Krause Fund Research Fall 2015
Energy Valero Energy Corp. (NYSE: VLO)
Recommendation: HOLD November 15, 2015
Analysts Current Price $69.60 Kramer Halverson [email protected] Target Price $84.22 Blake Galley [email protected] VLO Thriving in Low Oil Price Michael Schremp [email protected] Environment Austin Svatos [email protected]
Valero is trading at a very low valuation relative to its Company Overview industry. Valero Energy Corporation is an Oil & Gas Refining & Marketing company headquartered in San Antonio, Texas. Cheaper crude oil means cheaper input costs for Valero was incorporated in 1981 and trades publicly on the refineries. Gas prices have declined as well but not as much New York Stock Exchange. Valero owns and operates 15 as oil; so while revenue has declined profit margins have refineries located in The United States, Canada, and The increased. United Kingdom. Valero’s throughput capacity of 2.9 million barrels a day makes them the largest independent While we expect oil prices to remain low throughout refiner in the U.S. These refineries produce a variety of 2016, we believe they will rally back toward $100/barrel products including gas, diesel fuel, jet fuel, asphalt, and starting in summer 2017. Depending on the rate of this petrochemicals. Valero caters to markets in The United recovery, Valero could experience rapid rises in input cost States, Canada, The Caribbean, and The United Kingdom. over a short period of time. As of January 31, 2015 Valero had 10,065 employees and 1 currently sits at #13 on the Fortune 500. Support in The House to lift a 40 year old ban on US oil exports that, if passed, would squeeze Valero’s margins Stock Performance Highlights causing earnings to dwindle in the following years. 52 week High $72.70 52 week Low $43.45 “Crack Spreads” continue to rise which indicates even Beta Value 1.45 more profit for Valero’s refining segment this quarter and Average Daily Volume 6.09 m into 2016.
Share Highlights Recent strong dividend growth expected to continue into Market Capitalization $33.42 b 2016. Shares Outstanding 481.50 m Book Value per share $44.14 One Year Stock Performance EPS (ttm) $9.51 P/E Ratio (ttm) 7.30 Dividend Yield 2.87% Dividend Payout Ratio 21.39%
Company Performance Highlights ROA 9.98% ROE 22.95% Sales $130.8 b
Financial Ratios Current Ratio 2.03 Debt to Equity 31% 1
dependent upon oil prices; either as a revenue Economic Outlook driver or an input cost. Real Gross Domestic Product
Real Gross Domestic Product (GDP) is the most popular metric for measuring the overall wellbeing of an economy. GDP takes into account the value of all the goods and services that are produced within a given year. Recently, US GDP growth has been strong, posting positive growth for six straight quarters as demonstrated in the chart below.
Source: FRED Database
The Chart above validates oil price volatility within the last five years (from its 2011 high of $113.93/b to the recent low of $38.22/b). Since the summer of 2014, oil has seen an alarming decline of around 50% and currently sits at $41.85/b. This dramatic falloff can be explained by an oversupply of oil in the market due in large part to the US shale boom propelling an exponential increase in domestic oil production Source: whitehouse.gov which began in 2012.
Despite a global economic slowdown headlined by economic crises of China and Greece, the US still continues to have healthy GDP growth. We believe this will change in 2016 affirming that the current state of the global economy will finally begin to affect the US. Red flags close to home such as NAFTA partner Canada’s recent recession to the possible bailout for US territory Puerto Rico signals that an economic slowdown may come sooner than most think. We predict the US to post negative GDP growth in either Q2 or Q3 of 2016 and expect lower GDP growth in Q1 and Q4 of 2016 compared to the historical average of 6 3.24%. Source: cfainstitute.org
Also as previously discussed, Economic woes in Oil Prices China and the EU have thwarted demand and contributed to the low oil price environment we The price of oil is the energy sector’s primary see today.2 influencer considering that the majority of companies within this space are directly As one can imagine, these low oil prices have crippled the energy sector as a whole seeing a
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34% decline in the S&P 500 energy index in the past year. Low oil prices hinder companies that specialize in oil exploration and extraction as oil prices reflect these companies revenue per barrel drilled. In turn, these low oil prices provide an opportunity for refiners who use crude oil as input and therefore reduced oil prices lower these companies’ cost of goods sold and increase their gross margins.
We expect that oil prices will eventually make a significant recovery sometime in 2017 due to gradual global economic recovery, policy changes, and OPEC continuing to decrease its oil output. However, we believe that low oil prices are here to stay for the foreseeable future with an average price of $55/barrel in 2016. Source: nasdaq.com
Unfortunately, the biggest losers will be the US Government Policy and Regulation refineries like Valero. By lifting the ban, higher oil prices will mean a higher cost of goods sold The US government has many regulatory policies and substantially lower margins as shown by the in place that energy companies need to abide by. chart above. Most of the time the costs of these regulations are not significant enough to be a factor in the overall While it is true that we do not believe that this valuation of a company. However, a recent will happen during Obama’s presidency, we do development on the US oil export ban could have believe a lift on the oil export ban is likely to massive implications for the energy sector. come in 2017 especially if a republican candidate is elected president. This is a warning sign for In October, The House passed a vote that would Valero that investors should worry about if our lift the 40 year old ban on US oil exports. The lift predictions are realized down the road. However, President Obama is poised to veto the proposition and thus likely insuring that the lift on Interest Rates the ban will not happen during his presidency. The ban is a hot button issue with much debate. In December of this year, the Fed is expected to The popular opinion is that lifting the ban will raise the federal funds rate by 0.25%. increase jobs and GDP in the long run, but the greatest impact will be felt in the oil markets.4
We believe that lifting the ban will cause US oil prices to rise due to the decrease in the domestic oil supply while in turn lowering global oil prices due to the flood of oil from new US exports. This means that both US and global oil prices will converge to the point where they will equal one another. The biggest winners will be the US drilling companies as they will be able to sell their crude oil at a higher price.
Source: Market Realist
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When the Fed raises rates, interest rates usually rise as well. When interest rates rise, so does the Industry Outlook strength the dollar to other countries with lower interest rates. The chart on the previous page Industry Overview displays a negative correlation between dollar strength and oil prices. Since the value of oil is Valero operates within the industry Oil, Gas, & expressed in US dollars, an increase in the value Consumable Fuels. The industry itself is largely of the dollar will signal a decrease in oil prices.5 led by two sub-industries: integrated oil and gas, By expecting interest rates to rise in December, and oil & gas exploration & production. As we also expect oil price to decrease further, explained in greater detail below, the sub industry predicting a price below $40/barrel during oil & gas exploration & production can further be December and January. defined by placing those companies into three distinct categories: Upstream, Midstream, Capital Markets Outlook Downstream based on their operations. Consolidation and vertical integration within Based on our economic analysis, we expect that exploration/production and processing/refining the energy sector will continue to underperform. has allowed Exxon Mobil, Chevron, and Kinder Although, in the long term outlook 3-5 years Morgan to acquire approximately 49% of the down the road, we believe the energy sector will entire industry’s market capitalization. Firms recover and once again become a strong within this industry must operate with razor thin performer within the S&P. We believe the stock margins due to the highly positive correlation market as a whole will continue to slowly decline between revenue streams and the market price of in 2016 based on the chart below. crude oil and natural gas.
Defining the Industry
The Oil, Gas, & Consumable Fuels industry is composed of three large segments: 1. Exploration & Production, 2. Transportation & Delivery 3. Refining & Marketing. These three segments make up what is often referred to as the integrated process.7 Integrated oil companies (i.e. Exxon and Chevron) specialize in all three of these facets. and are hard to categorize into only one of these criteria. This Source: Y Charts industry as a whole is difficult to measure since it possesses many companies that operate very As you can see, the value of the S&P 500 loosely differently from one another and are thus helped follows the trend of US GDP. So since we or hindered differently due to changes in oil predicted that GDP growth would slow in the prices. To solve this problem, we can place coming year below the average of 3.24%, then we companies into three categories that will paint a also assume that the stock market will better picture as to how these companies are underperform as well. We predict the S&P 500 performing relative to other companies that have will average around 1,975 points in 2016 which is similar operations. The graphic on the next page 3.7% below 2015’s current average value of shows what these three categories are and how 2,051.6 points. each makes their money in different ways.
