Valero Energy Corporation reports lower third quarter; income still higher for year

SAN ANTONIO, Texas, Oct. 23, 2001 – Valero Energy Corporation today reported net income for the third quarter of 2001 of $101.1 million, or $1.58 per share, compared to net income of $127.4 million, or $2.01 per share, in the third quarter of 2000.

For the first nine months of 2001, Valero’s net income was $512.0 million, or $7.96 per share, compared to net income of $245.8 million, or $4.12 per share, for the first nine months of 2000.

Operating income for the third quarter of 2001 was $188.4 million, compared to operating income of $223.9 million for the same period last year. This decline in operating income was primarily due to the decrease in gasoline and distillate margins from the exceptionally high levels in the third quarter last year, partially offset by improved discounts on the company’s key sour crude oil feedstocks.

This quarter’s results also benefited from higher throughput volumes, primarily due to the contribution of the Corpus Christi refinery acquired from El Paso Energy in the second quarter of 2001, and significant capital improvements made throughout Valero’s refining system earlier this year.

“Our earnings this quarter really show the strength and flexibility of our refining system,” said Bill Greehey, Valero’s Chairman of the Board and Chief Executive Officer. “Last year in the third quarter, industry refining margins were significantly above the five-year average and we earned $2.01 per share. This year in the third quarter, industry refining margins were only slightly above historical average levels and yet we still earned $1.58 per share. This highlights what we have been saying – that the improvements and acquisitions we continue to make have dramatically improved our earnings power and earnings stability.

“In terms of market fundamentals, the investments we’ve made enabled us to benefit from the wider sour crude discounts in the third quarter. With respect to products, the quarter started with high gasoline inventories and low refining margins, which prompted some refiners to cut production and others to accelerate refinery maintenance. At the same time, prices at the pump decreased dramatically, which led to increased gasoline demand. The combination of these factors caused refined product inventories to return to normal seasonal levels by mid-quarter and refining margins improved significantly.

“With respect to the status of our merger with Ultramar Diamond Shamrock Corporation, the shareholders of both companies approved the merger on September 27. We continue to work closely with the FTC in their review of the merger and anticipate closing the transaction by the end of the fourth quarter.

“One of the most exciting aspects of this merger is the improved earnings we will be able to achieve going forward. The third quarter is a great example of how positive this merger is for us. UDS reported record net income of $2.00 per share for the third quarter. On a pro forma basis, based on UDS’ and our announced results for the quarter and assumptions similar to those in our merger proxy statement, the combined company would have earned $1.91 per share, making the transaction 21% accretive for the third quarter,” said Greehey.

Valero Energy Corporation and Ultramar Diamond Shamrock Corporation (UDS) announced in May that they had reached an agreement for Valero and UDS to merge, with Valero being the surviving corporation of the merger. The new organization is expected to have 23,000 employees in the United States and Canada, 13 refineries and a total throughput capacity of approximately 2 million barrels per day. Valero will also become one of the nation’s largest retailers with more than 5,000 retail outlets in the United States and Canada.

Valero Energy Corporation is a Fortune 500 company based in San Antonio, with more than 3,500 employees and annual revenues of more than $15 billion. The company currently owns and operates six refineries in Texas, California, Louisiana and New Jersey with a combined throughput capacity of more than one million barrels per day, making it the nation’s largest independent refining company. Valero is recognized throughout the industry as a leader in the production of premium, environmentally clean products such as reformulated gasoline, CARB Phase II gasoline, low-sulfur diesel and oxygenates. The company markets its products in 34 states through an extensive wholesale bulk and rack marketing network, and in California through approximately 80 Valero branded retail and 270 other retail distributor locations.

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