Valero Energy Corporation · NYSE:VLO
Valero Energy — Investor Presentation (May 2002)
55 slides from Valero Energy's investor presentation, May 23, 2002
Slide 1: Valero Energy Corporation
7 VALERO ENERGY ‘CORPORATION May 22-24, 2002 Quebec, Quebec
Slide 2: Presentation Agenda
SS Presentation Agenda Overview ~ Bill Greehey Refining Operations ~ Bill Klesse Marketing Operations ~ Gary Arthur Synergy Capture Update ~ John Hohnholt m4 Financial Review ~ Danny Gibbons
Slide 3: Overview
Overview Bill Greehey i : Chairman of the Board & Chief Executive Officer
Slide 4: Proven Growth Strategy
Proven Growth Strategy 2,000 Throughput Capacity (MBPD) oe 1,500 El Paso, Huntway Benicia 1,000 Paulsboro Basis Announced 500 Goal 2 MMBPD in 5 1996 1997 1998 2000 2001 2002 = Achieved goal of 2 million BPD capacity in 5 years = Low cost refinery acquisitions and internal upgrades
Slide 5: Great Execution
To Great Execution —eiee| = Basis e Texas City to flagship status yj = Paulsboro e Increased gross margin by $1 per barrel = Benicia ‘er e Dramatically enhanced earnings profile : = El Paso } e Annualized synergies estimated over $35 MM per year Ww es mad « Company transforming acquisition e $400+ m
Slide 6: Independent Major With Room To Grow
Independent Major With Room To Grow U.S. and Canadian (barrels per day in thousands) Crude Throughput Capacity® 2474 2,190 2,103 e a q 7) oF SC FEES SESS vans é. s e eé © Fs & al ie Souce: 018 Gs Juma &conpayy mit ©) Does not include addtional intermediate processing capacity
Slide 7: West Coast Asset Divestiture
West Coast Asset Divestiture u FTC required we divest the Golden Eagle refinery and 70 related retail sites by November 30, 2002 u Closed May 17th + Received $925 million to be applied to debt reduction = Original agreement with Tesoro Petroleum Corporation was $1.125 billion (includes $130 million
Slide 8: Current Market Conditions Challenging
Current Market Conditions Challenging = Difficult first quarter for all refiners = 1Q ‘02 net loss = $38.6 million, $.37 per share = Poor margin environment in 1Q ’02: > | e High product inventories e Weak economic conditions e Record warm winter in Northeast Ed e Reduced jet fuel demand due to 9/11
Slide 9: Valero's Response to Current Environment
66 : se] Valero’s Response to Current Environment = Cutting Runs e June rates to be cut by 23% e Cuts announced by other refiners = Deferring Capital e Excess of $200 million < = Reducing Working Capital ' i : e Target 10% reduction in inventories = Reducing Operating Costs sg = Reducing G & A expen
Slide 10: Gasoline Fundamentals
Gasoline Fundamentals (thousands of barrels) Gasoline Inventories Gasoline Demand/day J FMAM 3 3 AS OND 2 FMAM] 3A&S OND 5 Year Range = 2002 — 5 Year Avg. = High production and imports year-to-date Run cuts in U.S, and Europe being implemented Imports expected to moderate further; arb remains closed
Slide 11: Distillate Fundamentals
To Distillate Fundamentals @housands of barrels) = Distillate Inventories Distillate Demand/day 2 | [Es 0 ey | xm «00 om smn om +0 ama} aan} - 4 JFMAWIJJASOND JFMAMJJASOND i 5 Year Range i= 2002 — 5 Year Avg. We = Inventory overhang due to 9/11 and warm winter as = Distillate demand recovering e Jet
Slide 12: Sour Crude Fundamentals
Sour Crude Fundamentals OPEC Production y. Sour Crude Discounts 300 $10.0 2 780 $0 3 if SS a g 240 $40 2 20 Se $20 2 a 20.0 $00 Hae a 97 97 97 97 98 98 98 98 999 999 999 99 2000 29 2000 39 2000 49 2000 19 2001 29 2001 29 2001 49 2001 [oP EC Production —=Arab Medium Discount y = Sour crude discount t
Slide 13: Long Term Trends Remain Favorable
Long Term Trends Remain Favorable = Industry consolidation to continue _ « Bigger is better e Valero well positioned to capture opportunities 3] = Tight domestic supply / demand balance e High utilization rates in U.S. e Demand growth projected to exceed capacity growth * = Environmental changes to