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Source: Quora
Upstream: Firms that actively engage in the search and exploration of oil and natural gas occupy this segment of the integrated process. Once found, these firms sell the raw hydrocarbons on the open market to firms involved in commercial transportation, storage, Source: S&P Net Advantage and processing. The upstream has the potential to be the most profitable activity within the integrated Each barrel of crude oil is broken down and separated process, however it proves to bear the most risk due into gasoline, diesel, jet fuel, heavy fuel oil, and to the capital intensity of this segment. Revenue stem liquefied petroleum gas. Marketers then sell these solely from the access and discovery of oil deposits.7 transformed products to the ultimate consumer.7
Recent Developments and Trends Midstream: As stated above, midstream firms are involved in the second stage of the integrated process. Price Uncertainty and Instability Transportation of hydrocarbons around the world can Brought on by the October 2014 cut in Saudi Arabia’s take place in the form of pipelines, tanker ships, rail, official selling price, crude oil prices have 7 and sometimes tanker trucking. Transportation firms experienced dramatic downside volatility that has in operate by moving their supply of hydrocarbons to turn proved detrimental to U.S. shale oil producers. those who store (for own reserves or trading As the market price for crude oil slipped further purposes) hydrocarbons, or firms that operate in the toward the downside, upstream oil and natural gas downstream. Revenue streams in this segment are producers have found it increasingly difficult to highly dependent on the global supply and demand of maintain steady day to day operations. As a result, the hydrocarbons themselves. large majority of upstream players have needed to reduce or even cut rigs to maintain key profit margins and limit their exposure to excessive capital Downstream: Valero is classified as Downstream Oil expenditure.8 Going forward, it will be increasingly Company and acts as the final stage of the integrated important to take note of the capital structure process. The downstream process takes place once the embedded within these firm’s debt and equity hydrocarbons are transported and sold to refiners and contracts. As margins become thinner, these firms marketers. Refiners then transform raw hydrocarbons must emphasize reducing their individual cost of into usable petrochemical products. capital. Increasing Debt and Devalued Reserves As a result of falling oil prices, the first half of 2015 has not fared well for U.S. shale producers. Reporting billions in cash outflows, shale producers
5 have turned to selling equity, tangible assets, and issuing billions in public debt all in attempts to Industry Competition increase production and reserves.9 Effective October 1st, many U.S. shale firms will be subject to the The three biggest players in the Oil, Gas, & redetermination of their borrowing base. The bank's Consumable Fuels Industry make up 48.6% of the determination of how much capital they are willing to industry’s market cap. The two biggest companies lend to their oil and gas clients could prove to be being Exxon Mobil and Chevron, are integrated oil detrimental to many upstream oil and natural gas companies in which they operate over all three facets firms. By devaluing the reserves in which they sit, of the industry (i.e. Upstream, Midstream, small to midsize producers may encounter even Downstream). These two companies dominate almost higher levels of cash outflows and debt levels, which every process especially in upstream and downstream could lead to further slowing of production.7 production. Exxon Mobil and Chevron are each other's biggest competitors facing very little direct Integrated Revenue Drivers competition from other companies with the exception of a small few. Despite suffering heavy losses, integrated oil & natural gas firms have been able to mitigate some of That is not to say there are not smaller companies their upstream exposure from declining oil prices within the industry that are still competitive, but the through midstream and downstream operations. As oil larger companies do hold a considerable amount of prices fell and production ramped up, these firms power over them. Price is the most powerful force have greatly benefited from the swell in oil and driving competition due to the fact that no matter natural gas supplies as well as cheap input prices. which supplier a consumer chooses, all of their products are very similar; that is there is very little As U.S. onshore oil production surged, midstream difference between the crude oil and petroleum firms quickly became shocked with demand to move the new crude oil to refineries. In efforts to keep up products from one company to another besides the with demand, storage and transportation companies price tag. This is why industry margins are so thin scrambled to increase their capacity by building and because one of the only ways a company can expanding upon pipelines, storage terminals, and differentiate itself is to offer a lower price than processing facilities.10 S&P Capital IQ reported competitors. saying, “Overall, total US fractionation capacity is expected to rise by 30% to 5.8 million barrels per day by year-end 2016”.
Likewise, downstream oil processors and refiners have experienced a dramatic fall in input prices. As prices fell and a greater supply came onto the domestic market, refineries have been able to purchase crude oil at substantially lower prices. By reducing much of their variable cost and maintaining Source: Morningstar a steady refining margin, these firms have been able We took the top three companies based on market cap to increase profit despite posting lower revenue and in each segment and compared each of them across because of this have tended to fair the best given the three ratios to see if there were any difference across current state of oil prices. each process. Upstream and Downstream seemed to
have similar ratio values. Their debt/asset ratios are
all relatively low which is not surprising considering their revenue streams and margins are highly volatile due to fluctuating oil prices and debt needs to be kept low because the uncertain ability to pay back large
6 amounts of debt when oil prices work against their Refining favor. With the eception of Anadarko, Price/Cashflow and EV/EBITDA ratios for Upstream and Valero’s two reportable business segments are Downstream were also similar. These valuation ratios refining and ethanol. Valero owns and operates 15 tended to be lower in part because of these refineries located in The United States, Canada, and companies’ debt structure but also because of The United Kingdom. The refining segment includes refining operations, wholesale marketing, product overreaction in the stock market. Historically, when supply and distribution, and transportation operations. oil prices drop, Upstream and Downstream oil Valero’s refineries have a combined throughput company valuation ratios tend to also drop because of capacity of 2.9 million barrels a day. The refined investors selling their oil stocks. Low numbers for products are then sold wholesale through an extensive these valuation ratios tend to be viewed as positive as rack marketing network. These purchasers are usually they can indicate that a stock maybe undervalued. wholesalers, distributors, retailers, and truck- This is especially true in the Downstream where low delivered end users throughout the U.S., Canada, the oil prices can often be a very good thing and may just U.K., and Ireland.1 be mispriced based on the pessimistic attitudes toward the oil industry as a whole. Ethanol
The ratios for Midstream oil companies seem to On the ethanol side, sales come from ethanol and suggest that they operate very differently than distillers grains that are internally produced. Valero Upstream and Downstream companies. Debt/Asset owns 11 ethanol plants throughout the Midwest with ratio is significantly higher in the Midstream. This a production capacity of 1.3 billion gallons per year. can be explained by the theory that Midstream After production, ethanol is stored on site before companies are not as sensitive to changes in oil prices being transported to customers by truck and rail. and therefore are less worried about volatility within Ethanol is sold to large customers who are primarily their margins when compared to their counterparts. refiners and gasoline blenders. A bi product of ethanol is dry distillers grains (DDG). These DDGs Pipelines are usually fee based and are only worried are sold to animal feed customers throughout the U.S. about the volume of oil that passes through their and are shipped by truck and rail. DDGs are also sold pipelines rather than the price. While not always the on site at Valero’s 11 ethanol facilities.1 case, hypothetically oil prices should not affect the way a Midstream company operates. Specialty Products
Company Analysis In addition to Valero producing fuels such as gasoline and diesel in their refineries, “specialty products” are also produced and included in Valero’s refining Business Products and Strategy segment. These specialty products are produced at specific refineries and are used to better diversify the company into other sectors such as manufacturing and agriculture. Asphalt, sulfur, and petrochemicals are the three biggest specialty products that are sold by the refineries. Asphalt is sold to construction companies for use in road work and repair. Valero is a large producer of sulfur which is marketed and sold to customers in the agricultural sector who manufacture fertilizer. Finally, petrochemicals are produced and sold to chemical manufactures which further process these petrochemicals into products such as paints,
adhesives, and plastics.1 Provided by: valero.com
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Financial Analysis of Recent Earnings positives were partially offset by lower ethanol prices due to oil becoming more attractive option because of Operating Income by Segment its newly lowered price.1 Halfway through 2015 the effects of cheap oil has continued to take a toll on Valero’s refining operating income for 2014 was $5.9 Valero’s ethanol segment. Operating income for billion which was a $1.7 billion from 2013’s tally of ethanol after 2 quarters was $120 million which is an $4.2 billion. This increase is due to an over-supply in alarming decrease of 72.1% year over year. 12 the U.S. oil market which have driven down WTI crude oil price per barrel over the past year and a We expect oil prices to remain relatively cheap half.1 This event created a wider gap between the throughout the next 12 months and believe that WTI and Brent Crude Oil indexes which increased Valero’s refining segment will continue to thrive margins for refiners. US refiners buy crude oil based because of a continued increase in the “crack spread.” on the price set by WTI. After refining the oil into We believe Valero’s ethanol segment will start to gasoline, the refiners then sell their gas based on the struggle and operating income will continue to Brent crude oil benchmark.11 decrease until oil prices begin to recover. Overall, Valero’s gains in the refining segment will overcome ethanol losses to continue overall growth in operating income.
EPS
Source: YCharts
It is true that Brent crude oil and gasoline prices have also decreased over the last year. However, their decline has been substantially less than WTI crude oil. This gap between WTI crude oil prices and gas Data rovided by: Yahoo! Finance VLO Analyst Estimates prices creates the refining throughput margin or “crack spread” which is the profit margin that a Over the last four quarters, Valero has continued to refiner can expect to make after they refine a barrel of 13 beat market expectations by a wide margin. Over the crude oil into gasoline. Valero’s “Crack Spread” for last four earnings releases, Valero has beaten EPS Q2 2015 was 13.71 which is a 48.1% increase from expectations by an average of 21.5%.12 We believe Q2 2014. So in essence, Valero was able to take that the success of Valero’s refining segment is the advantage of high “crack spread” by buying cheap cause for these recent beats. Better refining from their suppliers and selling high to their throughput margin has caused Valero’s refining customers which led to increased profit margins for segment to see strong year over year growth.1 Due to the refining segment. This trend has continued into the recent decline in oil prices over the past 2 years, 2015. Through two quarters of 2015, the refining Valero has also benefitted from analyst’s low segment’s operating income is $3.8 billion which is 12 expectations on earnings releases. These pessimistic 58.3% year over year increase. expectations have set a low bar on the company and has allowed Valero to consistently surprise in their Valero’s ethanol segment posted an operating income earnings releases. We believe that Valero still has of $786M which was up $295 million from 2013’s good potential to continue to beat earnings estimates $491 million. This increase was due to lower corn but will not surprise by such large margins as seen in prices and higher production volumes. These the past year.
