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EX-32.01 - EXHIBIT 32.01 - VALERO ENERGY CORP/TXvloexh3201-6302017.htm
EX-31.02 - EXHIBIT 31.02 - VALERO ENERGY CORP/TXvloexh3102-6302017.htm
EX-31.01 - EXHIBIT 31.01 - VALERO ENERGY CORP/TXvloexh3101-6302017.htm
 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 1-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
74-1828067
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
One Valero Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)
(210) 345-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 31, 2017 was 441,663,968.
 
 
 
 
 



VALERO ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 





i



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except par value)
 
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and temporary cash investments
$
5,207

 
$
4,816

Receivables, net
4,573

 
5,901

Inventories
5,674

 
5,709

Prepaid expenses and other
277

 
374

Total current assets
15,731

 
16,800

Property, plant, and equipment, at cost
38,979

 
37,733

Accumulated depreciation
(11,925
)
 
(11,261
)
Property, plant, and equipment, net
27,054

 
26,472

Deferred charges and other assets, net
3,189

 
2,901

Total assets
$
45,974

 
$
46,173

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and capital lease obligations
$
121

 
$
115

Accounts payable
5,456

 
6,357

Accrued expenses
955

 
694

Taxes other than income taxes
1,076

 
1,084

Income taxes payable
75

 
78

Total current liabilities
7,683

 
8,328

Debt and capital lease obligations, less current portion
8,366

 
7,886

Deferred income taxes
7,254

 
7,361

Other long-term liabilities
1,906

 
1,744

Commitments and contingencies

 

Equity:
 
 
 
Valero Energy Corporation stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 1,200,000,000 shares authorized;
673,501,593 and 673,501,593 shares issued
7

 
7

Additional paid-in capital
7,096

 
7,088

Treasury stock, at cost;
231,498,415 and 222,000,024 common shares
(12,660
)
 
(12,027
)
Retained earnings
26,603

 
26,366

Accumulated other comprehensive loss
(1,123
)
 
(1,410
)
Total Valero Energy Corporation stockholders’ equity
19,923


20,024

Noncontrolling interests
842

 
830

Total equity
20,765

 
20,854

Total liabilities and equity
$
45,974

 
$
46,173


See Condensed Notes to Consolidated Financial Statements.



1



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(millions of dollars, except per share amounts)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Operating revenues (a)
$
22,254

 
$
19,584

 
$
44,026

 
$
35,298

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (excluding the lower of cost or market inventory
valuation adjustment)
19,609

 
17,120

 
39,037

 
30,627

Lower of cost or market inventory valuation adjustment

 
(454
)
 

 
(747
)
Operating expenses
1,097

 
1,001

 
2,214

 
2,031

General and administrative expenses
178

 
159

 
368

 
315

Depreciation and amortization expense
499

 
471

 
999

 
956

Asset impairment loss

 
56

 

 
56

Total costs and expenses
21,383

 
18,353

 
42,618

 
33,238

Operating income
871

 
1,231

 
1,408

 
2,060

Other income, net
16

 
14

 
33

 
23

Interest and debt expense, net of capitalized interest
(119
)
 
(111
)
 
(240
)
 
(219
)
Income before income tax expense
768

 
1,134

 
1,201

 
1,864

Income tax expense
196

 
291

 
308

 
508

Net income
572

 
843

 
893

 
1,356

Less: Net income attributable to noncontrolling interests
24

 
29

 
40

 
47

Net income attributable to Valero Energy Corporation stockholders
$
548

 
$
814

 
$
853

 
$
1,309

 
 
 
 
 
 
 
 
Earnings per common share
$
1.23

 
$
1.74

 
$
1.90

 
$
2.79

Weighted-average common shares outstanding (in millions)
444

 
467

 
446

 
468

Earnings per common share – assuming dilution
$
1.23

 
$
1.73

 
$
1.90

 
$
2.78

Weighted-average common shares outstanding –
assuming dilution (in millions)
446

 
470

 
448

 
471

Dividends per common share
$
0.70

 
$
0.60

 
$
1.40

 
$
1.20

_______________________________________________
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
(a)    Includes excise taxes on sales by certain of our international
operations
$
1,384

 
$
1,470

 
$
2,656

 
$
2,865


See Condensed Notes to Consolidated Financial Statements.



