Edgar Filing: VALERO ENERGY CORP/TX

VLO Form 10-Q - 6.30.2013

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013



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 R 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 R No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer R	Accelerated filer o	Non-accelerated filer o	Smaller reporting company 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 R

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 31, 2013 was 542,142,749.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS




	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012	1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012	2
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012	3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	4
Condensed Notes to Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	58
Item 4. Controls and Procedures	60
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	60
Item 1A. Risk Factors	61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 6. Exhibits	61
SIGNATURE	62

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Millions of Dollars, Except Par Value)



	June 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments	$	2,398		$	1,723
Receivables, net	7,486			8,167
Inventories	6,446			5,973
Income taxes receivable	56			169
Deferred income taxes	246			274
Prepaid expenses and other	136			154
Total current assets	16,768			16,460
Property, plant and equipment, at cost	33,087			34,132
Accumulated depreciation	(7,701		)	(7,832		)
Property, plant and equipment, net	25,386			26,300
Intangible assets, net	159			213
Deferred charges and other assets, net	1,864			1,504
Total assets	$	44,177		$	44,477
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	303		$	586
Accounts payable	9,507			9,348
Accrued expenses	504			590
Taxes other than income taxes	1,239			1,026
Income taxes payable	85			1
Deferred income taxes	397			378
Total current liabilities	12,035			11,929
Debt and capital lease obligations, less current portion	6,261			6,463
Deferred income taxes	6,159			5,860
Other long-term liabilities	1,697			2,130
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	7,237			7,322
Treasury stock, at cost; 131,412,237 and 121,406,520 common shares	(6,818		)	(6,437		)
Retained earnings	17,593			17,032
Accumulated other comprehensive income (loss)	(99		)	108
Total Valero Energy Corporation stockholders’ equity	17,920			18,032
Noncontrolling interests	105			63
Total equity	18,025			18,095
Total liabilities and equity	$	44,177		$	44,477

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Millions of Dollars, Except Per Share Amounts)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Operating revenues	$	34,034		$	34,662		$	67,508		$	69,829
Costs and expenses:
Cost of sales	31,523			31,621			62,208			64,656
Operating expenses:
Refining	906			868			1,782			1,832
Retail	57			170			226			336
Ethanol	102			85			179			172
General and administrative expenses	233			171			409			335
Depreciation and amortization expense	405			386			835			770
Asset impairment losses	—			—			—			611
Total costs and expenses	33,226			33,301			65,639			68,712
Operating income	808			1,361			1,869			1,117
Other income (expense), net	11			(5		)	25			1
Interest and debt expense, net of capitalized interest	(78		)	(74		)	(161		)	(173		)
Income before income tax expense	741			1,282			1,733			945
Income tax expense	276			452			616			547
Net income	465			830			1,117			398
Less: Net loss attributable to noncontrolling interests	(1		)	(1		)	(3		)	(1		)
Net income attributable to Valero Energy Corporation stockholders	$	466		$	831		$	1,120		$	399

Earnings per common share	$	0.86		$	1.50		$	2.04		$	0.72
Weighted-average common shares outstanding (in millions)	543			550			546			550

Earnings per common share – assuming dilution	$	0.85		$	1.50		$	2.03		$	0.72
Weighted-average common shares outstanding – assuming dilution (in millions)	548			555			552			556

Dividends per common share	$	0.20		$	0.15		$	0.40		$	0.30

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Millions of Dollars)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net income	$	465		$	830		$	1,117		$	398

Other comprehensive income (loss):
Foreign currency translation adjustment	(64		)	(91		)	(268		)	32

Pension and other postretirement benefits:
Gain arising during the period related to remeasurement due to plan amendments	—			—			328			—
(Gain) loss reclassified into income related to:
Net actuarial loss	15			9			29			17
Prior service credit	(9		)	(6		)	(15		)	(10		)
Net gain on pension and other postretirement benefits	6			3			342			7