Slide 14: 2002-2005 Worldwide Production Capacity Increases
2002 - 2005 Worldwide Production Capa Increases (MMBPD) High-Quality Low-Quality Crude Crude) = World crude demand expected to grow 1.8% annually Production increases primarily lower quality crudes e Supports wider discounts for Valero’s feedstocks Feedstock flexibility provides margin advantage 2D
Slide 15: Strategy for the Next Five Years
‘or the Next Five Years a Optimize existing system Integrate assets (synergy capture No. 1 priority) Feedstock flexi ity & clean fuels leadership Apply Best Practices throughout system Rationalize under-performing assets « Refining « Retail High-grade retained retail network Grow wholesale distribut
Slide 16: Valero's Strategy for the Next Five Years
(oF ae) Valero’s Strategy for the Next Five Years =ejgea) = Continued growth through acquisitions e Acquisition opportunities remain focused in U.S. and Canada = Benefit from growth of Valero L.P. = Financially well-positioned for growth e Access to capital | e Investment grade rating a « Strong liq
Slide 17: Refining Operations
a Refining Operations Bill Klesse fe Executive Vice President Refining & Commercial Operations a7
Slide 18: System Overview
System Overview QUEBEC DENVER 205,000 bpd 27,000 bad BENICIA 180,000 bpd W jenni PAULSBORO Bele 195,000 bpd WrwiarON . cane” SS 4 SaDnOEE . = [85,000 bpd KEE 170,000 bod KROT2 SPRINGS 95,000 bpd THREE RIVERS 98,000 bpd ‘ t Refine: A Terminals Texasiery | | coo pea a conus cunrsrs || 240,000 bod ; —
Slide 19: Complex and Flexible Refining System
SS Complex and Flexible Refining System =o at Nelson Complexity 14 11.0 eats $féptrgge eZ é 22 ° a We have invested in our system to be well-positioned for the future = Complex system gives us a margin advantage versus ae our peers, even in a low margin environment 19
Slide 20: Feedstocks Overview
To Feedstocks Overview =i FEEDSTOCK SLATE‘) Sour Crude 50% Blendstocks 5% Other Feedstocks We 15% (D Based on 1,900 MBPD throughput capacity 20
Slide 21: Valero's Crude Sources
Valero’s Crude Sources oncooo Seam J a 400,000 5D bara, enn 90 Sim r* @ vile East “ os * 650,000 BPD wa io wy wa 20,000 8PD % Eel ms . 210, [ances * wy @)ncreases to 170,000 BPD upon completion of Texas City Coker a
Slide 22: Refined Products and Distribution Channels
Distillate 30% Gasoline & Blendstocks Asphalt, Petrochemicals, Other 18% REFINED DISTRIBUTION PRODUCTS CHANNELS (Gasoline & distillate) n
Slide 23: Responding to Current Environment
Responding to Current Environment Refinery margins below breakeven in many operating areas Have cut runs; Plan to reach 23% in June « Gulf Coast, Mid-Continent, East Coast * Deeper if necessary Initiating significant cost reductions * Reducing contractor headcount by 20% * Reducing controllable cost
Slide 24: Capital Spending ($ in millions)
(3 in millions) ane 2002 - $900 million 2003 - $1.3 billion : G&A Turnarounds : SBS $50, $100. Maines Marketing Turnaro $150 Marketing $300 Maintenance Strategic - $32. Environmental « Strategic $445 Sk $300 rie 4 Environmental sg y = Light turnaround schedule rest of 2002 and 2003 ans = Strategic c
Slide 25: Texas City Refinery Modernization and Upgrade
7 = Texas City refinery is undergoing major modernization and ia | upgrade . * Crude unit revamp in 2001 resulted in major efficiency improvement | « 25 MBPD FCC expansion and alkylation unit upgrade in 2Q02 to significantly enhance upgrading capabilities e Total investment of $175 million to contri
Slide 26: 2002/2003 Capital Improvements
2002/2003 Capital Improvements (8 in millions) Annual Investment EBITDA Startup Beni 1 hhstall 50 megawatt cogeneration facility 2902 to reduce power cost dependence on sa $0 outside power supply Three Rivers ® Lowering feedstock costs and enhanced 2Q02 diesel hydrotreating by processing #0 $20 Vene
