Valero: Managing Mergers And Mother Nature

Dealt a one-two punch, San Antonio-based Valero Energy Corp., with a combined throughput capacity of 3.3 million barrels of refined oil per day, has learned a valuable lesson about Mother Nature -- she can be relentless.

Since Hurricane Katrina blew into the Gulf Coast area, Valero Energy -- one of IndustryWeek's IW 50 Best Manufacturing Companies in 2005 -- has spent much time and resources pumping out floodwaters from its Port Arthur, La.-based refinery. The 260,000 barrel-per-day plant employs 550 workers.

Now that Hurricane Rita dumped more water into the fragile Crescent City and it surroundings, Valero, the $70 billion company with 22,000 employees, stated in a Sept. 26, 2005, release that it "discovered extensive electrical power pole damage and extensive insulation damage [to its Port Arthur refinery]. Power is not expected to be restored to the area for about one month. However, we are beginning to implement the needed repairs and are capable of generating about 80% of our own power at our Port Arthur refinery, so we continue to expect to restart this refinery within two to four weeks."

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Speaking of repairs, according to a Sept. 28 article in The Wall Street Journal, Valero Energy "intends to put off any maintenance that can be safely deferred to continue producing as much fuel as possible [at its other refineries]."

Just prior to the devastating hurricanes, Valero acquired another IW 50 Best Manufacturing company -- Premcor Inc.

"With the addition of Premcor's four refineries, which we bought for significantly less than their replacement cost, we have improved our leverage to product margins and further enhanced our sour crude processing capabilities," said Bill Greehey, Valero's chairman of the board and CEO, in a Sept. 1, 2005, press release.

"As I have often said, we are in a new era for refining where I believe you will continue to see higher highs and higher lows for both product margins and sour crude discounts. And now with 18 refineries, no one is better positioned to benefit from this than Valero."

Valero Energy At A Glance Valero Energy Inc. San Antonio, Texas Primary Industry: Petroleum & Coal Products Number of employees: 22,000 2004 In Review Revenue: $70 billion Profit Margin: 3.3% Sales Turnover: 2.8 Inventory Turnover: 23.6 Revenue Growth: 43.9% Return On Assets: 11.5% Return On Equity: 31.5%

The company also noted that, as a result of closing the transaction on Sept. 1 rather than Jan. 1 as originally projected, the company will initially record Premcor's crude oil and refined product inventories at their Sept. 1 market values under purchase accounting rules. During the remainder of the year, Valero will then apply LIFO accounting rules, which require these values to be adjusted to their year-to-date average purchase prices. Because these year-to-date average prices are substantially lower than current market values, LIFO accounting will result in a charge to expense in the company's third-quarter income statement.

Once the merger is completed, Premcor Refining Group will become an indirect, wholly owned subsidiary of Valero. The acquisition makes Valero the largest refiner in North America with a capacity of 138.6 million gallons per day, moving it ahead of BP and Shell and two other IW 50 Best Manufacturing Companies: Exxon Mobil and ConocoPhilips.

In addition to its refineries, Valero has approximately 4,700 retail sites branded as Valero, Diamond Shamrock, Ultramar, Beacon and Total. It also boasts 9,150 miles of pipeline.

Traci Purdum, IndustryWeek associate editor, is director of the IW1000, IW U.S. 500 and the IW 50 research programs. She is based in Cleveland.

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