Derivative instruments designated and qualifying as cash flow hedges:
Net gain (loss) arising during the period	(10		)	(31		)	(9		)	16
Net (gain) loss reclassified into income	8			12			5			(36		)
Net loss on cash flow hedges	(2		)	(19		)	(4		)	(20		)

Other comprehensive income (loss), before income tax expense (benefit)	(60		)	(107		)	70			19
Income tax expense (benefit) related to items of other comprehensive income (loss)	1			(5		)	118			(4		)
Other comprehensive income (loss)	(61		)	(102		)	(48		)	23

Comprehensive income	404			728			1,069			421
Less: Comprehensive loss attributable to noncontrolling interests	(1		)	(1		)	(3		)	(1		)
Comprehensive income attributable to Valero Energy Corporation stockholders	$	405		$	729		$	1,072		$	422

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of Dollars)

(Unaudited)



	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	1,117		$	398
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	835			770
Asset impairment losses	—			611
Noncash interest expense and other income, net	1			11
Stock-based compensation expense	25			20
Deferred income tax expense	341			480
Changes in current assets and current liabilities	444			565
Changes in deferred charges and credits and other operating activities, net	51			(21		)
Net cash provided by operating activities	2,814			2,834
Cash flows from investing activities:
Capital expenditures	(1,211		)	(1,420		)
Deferred turnaround and catalyst costs	(449		)	(264		)
Proceeds from the sale of the Paulsboro Refinery	—			160
Minor acquisitions	—			(66		)
Other investing activities, net	(23		)	9
Net cash used in investing activities	(1,683		)	(1,581		)
Cash flows from financing activities:
Non-bank debt:
Borrowings	—			300
Repayments	(480		)	(862		)
Bank credit agreements:
Borrowings	—			1,100
Repayments	—			(1,100		)
Accounts receivable sales program:
Proceeds from the sale of receivables	—			1,300
Repayments	—			(1,450		)
Purchase of common stock for treasury	(560		)	(147		)
Proceeds from the exercise of stock options	43			11
Common stock dividends	(220		)	(166		)
Contributions from noncontrolling interests	45			25
Separation of retail business:
Proceeds from short-term debt	550			—
Cash distributed to Valero by CST Brands, Inc.	500			—
Cash held and retained by CST Brands, Inc. upon separation	(315		)	—
Other financing activities, net	24			(2		)
Net cash used in financing activities	(413		)	(991		)
Effect of foreign exchange rate changes on cash	(43		)	9
Net increase in cash and temporary cash investments	675			271
Cash and temporary cash investments at beginning of period	1,723			1,024
Cash and temporary cash investments at end of period	$	2,398		$	1,295

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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. Financial information for the three and six months ended June 30, 2013 and 2012 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited financial statements. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

The balance sheet as of December 31, 2012 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, 2012.

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.

Comprehensive Income

In February 2013, the provisions of Accounting Standards Codification (ASC) Topic 220, “Comprehensive Income,” were amended to require an entity to disclose information about the amounts reclassified out of accumulated other comprehensive income and into net income. An entity is required to present information on the face of the statement of income or in the notes to the financial statements about the effects on net income from significant amounts reclassified out of accumulated other comprehensive income if those amounts were required to be reclassified into net income in their entirety in the same reporting period they were initially charged to other comprehensive income. For other significant amounts that were not required to be reclassified into net income in their entirety in the same reporting period they were initially charged to other comprehensive income, a cross-reference is required in the notes to the financial statements to the disclosures that provide additional details about those amounts. These provisions were effective for interim and annual reporting periods beginning after December 15, 2012. The adoption of this guidance effective January 1, 2013 did not affect our financial position or results of operations, but resulted in additional disclosures, which are included in Note 7.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Balance Sheet Offsetting Arrangements

In December 2011, the provisions of ASC Topic 210, “Balance Sheet,” were amended to require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of these arrangements on its financial position. In January 2013, the provisions of ASC Topic 210 were further amended to clarify that the scope of the previous amendment only applies to derivative instruments, including bifurcated derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either eligible for offset in the balance sheet or are subject to an agreement similar to a master netting agreement. The guidance requires entities to disclose both gross information and net information about assets and liabilities within the scope of the amendment. These provisions were effective for interim and annual reporting periods beginning on or after January 1, 2013. The adoption of this guidance effective January 1, 2013 did not affect our financial position or results of operations, but resulted in additional disclosures, which are included in Note 12.