2



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions of dollars)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
572

 
$
843

 
$
893

 
$
1,356

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
208

 
(202
)
 
282

 
(80
)
Net gain on pension and other postretirement
benefits
4

 
3

 
7

 
6

Other comprehensive income (loss) before
income tax expense (benefit)
212

 
(199
)
 
289

 
(74
)
Income tax expense (benefit) related to
items of other comprehensive income (loss)
1

 
1

 
2

 
(6
)
Other comprehensive income (loss)
211

 
(200
)
 
287

 
(68
)
Comprehensive income
783

 
643

 
1,180

 
1,288

Less: Comprehensive income attributable
to noncontrolling interests
24

 
29

 
40

 
48

Comprehensive income attributable to
Valero Energy Corporation stockholders
$
759

 
$
614

 
$
1,140

 
$
1,240


See Condensed Notes to Consolidated Financial Statements.



3



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
(unaudited)
 
Six Months Ended
June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
893

 
$
1,356

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Depreciation and amortization expense
999

 
956

Lower of cost or market inventory valuation adjustment

 
(747
)
Asset impairment loss

 
56

Deferred income tax expense
24

 
195

Changes in current assets and current liabilities
859

 
1,130

Changes in deferred charges and credits and
other operating activities, net
10

 
13

Net cash provided by operating activities
2,785

 
2,959

Cash flows from investing activities:
 
 
 
Capital expenditures
(572
)
 
(610
)
Deferred turnaround and catalyst costs
(308
)
 
(325
)
Investment in joint venture
(222
)
 

Acquisition of undivided interest in crude system assets
(72
)
 

Other investing activities, net

 
4

Net cash used in investing activities
(1,174
)
 
(931
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuances or borrowings

 
197

Repayments of debt and capital lease obligations
(11
)
 
(24
)
Purchase of common stock for treasury
(660
)
 
(665
)
Common stock dividends
(627
)
 
(564
)
Proceeds from issuance of Valero Energy Partners LP common units
36

 

Distributions to noncontrolling interests
(public unitholders) of Valero Energy Partners LP
(18
)
 
(14
)
Distributions to other noncontrolling interests
(27
)
 
(33
)
Other financing activities, net
(21
)
 
(134
)
Net cash used in financing activities
(1,328
)
 
(1,237
)
Effect of foreign exchange rate changes on cash
108

 
20

Net increase in cash and temporary cash investments
391

 
811

Cash and temporary cash investments at beginning of period
4,816

 
4,114

Cash and temporary cash investments at end of period
$
5,207

 
$
4,925


See Condensed Notes to Consolidated Financial Statements.



4



VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
General
As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.

These unaudited financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The balance sheet as of December 31, 2016 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016.

Reclassifications
Effective January 1, 2017, we revised our reportable segments to reflect a new reportable segment — VLP. The results of the VLP segment include the results of Valero Energy Partners LP (VLP), our majority-owned master limited partnership. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation. See Note 10 for additional information.

Certain amounts reported for the six months ended June 30, 2016 have been reclassified to conform with the 2017 presentation.

Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Accounting Pronouncements Adopted During the Period
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, “Inventory (Topic 330),” to simplify the measurement of inventory measured using the first-in, first-out or average cost methods. The provisions of this ASU require the inventory to be measured at the lower of cost and net realizable value rather than the lower of cost or market. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The provisions of this ASU are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. Our adoption of this ASU effective January 1,



5





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2017 did not affect our financial position or results of operations since the majority of our inventory is stated at last-in, first-out (LIFO).

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740),” to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The provisions of this ASU require an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory immediately when the transfer occurs. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The provisions should be applied on a modified retrospective basis with a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption to recognize the income tax consequences of intra-entity transfers of assets that occurred before the adoption date. Our early adoption of this ASU using the modified retrospective method effective January 1, 2017 did not have a material affect on our financial position or results of operations. Adoption of this guidance more accurately reflects the economics of an intra-entity asset transfer when it occurs by eliminating the previous exception that prohibited the recognition of the income tax consequences of an intra-entity asset transfer until the asset had been sold to an outside party.