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Dividends and Buybacks
For the second time this year, Valero has increased Valero is valued very low right now compared to their quarterly dividend. Currently Valero is paying the past few years. Valero’s trailing P/E is out an annual dividend of $2.00 which is a yield of currently 6.78. There have been times in the past 5 2.87%.12 This new dividend was announced after strong 2015 Q3 earnings where Valero declared that they would increase their quarterly dividend to $0.50 from $0.40. Previously in 2015, Valero increased quarterly dividends by $0.125 to $0.40 in January. In 2014, Valero paid out $554 million of its $3.8 billion net income in the form of dividends and seems committed to improve upon that for 2015 and onward.13 That commitment seems to hold water years where Valero traded at a P/E of 20 which is as the annual rate of dividend growth over the past over three times its current value.14 three years was 51.8%.13 We believe that Valero will Source: Seeking Alpha continue to disperse their profits to shareholders through dividends. With profits expected to be higher Not only is Valero valued historically low, it is also in 2015 than 2014 due to increased “crack spreads”, carries a low valuation given its current margins. our prediction is for dividend yields to increase for Valero’s margins are comfortably higher than the 2016. industry, sector, and S&P median. This may be a little misleading because some Valero’s industry covers all Another way Valero returns cash back to its oil companies that operate in different facets of the oil shareholders is through stock buybacks. In 2014, market and are thus affected differently by oil prices. Valero repurchased $1.3 billion worth of shares.13 Valero being primarily a downstream oil company Over the past five years shares outstanding of Valero will tend to do better than an upstream company when have declined 13% for annual reduction of 2.6%. By oil prices are low like they currently are now. Never reducing the share count by 2.6%, annual EPS the less, Valero still possesses good margins even increases 2.6%.14 We expect Valero to generate large though they may seem a little inflated and it is amounts of cash especially through the rest of 2015 interesting to see that these margins do not and into 2016. If this happens Valero could use this necessarily translate to a higher valuation. This may extra cash to continue buying back stock and suggest a misevaluation by the market and returning its earnings to stockholders at a possibly opportunity to invest in an undervalued company and increased rate. realize a significant return.
Valuation Metrics Valero’s Price to free cash flow is also low at just 7.1. This gives Valero a cash flow yield of 14% which “theoretically could mean Valero could finance a dividend yielding 14% through its free cashflow.”14 This information seems to reaffirm our position of a possible increase in dividend yields in the near future.
Production and Distribution
Valero refines its products from crude oil. Crude oil is rich in hydrocarbons and refiners break down or “refine” these hydrocarbons into different products Source: Y Charts such as diesel fuel and gasoline. To isolate the
9 hydrocarbons, crude oil is heated in a still and the relative to its industry, regardless of the amount of various hydrocarbons are boiled off at different debt it has taken on (which still happens to be one of temperatures. These hydrocarbons are retrieved the lowest peer percentages). through a condensation process that transforms them into specific products.15 The low Price to Cash Flow ratio (P/CF) is another indicator of Valero’s Comparative advantage. Having After the refineries breakdown the crude oil into a P/CF ratio that is nearly half of all the top refined products, they are shipped through a competitors in the Downstream market shows that pipeline to bulk storage terminals near large Valero’s cash flows are more efficient in supporting consuming areas such as cities. The products are the current trading price than its competitors. Valero’s then transported by tanker trucks to retail gas ability generate more efficient cash flows means it is stations.15 Valero owns many of these able to generate higher cash flow per share. This transportation and logistical assets including provides Valero some protection to stock price refined products pipelines, terminal tanks, and decline should its cash flows begin to dwindle. tanker trucks.1 These assets are valuable as many refiners share transportation and storage or have to pay fees to a third party distributor. Valero also Efficiency Comparison owns 100% of the general partner interest in Valero Energy Partners (VLP). VLP is a A unique aspect in the oil industry is the high amount midstream oil company that transports crude oil of product that is produced and sold daily, giving very from the oil fields directly to 5 of Valero’s high revenues compared to other industries. An oil refineries.1 By owning these assets, Valero can company’s efficiency crucial to their success. Valero reduce logistical costs and charge other has emerged as the most efficient company in terms companies fees to use their storage and pipeline of earning nearly thirteen million dollars in annual facilities under Valero Energy Partners. revenue per employee, which is an astounding number when compared to the other top downstream Competition producers. Having a high revenue/employee value indicates that Valero is much more productive than its competitors. This could also mean that since Valero can generate competitive revenues with less labor, they have a lower wage expense which can lead to higher profit margins. Valero is also the largest refiner in the industry based on refining capacity. This is a huge advantage in an industry with historically low margins where volume becomes a key Data provided by: Market Watch and Respective 10K’s component in the ability to produce significant profit.
Valuation Comparison Capital Structure We Chose 5 companies from our relative valuation worksheet and compared them to Valero using In terms of capital structure, Valero has the second various metrics. We have found Valero is lowest Debt to Asset ratio of the top downstream undervalued compared to its top industry competitors. competitors. This gives Valero a much stronger Valero possesses the second lowest Enterprise financial structure as this indicates Valero finances Multiple (EV/EBITDA). The Enterprise Multiple less operations with debt than its industry peers, helps us examine a company disregarding any giving it a lower risk factor. Given the large size of changes in capital structure and given the somewhat Valero compared to the other top companies in the similar debt to asset ratios seen above, we observe a industry, the ability to maintain a relatively low far lower Enterprise Multiple for Valero than the table leveraged company is very attractive investment to average (5.51). This suggests Valero is undervalued, stockholders. This also coincides with our findings
10 above in terms of efficiency, having a more efficient coincides fairly closely with our findings from the system with the assets in place allows Valero to take DDM model and Relative P/E models. This is at the on less debt to finance its operations giving it a nice top end of our range, but we believe that this model buffer against the risk associated with price and rate gives us the most accurate representation of our changes in a notoriously volatile oil industry. portfolio valuation because it is based on a variety of company specific factors which is why we have chosen to use it as our target price. Valuation Discussion Relative P/E Ratio Revenue Decomposition
Valero’s two reported sources of revenue are through We used a relative P/E ratio in order to get a better its Refining and Ethanol segments. For refining, to idea of how Valero compares to similar firms in the find revenue per refined barrel, we took the reported industry, comparing Valero to the following firms: volume of refined barrels produced per day and Phillips 66, Tesoro, HollyFrontier Corp, Western converted it to barrels/year. Then, we took the Refining and Marathon Petroleum. We produced an refining segment revenue and divided it by our average forward P/E ratio of 9.0. After multiplying refined barrels/year. The process was the same for this P/E by our 2015 EPS of 8.04, we found a relative ethanol except instead of barrels/day we were given price of $72.72 and $77.88 for 2015 and 2016, gallons/day. Readers may be confused as to why our respectively. calculated revenue/gallon is larger than current gas prices. This is because ethanol production is This signals that Valero is more accurately valued subsidized by the government and these subsidies are than we previously thought. While concerning, this already built into our revenue/gallon making them valuation should be taken with a grain of salt. As we appear inflated when compared to normal gas prices. have explained earlier, oil companies tend to suffer from abnormally lower P/E ratios when oil prices are Refining accounts for roughly 94% of the revenue, down and are historically low regardless of oil prices. with ethanol making up the other 6%. We forecast an Because of this, oil companies are difficult to value initial large drop off in Revenue in 2015 due to the using a relative P/E method. However, this does help lower gas prices. Currently, Valero is not producing reaffirm our hold rating even if the results may be at its refining capacity. We believe this will change slightly skewed downward. when we predict a lifting on the US oil export ban in 2017. The lifted ban will squeeze Valero’s margins and force them to increase out to its capacity of 2.9 Dividend Discount Model Million barrels/day. Valero is in the process in expanding capacity in one of its Texas refineries that Our Dividend Discount Model estimated an intrinsic will allow them to increase capacity by 100,000 value (after partial-year adjustment) of $81.72, which barrels/day. The project is expected to be completed gives us a 17.4% upside potential compared to the in 2016. However, we will allow an extra year and closing stock price of $69.60 on 11/15/2015. This half to account for in setbacks in construction and model was difficult to estimate due to Valero’s recent sufficient time to hire new employees to operate the high percentage increases in its dividend. We tried to expansion. This will increase Valero’s capacity to 3.0 be as conservative as possible with our dividend million barrels/day by 2019 at the latest. growth rates. We grew our dividends by 15% in years 2017-2020 which may seem high, but is significantly DCF and Relative P/E Valuation lower than Valero’s more recent dividend growth rates. We settled on a CV dividend growth rate of 8% After forecasting our DCF and EP models we arrived which is a little higher than we would have liked, but at a partial year adjusted stock price for both models once again is more conservative when compared to of $84.22, suggesting again that Valero is currently Valero’s past dividend growth. With that being said, undervalued. These models produce a potential upside this valuation supports our DCF and Ep valuations. of 21% of the November 15 stock price, which
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We found SG&A as a percent of revenue was a Sensitivity Analysis very integral in our valuation of Valero as a whole, as Valero had few other Operating Beta Vs Current Value Growth (NOPLAT) Expenses, so changing SG&A in any direction has a direct effect on many of our ratios The risk of a firm and there continuing value of the including the EV/EBITDA ratio discussed firms growth rates are crucial considerations when previously. This is our reasoning for establishing an investment recommendation, so conducting a very precise analysis, in terms of understanding the sensitivity of Valero’s stock very small incremental changes in SG&A as a price to both was very important to us. As you can percent of revenue. For example, all else held see, all else held constant, a slight decrease in the constant, a slight 0.2% decrease in SG&A Beta of Valero, from 1.45 to 1.35 leads to a 6.85% increases our stock price 4.98%, and a 0.2% increase in the stock price, from $84.22 to $90.41. increase gives us a 5.25% decrease in our stock This shows that Valero’s stock price is very price. The same holds true for normal cash, we sensitive to the risk of the firm, which makes sense saw a significant change in stock price, with a as we have shown previously with the debt to asset 0.3% change in either direction, all else ratio, Valero has low risk relative to industry peers constant. which plays into our contention that it is undervalued in the market. Conversely, with Beta and all else held constant, a 1% increase in the CV Important Disclaimer Growth rate of NOPLAT has a smaller effect on the stock price, only increasing the stock price This report was created by students enrolled in the 0.98% up to $85.05. Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer Risk Free Rate Vs. Risk Premium an internal investment recommendation for the University of Iowa Krause Fund and its advisory Given the volatility of interest rates in the market board. The report also provides potential today, we found it very important to consider the employers and other interested parties an example effects of changes in the risk-free rates and risk of the students’ skills, knowledge and abilities. premiums used when evaluating our stock price. Members of the Krause Fund are not registered This helped us to look more at long-term trends in investment advisors, brokers or officially licensed interest rates, for example we can see the large financial professionals. The investment advice effect of (all else held constant), a small variation contained in this report does not represent an offer in either direction of the risk premium would cause or solicitation to buy or sell any of the securities our price to fluctuate from $107.85 (a 21.91% mentioned. Unless otherwise noted, facts and increase), with a 1.25% decrease; down to $69.61 figures included in this report are from publicly (a 17.35% decrease), with a 1.25% increase. It is available sources. This report is not a complete plain to see that fluctuations in the risk premium compilation of data, and its accuracy is not have a large effect on our stock price, which makes guaranteed. From time to time, the University of sense as it is crucial in calculating the cost of Iowa, its faculty, staff, students, or the Krause equity as well as the WACC for Valero. Fund may hold a financial interest in the Conversely, the risk free rate has a smaller effect, companies mentioned in this report. but this is also due to the fact that we believe that the Federal Reserve plans to keep the risk free rate close to its current level, with a possible slight increase over the next five years.