Slide 27: Tier II Clean Fuels Investment
2002 2003 2004 2005 Total Tier II Gasoline $35 $215 $100 $90 $440 Tier II Diesel — — $25 $200 $225 Other(1) $100 $230 $145 $300 $775 Total $135 $445 $270 $590 $1,440 = Install gasoline hydrotreating 2004-2006 to meet Tier IT = Install distillate hydrotreating 2004-2005 to meet Tier IT No investment
Slide 28: Operating Goals
Operating Goals Safety is No. 1 priority Environmental compliance Increase mechanical availability to 98% Capital spending discipline e Spending directed at margin improvement, environmental compliance and expense reduction e Little capacity expansion = Continuous cost reduction process =u Apply Bes
Slide 29: Marketing Operations
a Marketing Operations Gary Arthur ie Senior Vice President Marketing 20
Slide 30: Marketing Organization
Marketing Organization
Slide 31: Retail & Wholesale System Sites
California Sites Exxon 260 Beacon 190 Ultramar 150 Valero 20 620 Retail & Wholesale System ‘id-Continent Sites Total 420 Diamond ‘Shamrock _80 500 Canada Sites Ultramar 1,130, a1
Slide 32: Current State of U.S. Retail System
Current State of U.S. Retail System Mc} = 1,425 company operated stores under 5 brands « Diamond Shamrock * Valero S| Ultramar e Beacon » Total Exe ae mad - ’ SR] = 2,000 wholesale branded sites = Complex network with varying strengths, competitive ri positions and operating cost structures = Retail
Slide 33: Competitive Environment
Competitive Environment High volume retailers entering business * Low price/high volume strategy * Pressuring fuel margins in some areas Site quality grows in importance * New entrants with strong value brand (Costco, regional chains) * Fuel margins squeezed as majors price closer to low price leade
Slide 34: Brand Strategy
Brand Strategy California - Rebrand Beacon & Ultramar to Valero Brand Rest of U.S. - Diamond Shamrock Phase-out TOTAL brand over next 3 years Canada / Northeast - Retain Ultramar brand 4
Slide 35: Attractive Brands
Attractive Brands
Slide 36: U.S. Retail Optimization & Image
Objective: 800 600 400 200 U.S. Retail Optimization & Image I Develop a network that consistently earns 10% ROCE by divesting poor performing sites and upgrading the remaining network + Growth Potential - Core Good Potential + Great “Dirt” + Good “Dirt” + EBIT challenged + 20400 ROCE + Positive & St
Slide 37: Retail Strategic Initiatives
SS Retail Strategic Initiatives ea) ™ Invest to upgrade retained network e 130 Diamond Shamrock stores along with 80 Valero sites already re-imaged S| e Remainder of 2002 focused on Colorado, San Antonio and California e Expected ROCE over 13% = High-grading assets will allow us to exploit rt opport
Slide 38: Wholesale Strategic Initiatives
SS Wholesale Strategic Initiatives i} = Currently sell approximately 30% of refinery production via wholesale distributor network = Enhanced image, standards & programs allow for | rapid expansion of wholesale distributor network e Expand geographically to support refinery network = Low capital inve
Slide 39: Synergy Capture Update
Synergy Capture Update John Hohnholt bic Senior Vice President Development & Technical Support 30
Slide 40: Synergy Process
Synergy Process Formed new development and technical support department reporting to CEO Developed synergy identification and tracking process Other key objectives to help achieve synergy targets: e Implement best practices throughout refinery system e Asset optimization plan to increase mid-cycle e
Slide 41: 2002 Synergy Benefits - April YTD
2002 Synergy Benefits - April YTD Projected ‘Actual year-to-date J F M AM J FJ A S O N D = Significant progress to date Total item count - approximately 900 « Completed benefits analysis on 80% of items Note: Includes non-recurring benefits of approximately $50 million 4l
Slide 42: Synergy Targets