In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810),” to provide guidance on how a reporting entity that is a single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. The provisions should be applied on a retrospective basis to all relevant prior periods beginning with the fiscal year in which the VIE guidance was adopted with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Our adoption of this ASU effective January 1, 2017 did not affect our financial position or results of operations.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The provisions of this ASU provide a more robust framework to use in determining when a set of assets and activities is a business by clarifying the requirements related to inputs, processes, and outputs. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. Our early adoption of this ASU effective January 1, 2017 did not have an effect on our financial position or results of operations. However, more of our future acquisitions may be accounted for as asset acquisitions.

Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. This new standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We recently completed our evaluation of the provisions of this standard and concluded that our adoption will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. The majority of our revenues are generated from the sale of refined petroleum products and ethanol. These revenues are largely based on the current spot (market) prices of the products sold, which represents consideration specifically allocable to the products being sold on a given day, and we recognize



6





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

those revenues upon delivery and transfer of title to the products to our customers. The time at which delivery and transfer of title occurs is the point when our control of the products is transferred to our customers and when our performance obligation to our customers is fulfilled. We will adopt this new standard effective January 1, 2018, and we expect to use the modified retrospective method of adoption as permitted by the standard. Under that method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed. During 2017, we are developing our revenue disclosures and enhancing our accounting systems.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this ASU effective January 1, 2018 will not affect our financial position or results of operations, but will result in revised disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We will adopt this new standard on January 1, 2019 and we expect to use the modified retrospective method of adoption as permitted by the standard. We are developing enhanced contracting and lease evaluation processes and information systems to support such processes, as well as new and enhanced accounting systems to account for our leases and support the required disclosures. We continue to evaluate the effect that adopting this standard will have on our financial statements and related disclosures.

In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The provisions of this ASU require that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU is to be applied retrospectively for income statement items and prospectively for any capitalized benefit costs. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The adoption of this ASU effective January 1, 2018 is not expected to materially affect our financial position or results of operations.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718),” to reduce diversity in practice, as well as reduce cost and complexity regarding a change to the terms or conditions of a share-based payment award. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The adoption of this ASU effective January 1, 2018 will not have an immediate effect on our



7





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

financial position or results of operations as it will be applied prospectively to an award modified on or after adoption.

2.
ARUBA DISPOSITION

Prior to the Aruba Disposition discussed below, we recognized an asset impairment loss of $56 million in June 2016 representing all of the remaining carrying value of our long-lived assets in Aruba. These assets were primarily related to our crude oil and refined petroleum products terminal and transshipment facility in Aruba (collectively, the Aruba Terminal), which were included in our refining segment. We recognized the impairment loss at that time because we concluded that it was more likely than not that we would ultimately transfer ownership of these assets to the Government of Aruba (GOA) as a result of agreements entered into in June 2016 between the GOA, CITGO Aruba Refining N.V. (CAR), and CITGO Petroleum Corporation (together with CAR and certain other affiliates, collectively, CITGO) providing for, among other things, the GOA’s lease of those assets to CITGO. (See Note 12 for disclosure related to the method to determine fair value.)

Effective October 1, 2016, we (i) transferred ownership of all of our assets in Aruba, other than certain hydrocarbon inventories and working capital, to Refineria di Aruba N.V., an entity wholly-owned by the GOA, (ii) settled our obligations under various agreements with the GOA, including agreements that required us to dismantle our leasehold improvements under certain conditions, and (iii) sold the working capital of our Aruba operations, including hydrocarbon inventories, to the GOA and CITGO. We refer to this transaction as the “Aruba Disposition.” The agreements associated with the Aruba Disposition were finalized in September 2016, including approval of such agreements by the Aruba Parliament. We no longer own any assets or have any operations in Aruba.

3.
INVENTORIES

Inventories consisted of the following (in millions):
 
June 30,
2017

December 31,
2016
Refinery feedstocks
$
2,254

 
$
2,068

Refined petroleum products and blendstocks
2,941

 
3,153

Ethanol feedstocks and products
227

 
238

Materials and supplies
252

 
250

Inventories
$
5,674

 
$
5,709


Inventories are valued at the lower of cost or market. As of December 31, 2015, we had a valuation reserve of $766 million in order to state our inventories at market. We recorded a change in our lower of cost or market inventory valuation reserve that resulted in a net benefit to our results of operations of $454 million and $747 million for the three and six months ended June 30, 2016, respectively.