SG&A % of Revenue Vs Normal Cash % of Revenue
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9. Financial Times. N.p., n.d. Web. 11 Sept. Sources 2015. 1. VLO’s 2014 10K 453585f2cfcd.html#axzz3lkxf7C7K>. 2. Anderson, Richard. "Are low oil prices here to stay?." BBC. N.p., 24 Feb. 2015. 10. "Sub-Industry Review : Oil & Gas Web. 14 Nov. 2015. Drilling." S&P Capital IQ Net Advantage . 3. Reklaitis, Viktor. "Oil futures rise on N.p., June 2015. Web. 9 Sept. 2015. worries about supply disruptions." N.p., 13 Valero Energy Corporation Revenue Decomposition Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E Refining 122,925 129,064 126,004 84,423 88,644 95,985 101,744 114,554 127,355 131,813 YOY Growth(%) 12.63% 4.99% -2.37% -33.00% 5.00% 8.28% 6.00% 12.59% 11.17% 3.50% Ethanol 4,317 5,114 4,840 5,045 4,793 4,319 3,866 4,239 4,712 4,948 YOY Growth(%) -16.17% 18.46% -5.36% 4.24% -5.00% -9.88% -10.49% 9.63% 11.17% 5.00% Retail 12,008 3,896 ------YOY Growth(%) 2.64% -67.55% -100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total 139,250 138,074 130,844 89,468 93,437 100,305 105,611 118,793 132,067 136,760 YOY Growth(%) 10.53% -0.84% -5.24% -31.62% 4.44% 7.35% 5.29% 12.48% 11.17% 3.55% Refining Volume (Million Barrels/Day) 2.6 2.6 2.4 2.5 2.5 2.9 2.9 3.0 3.0 3.0 Volume (Million Barrels/Year) 949 949 876 909 929 949 949 1,008 1,088 1,088 Revenue Per Refined Barrel 129.53 136.00 143.84 92.87 95.42 101.14 107.21 113.64 117.05 121.15 Ethanol Volume (Millions Gallons/Day) 3.0 3.3 3.4 3.8 3.8 3.3 3.3 3.0 3.4 3.4 Volume (Million Gallons/Year) 1,095 1,205 1,241 1,387 1,387 1,205 1,205 1,095 1,241 1,241 Revenue Per Gallon 3.94 4.25 3.90 3.64 3.46 3.59 3.21 3.87 3.80 3.99 Valero Energy Corporation Income Statement Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E Sales 139,250 138,074 130,844 89,468 93,437 100,305 105,611 118,793 132,067 136,760 COGS excluding D&A 131,866 131,328 123,294 80,773 85,962 93,850 98,295 110,562 124,190 128,604 Depreciation 1,100 1,200 1,201 1,233 1,288 1,346 1,407 1,470 1,536 1,605 Amortization of Intangibles 474 520 489 326 340 365 384 432 481 498 Gross Income 5,810 5,026 5,860 7,136 5,847 4,744 5,524 6,328 5,860 6,053 SG&A Expense 698 728 724 483 505 542 570 641 713 739 Other Operating Expense 0 0 0 ------EBIT (Operating Income) 5,112 4,298 5,136 6,653 5,342 4,202 4,954 5,687 5,147 5,314 Nonoperating Income - Net 82 382 45 ------Interest Expense 313 365 397 364 381 384 389 386 376 373 Unusual Expense - Net 1,175 333 -768 ------Pretax Income 3,706 3,982 5,552 6,289 4,961 3,818 4,565 5,300 4,771 4,942 Income Taxes 1,626 1,254 1,777 2,201 1,736 1,336 1,598 1,855 1,670 1,730 Other After Tax Adjustments 0 -2 -554 ------Consolidated Net Income 2,080 2,726 3,221 4,088 3,225 2,482 2,968 3,445 3,101 3,212 Minority Interest -3 8 81 ------Net Income 2,083 2,718 3,140 4,088 3,225 2,482 2,968 3,445 3,101 3,212 Preferred Dividends 0 0 0 ------Net Income available to Common 2,083 2,718 3,140 4,088 3,225 2,482 2,968 3,445 3,101 3,212 EPS (recurring) 5.23 5.39 4.91 8.04 6.41 4.95 5.93 6.90 6.24 6.48 Total Shares Outstanding 552.10 535.57 514.30 508.15 502.73 501.45 500.39 499.04 497.35 495.83 Dividends per Share 0.65 0.85 1.05 2.00 2.25 2.40 2.76 3.17 3.65 3.94 Payout Ratio 17.33% 17.10% 18.09% 24.86% 35.08% 48.49% 46.54% 45.97% 58.54% 60.85% Valero Energy Corporation Balance Sheet Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E Assets Cash & Cash Equivalents 1,723 4,292 3,689 5,896 6,673 6,734 7,286 8,243 8,353 8,316 Short-Term Investments 8,336 8,823 5,976 6,107 6,242 6,379 6,519 6,663 6,810 6,959 Accounts Receivables, Net 8,087 8,699 5,509 4,643 4,875 5,279 5,596 6,300 7,005 7,250 Inventories 5,973 5,758 6,623 6,948 7,288 7,645 8,020 8,413 8,825 9,257 Other Current Assets 428 404 326 253 264 284 299 336 374 387 Total Current Assets 16,460 19,277 16,614 23,847 25,342 26,322 27,720 29,956 31,366 32,169 Net Property, Plant & Equipment 26,300 25,707 26,735 28,668 29,958 31,306 32,715 34,187 35,726 37,333 Property, Plant & Equipment - Gross 34,132 33,933 35,933 39,099 41,677 44,371 47,187 50,129 53,204 56,417 Accumulated Depreciation 7,832 8,226 9,198 10,431 11,719 13,065 14,472 15,942 17,478 19,083 Intangible Assets 213 156 ------Other Assets 1,504 2,120 2,194 2,225 2,257 2,289 2,322 2,355 2,389 2,423 Total Assets 44,477 47,260 45,550 54,740 57,558 59,917 62,757 66,498 69,481 71,926 Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 586 303 606 409 391 391 331 331 261 208 Accounts Payable 9,348 9,931 6,760 6,352 6,634 7,122 7,498 8,434 9,377 9,710 Income Tax Payable 379 1,022 809 787 621 478 571 663 597 618 Other Current Liabilities 1,616 1,867 1,805 1,142 1,193 1,280 1,348 1,516 1,686 1,746 Accrued Payroll 314 287 342 221 231 248 261 294 327 338 Total Current Liabilities 11,929 13,123 9,980 8,911 9,070 9,519 10,010 11,238 12,247 12,621 Long-Term Debt 6,463 6,261 5,780 6,920 7,111 7,134 7,168 7,197 7,215 7,218 Provision for Risks & Charges 1,706 1,086 1,552 1,906 1,951 1,956 1,950 1,957 1,944 1,931 Deferred Tax Liabilities 5,860 6,601 6,607 7,069 7,564 7,489 8,013 7,933 8,488 9,082 Other Liabilities 424 243 387 423 429 435 441 448 454 460 Total Liabilities 26,382 27,314 24,306 25,229 26,125 26,533 27,581 28,773 30,347 31,312 Common Equity 7,329 7,194 7,123 7,145 7,144 7,142 7,141 7,139 7,138 7,136 Retained Earnings 17,032 18,970 22,046 25,117 27,211 28,489 30,076 31,937 33,223 34,481 Cumulative Translation Adjustment/Unrealized For. 666 Exch. Gain 408 1 950 1,889 2,820 3,782 4,746 5,785 6,905 Other Appropriated Reserves (558) (58) (368) 4,266 3,604 3,519 2,949 2,867 2,148 1,450 Treasury Stock (6,437) (7,054) (8,125) (8,625) (9,125) (9,325) (9,525) (9,725) (9,925) (10,125) Total Shareholders' Equity 18,032 19,460 20,677 28,853 30,722 32,646 34,422 36,964 38,369 39,847 Accumulated Minority Interest 63 486 567 658 710 739 754 761 765 767 Total Equity 18,095 19,946 21,244 29,511 31,433 33,384 35,176 37,725 39,134 40,614 Total Liabilities & Shareholders' Equity 44,477 47,260 45,550 54,740 57,558 59,917 62,757 66,498 69,481 71,926 Valero Energy Corporation Cash Flow Statement Fiscal Years Ending Dec. 31 2006 2007 2008 2009 2010 2011 2012 2013 2014 Operating Activities Net Income / Starting Line 5,463 5,234 (1,131) (1,982) 324 2,089 2,080 2,728 3,711 Depreciation, Depletion & Amortization 1,155 1,376 1,476 1,527 1,473 1,534 1,574 1,720 1,690 Depreciation and Depletion 812 1,328 1,443 973 985 1,100 1,100 1,200 1,201 Amortization of Intangible Assets 343 48 33 554 488 434 474 520 489 Deferred Taxes & Investment Tax Credit 290 (131) 675 (343) 347 461 963 501 445 Other Funds (189) (752) 3,747 2,539 892 70 955 (307) 123 Funds from Operations 6,719 5,727 