Other

The statement of cash flows for the six months ended June 30, 2012, which was included in our Form 10‑Q for the quarterly period ended June 30, 2012, reflected an incorrect classification of $160 million in proceeds on a note receivable related to the sale of our Paulsboro Refinery in December 2010. We previously reflected such proceeds as a component of cash flows from operating activities rather than as a component of cash flows from investing activities. The statement of cash flows for the six months ended June 30, 2012 included in this Form 10-Q for the quarterly period ended June 30, 2013 has been corrected to properly reflect the classification of those proceeds.

New Accounting Pronouncements

In July 2013, the provisions of ASC Topic 740, “Income Taxes,” were amended to provide specific guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendment requires entities to present an unrecognized tax benefit as a reduction to the deferred tax asset generated by the net operating loss carryforward, similar tax loss, or tax credit carryforward, if such items are available to be used to offset the unrecognized tax benefit. These provisions are effective for interim and annual reporting periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date, with retrospective application permitted. The adoption of this guidance effective January 1, 2014 will not affect our financial position or results of operations, nor will it require any additional disclosures, but may result in a change in presentation to our consolidated balance sheets.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2.	SEPARATION OF RETAIL BUSINESS

On May 1, 2013, we completed the separation of our retail business by creating an independent public company named CST Brands, Inc. (CST) and distributing 80 percent of the outstanding shares of CST common stock to our stockholders on May 1, 2013. Each Valero stockholder received one share of CST common stock for every nine shares of Valero common stock held at the close of business on the record date of April 19, 2013. Fractional shares of CST common stock were not distributed, but instead were aggregated and sold in the open market at prevailing rates with net cash proceeds then distributed pro rata to each Valero stockholder who was entitled to receive fractional shares.

In connection with the separation, we received an aggregate of $1.05 billion in cash, consisting of $550 million from the issuance of short-term debt to a third-party financial institution on April 16, 2013 and $500 million distributed to us by CST on May 1, 2013. The cash distributed to us by CST was borrowed by CST on May 1, 2013 under its senior secured credit facility. See Note 5 for further discussion of that credit facility. Also on May 1, 2013, CST issued $550 million of its senior unsecured bonds to us, and we exchanged those bonds with the third-party financial institution in satisfaction of our short-term debt. Immediately prior to May 1, 2013, subsidiaries of CST held $315 million of cash, and CST retained that cash following the distribution on May 1, 2013. Also in connection with the separation, we incurred a tax liability of approximately $189 million primarily related to the manner in which the transaction is treated for tax purposes in Canada, and most of these taxes will not be paid until the first half of 2014. Therefore, the cash we received as a result of the separation, net of our tax liability, was $546 million. We also incurred $30 million in costs during the three months ended June 30, 2013 to effect the separation, which are included in general and administrative expenses. We expect to liquidate the remaining 20 percent of the outstanding shares of CST common stock that we own within 18 months of the date of separation.

We also entered into long-term motor fuel supply agreements with CST in the U.S. and Canada. The nature and significance of our agreements to supply motor fuel to CST through 2028 represents a continuation of activities with CST for accounting purposes. As such, the historical results of operations of our retail business have not been reported as discontinued operations in our statements of income.