As of June 30, 2017 and December 31, 2016, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $1.1 billion and $1.9 billion, respectively. As of June 30, 2017



8





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and December 31, 2016, our non-LIFO inventories accounted for $421 million and $641 million, respectively, of our total inventories.

4.
DEBT AND CAPITAL LEASE OBLIGATIONS

Debt
There was no significant activity related to our debt during the six months ended June 30, 2017.

During the six months ended June 30, 2016, the following activity occurred related to our debt:

VLP borrowed $139 million under its $750 million senior unsecured revolving credit facility (the VLP Revolver) in connection with VLP’s acquisition from us of the McKee Terminal Services Business in April 2016, and

one of our consolidated joint ventures entered into a C$72 million senior secured credit facility.

We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (in millions):
 
 
 
 
 
 
June 30, 2017
 
 
Facility
Amount
 
Maturity Date
 
Outstanding
Borrowings
 
Letters of
Credit Issued
 
Availability
Committed facilities:
 
 
 
 
 
 
 
 
 
 
Valero Revolver
 
$
3,000

 
November 2020
 
$

 
$
150

 
$
2,850

VLP Revolver
 
$
750

 
November 2020
 
$
30

 
$

 
$
720

Canadian Revolver
 
C$
25

 
November 2017
 
C$

 
C$
10

 
C$
15

Accounts receivable
sales facility (a)
 
$
1,300

 
July 2017
 
$
100

 
n/a

 
$
999

Letter of credit facility
 
$
100

 
November 2017
 
n/a

 
$

 
$
100

Uncommitted facilities:
 
 
 
 
 
 
 
 
 
 
Letter of credit facilities
 
n/a

 
n/a
 
n/a

 
$
202

 
n/a

___________________
(a)
As of June 30, 2017, the actual availability under the accounts receivable sales facility fell below the facility borrowing capacity to $1.1 billion due to a decrease in eligible trade receivables. In July 2017, we amended this facility to extend the maturity date from July 2017 to July 2018.

In June 2017, one of our committed letter of credit facilities with a borrowing capacity of $125 million expired and was not renewed.

As of June 30, 2017 and December 31, 2016, the weighted-average interest rate on the VLP Revolver was 2.5625 percent and 2.3125 percent, respectively. As of June 30, 2017 and December 31, 2016, the weighted-average interest rate on the accounts receivable sales facility was 1.7249 percent and 1.3422 percent, respectively.




9





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Disclosures
Interest and debt expense, net of capitalized interest is comprised of the following (in millions):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Interest and debt expense
$
134

 
$
130

 
$
268

 
$
258

Less capitalized interest
15

 
19

 
28

 
39

Interest and debt expense, net of
capitalized interest
$
119

 
$
111

 
$
240

 
$
219


Capital Leases
In January 2017, we recognized capital lease assets and related obligations totaling approximately $490 million for the lease of storage tanks located at three of our refineries. These lease agreements have initial terms of 10 years each with successive 10-year automatic renewals.

5.
COMMITMENTS AND CONTINGENCIES

Environmental Matters
We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and during 2015, one of these companies assumed the ongoing remediation in the Village pursuant to a federal court order. We had previously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The parties involved in the initial response may have further claims among themselves for costs already incurred. We also continue to be engaged in site assessment and interim measures at the adjacent shutdown refinery site, which we acquired as part of an acquisition in 2005, and we are in litigation with other potentially responsible parties and the Illinois EPA relating to the remediation of the site. In each of these matters, we have various defenses, limitations, and potential rights for contribution from the other responsible parties. We have recorded a liability for our expected contribution obligations. However, because of the unpredictable nature of these cleanups, the methodology for allocation of liabilities, and the State of Illinois’ failure to directly sue third parties responsible for historic contamination at the site, it is reasonably possible that we could incur a loss in a range of $0 to $200 million in excess of the amount of our accrual to ultimately resolve these matters. Factors underlying this estimated range are expected to change from time to time, and actual results may vary significantly from this estimate.