4,767 1,741 3,036 4,154 5,572 4,642 5,969 Changes in Working Capital (406) (469) (1,675) 73 9 (116) (302) 922 (1,728) Receivables (799) (3,195) 4,618 (1,474) (134) (2,982) 488 (743) 2,730 Inventories (405) (249) (705) (77) (407) 643 (282) (13) (1,014) Accounts Payable 1,362 2,557 (4,985) 1,475 670 2,004 (113) 977 (3,149) Income Taxes Payable (162) 481 (446) 95 (3) 124 (380) 646 (319) Other Accruals (54) (20) 182 73 (99) (18) 13 53 38 Other Assets/Liabilities (348) (43) (339) (19) (18) 113 (28) 2 (14) Net Operating Cash Flow 6,313 5,258 3,092 1,814 3,045 4,038 5,270 5,564 4,241 Investing Activities Capital Expenditures (3,756) (2,260) (2,790) (2,306) (1,730) (2,355) (2,931) (2,121) (2,802) Capital Expenditures (Fixed Assets) (3,187) (2,260) (2,790) (2,306) (1,730) (2,355) (2,931) (2,121) (2,153) Capital Expenditures (Other Assets) (569) ------(649) Net Assets from Acquisitions (101) - (144) (29) (260) (2,275) (80) - - Sale of Fixed Assets & Businesses 64 2,491 488 16 767 - 160 - - Purchase/Sale of Investments 854 (209) - 27 330 - - - - Purchase of Investments 26 209 ------Sale/Maturity of Investments 880 - - 27 330 - - - - Other Funds (32) (604) (416) (1,000) (512) (668) (500) (691) (42) Other Uses (40) (604) (440) (1,000) (535) (668) (500) (691) (42) Other Sources 8 - 24 - 23 - - - - Net Investing Cash Flow (2,971) (582) (2,862) (3,292) (1,405) (5,298) (3,351) (2,812) (2,844) Financing Activities Cash Dividends Paid (184) (271) (299) (324) (114) (169) (360) (462) (566) Change in Capital Stock (1,898) (5,629) (939) 806 7 (300) (222) (500) (1,249) Repurchase of Common & Preferred Stk. (2,020) (5,788) (955) (4) (13) (349) (281) (928) (1,296) Sale of Common & Preferred Stock 122 159 16 810 20 49 59 428 47 Proceeds from Sale of Stock - 159 - 810 20 - - - - Proceeds from Stock Options 122 - 16 - - 49 59 428 47 Issuance/Reduction of Debt, Net (303) 1,782 (374) 713 1,027 (778) (562) 537 (172) Change in Current Debt - - - - - (4) - 1,017 - Change in Long-Term Debt (303) 1,782 (374) 713 1,027 (774) (562) (480) (172) Issuance of Long-Term Debt - 2,245 296 1,037 1,544 - 1,400 - 28 Reduction in Long-Term Debt (303) (463) (670) (324) (517) (774) (1,962) (480) (200) Other Funds 197 287 5 94 (104) 181 (89) 262 57 Other Uses (9) (24) (4) (861) (1,329) - (1,650) (315) - Other Sources 206 311 9 955 1,225 181 1,561 577 57 Net Financing Cash Flow (2,188) (3,831) (1,607) 1,289 816 (1,066) (1,233) (163) (1,930) Exchange Rate Effect 1 29 (47) 65 53 16 13 (20) (70) Beginning Cash 466 1,621 2,495 1,071 947 3,334 1,024 1,723 4,292 Ending Cash 1,621 2,495 1,071 947 3,334 1,024 1,723 4,292 3,689 Net Change in Cash 1,155 874 (1,424) (124) 2,509 (2,310) 699 2,569 (603) Free Cash Flow 3,126 2,998 302 (492) 1,315 1,683 2,339 3,443 2,088 Free Cash Flow per Share 5 5 1 (1) 2 3 4 6 4 Free Cash Flow Yield (%) 10 7 3 (5) 10 14 12 12 8 Valero Energy Corporation Cash Flow Statement Fiscal Years Ending Dec. 31 2015 2016 2017 2018 2019 2020 CV 2021 Operating Activities Net Income / Starting Line 4,088 3,225 2,482 2,968 3,445 3,101 3,212 Depreciation 985 1,100 1,100 1,200 1,201 1,233 1,288 Amortization of Intangible Assets 326 340 365 384 432 481 498 Accounts Receivables, Net 866 (232) (404) (317) (705) (704) (245) Inventories (325) (340) (357) (375) (393) (412) (432) Accounts Payable (408) 282 488 377 936 942 333 Income Taxes Payable (22) (166) (143) 93 92 (66) 21 Accrued Payroll (121) 10 17 13 33 33 12 Deffered Taxes 566 605 599 641 635 679 727 Net Operating Cash Flow 5,955 4,823 4,147 4,985 5,676 5,287 5,413 Investing Activities Short Term Investments (131) (134) (137) (140) (143) (147) (150) Capital Expenditures (3,166) (2,578) (2,694) (2,816) (2,942) (3,075) (3,213) Capitalization of Intangible Assets ------Other Assets (31) (32) (32) (33) (33) (34) (34) Net Investing Cash Flow (3,197) (2,610) (2,727) (2,848) (2,975) (3,108) (3,247) Financing Activities Stock Repurchase (500) (500) (200) (200) (200) (200) (200) Proceeds from Stock Options 22 22 22 22 11 - - Change in Current Debt (197) (18) - (60) - (70) (52) Change in Long-Term Debt 1,140 191 22 34 29 17 3 Payment of Dividends (1,016) (1,131) (1,203) (1,381) (1,584) (1,815) (1,955) Net Financing Cash Flow (551) (1,435) (1,359) (1,585) (1,743) (2,068) (2,204) Beginning Cash 3,689 5,896 6,673 6,734 7,286 8,243 8,353 Net Change in Cash 2,207 777 62 552 957 110 (37) Ending Cash 5,896 6,673 6,734 7,286 8,243 8,353 8,316 Valero Energy Corporation Common Size Income Statement Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E Sales 139,250.00 138,074.00 130,844.00 100% 100% 100% 100% 100% 100% 100% COGS excluding D&A 94.70% 95.11% 94.23% 90.28% 92.00% 93.56% 93.07% 93.07% 94.04% 94.04% Depreciation 0.79% 0.87% 0.92% 1.38% 1.38% 1.34% 1.33% 1.24% 1.16% 1.17% Amortization of Intangibles 0.34% 0.38% 0.37% 0.36% 0.36% 0.36% 0.36% 0.36% 0.36% 0.36% Gross Income 4.17% 3.64% 4.48% 7.98% 6.26% 4.73% 5.23% 5.33% 4.44% 4.43% SG&A Expense 0.50% 0.53% 0.55% 0.54% 0.54% 0.54% 0.54% 0.54% 0.54% 0.54% Other Operating Expense 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% EBIT (Operating Income) 3.67% 3.11% 3.93% 7.44% 5.72% 4.19% 4.69% 4.79% 3.90% 3.89% Nonoperating Income - Net 0.06% 0.28% 0.03% 0.12% 0.14% 0.10% 0.12% 0.12% 0.12% 0.12% Interest Expense 0.22% 0.26% 0.30% 0.41% 0.41% 0.38% 0.37% 0.33% 0.28% 0.27% Unusual Expense - Net 0.84% 0.24% -0.59% 0.17% -0.06% -0.16% -0.02% -0.08% -0.09% -0.06% Fixed Assets Impairment 0.73% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Reorganization and Restructure Expense 0.03% ------Goodwill Write Off ------Legal Claim Expense ------Other Unusual Expense 0.09% 0.24% -0.59% -0.09% -0.14% -0.27% -0.17% -0.19% -0.21% -0.19% Pretax Income 2.66% 2.88% 4.24% 7.03% 5.31% 3.81% 4.32% 4.46% 3.61% 3.61% Income Taxes 1.17% 0.91% 1.36% 2.46% 1.86% 1.33% 1.51% 1.56% 1.26% 1.26% Other After Tax Adjustments 0.00% 0.00% -0.42% ------Consolidated Net Income 1.49% 1.97% 2.46% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35% Minority Interest 0.00% 0.01% 0.06% ------Net Income 1.50% 1.97% 2.40% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35% Preferred Dividends 0.00% 0.00% 0.00% ------Net Income available to Common 1.50% 1.97% 2.40% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35% EPS (recurring) 0.00% 0.00% 0.00% 0.01% 0.01% 0.00% 0.01% 0.01% 0.00% 0.00% Total Shares Outstanding 0.40% 0.39% 0.39% 0.57% 0.54% 0.50% 0.47% 0.42% 0.38% 0.36% Dividends per Share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Payout Ratio 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Valero Energy Corporation Common Size Balance Sheet Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E Sales 139,250 138,074 130,844 