Selected historical results of operations of our retail business prior to the separation are disclosed in Note 10. Subsequent to May 1, 2013, our share of CST’s results of operations associated with our retained 20 percent equity interest in CST is reflected in “other income (expense), net” and our equity investment in CST, which is accounted for under the equity method, is included in “deferred charges and other assets, net.” Our share of income taxes incurred directly by CST is reported in the equity in earnings from CST, and as such is not included in income taxes in our statements of income.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the carrying values of the major categories of assets and liabilities of our retail business, immediately preceding its separation on May 1, 2013, which are excluded from our consolidated balance sheet as of June 30, 2013 (in millions):



Assets
Cash and temporary cash investments	$	315
Credit card receivables from Valero	44
Other receivables, net	109
Inventories	170
Deferred income taxes	14
Prepaid expenses and other	13
Total current assets	665
Property, plant and equipment, at cost	1,891
Accumulated depreciation	(611		)
Property, plant and equipment, net	1,280
Intangible assets, net	38
Deferred charges and other assets, net	205
Total assets	$	2,188

Liabilities
Current portion of capital lease obligations	$	2
Trade payable to Valero	242
Other accounts payable	96
Accrued expenses	31
Taxes other than income taxes	20
Total current liabilities	391
Debt and capital lease obligations, less current portion	1,053
Deferred income taxes	83
Other long-term liabilities	112
Total liabilities	$	1,639

We retained certain environmental and other liabilities related to our former retail business and we have indemnified CST for certain self-insurance liabilities related to its employees and property.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


3.	IMPAIRMENTS

Aruba Refinery

In March 2012, we suspended the operations of the Aruba Refinery because of its inability to generate positive cash flows on a sustained basis subsequent to its restart in January 2011 and the sensitivity of its profitability to sour crude oil differentials, which had narrowed significantly in the fourth quarter of 2011. Shortly thereafter, we received a non-binding offer to purchase the refinery for $350 million, plus working capital as of the closing date. Because of our decision to suspend the operations and the possibility of selling the refinery, we evaluated the refinery for potential impairment as of March 31, 2012 and concluded that it was impaired. We recognized an asset impairment loss of $595 million in March 2012. We did not, however, classify the Aruba Refinery as “held for sale” in our balance sheet because all of the accounting criteria required for that classification had not been met.

In September 2012, we decided to reorganize the Aruba Refinery into a crude oil and refined products terminal in response to the withdrawal of the non-binding offer to purchase the refinery. We bifurcated the idled crude oil processing units and related infrastructure (refining assets) from the terminal assets and evaluated the refining assets for potential impairment as of September 30, 2012. We concluded that the refining assets were impaired and recognized an asset impairment loss of $308 million in September 2012. We also recognized an asset impairment loss of $25 million related to materials and supplies inventories that supported the refining operations, resulting in a total asset impairment loss of $333 million that was recognized in September 2012 related to the Aruba Refinery. The terminal assets were not impaired.

We have continued to maintain the refining assets to allow them to be restarted and do not consider them to be abandoned. Therefore, we have not reflected the Aruba Refinery as a discontinued operation in our financial statements. It is possible, however, that we may abandon these assets in the future. Should we ultimately decide to abandon these assets, we may be required under our land lease agreement with the Government of Aruba to dismantle and remove the abandoned assets, which would require us to recognize an asset retirement obligation, that would be immediately charged to expense. We do not expect these amounts to be material to our financial position or results of operations.

The variation in the customary relationship between income tax expense and income before income tax expense for the six months ended June 30, 2012 was primarily due to not recognizing a tax benefit associated with the asset impairment loss of $595 million related to the Aruba Refinery as we do not expect to realize this tax benefit.

Cancelled Capital Project

In March 2012, we wrote down the carrying value of equipment associated with a permanently cancelled capital project at one of our refineries, resulting in an asset impairment loss of $16 million.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


4.	INVENTORIES

Inventories consisted of the following (in millions):



	June 30, 2013		December 31, 2012
Refinery feedstocks	$	2,641	$	2,458
Refined products and blendstocks	3,446		2,995
Ethanol feedstocks and products	139		191
Convenience store merchandise	—		112
Materials and supplies	220		217
Inventories	$	6,446	$	5,973

As of June 30, 2013 and December 31, 2012, the replacement cost (market value) of last in, first out (LIFO) inventories exceeded their LIFO carrying amounts by approximately $6.3 billion and $6.7 billion, respectively.