Litigation Matters
We are party to claims and legal proceedings arising in the ordinary course of business. We have not recorded a loss contingency liability with respect to some of these matters because we have determined that it is remote that a loss has been incurred. For other matters, we have recorded a loss contingency liability where we have determined that it is probable that a loss has been incurred and that the loss is reasonably estimable. These loss contingency liabilities are not material to our financial position. We re-evaluate and update our loss contingency liabilities as matters progress over time, and we believe that any changes to the recorded liabilities will not be material to our financial position, results of operations, or liquidity.




10





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.
EQUITY

Reconciliation of Balances
The following is a reconciliation of the beginning and ending balances of equity attributable to our stockholders, equity attributable to noncontrolling interests, and total equity (in millions):
 
Six Months Ended June 30,
 
2017
 
2016
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests (a)
 
Total
Equity
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests (a)
 
Total
Equity
Balance as of
beginning of period
$
20,024

 
$
830

 
$
20,854

 
$
20,527

 
$
827

 
$
21,354

Net income
853

 
40

 
893

 
1,309

 
47

 
1,356

Dividends
(627
)
 

 
(627
)
 
(564
)
 

 
(564
)
Stock-based
compensation expense
25

 

 
25

 
23

 

 
23

Stock purchases
in connection with
stock-based
compensation plans
(13
)
 

 
(13
)
 
(43
)
 

 
(43
)
Stock purchases under
purchase program
(649
)
 

 
(649
)
 
(610
)
 

 
(610
)
Distributions to
noncontrolling interests

 
(45
)
 
(45
)
 

 
(47
)
 
(47
)
Other
23

 
17

 
40

 
3

 

 
3

Other comprehensive
income (loss)
287

 

 
287

 
(69
)
 
1

 
(68
)
Balance as of end of period
$
19,923

 
$
842

 
$
20,765

 
$
20,576

 
$
828

 
$
21,404

___________________
(a)
The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See Note 7 for information about our consolidated VIEs.

Share Activity
There was no significant share activity during the six months ended June 30, 2017 and 2016.

Common Stock Dividends
On July 20, 2017, our board of directors declared a quarterly cash dividend of $0.70 per common share payable on September 7, 2017 to holders of record at the close of business on August 9, 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



11





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows (in millions):
 
Six Months Ended June 30,
 
2017
 
2016
 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
Items
 
Total
 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
Items
 
Total
Balance as of
beginning of period
$
(1,021
)
 
$
(389
)
 
$
(1,410
)
 
$
(605
)
 
$
(328
)
 
$
(933
)
Other comprehensive income (loss)
before reclassifications
282

 

 
282

 
(81
)
 
8

 
(73
)
Amounts reclassified from
accumulated other
comprehensive loss

 
5

 
5

 

 
4

 
4

Net other comprehensive income (loss)
282

 
5

 
287

 
(81
)
 
12

 
(69
)
Balance as of end of period
$
(739
)
 
$
(384
)
 
$
(1,123
)
 
$
(686
)
 
$
(316
)
 
$
(1,002
)
 
 
 
 
 
 
 
7.
VARIABLE INTEREST ENTITIES

Overview
In the normal course of business, we have financial interests in certain entities that have been determined to be VIEs. We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary such that we have (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to make this determination, we evaluated our contractual arrangements with the VIEs, including arrangements for the use of assets, purchases of products and services, debt, equity, or management of operating activities.

Our significant VIE’s include:

VLP, a publicly traded master limited partnership formed to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets; and

Diamond Green Diesel Holdings LLC (DGD), a joint venture formed to construct and operate a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel.

The VIEs’ assets can only be used to settle their own obligations and the VIEs’ creditors have no recourse to our assets. We do not provide financial guarantees to our VIEs. Although we have provided credit facilities to the VIEs in support of their construction or acquisition activities, these transactions are eliminated in consolidation. Our financial position, results of operations, and cash flows are impacted by our consolidated VIEs’ performance, net of intercompany eliminations, to the extent of our ownership interest in each VIE.




12





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables present summarized balance sheet information for the significant assets and liabilities of our VIEs, which are included in our balance sheets (in millions).
 