89,468 93,437 100,305 105,611 118,793 132,067 136,760 Assets Cash & Short-Term Investments 1.24% 3.11% 2.82% 6.59% 7.14% 6.71% 6.90% 6.94% 6.33% 6.08% Short-Term Receivables 5.99% 6.39% 4.57% 6.83% 6.68% 6.36% 6.17% 5.61% 5.16% 5.09% Accounts Receivables, Net 5.81% 6.30% 4.21% 5.19% 5.22% 5.26% 5.30% 5.30% 5.30% 5.30% Inventories 4.29% 4.17% 5.06% 7.77% 7.80% 7.62% 7.59% 7.08% 6.68% 6.77% Other Current Assets 0.31% 0.29% 0.25% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Current Assets 11.82% 13.96% 12.70% 26.65% 27.12% 26.24% 26.25% 25.22% 23.75% 23.52% Net Property, Plant & Equipment 18.89% 18.62% 20.43% 32.04% 32.06% 31.21% 30.98% 28.78% 27.05% 27.30% Property, Plant & Equipment - Gross 24.51% 24.58% 27.46% 43.70% 44.60% 44.24% 44.68% 42.20% 40.29% 41.25% Accumulated Depreciation 5.62% 5.96% 7.03% 11.66% 12.54% 13.03% 13.70% 13.42% 13.23% 13.95% Total Investments and Advances -- -- 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Intangible Assets 0.15% 0.11% ------Other Assets 0.15% 1.54% 1.68% 2.49% 2.42% 2.28% 2.20% 1.98% 1.81% 1.77% Deferred Charges -- -- 0.01% ------Tangible Other Assets 1.08% 1.54% 1.68% 2.49% 2.42% 2.28% 2.20% 1.98% 1.81% 1.77% Total Assets 31.94% 34.23% 34.81% 61.18% 61.60% 59.74% 59.42% 55.98% 52.61% 52.59% Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 0.42% 0.22% 0.46% 0.46% 0.42% 0.39% 0.31% 0.28% 0.20% 0.15% Accounts Payable 6.71% 7.19% 5.17% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% 7.10% Income Tax Payable 0.27% 0.74% 0.62% 0.88% 0.66% 0.48% 0.54% 0.56% 0.45% 0.45% Other Current Liabilities 1.16% 1.35% 1.38% ------Accrued Payroll 0.23% 0.21% 0.26% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% Miscellaneous Current Liabilities 0.94% 1.14% 1.12% ------Total Current Liabilities 8.57% 9.50% 7.63% 9.96% 9.71% 9.49% 9.48% 9.46% 9.27% 9.23% Long-Term Debt 4.64% 4.53% 4.42% 7.73% 7.61% 7.11% 6.79% 6.06% 5.46% 5.28% Provision for Risks & Charges 1.23% 0.79% 1.19% 2.13% 2.09% 1.95% 1.85% 1.65% 1.47% 1.41% Deferred Tax Liabilities 4.21% 4.78% 5.05% 7.90% 8.10% 7.47% 7.59% 6.68% 6.43% 6.64% Other Liabilities 0.30% 0.18% 0.30% 0.47% 0.46% 0.43% 0.42% 0.38% 0.34% 0.34% Other Liabilities (excl. Deferred Income) 0.30% 0.18% 0.30% 0.47% 0.46% 0.43% 0.42% 0.38% 0.34% 0.34% Deferred Income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Liabilities 18.95% 19.78% 18.58% 28.20% 27.96% 26.45% 26.12% 24.22% 22.98% 22.90% Common Equity 5.26% 5.21% 5.44% 7.99% 7.65% 7.12% 6.76% 6.01% 5.40% 5.22% Retained Earnings 12.23% 13.74% 16.85% 28.07% 29.12% 28.40% 28.48% 26.88% 25.16% 25.21% Cumulative Translation Adjustment/Unrealized For. 0.48%Exch. Gain 0.30% 0.00% 1.06% 2.02% 2.81% 3.58% 3.99% 4.38% 5.05% Other Appropriated Reserves -0.40% -0.04% -0.28% 4.77% 3.86% 3.51% 2.79% 2.41% 1.63% 1.06% Treasury Stock -4.62% -5.11% -6.21% -9.64% -9.77% -9.30% -9.02% -8.19% -7.52% -7.40% Total Shareholders' Equity 12.95% 14.09% 15.80% 32.25% 32.88% 32.55% 32.59% 31.12% 29.05% 29.14% Accumulated Minority Interest 0.05% 0.35% 0.43% 0.74% 0.76% 0.74% 0.71% 0.64% 0.58% 0.56% Total Equity 12.99% 14.45% 16.24% 32.99% 33.64% 33.28% 33.31% 31.76% 29.63% 29.70% Total Liabilities & Shareholders' Equity 31.94% 34.23% 34.81% 61.18% 61.60% 59.74% 59.42% 55.98% 52.61% 52.59% Valero Energy Corporation Value Driver Estimation Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E NOPLAT EBITA Operating Revenues 139,250.00 138,074.00 130,844.00 89,467.68 93,436.56 100,304.65 105,610.72 118,792.66 132,067.27 136,760.30 (Cost of Goods Sold) 131,866.00 131,328.00 123,294.00 80,773.16 85,961.64 93,849.64 98,295.30 110,561.94 124,190.35 128,604.16 (SG&A) 698.00 728.00 724.00 483.13 504.56 541.65 570.30 641.48 713.16 738.51 (Depreciation) 1,100.00 1,200.00 1,201.00 1,232.73 1,288.20 1,346.17 1,406.75 1,470.05 1,536.20 1,605.33 (Amortization of Non-Goodwill Intangibles) 474.00 520.00 489.00 325.66 340.11 365.11 384.42 432.41 480.72 497.81 (R&D Expenses) ------(Other Operating Expenses) ------Implied Lease Interest 67.91 81.72 75.16 73.40 79.27 85.61 92.46 99.86 107.85 116.48 EBITA 5,179.91 4,379.72 5,211.16 6,726.40 5,421.33 4,287.70 5,046.42 5,786.64 5,254.67 5,430.97 ADJUSTED TAXES Marginal Tax Rate 43.9% 31.5% 32.0% 35% 35% 35% 35% 35% 35% 35% Provision for Income Tax 1,626.00 1,254.00 1,777.00 2,201.11 1,736.29 1,336.43 1,597.89 1,855.13 1,669.94 1,729.62 Tax on Interest Expense 137.41 114.98 127.04 127.44 133.43 134.30 136.00 135.24 131.44 130.46 Tax on Non-operating Income 36.00 120.33 14.40 ------Tax Shield on Implied Lease Interest 29.81 25.74 24.05 25.69 27.75 29.96 32.36 34.95 37.75 40.77 Tax on Unusual Expense 515.83 104.90 (245.76) ------Total Adjusted Taxes 906.96 888.06 1,857.27 2,047.98 1,575.11 1,172.17 1,429.53 1,684.94 1,500.75 1,558.40 CHANGE IN DEFERRED TAXES From Cash Flow Statement 963.00 501.00 445.00 565.56 605.15 599.10 641.03 634.62 679.05 726.58 NOPLAT 5,235.95 3,992.66 3,798.89 5,243.98 4,451.37 3,714.63 4,257.92 4,736.32 4,432.97 4,599.16 Invested Capital Operating Current Assets "Normal" Cash 1,127.93 1,118.40 1,059.84 724.69 756.84 812.47 855.45 962.22 1,069.74 1,107.76 Accounts Receivable 8,087.00 8,699.00 5,509.00 4,643.25 4,875.41 5,279.19 5,595.94 6,300.48 7,004.53 7,249.69 Inventory 5,973.00 5,758.00 6,623.00 6,947.53 7,287.96 7,645.07 8,019.67 8,412.64 8,824.86 9,257.28 Other Current Operating Assets 428.00 404.00 326.00 253.19 264.43 283.86 298.88 336.18 373.75 387.03 Non Interest-Bearing Current Liabilities Accounts Payable 9,348.00 9,931.00 6,760.00 6,352.21 6,634.00 7,121.63 7,498.36 8,434.28 9,376.78 9,709.98 Accrued Expenses 314.00 287.00 342.00 221.27 231.09 248.07 261.20 293.80 326.63 338.24 Income Taxes Payable 379.00 1,022.00 809.00 786.90 620.72 477.78 571.25 663.21 597.00 618.34 Other Current Liabilities 1,616.00 1,867.00 1,805.00 1,141.90 1,192.56 1,280.22 1,347.94 1,516.19 1,685.61 1,745.51 Net Operating Working Capital 5,574.93 4,739.40 5,606.84 5,208.28 5,698.82 6,173.11 6,439.14 6,620.23 6,972.47 7,335.20 Net Property, Plant, and Equiptment Gross Property, Plant, And Equiptment 34,132.00 33,933.00 35,933.00 39,098.80 41,677.07 44,371.35 47,186.88 50,129.11 53,203.73 56,416.72 (Accumulated Depreciation) 7,832.00 8,226.00 9,198.00 10,430.73 11,718.93 13,065.10 14,471.84 15,941.89 17,478.10 19,083.43 Net Property, Plant, and Equiptment 26,300.00 25,707.00 26,735.00 28,668.08 29,958.14 31,306.25 32,715.04 34,187.21 35,725.64 37,333.29 Plus: Net Other Operating Assets (Net D&A) Net Intangible Assets (Non-Goodwill) 213.00 156.00 ------Capitalized PV of Operating Leases 1,021.50 939.50 917.50 990.90 1070.17 1155.79 1248.25 1348.11 1455.96 1572.43 Other Operating Assets 1,504.00 2,120.00 2,194.00 2,225.37 