30

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October 26, 2022 5:10 PM EDT

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VALERO ENERGY CORP/TX0001035002FALSE2022Q3--12-31Includes excise taxes on sales by certain of our foreign operations of $1,213 million and $1,610 million for the three months ended September 30, 2022 and 2021, respectively, and $3,890 million and $4,152 million for the nine months ended September 30, 2022 and 2021, 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission File Number 001-13175

VALERO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)


Delaware			74-1828067
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification No.)

One Valero Way

San Antonio, Texas

(Address of principal executive offices)

78249

(Zip Code)

(210) 345-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock

VLO

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of October 21, 2022 was 385,523,278.

VALERO ENERGY CORPORATION

TABLE OF CONTENTS



			Page
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021			1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021			2
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021			3
Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2022 and 2021			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021			6
Condensed Notes to Consolidated Financial Statements			7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			63
ITEM 4. CONTROLS AND PROCEDURES			64
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			64
ITEM 1A. RISK FACTORS			64
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			65
ITEM 6. EXHIBITS			66
SIGNATURE			67

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions of dollars, except par value)


	September 30, 2022		December 31, 2021
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,969	$	4,122
Receivables, net	11,581		10,378
Inventories	6,628		6,265
Prepaid expenses and other	518		400
Total current assets	22,696		21,165
Property, plant, and equipment, at cost	49,638		49,072
Accumulated depreciation	(19,130)		(18,225)
Property, plant, and equipment, net	30,508		30,847
Deferred charges and other assets, net	6,125		5,876
Total assets	$	59,329	$	57,888
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and finance lease obligations	$	1,006	$	1,264
Accounts payable	13,003		12,495
Accrued expenses	1,265		1,253
Taxes other than income taxes payable	1,311		1,461
Income taxes payable	652		378
Total current liabilities	17,237		16,851
Debt and finance lease obligations, less current portion	10,570		12,606
Deferred income tax liabilities	4,938		5,210
Other long-term liabilities	2,869		3,404
Commitments and contingencies
Equity:
Valero Energy Corporation stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 673,501,593 and 673,501,593 shares issued	7		7
Additional paid-in capital	6,858		6,827
Treasury stock, at cost; 287,978,793 and 264,305,955 common shares	(18,466)		(15,677)
Retained earnings	35,510		28,281
Accumulated other comprehensive loss	(1,997)		(1,008)
Total Valero Energy Corporation stockholders’ equity	21,912		18,430
Noncontrolling interests	1,803		1,387
Total equity	23,715		19,817
Total liabilities and equity	$	59,329	$	57,888

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(millions of dollars, except per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues (a)	$	44,454	$	29,520	$	134,637	$	78,074
Cost of sales:
Cost of materials and other	38,064		26,624		115,959		70,865

Operating expenses (excluding depreciation and amortization expense reflected below)	1,746		1,348		4,751		4,218
Depreciation and amortization expense	621		630		1,806		1,772
Total cost of sales	40,431		28,602		122,516		76,855
Other operating expenses	6		19		40		69
General and administrative expenses (excluding depreciation and amortization expense reflected below)	214		195		652		579
Depreciation and amortization expense	11		11		34		35

Operating income	3,792		693		11,395		536
Other income, net	74		32		87		179
Interest and debt expense, net of capitalized interest	(138)		(152)		(425)		(451)
Income before income tax expense	3,728		573		11,057		264
Income tax expense	816		65		2,410		86


Net income	2,912		508		8,647		178
Less: Net income attributable to noncontrolling interests	95		45		232		257
Net income (loss) attributable to Valero Energy Corporation stockholders	$	2,817	$	463	$	8,415	$	(79)








Earnings (loss) per common share	$	7.20	$	1.13	$	20.94	$	(0.20)
Weighted-average common shares outstanding (in millions)	390		407		400		407





Earnings (loss) per common share – assuming dilution	$	7.19	$	1.13	$	20.93	$	(0.20)
Weighted-average common shares outstanding – assuming dilution (in millions)	390		408		401		407

__________________________
Supplemental information:
(a) Includes excise taxes on sales by certain of our foreign operations	$	1,213	$	1,610	$	3,890	$	4,152