June 30, 2017
 
VLP
 
DGD
 
Other
 
Total
Assets
 
 
 
 
 
 
 
Cash and temporary cash investments
$
88

 
$
155

 
$
12

 
$
255

Other current assets
1

 
55

 

 
56

Property, plant, and equipment, net
945

 
371

 
130

 
1,446

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
$
14

 
$
17

 
$
6

 
$
37

Debt and capital lease obligations,
less current portion
525

 

 
45

 
570

 
December 31, 2016
 
VLP
 
DGD
 
Other
 
Total
Assets
 
 
 
 
 
 
 
Cash and temporary cash investments
$
71

 
$
167

 
$
15

 
$
253

Other current assets
3

 
87

 

 
90

Property, plant, and equipment, net
865

 
355

 
133

 
1,353

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
$
15

 
$
17

 
$
7

 
$
39

Debt and capital lease obligations,
less current portion
525

 

 
46

 
571





13





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.
EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost related to our defined benefit plans were as follows (in millions):
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
2017
 
2016
 
2017
 
2016
Three months ended June 30:
 
 
 
 
 
 
 
Service cost
$
30

 
$
28

 
$
2

 
$
1

Interest cost
22

 
21

 
2

 
3

Expected return on plan assets
(38
)
 
(34
)
 

 

Amortization of:
 
 
 
 
 
 
 
Net actuarial (gain) loss
14

 
12

 
(1
)
 

Prior service credit
(5
)
 
(5
)
 
(4
)
 
(4
)
Net periodic benefit cost (credit)
$
23

 
$
22

 
$
(1
)
 
$

 
 
 
 
 
 
 
 
Six months ended June 30:
 
 
 
 
 
 
 
Service cost
$
61

 
$
56

 
$
3

 
$
3

Interest cost
43

 
42

 
5

 
6

Expected return on plan assets
(75
)
 
(69
)
 

 

Amortization of:
 
 
 
 
 
 
 
Net actuarial (gain) loss
27

 
24

 
(2
)
 

Prior service credit
(10
)
 
(10
)
 
(8
)
 
(8
)
Net periodic benefit cost (credit)
$
46

 
$
43

 
$
(2
)
 
$
1


We contributed $14 million and $14 million, respectively, to our pension plans and $13 million and $8 million, respectively, to our other postretirement benefit plans during the six months ended June 30, 2017 and 2016.

Management has elected to increase the discretionary contributions to our pension plans by $80 million in the third quarter of 2017, resulting in expected contributions to our pension plans of $108 million for 2017. Our anticipated contributions to our other postretirement benefit plans during 2017 have not changed from the amount previously disclosed in our financial statements for the year ended December 31, 2016.



14





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.
EARNINGS PER COMMON SHARE

Earnings per common share were computed as follows (dollars and shares in millions, except per share amounts):
 
Three Months Ended June 30,
 
2017
 
2016
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
548

 
 
 
$
814

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
311

 
 
 
281

Participating securities
 
 
1

 
 
 
1

Undistributed earnings
 
 
$
236

 
 
 
$
532

Weighted-average common shares outstanding
2

 
444

 
1

 
467

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
0.70

 
$
0.70

 
$
0.60

 
$
0.60

Undistributed earnings
0.53

 
0.53

 
1.14

 
1.14

Total earnings per common share
$
1.23

 
$
1.23

 
$
1.74

 
$
1.74

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
548

 
 
 
$
814

Weighted-average common shares outstanding
 
 
444

 
 
 
467

Common equivalent shares
 
 
2

 
 
 
3

Weighted-average common shares outstanding –
assuming dilution
 
 
446

 
 
 
470

Earnings per common share – assuming dilution
 
 
$
1.23

 
 
 
$
1.73




15





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
Six Months Ended June 30,
 
2017
 
2016
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
853

 
 
 
$
1,309

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
625

 
 
 
562

Participating securities
 
 
2

 
 
 
2

Undistributed earnings
 
 
$
226

 
 
 
$
745

Weighted-average common shares outstanding
2

 
446

 
1

 
468

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
1.40

 
$
1.40

 
$
1.20

 
$
1.20

Undistributed earnings
0.50

 
0.50

 
1.59

 
1.59

Total earnings per common share
$
1.90

 
$
1.90

 
$
2.79

 
$
2.79

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
853

 
 
 
$
1,309

Weighted-average common shares outstanding
 
 
446

 
 
 
468

Common equivalent shares
 
 
2

 
 
 
3

Weighted-average common shares outstanding –
assuming dilution
 
 
448

 
 
 
471

Earnings per common share – assuming dilution
 
 
$
1.90

 
 
 
$
2.78


Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan.