2,257.20 2,289.47 2,322.21 2,355.42 2,389.10 2,423.27 Total Net Other Operating Assets 2,738.50 3,215.50 3,111.50 3,216.27 3,327.37 3,445.26 3,570.46 3,703.53 3,845.06 3,995.70 Less: Other Operating Liabilities Warranty Liabilities (Long Term) ------Other Non-Interest Bearing Op. Liabilities 1,616.00 1,867.00 1,805.00 1,141.90 1,192.56 1,280.22 1,347.94 1,516.19 1,685.61 1,745.51 Total Other Operating Liabilities 1,616.00 1,867.00 1,805.00 1,141.90 1,192.56 1,280.22 1,347.94 1,516.19 1,685.61 1,745.51 Invested Capital 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56 46,918.68 VLO Drivers Invested capital 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56 46,918.68 NOPLAT 5,235.95 3,992.66 3,798.89 5,243.98 4,451.37 3,714.63 4,257.92 4,736.32 4,432.97 4,599.16 ROIC 16.85% 12.10% 11.95% 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25% EP 2,208.10 778.16 701.53 1,966.07 949.16 33.07 395.89 705.54 244.55 229.28 FCF 3,319.91 5,195.18 1,945.46 2,941.59 2,610.33 1,861.99 2,525.63 3,118.23 2,570.20 2,538.04 ROIC Calculations NOPLAT 5,235.95 3,992.66 3,798.89 5,243.98 4,451.37 3,714.63 4,257.92 4,736.32 4,432.97 4,599.16 Beginning IC 31,081.38 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56 ROIC 16.85% 12.10% 11.95% 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25% EP Calculations IC 32,997.42 31,794.90 33,648.34 35,950.73 37,791.77 39,644.41 41,376.70 42,994.79 44,857.56 46,918.68 ROIC 16.85% 12.10% 11.95% 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25% WACC 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% 9.74% (ROIC-WACC) 7.10% 2.36% 2.21% 5.84% 2.64% 0.09% 1.00% 1.71% 0.57% 0.51% EP 2208.10 778.16 701.53 1966.07 949.16 33.07 395.89 705.54 244.55 229.28 Valero Energy Corporation Weighted Average Cost of Capital (WACC) Estimation 2014 Risk Free 2.87% Risk Premium 5.75% Beta 1.45 Cost of Equity 11.21% Debt Rating BBB+ Pre-Tax Cost of Debt 5.40% Tax Rate 35% After-Tax Cost of Debt 3.51% Cost of Preferred 0.0% MV Weight of Equity 81% MV Weight of Debt 19% MV Weight of Pfd 0% WACC 9.74% Valero Energy Corporation Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth 3.50% CV ROIC 10.25% WACC 9.74% Cost of Equity 11.21% Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E CV (2021E) DCF Model NOPLAT 5243.98 4451.37 3714.63 4257.92 4736.32 4432.97 4599.16 Change in Invested Capital 2302.39 1841.04 1852.64 1732.29 1618.09 1862.77 2061.12 FCF 2941.59 2610.33 1861.99 2525.63 3118.23 2570.20 2538.04 CV 48530.87 Discount Factor 1.10 1.20 1.32 1.45 1.59 1.75 1.75 PV of FCF's 2680.46 2167.46 1408.84 1741.34 1959.07 1471.42 27783.60 Value of Operations 39212.20 Excess Cash 2629 Short Term Investments 5976 ESOP -22 PV of Operating Leases -917 Debt -6386 VE 40491.57 Shares Outstanding 514.30 Target Price DEC 31, 2014 $ 78.73 Target Price Today (Partial Year Adjustment) $ 84.22 EP Model NOPLAT 5243.98 4451.37 3714.63 4257.92 4736.32 4432.97 4599.16 Beginning IC 33648 35951 37792 39644 41377 42995 44858 ROIC 15.58% 12.38% 9.83% 10.74% 11.45% 10.31% 10.25% Economic Profic 1966.07 949.16 33.07 395.89 705.54 244.55 229.28 CV 3673.31 Discount Factor 1.10 1.20 1.32 1.45 1.59 1.75 1.75 PV of Economic Profit 1791.54 788.13 25.02 272.95 443.26 140.00 2102.95 SUM of PV's 5564 ADD IC 2014 33648 Value of Operations 39212.20 Excess Cash 2629 Short Term Investments 5976 ESOP -22 PV of Operating Leases -917 Debt -6386 VE 40491.57 Shares Outstanding 514.30 Target Price DEC 31, 2014 $ 78.73 Target Price Today (Partial Year Adjustment) $ 84.22 Valero Energy Corporation Dividend Discount Model (DDM) or Fundamental P/E Valuation Model Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E CV (2021E) EPS $ 8.04 $ 6.41 $ 4.95 $ 5.93 $ 6.90 $ 6.24 $ 6.48 Dividend 2.00 2.25 2.40 2.76 3.17 3.65 3.94 CV 122.90 Discount Factor 1.11 1.24 1.38 1.53 1.70 1.89 1.89 PV's of Dividends 1.80 1.82 1.75 1.80 1.87 1.93 64.98 Key Assumptions CV growth (Dividends) 8.00% CV ROE 8.06% Cost of Equity 11.21% Intrinsic Value (12/31/14) $ 75.94 Partial Year Adjust $ 81.72 Valero Energy Corporation As of 11-3-15 Relative Valuation Models EPS EPS Ticker Company Price 2015E 2016E P/E 15 P/E 16 PSX Phillips 66 $92.67 $8.71 $7.30 10.6 12.7 TSO Tesoro Corp. $112.53 $12.80 $8.63 8.8 13.0 HFC HollyFrontier Corp. $50.99 $3.03 $4.39 16.8 11.6 WNR Western Refining $45.26 $5.56 $3.54 8.1 12.8 MPC Marathon Petroleum $54.63 $6.36 $5.17 8.6 10.6 Average 9.0 12.1 VLO Valero Energy Corporation $69.61 8.04 6.41 8.7 10.9 Implied Value: Relative P/E (EPS15) $ 72.72 Relative P/E (EPS16) $ 77.88 Valero Energy Corporation Key Management Ratios Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 2021E Liquidity Ratios Current Ratio 1.38 1.47 1.66 2.68 2.79 2.77 2.77 2.67 2.56 2.55 Operating Cash Flow Ratio 0.38 0.32 0.46 0.64 0.54 0.44 0.48 0.47 0.41 0.41 Quick Ratio 0.40 0.49 0.41 0.67 0.69 0.70 0.71 0.75 0.74 0.73 Activity or Asset-Management Ratios Asset Turnover Ratio 3.13 2.92 2.87 1.63 1.62 1.67 1.68 1.79 1.90 1.90 Inventory Turnover Ratio 23.31 23.98 19.76 12.88 12.82 13.12 13.17 14.12 14.97 14.77 Net Working Capital Turnover Ratio 30.73 22.44 19.72 5.99 5.74 5.97 5.96 6.35 6.91 7.00 Financial Leverage Ratios Debt to Equity 0.39 0.34 0.31 0.25 0.24 0.23 0.22 0.20 0.19 0.19 Interest Coverage 16.33 11.78 12.94 18.27 14.01 10.95 12.75 14.72 13.70 14.26 Equity Multiplier 2.46 2.37 2.14 1.85 1.83 1.79 1.78 1.76 1.78 1.77 Profitability Ratios Profit Margin 1.50% 1.97% 2.40% 4.57% 3.45% 2.47% 2.81% 2.90% 2.35% 2.35% Return on Assets 4.68% 5.75% 6.89% 7.47% 5.60% 4.14% 4.73% 5.18% 4.46% 4.47% Return on Equity 11.55% 13.97% 15.19% 14.17% 10.50% 7.60% 8.62% 9.32% 8.08% 8.06% Payout Policy Ratios Dividend Payout Ratio 12% 16% 21% 25% 35% 48% 47% 46% 59% 61% Dividend Yield 0.93% 1.22% 1.51% 2.87% 3.23% 3.45% 3.96% 4.56% 5.24% 5.66% Sensitivity Analysis Beta $ 84.22 1.2 1.3 1.35 1.4 1.45 1.5 1.55 1.6 1.65 2.00% 97.60 91.34 88.51 85.86 83.37 81.03 78.82 76.74 74.77 2.50% 98.78 92.06 89.05 86.24 83.61 81.15 78.84 76.67 74.62 3.00% 100.17 92.90 89.67 86.68 83.89 81.29 78.86 76.58 74.45 CV (Noplat) 3.50% 101.83 93.90 90.41 87.19 84.22 81.45 78.89 76.49 74.25 4.00% 103.86 95.09 91.28 87.80 84.60 81.64 78.91 76.38 74.03 4.50% 106.39 96.54 92.34 88.53 85.05 81.87 78.95 76.25 73.76 5.00% 109.62 98.36 93.64 89.41 85.60 82.14 78.99 76.10 73.46 Risk Free $ 84.22 2.67% 2.72% 2.77% 2.82% 2.87% 2.92% 2.97% 3.02% 3.07% 4.50% 111.38 110.47 109.58 108.71 107.85 107.00 106.17 105.35 104.55 5.00% 99.63 98.91 98.21 97.52 96.84 96.17 95.51 94.86 94.21 5.500% 90.26 89.69 89.12 88.56 88.01 87.46 86.92 86.39 85.87 Risk Premium 5.75% 86.26 85.74 85.22 84.72 84.22 83.72 83.23 82.75 82.27 6.00% 82.63 82.15 81.69 81.22 80.77 80.31 79.87 79.43 