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(millions of dollars)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	2,912	$	508	$	8,647	$	178
Other comprehensive loss:
Foreign currency translation adjustment	(606)		(259)		(1,035)		(114)
Net gain on pension and other postretirement benefits	8		16		25		44
Net gain (loss) on cash flow hedges	69		(17)		74		(14)
Other comprehensive loss before income tax expense (benefit)	(529)		(260)		(936)		(84)
Income tax expense (benefit) related to items of other comprehensive loss	9		(1)		16		8
Other comprehensive loss	(538)		(259)		(952)		(92)
Comprehensive income	2,374		249		7,695		86
Less: Comprehensive income attributable to noncontrolling interests	129		35		269		249
Comprehensive income (loss) attributable to Valero Energy Corporation stockholders	$	2,245	$	214	$	7,426	$	(163)

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(millions of dollars)

(unaudited)


	Valero Energy Corporation Stockholders’ Equity
	Common Stock		Additional Paid-in Capital		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total		Non- controlling Interests		Total Equity
Balance as of June 30, 2022	$	7	$	6,845	$	(17,537)	$	33,079	$	(1,425)	$	20,969	$	1,764	$	22,733
Net income	—		—		—		2,817		—		2,817		95		2,912
Dividends on common stock ($0.98 per share)	—		—		—		(386)		—		(386)		—		(386)
Stock-based compensation expense	—		13		—		—		—		13		—		13
Transactions in connection with stock-based compensation plans	—		—		(1)		—		—		(1)		—		(1)
Purchases of common stock for treasury	—		—		(928)		—		—		(928)		—		(928)

Distributions to noncontrolling interests	—		—		—		—		—		—		(90)		(90)

Other comprehensive income (loss)	—		—		—		—		(572)		(572)		34		(538)
Balance as of September 30, 2022	$	7	$	6,858	$	(18,466)	$	35,510	$	(1,997)	$	21,912	$	1,803	$	23,715

Balance as of June 30, 2021	$	7	$	6,819	$	(15,696)	$	27,610	$	(1,089)	$	17,651	$	1,053	$	18,704
Net income	—		—		—		463		—		463		45		508
Dividends on common stock ($0.98 per share)	—		—		—		(400)		—		(400)		—		(400)
Stock-based compensation expense	—		11		—		—		—		11		—		11


Contributions from noncontrolling interests	—		—		—		—		—		—		25		25


Other comprehensive loss	—		—		—		—		(249)		(249)		(10)		(259)
Balance as of September 30, 2021	$	7	$	6,830	$	(15,696)	$	27,673	$	(1,338)	$	17,476	$	1,113	$	18,589

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY (Continued)

(millions of dollars)

(unaudited)


	Valero Energy Corporation Stockholders’ Equity
	Common Stock		Additional Paid-in Capital		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total		Non- controlling Interests		Total Equity
Balance as of December 31, 2021	$	7	$	6,827	$	(15,677)	$	28,281	$	(1,008)	$	18,430	$	1,387	$	19,817
Net income	—		—		—		8,415		—		8,415		232		8,647
Dividends on common stock ($2.94 per share)	—		—		—		(1,186)		—		(1,186)		—		(1,186)
Stock-based compensation expense	—		60		—		—		—		60		—		60
Transactions in connection with stock-based compensation plans	—		(29)		31		—		—		2		—		2
Purchases of common stock for treasury	—		—		(2,820)		—		—		(2,820)		—		(2,820)
Contributions from noncontrolling interests	—		—		—		—		—		—		240		240
Distributions to noncontrolling interests	—		—		—		—		—		—		(93)		(93)

Other comprehensive income (loss)	—		—		—		—		(989)		(989)		37		(952)
Balance as of September 30, 2022	$	7	$	6,858	$	(18,466)	$	35,510	$	(1,997)	$	21,912	$	1,803	$	23,715

Balance as of December 31, 2020	$	7	$	6,814	$	(15,719)	$	28,953	$	(1,254)	$	18,801	$	841	$	19,642
Net income (loss)	—		—		—		(79)		—		(79)		257		178
Dividends on common stock ($2.94 per share)	—		—		—		(1,201)		—		(1,201)		—		(1,201)
Stock-based compensation expense	—		52		—		—		—		52		—		52
Transactions in connection with stock-based compensation plans	—		(36)		38		—		—		2		—		2
Purchases of common stock for treasury	—		—		(15)		—		—		(15)		—		(15)
Contributions from noncontrolling interests	—		—		—		—		—		—		25		25
Distributions to noncontrolling interests	—		—		—		—		—		—		(2)		(2)