16





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.
SEGMENT INFORMATION

Effective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — VLP. The results of the VLP segment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.

As a result, we have three reportable segments as follows:

Refining segment includes our refining operations, the associated marketing activities, and certain logistics assets that support our refining operations that are not owned by VLP;

Ethanol segment includes our ethanol operations, the associated marketing activities, and logistics assets that support our ethanol operations; and

VLP segment includes the results of VLP, which provides transportation and terminaling services in support of our refining segment.

Operations that are not included in any of the reportable segments are included in the corporate category.

Our reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires unique technologies and marketing strategies. Performance is evaluated based on segment operating income, which includes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates.



17





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reflects activity related to our reportable segments (in millions):
 
Refining
 
Ethanol
 
VLP
 
Corporate
and
Eliminations
 
Total
Three months ended June 30, 2017:
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Operating revenues from external customers
$
21,415

 
$
839

 
$

 
$

 
$
22,254

Intersegment revenues

 
28

 
110

 
(138
)
 

Total operating revenues
21,415

 
867

 
110

 
(138
)
 
22,254

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
 
 
Cost of sales from external customers
18,899

 
710

 

 

 
19,609

Intersegment cost of sales
138

 

 

 
(138
)
 

Total cost of sales
19,037

 
710

 

 
(138
)
 
19,609

Operating expenses
965

 
107

 
27

 
(2
)
 
1,097

General and administrative expenses

 

 

 
178

 
178

Depreciation and amortization expense
454

 
19

 
12

 
14

 
499

Total costs and expenses
20,456

 
836

 
39

 
52

 
21,383

Operating income (loss)
$
959

 
$
31

 
$
71

 
$
(190
)
 
$
871

 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2016:
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Operating revenues from external customers
$
18,664

 
$
920

 
$

 
$

 
$
19,584

Intersegment revenues

 
45

 
87

 
(132
)
 

Total operating revenues
18,664

 
965

 
87

 
(132
)
 
19,584

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales (excluding the lower of cost or
market inventory valuation adjustment):
 
 
 
 
 
 
 
 
 
Cost of sales from external customers
16,322

 
798

 

 

 
17,120

Intersegment cost of sales
132

 

 

 
(132
)
 

Total cost of sales (excluding the lower
of cost or market inventory
valuation adjustment)
16,454

 
798

 

 
(132
)
 
17,120

Lower of cost or market inventory
valuation adjustment
(434
)
 
(20
)
 

 

 
(454
)
Operating expenses (a)
878

 
99

 
24

 

 
1,001

General and administrative expenses

 

 

 
159

 
159

Depreciation and amortization expense (a)
430

 
19

 
11

 
11

 
471

Asset impairment loss
56

 

 

 

 
56

Total costs and expenses
17,384

 
896

 
35

 
38

 
18,353

Operating income (loss)
$
1,280

 
$
69

 
$
52

 
$
(170
)
 
$
1,231

___________________
(a)
The VLP segment information for the three months ended June 30, 2016 has been retrospectively adjusted for VLP’s acquisitions that occurred subsequent to June 30, 2016.



18





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
Refining
 
Ethanol
 
VLP
 
Corporate
and
Eliminations
 
Total
Six months ended June 30, 2017:
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Operating revenues from external customers
$
42,302

 
$
1,724

 
$

 
$

 
$
44,026

Intersegment revenues

 
88

 
216

 
(304
)
 

Total operating revenues
42,302

 
1,812

 
216

 
(304
)
 
44,026

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
 
 
Cost of sales from external customers
37,540

 
1,497

 

 

 
39,037

Intersegment cost of sales
304

 

 

 
(304
)
 

Total cost of sales
37,844

 
1,497

 

 
(304
)
 
39,037

Operating expenses
1,949

 
216

 
51

 
(2
)
 
2,214

General and administrative expenses

 

 

 
368

 
368

Depreciation and amortization expense
903

 
46

 
24

 
26

 
999

Total costs and expenses
40,696

 
1,759

 
75

 
88

 
42,618

Operating income (loss)
$
1,606

 
$
53

 
$
141

 
$
(392
)
 
