Valero Energy Corporation (NYSE: VLO) today reported first quarter 2008 income from continuing operations of $261 million, or $0.48 per share, which includes a pre-tax benefit of $101 million, or $0.12 per share, of business interruption insurance recovery related to the fire at the company’s McKee refinery in the first quarter of 2007. The company’s income from continuing operations in the first quarter of 2007 was $1.1 billion, or $1.77 per share. Income from discontinued operations for the three months ended March 31, 2007 reflected in the accompanying financial tables relates to the Lima, Ohio refinery, which the company sold effective July 1, 2007.
First quarter 2008 operating income was $472 million, or $371 million without the previously mentioned insurance recovery, versus $1.7 billion reported in the first quarter of 2007. The decline in operating income was primarily attributable to lower margins for many of the company’s products in the first quarter of 2008 compared to the same quarter last year. Refined product margins decreased as the cost of crude oil and other feedstocks increased more rapidly than the prices of gasoline and other products, such as asphalt, fuel oils, petroleum coke and petrochemical feedstocks. The average price of West Texas Intermediate (WTI) crude oil increased nearly $40 per barrel, whereas the average wholesale price of Gulf Coast conventional gasoline increased by about $34 per barrel, causing benchmark Gulf Coast gasoline margins to narrow by $6 per barrel, or 59 percent, in the first quarter of 2008 versus the first quarter of 2007. Partially offsetting these weaker margins were substantially higher margins on diesel and jet fuel as global demand for these products remained high.
Other factors also contributed to the decline in operating income in the first quarter of 2008. Refinery operating expenses increased by $180 million from the first quarter of 2007 to the first quarter of 2008, primarily due to higher energy costs and maintenance expenses. Additionally, throughput volumes decreased from the first quarter of 2007 to the first quarter of 2008 by an average of 138,000 barrels per day in large part due to operating issues at the Aruba, Port Arthur, and Delaware City refineries.
“Despite a difficult environment for gasoline margins, we reported positive results for the first quarter,” said Bill Klesse, Valero’s Chairman of the Board and Chief Executive Officer. “More recently, gasoline margins have shown moderate improvement as inventories have fallen and demand has increased as it normally does this time of year. We continue to benefit from a very solid on-road diesel market, with margins over $25 per barrel across our system. Concerning refinery inputs, differentials continue to be wide for the heavy and sour feedstocks that we can process, such as Maya crude oil, which has averaged $20 per barrel under WTI in April.”
“From a financial perspective, we ended the quarter with a healthy balance sheet,” said Klesse. “At the end of March, our debt-to-capitalization ratio stood at a relatively low 22 percent when adjusted for our $1.4 billion cash balance.”
The company’s capital spending in the first quarter of 2008 was about $640 million, of which about $100 million was for turnaround expenditures. Regarding other uses of cash, the company spent $518 million to purchase 8.8 million shares of its common stock and used approximately $375 million to redeem high-coupon debt during the first quarter.
“For the second quarter, average throughput rates for the Gulf Coast should increase by approximately 100,000 barrels per day as we complete the repairs on the coker drums at our Port Arthur refinery and the vacuum tower at our Aruba refinery in May. These refineries specialize in running heavy, sour feedstocks, so there should be noticeable improvement in our Gulf Coast performance.
“The strategic review of our refining portfolio continues. We are working closely with a prospective buyer for the Aruba refinery and expect to have an announcement this quarter. We are also evaluating bids that we received for our Memphis and Krotz Springs refineries. In addition, we recently initiated a process to explore strategic alternatives for our Ardmore refinery.
“The refining business has always been seasonal, volatile, and cyclical. We will continue working toward excellence in safety, environmental regulatory compliance, and reliability, while also striving to lower expenses and improve our effectiveness. Everyday, we are very focused on improving long-term returns and creating value for our shareholders,” Klesse said.
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 web site at www.valero.com.
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About Valero
Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and 2007 annual revenues of $95 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.