Other comprehensive loss	—		—		—		—		(84)		(84)		(8)		(92)
Balance as of September 30, 2021	$	7	$	6,830	$	(15,696)	$	27,673	$	(1,338)	$	17,476	$	1,113	$	18,589

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of dollars)

(unaudited)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	8,647	$	178
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	1,840		1,807
Loss on early retirement of debt	24		—


Gain on sale of assets	—		(62)
Deferred income tax benefit	(161)		(150)
Changes in current assets and current liabilities	(1,617)		1,630
Changes in deferred charges and credits and other operating activities, net	(255)		2
Net cash provided by operating activities	8,478		3,405
Cash flows from investing activities:
Capital expenditures (excluding variable interest entities (VIEs))	(552)		(368)
Capital expenditures of VIEs:
Diamond Green Diesel Holdings LLC (DGD)	(682)		(730)
Other VIEs	(30)		(59)
Deferred turnaround and catalyst cost expenditures (excluding VIEs)	(820)		(544)
Deferred turnaround and catalyst cost expenditures of DGD	(13)		(6)
Proceeds from sale of assets	32		270
Investments in nonconsolidated joint ventures	(1)		(8)


Other investing activities, net	(4)		33
Net cash used in investing activities	(2,070)		(1,412)
Cash flows from financing activities:
Proceeds from debt issuances and borrowings (excluding VIEs)	1,839		—
Proceeds from borrowings of VIEs:
DGD	684		100
Other VIEs	73		29
Repayments of debt and finance lease obligations (excluding VIEs)	(4,234)		(672)
Repayments of debt and finance lease obligations of VIEs:
DGD	(718)		—
Other VIEs	(51)		(4)
Premiums paid on early retirement of debt	(48)		—
Purchases of common stock for treasury	(2,769)		(15)
Common stock dividend payments	(1,186)		(1,201)
Contributions from noncontrolling interests	240		25
Distributions to noncontrolling interests	(93)		(2)
Other financing activities, net	(6)		1
Net cash used in financing activities	(6,269)		(1,739)
Effect of foreign exchange rate changes on cash	(292)		(69)
Net increase (decrease) in cash and cash equivalents	(153)		185
Cash and cash equivalents at beginning of period	4,122		3,313
Cash and cash equivalents at end of period	$	3,969	$	3,498

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

General

The terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole. The term “DGD,” as used in this report, may refer to Diamond Green Diesel Holdings LLC, its wholly owned consolidated subsidiary, or both of them taken as a whole.

These unaudited financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these interim financial statements reflect all adjustments considered necessary for a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature unless disclosed otherwise. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The financial statements presented herein should be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, 2021.

The balance sheet as of December 31, 2021 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2021.

Significant Accounting Policy

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

2. INVENTORIES

Inventories consisted of the following (in millions):


	September 30, 2022		December 31, 2021
Refinery feedstocks	$	1,781	$	1,995
Refined petroleum products and blendstocks	4,008		3,567
Renewable diesel feedstocks and products	310		135
Ethanol feedstocks and products	228		273
Materials and supplies	301		295


Inventories	$	6,628	$	6,265

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2022 and December 31, 2021, the replacement cost (market value) of last-in, first-out (LIFO) inventories exceeded their LIFO carrying amounts by $8.6 billion and $5.2 billion, respectively. Our non-LIFO inventories accounted for $1.3 billion and $1.4 billion of our total inventories as of September 30, 2022 and December 31, 2021, respectively.

3. PROPERTY, PLANT, AND EQUIPMENT

In June 2022, we sold our ethanol plant in Jefferson, Wisconsin for $32 million, which resulted in a gain of $23 million that is included in depreciation and amortization expense for the nine months ended September 30, 2022.