5.	DEBT

Bank Debt and Credit Facilities

We have a $3 billion revolving credit facility (the Revolver) that has a maturity date of December 2016. The Revolver has certain restrictive covenants, including a maximum debt-to-capitalization ratio of 60 percent. As of June 30, 2013 and December 31, 2012, our debt-to-capitalization ratios, calculated in accordance with the terms of the Revolver, were 19 percent and 23 percent, respectively. We believe that we will remain in compliance with this covenant. In addition to the Revolver, one of our Canadian subsidiaries has a committed revolving credit facility under which it may borrow and obtain letters of credit up to C$50 million.

During the six months ended June 30, 2013, we had no borrowings or repayments under our Revolver. During the six months ended June 30, 2012, we borrowed and repaid $1.1 billion under our Revolver. We had no borrowings or repayments under the Canadian revolving credit facility during the six months ended June 30, 2013 and 2012. As of June 30, 2013 and December 31, 2012, we had no borrowings outstanding under the Revolver or the Canadian revolving credit facility.

On March 20, 2013, in anticipation of the separation of our retail business as described in Note 2, CST entered into a credit agreement providing for $800 million of senior secured credit facilities (consisting of a $500 million term loan facility and a revolving credit facility with an aggregate principal amount of up to $300 million). Borrowings under the term loan and revolving credit facilities bear interest at the London Interbank Offered Rate (LIBOR) plus a margin or an alternate base rate, as defined in the agreement, plus a margin. The credit agreement matures on May 1, 2018 and has certain restrictive covenants. This credit agreement and related credit facilities were retained by CST after the separation from us. Therefore, we have no rights to obtain credit under nor any liabilities in connection with this credit agreement and related credit facilities.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On April 16, 2013, also in anticipation of the separation of our retail business, we borrowed $550 million under a short-term debt agreement with a third-party financial institution. On May 1, 2013, CST issued $550 million of its senior unsecured bonds to us, and we exchanged those bonds with the third-party financial institution in satisfaction of our short-term debt.

We had outstanding letters of credit under our committed lines of credit as follows (in millions):



				Amounts Outstanding
	Borrowing Capacity		Expiration	June 30, 2013		December 31, 2012
Letter of credit facilities	$	550	June 2014	$	250	$	418
Revolver	$	3,000	December 2016	$	59	$	59
Canadian revolving credit facility	C$	50	November 2013	C$	9	C$	10

As of June 30, 2013 and December 31, 2012, we had $87 million and $275 million, respectively, of letters of credit outstanding under our uncommitted short-term bank credit facilities.

Non-Bank Debt

During the six months ended June 30, 2013, the following activity occurred:


•	in June 2013, we made a scheduled debt repayment of $300 million related to our 4.75% notes; and


•	in January 2013, we made a scheduled debt repayment of $180 million related to our 6.7% senior notes.

During the six months ended June 30, 2012, the following activity occurred:


•	in June 2012, we remarketed and received proceeds of $300 million related to the 4.0% Gulf Opportunity Zone Revenue Bonds Series 2010 issued by the Parish of St. Charles, State of Louisiana, which are due December 1, 2040, but are subject to mandatory tender on June 1, 2022;


•	in April 2012, we made scheduled debt repayments of $4 million related to our Series 1997A 5.45% industrial revenue bonds and $750 million related to our 6.875% notes; and