$
1,408

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016:
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Operating revenues from external customers
$
33,584

 
$
1,714

 
$

 
$

 
$
35,298

Intersegment revenues

 
79

 
166

 
(245
)
 

Total operating revenues
33,584

 
1,793

 
166

 
(245
)
 
35,298

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales (excluding the lower of cost or
market inventory valuation adjustment):
 
 
 
 
 
 
 
 
 
Cost of sales from external customers
29,121

 
1,506

 

 

 
30,627

Intersegment cost of sales
245

 

 

 
(245
)
 

Total cost of sales (excluding the lower
of cost or market inventory
valuation adjustment)
29,366

 
1,506

 

 
(245
)
 
30,627

Lower of cost or market inventory
valuation adjustment
(697
)
 
(50
)
 

 

 
(747
)
Operating expenses (a)
1,785

 
198

 
48

 

 
2,031

General and administrative expenses

 

 

 
315

 
315

Depreciation and amortization expense (a)
879

 
31

 
23

 
23

 
956

Asset impairment loss
56

 

 

 

 
56

Total costs and expenses
31,389

 
1,685

 
71

 
93

 
33,238

Operating income (loss)
$
2,195

 
$
108

 
$
95

 
$
(338
)
 
$
2,060

___________________
(a)
The VLP segment information for the six months ended June 30, 2016 has been retrospectively adjusted for VLP’s acquisitions that occurred subsequent to June 30, 2016.



19





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Total assets by reportable segment were as follows (in millions):
 
June 30,
2017
 
December 31,
2016
Refining
$
37,401

 
$
38,095

Ethanol
1,314

 
1,316

VLP
1,072

 
972

Corporate
6,187

 
5,790

Total assets
$
45,974

 
$
46,173


11.
SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
 
Six Months Ended
June 30,
 
2017
 
2016
Decrease (increase) in current assets:
 
 
 
Receivables, net
$
1,396

 
$
(467
)
Inventories
123

 
422

Income taxes receivable
45

 
169

Prepaid expenses and other
41

 
14

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(942
)
 
1,090

Accrued expenses
262

 
(113
)
Taxes other than income taxes
(41
)
 
7

Income taxes payable
(25
)
 
8

Changes in current assets and current liabilities
$
859

 
$
1,130


Noncash investing and financing activities during the six months ended June 30, 2017 included the recognition of a capital lease asset and related obligation associated with an agreement for storage tanks near three of our refineries. This noncash transaction is further described in Note 4. There were no significant noncash investing or financing activities during the six months ended June 30, 2016.

Cash flows reflected as “other financing activities, net” for the six months ended June 30, 2016 included the payment of a long-term liability of $137 million owed to a joint venture partner associated with an owner-method joint venture investment.




20





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash flows related to interest and income taxes were as follows (in millions):
 
Six Months Ended
June 30,
 
2017
 
2016
Interest paid in excess of amount capitalized
$
235

 
$
213

Income taxes paid, net
263

 
137


12.
 FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements
The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of June 30, 2017 and December 31, 2016.

We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the tables below on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
 
June 30, 2017
 
 
 
Total
Gross
Fair
Value
 
Effect of
Counter-
party
Netting
 
Effect of
Cash
Collateral
Netting
 
Net
Carrying
Value on
Balance
Sheet
 
Cash
Collateral
Paid or
Received
Not Offset
 
Fair Value Hierarchy
 
 
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative
contracts
$
650

 
$
12

 
$

 
$
662

 
$
(612
)
 
$
(5
)
 
$
45

 
$

Investments of certain
benefit plans
59

 

 
11

 
70

 
n/a

 
n/a

 
70

 
n/a

Total
$
709

 
$
12

 
$
11

 
$
732

 
$
(612
)
 
$
(5
)
 
$
115

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 

 
 
 
 
 

 
 
Commodity derivative
contracts
$
605

 
$
14

 
$

 
$
619

 
$
(612
)
 
$
(7
)
 
$

 
$
(68
)
Environmental credit
obligations

 
274

 

 
274

 
n/a

 
n/a

 
274

 
n/a

Physical purchase
contracts

 
4

 

 
4

 
n/a

 
n/a

 
4

 
n/a

Foreign currency
contracts
10