The Jefferson plant was temporarily idled in 2020 at the onset of the COVID-19 pandemic in response to the decreased demand for ethanol resulting from the effects of the pandemic on our business, and we had previously evaluated this plant for potential impairment assuming that operations would resume. However, we completed an evaluation of the plant during the third quarter of 2021 and concluded that it was no longer a strategic asset for our ethanol business. The plant’s operations permanently ceased at that time and we reduced its estimated useful life, which reduced its net book value to estimated salvage value. The additional depreciation expense of $48 million for the three and nine months ended September 30, 2021 resulting from this change did not have a material impact on our results of operations nor was there a material impact to our financial position.

4. DEBT

Public Debt

During the nine months ended September 30, 2022, the following activity occurred:

•In September 2022, we used cash on hand to purchase and retire the following notes in connection with cash tender offers that we publicly announced in August 2022 and completed in September 2022 (in millions):


Debt Purchased and Retired	Principal Amount
3.65% Senior Notes due 2025	$	48
2.850% Senior Notes due 2025	291
4.375% VLP Senior Notes due 2026	62
3.400% Senior Notes due 2026	166
4.350% Senior Notes due 2028	131
4.000% Senior Notes due 2029	552
Total	$	1,250

In connection with the early debt retirement activity described above, we recognized a net gain of $26 million in “other income, net” primarily comprised of $36 million of discounts.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•In June 2022, we reduced our debt through the acquisition of the $300 million of 4.00 percent Gulf Opportunity Zone Revenue Bonds Series 2010 (GO Zone Bonds) that are due December 1, 2040, but were subject to mandatory tender on June 1, 2022. We have the option to effectuate a remarketing of these bonds.

•In February 2022, we issued $650 million of 4.000 percent Senior Notes due June 1, 2052. Proceeds from this debt issuance totaled $639 million before deducting the underwriting discount and other debt issuance costs. The proceeds and cash on hand were used to purchase and retire the following notes in connection with cash tender offers that we publicly announced and completed in February 2022 (in millions):


Debt Purchased and Retired	Principal Amount
3.65% Senior Notes due 2025	$	72
2.850% Senior Notes due 2025	507
4.375% VLP Senior Notes due 2026	168
3.400% Senior Notes due 2026	653
Total	$	1,400

In connection with the early debt retirement activity described above, we recognized a charge of $50 million in “other income, net” primarily comprised of $48 million of premiums paid.

In September 2021, we redeemed our Floating Rate Senior Notes due September 15, 2023 for $575 million.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit Facilities

We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (amounts in millions and currency in U.S. dollars, except as noted):


				September 30, 2022
	Facility Amount		Maturity Date	Outstanding Borrowings		Letters of Credit Issued (a)		Availability
Committed facilities:
Valero Revolver	$	4,000	March 2024	$	—	$	538	$	3,462
Canadian Revolver	C$	150	November 2022	C$	—	C$	5	C$	145
Accounts receivable sales facility	$	1,300	July 2023	$	—	n/a		$	1,300
Letter of credit facility	$	50	November 2022	n/a		$	—	$	50
Committed facilities of VIEs (b):
DGD Revolver (c)	$	400	March 2024	$	100	$	8	$	292
DGD Loan Agreement (d)	$	25	April 2023	$	—	n/a		$	25
IEnova Revolver (e)	$	830	February 2028	$	705	n/a		$	125
Uncommitted facilities:
Letter of credit facilities	n/a		n/a	n/a		$	1,613	n/a

________________________

(a)Letters of credit issued as of September 30, 2022 expire at various times in 2022 through 2023.

(b)Creditors of the VIEs do not have recourse against us.

(c)The variable interest rate on the DGD Revolver was 4.320 percent and 1.860 percent as of September 30, 2022 and December 31, 2021, respectively.

(d)The amounts shown for this facility represent the facility amount available from, and borrowings outstanding to, the noncontrolling member as any transactions between DGD and us under this facility are eliminated in consolidation. The variable interest rate on the DGD Loan Agreement was 5.133 percent and 2.603 percent as of September 30, 2022 and December 31, 2021, respectively.

(e)The variable interest rate on the IEnova Revolver was 5.927 percent and 3.781 percent as of September 30, 2022 and December 31, 2021, respectively.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Activity under our credit facilities was as follows (in millions):


	Nine Months Ended September 30,
	2022		2021
Borrowings:
Accounts receivable sales facility	$	1,200	$	—
DGD Revolver	659