Valero Energy Corporation (NYSE:VLO) today reported third quarter 2007 income from continuing operations of $848 million, or $1.34 per share, which compares to $1.6 billion, or $2.48 per share, in the third quarter of 2006. The third quarter 2007 results include the effect on diluted earnings per share related to the company's settlement payment of $94 million, or $0.16 per share, for the accelerated share repurchase program that was completed on July 23, 2007, and a pre-tax gain of $91 million, or $0.10 per share, resulting from the repayment of a loan by a foreign subsidiary. Excluding these special items, third quarter 2007 income from continuing operations was $1.40 per share. The third quarter 2006 results include a $132 million pre-tax gain on the sale of 41 percent of the company's ownership interest in NuStar GP Holdings, LLC on July 19, 2006. Excluding this gain, third quarter 2006 diluted earnings per share from continuing operations were $2.35.
Third quarter 2007 income from discontinued operations of $426 million, or $0.75 per share, represents the company's after-tax gain on the sale of its Lima, Ohio refinery, which was effective July 1, 2007. Income from discontinued operations for periods prior to the third quarter 2007 reflects the operating results of the Lima, Ohio refinery prior to its sale.
For the nine months ended September 30, 2007, income from continuing operations was $4.0 billion, or $6.66 per share, compared to the company's income from continuing operations of $4.2 billion, or $6.61 per share, for the same period last year. Excluding the special items noted above, income from continuing operations was $6.72 per share for the nine months ended September 30, 2007 compared to $6.47 per share for the same period in 2006.
Third quarter 2007 operating income was $1.2 billion versus $2.3 billion reported in the same period last year. The $1.1 billion reduction in operating income was mainly due to higher prices for light sweet crude oils and narrower discounts for sour crude oils. Relative to the price of West Texas Intermediate crude oil, the company's feedstocks were approximately $3 per barrel more expensive in the third quarter of 2007 compared to the third quarter of 2006, which resulted in more than a $700 million unfavorable impact to operating income.
Several other factors also contributed to the reduction in operating income in the third quarter of 2007. Industry refining margins in the West Coast region were substantially lower, as CARB gasoline and diesel margins fell 29 percent and 17 percent, respectively, compared to the third quarter of last year. Margins for many of the company's other products, such as asphalt, lube oils, and petrochemical feedstocks, were considerably lower than last year. Finally, the impact of Hurricane Humberto on the company's Port Arthur refinery, as well as operational issues at the company's Port Arthur, Aruba, and Ardmore refineries, limited the company's performance.
With regard to uses of cash in the third quarter, capital spending was $619 million, of which $108 million was for turnaround expenditures. Concerning stock buybacks, the company purchased approximately seven million shares of its common stock during the third quarter. So far in the fourth quarter, the company has purchased an additional one million shares of its common stock. Since the beginning of the year, the company has returned approximately $5 billion to its stockholders through the purchase of 70 million shares with $4.8 billion and the payment of $205 million in common stock dividends. Cumulative stock purchases in 2007 represent approximately 11 percent of the company's outstanding shares at the end of 2006, and since the beginning of 2006, the company has purchased over 100 million shares of its stock.
As to operating highlights in the third quarter, the company commissioned a 16,000 barrel-per-day distillate hydrotreater at its Benicia refinery and a 50,000 barrel-per-day mild hydrocracker at its St. Charles refinery. Additionally, at its October meeting, the company's Board of Directors approved a major growth project at the St. Charles refinery. This project, which is scheduled to be commissioned in 2010, includes a new 50,000 barrel-per-day hydrocracker plus 45,000 and 10,000 barrel-per-day expansions to the crude and coker units, respectively. This project was designed to maximize production of ultra-low-sulfur distillates.
"So far in the fourth quarter, the margin environment has been difficult as prices for refined products have failed to keep pace with the increase in feedstock costs," said Bill Klesse, Valero's Chairman of the Board and Chief Executive Officer. "In particular, the seasonal supply and demand patterns and higher feedstock prices have squeezed gasoline margins. However, industry fundamentals are intact with gasoline inventories near five-year lows and diesel stocks considerably below last year's levels. And, unlike the third quarter, we're seeing more favorable discounts for the sour and heavy feedstocks that Valero's complex refining system processes.
"As part of our strategy to improve returns, we are upgrading our portfolio by investing in growth projects at competitively advantaged refineries and considering alternatives for assets that may be more valuable to others. In particular, we are pleased to be moving ahead with one of the largest growth projects in Valero's history at our St. Charles refinery. Also, consistent with our strategy, we have decided to explore strategic alternatives for our Aruba refinery. We have retained UBS Investment Bank to assist us with this process.
"As we have stated many times, we are taking a balanced approach to allocating free cash flow, and we have delivered on that commitment. By the end of 2007, we expect to have purchased $6 billion of our shares. To reach our goal, we plan to purchase approximately $1.2 billion of our shares by the end of this quarter. As we move into next year, we plan to continue our balanced approach by investing in growth projects, improving our operating performance, buying back more stock, and increasing dividends, while maintaining our investment-grade credit rating," said Klesse.
Valero's senior management will hold a conference call at 11 a.m. ET (10 a.m. CT) today to discuss this earnings release and provide an update on company operations. A live broadcast of the conference call will be available on the company's website at www.valero.com.
About Valero:
Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 21,000 employees and 2006 annual revenues of more than $90 billion. The company owns and operates 17 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.1 million barrels per day, making it the largest refiner in North America. Valero is also one of the nation's largest retail operators with approximately 5,800 retail and branded wholesale outlets in the United States, Canada and the Caribbean under various brand names including Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon. Please visit www.valero.com for more information.
Forward-Looking Statements:
Statements contained in this release that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words "believe," "expect," "should," "estimates," and other similar expressions identify forward-looking statements. It is important to note that actual results could differ materially from those projected in such forward-looking statements. For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see Valero's annual reports on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission and on Valero's website at www.valero.com.
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