78.99 6.50% 76.29 75.89 75.50 75.11 74.72 74.34 73.97 73.60 73.23 7.00% 70.94 70.60 70.27 69.93 69.61 69.28 68.96 68.64 68.33 SG&A % of Revenue $ 84.22 0.3400% 0.3900% 0.4400% 0.4900% 0.54% 0.5900% 0.6400% 0.6900% 0.7400% 0.51% 89.66 88.55 87.45 86.34 85.24 84.13 83.03 81.92 80.82 0.61% 89.32 88.21 87.11 86.00 84.90 83.79 82.69 81.58 80.48 0.71% 88.98 87.87 86.77 85.66 84.56 83.45 82.35 81.24 80.14 Normal Cash 0.81% 88.63 87.53 86.43 85.32 84.22 83.11 82.01 80.90 79.80 % of Revenue 0.91% 88.29 87.19 86.08 84.98 83.88 82.77 81.67 80.56 79.46 1.01% 87.95 86.85 85.74 84.64 83.53 82.43 81.33 80.22 79.12 1.11% 87.61 86.51 85.40 84.30 83.19 82.09 80.98 79.88 78.78 Cost of Equity $ 84.22 9.21% 9.71% 10.21% 10.71% 11.21% 11.71% 12.21% 12.71% 13.21% 4.90% 83.71 84.05 84.38 84.71 85.04 85.37 85.70 86.03 86.36 5.00% 83.55 83.88 84.21 84.54 84.87 85.20 85.53 85.86 86.19 5.10% 83.39 83.72 84.05 84.38 84.71 85.04 85.36 85.69 86.02 5.20% 83.23 83.56 83.89 84.21 84.54 84.87 85.20 85.53 85.85 5.30% 83.07 83.40 83.72 84.05 84.38 84.71 85.03 85.36 85.69 Cost of Debt 5.40% 82.91 83.24 83.56 83.89 84.22 84.54 84.87 85.20 85.52 5.50% 82.75 83.07 83.40 83.73 84.05 84.38 84.71 85.03 85.36 5.60% 82.59 82.92 83.24 83.57 83.89 84.22 84.54 84.87 85.19 5.70% 82.43 82.76 83.08 83.41 83.73 84.06 84.38 84.71 85.03 5.80% 82.27 82.60 82.92 83.25 83.57 83.90 84.22 84.54 84.87 5.90% 82.12 82.44 82.77 83.09 83.41 83.74 84.06 84.38 84.71 VALUATION OF OPTIONS GRANTED IN ESOP Ticker Symbol VLO Current Stock Price $69.61 Risk Free Rate 2.87% Current Dividend Yield 2.87% Annualized St. Dev. of Stock Returns 38.80% Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 4,669,221 21.48 4.50 $ 43.20 $ 201,695,920 In Millions $ 201.70 Total 4,669,221 $ 21.48 4.50 $ 51.36 $ 201,696,122 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding Number of Options Outstanding (shares): 4,669,221 Average Time to Maturity (years): 4.50 Expected Annual Number of Options Exercised: 1,037,605 In Millions 1.04 Current Average Strike Price: $ 21.48 Cost of Equity: 11.21% Current Stock Price: $69.61 2015E 2016E 2017E 2018E 2019E 2020E 2021E Increase in Shares Outstanding (Millions): 1.04 1.04 1.04 1.04 0.52 0.00 0.00 Average Strike Price: $ 21.48 $ 21.48 $ 21.48 $ 21.48 $ 21.48 $ 21.48 $ 21.48 Increase in Common Stock Account: 22 22 22 22 11 - - Change in Treasury Stock 500 500 200 200 200 200 200 Expected Price of Repurchased Shares: $ 69.61 $ 77.41 $ 86.09 $ 95.74 $ 106.47 $ 118.40 $ 131.67 Number of Shares Repurchased (Millions): 7.18 6.46 2.32 2.09 1.88 1.69 1.52 Shares Outstanding (beginning of the year) 514.30 508.15 502.73 501.45 500.39 499.04 497.35 Plus: Shares Issued Through ESOP 1.04 1.04 1.04 1.04 0.52 0.00 0.00 Less: Shares Repurchased in Treasury 7.18 6.46 2.32 2.09 1.88 1.69 1.52 Shares Outstanding (end of the year in Millions) 508.15 502.73 501.45 500.39 499.04 497.35 495.83 Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009) Present Value of Operating Lease Obligations (2008) Present Value of Operating Lease Obligations (2007) Present Value of Operating Lease Obligations (2006) Present Value of Operating Lease Obligations (2005) Operating Operating Operating Operating Operating Operating Operating Operating Operating Operating #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases #REF! Leases 2015 314.00 2014 305.00 2013 337.00 2012 291.00 2011 353.00 2010 348.00 2009 397.00 2008 384.00 2007 413.00 2006 320.00 2016 229.00 2015 230.00 2014 250.00 2013 198.00 2012 237.00 2011 230.00 2010 282.00 2009 298.00 2008 331.00 2007 285.00 2017 159.00 2016 162.00 2015 179.00 2014 131.00 2013 160.00 2012 127.00 2011 179.00 2010 200.00 2009 243.00 2008 226.00 2018 131.00 2017 111.00 2016 133.00 2015 106.00 2014 104.00 2013 86.00 2012 90.00 2011 115.00 2010 161.00 2009 160.00 2019 75.00 2018 95.00 2017 86.00 2016 86.00 2015 85.00 2014 65.00 2013 55.00 2012 59.00 2011 100.00 2010 96.00 Thereafter 275.00 Thereafter 321.00 Thereafter 350.00 Thereafter 294.00 Thereafter 324.00 Thereafter 297.00 Thereafter 270.00 Thereafter 203.00 Thereafter 238.00 Thereafter 443.00 Total Minimum Payments 1183 Total Minimum Payments 1224 Total Minimum Payments 1335 Total Minimum Payments 1106 Total Minimum Payments 1263 Total Minimum Payments 1153 Total Minimum Payments 1273 Total Minimum Payments 1259 Total Minimum Payments 1486 Total Minimum Payments 1530 Less: Interest 266 Less: Interest 284 Less: Interest 314 Less: Interest 257 Less: Interest 288 Less: Interest 261 Less: Interest 271 Less: Interest 248 Less: Interest 298 Less: Interest 383 PV of Minimum Payments 917.50 PV of Minimum Payments 940 PV of Minimum Payments 1021 PV of Minimum Payments 849 PV of Minimum Payments 975 PV of Minimum Payments 892 PV of Minimum Payments 1002 PV of Minimum Payments 1011 PV of Minimum Payments 1188 PV of Minimum Payments 1147 Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Pre-Tax Cost of Debt 8.00% Number Years Implied by Year 6 Payment 3.7 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 4.1 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 4.6 Number Years Implied by Year 6 Payment 4.9 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 2.4 Number Years Implied by Year 6 Payment 4.6 Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 314 290.7 1 305 282.4 1 337 312.0 1 291 269.4 1 353 326.9 1 348 322.2 1 397 367.6 1 384 355.6 1 413 382.4 1 320 296.3 2 229 196.3 2 230 197.2 2 250 214.3 2 198 169.8 2 237 203.2 2 230 197.2 2 282 241.8 2 298 255.5 2 331 283.8 2 285 244.3 3 159 126.2 3 162 128.6 3 179 142.1 3 131 104.0 3 160 127.0 3 127 100.8 3 179 142.1 3 200 158.8 3 243 192.9 3 226 179.4 4 131 96.3 4 111 81.6 4 133 97.8 4 106 77.9 4 104 76.4 4 86 63.2 4 90 66.2 4 115 84.5 4 161 118.3 4 160 117.6 5 75 51.0 5 95 64.7 5 86 58.5 5 86 58.5 5 85 57.8 5 65 44.2 5 55 37.4 5 59 40.2 5 100 68.1 5 96 65.3 6 & beyond 75 156.9 6 & beyond 95 185.1 6 & beyond 86 196.7 6 & beyond 86 169.3 6 & beyond 85 183.8 6 & beyond 65 163.9 6 & beyond 55 147.2 6 & beyond 59 116.8 6 & beyond 100 142.4 6 & beyond 96 244.1 PV of Minimum Payments 917.50 PV of Minimum Payments 939.50 PV of Minimum Payments 1021.50 PV of Minimum Payments 848.88 PV of Minimum Payments 975.20 PV of Minimum Payments 891.62 PV of Minimum Payments 1002.26 PV of Minimum Payments 1011.26 PV of Minimum Payments 1187.9 PV of Minimum Payments 1147.1 Assumed Cost of Debt 8.00% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV2021E PV of Minimum PMTS 1147.1 1187.9 1011.26 1002.26 891.62 975.20 848.88 1021.50 939.50 917.50 990.90 1070.17 1155.79 1248.25 1348.11 1455.96 1572.43 Implied Lease Interest 0 91.8 95.0 80.9 80.2 71.3 78.0 67.9 81.7 75.2 73.4 79.3 85.6 92.5 99.9 107.8 116.5