eke Synergy Targets =o ‘am $400 $400 $300 sd | $300 $200 $200 $100 EY wo SN 2002 2004 i = Major Opportuni' Best Practices Energy We Operating synergies Procurement Crude Sourcing Marketing = Product supply Corporate SG&A re HD synergies require little or no capital rr
Slide 43: Key Synergy Capture Items
GS inmiltions) SS Key Synergy Capture Items = Best Practices 5 Inplement tumaround and maintenance best practices Sag) © Norreintenance expense reduction ’ © Yield improvement of conversion units Operating Synergies: ®@ Regional refining system integration 3 * Northeast ee Mid-Continent i ® Gulf Coa
Slide 44: Key Synergy Capture Items
Key Synergy Capture Items = = Reduce inventories through optimizing supply $5 $13 chain Sag) = Upgrade product mix to higher value markets by $8 $13 ’ capitalizing on blending synergies = Consolidate exchanges in Gulf Coast 4 $10 Energy ewil] © Renegotiate power contracts $13 $20 m | Consolidate nat
Slide 45: Key Synergy Capture Items
SS Key Synergy Capture Items G inmillions) - 1 Leverage maintenance service contracts $14 = Catadystand charical contract consolidation #] = Retail merchandising leverage = Office and operating supply contracts Marketing m Increase netback on propylene sdes aA = Asphatsystem optimization a@y = Reduc
Slide 46: Synergy Opportunities That Require Capital
SS Synergy Opportunities That Require Capital ant upside to synergy targets from ied capital projects e Install sulfur plants at McKee, Ardmore and Three =m | River refineries to increase sour crude handling / capabi + 1Q05 start up + $85 million investment to contribute $70 million in annual EBITDA
Slide 47: Financial Review
Sul Financial Review Danny Gibbons A Executive Vice President & CFO ca
Slide 48: Golden Eagle Transaction
Golden Eagle Transaction 6 inmittons oa Zi oe Selected Financial Statement Amounts: Ist Qtr Effectof Mar 31 4) 10-0 Transaction Pro Forma Held Separate Business $1,027 $(1,027) $0 Goodwill $2,272 $109 $2,381 NoteReceivable === $91 $91 Debt (incl. Cap. Lease) $5,534 $( 925) $4,609 eM Stockholders Equ
Slide 49: Refining Margin Data
Refining Margin Data 6 inmilions) milaue ected aE: Volumes 2002 Historical Historical tak, PD) —_Estimaté? Average Average —Sersitivity” . Feedstocks (per bbl} . WTI Sour aude 900,000 $2.25 $3.24 $3.17 $.46 POM) Products (oer bby }ouscc Gasdline - WT 385,000 $2.68 $3.84 $3.78 $.20 Heating Oil - WTL
Slide 50: 2002 Estimate
2002 Estimate @ inmilliens, except per share amounts) = —= 1a 2002) = | EBITDA $1,110 Operating Income $700 Net Income $250 sh Earnings Per Share $2.25 Total Debt $4,620 Ay Debt-to-Capitalization (net of cash) 49.9% Shares Outstanding (mM, diluted) 112 vs tr 1) Based on forward curve for 2002 as of
Slide 51: 2002 Cash Flow Estimate
2002 Cash Flow Estimate ($ i millions) ae = 2002(1) “y Cash Flow from Operating Sources $800 Asset Divestitures 1,225 Assets Held For Sale (160) Inventory Monetization (290) 33g Dividends, Distributions, Stock Buybacks (100) i * Capital Investments (900) , Cash Available for Debt Reduction $575 Ww v
Slide 52: Mid-Cycle Case in 2003
Mid-Cycle Case in 2003 @ inmilliens, except per share amounts) ar 2003 Cases Seay eBrTpa $1,775 $1,700 Operating Income $1,350 $1,275 Net Income $650 $610 al) Earnings Per Share $5.75 $5.50 ata Debt $4,630 $4,675 } Debt-to-Capitalization (net of cash) 46.7% 47.2% Shares Outstanding (MM, diluted) 112
Slide 53: Financing Plan
ele Financing Plan @ inmiltions) ae i. Total Refinancings $2,080 ~ Amounts likely to roll over 1,300 = Net refinancing needs $780 Bank line availability: Committed and undrawn $1475 hd Uncommitted and undrawn 200 a Cash 250 if ‘ Refinancing sources $1,925 53
Slide 54: Q&A
Q&A 54
Slide 55: Safe Harbor Statement
Cn 9 Safe Harbor Statement Statements contained in this presentation 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 Lx Exchange A