•	in March 2012, we exercised the call provisions on our Series 1997 5.6%, Series 1998 5.6%, Series 1999 5.7%, Series 2001 6.65%, and Series 1997A 5.45% industrial revenue bonds, which were redeemed on May 3, 2012 for $108 million, or 100 percent of their outstanding stated values.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell up to $1.5 billion of eligible trade receivables on a revolving basis. In July 2013, we amended this facility to extend the maturity date to July 2014. Proceeds from the sale of receivables under this facility are reflected as debt. Under this program, one of our marketing subsidiaries (Valero Marketing) sells eligible receivables, without recourse, to another of our subsidiaries (Valero Capital), whereupon the receivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells an undivided percentage ownership interest in the eligible receivables, without recourse, to the third-party entities and financial institutions. To the extent that Valero Capital retains an ownership interest in the receivables it has purchased from Valero Marketing, such interest is included in our financial statements solely as a result of the consolidation of the financial statements of Valero Capital with those of Valero Energy Corporation; the receivables are not available to satisfy the claims of the creditors of Valero Marketing or Valero Energy Corporation.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Changes in the amounts outstanding under our accounts receivable sales facility were as follows (in millions):



	Six Months Ended June 30,
	2013		2012
Balance as of beginning of period	$	100	$	250
Proceeds from the sale of receivables	—		1,300
Repayments	—		(1,450		)
Balance as of end of period	$	100	$	100

Capitalized Interest

Capitalized interest was $45 million and $53 million for the three months ended June 30, 2013 and 2012, respectively, and $85 million and $105 million for the six months ended June 30, 2013 and 2012, respectively.


6.	COMMITMENTS AND CONTINGENCIES

Environmental Matter

We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and the adjacent shutdown refinery site, which we acquired as part of a prior acquisition. In cooperation with some of the other companies, we have been conducting initial mitigation and cleanup response pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The EPA is seeking further cleanup obligations from us and other potentially responsible parties for the Village. In parallel with the Village cleanup, we are also in litigation with the State of Illinois Environmental Protection Agency and other potentially responsible parties relating to the remediation of the shutdown refinery site. In each of these matters, we have various defenses and rights for contribution from the other potentially responsible parties. We have accrued for our own expected contribution obligations. However, because of the unpredictable nature of these cleanups and the methodology for allocation of liabilities, 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 or results of operations.

One-Time Severance Benefits

As described in Note 3, we decided to reorganize the Aruba Refinery into a crude oil and refined products terminal in September 2012 resulting in a decrease in required personnel for our operations in Aruba. We notified 495 employees in September 2012 of the termination of their employment effective November 15,

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2012. Benefits to each terminated employee consisted primarily of a cash payment based on a formula that considers the employee’s current compensation and years of service, among other factors. We recognized a severance liability of $41 million in September 2012, which approximated fair value. We paid $31 million of these benefits in the fourth quarter of 2012 and we paid the remaining termination benefits of $10 million during the first quarter of 2013.


7.	EQUITY

Reconciliation of Balances

The following is a reconciliation of the beginning and ending balances of equity attributable to our stockholders, equity attributable to the noncontrolling interests, and total equity for the six months ended June 30, 2013 and 2012 (in millions):



	2013									2012
	Valero Stockholders’ Equity			Non- controlling Interests			Total Equity			Valero Stockholders’ Equity			Non- controlling Interest			Total Equity
Balance as of beginning of period	$	18,032		$	63		$	18,095		$	16,423		$	22		$	16,445
Net income (loss)	1,120			(3		)	1,117			399			(1		)	398
Dividends	(220		)	—			(220		)	(166		)	—			(166		)
Stock-based compensation expense	25			—			25			20			—			20
Tax deduction in excess of stock-based compensation expense	27			—			27			3			—			3
Transactions in connection with stock-based compensation plans:
Stock issuances	43			—			43			11			—			11
Stock repurchases	(196		)	—			(196		)	(136		)	—			(136		)
Stock repurchases under buyback program	(364		)	—			(364		)	—			—			—
Separation of retail business	(499		)	—			(499		)	—			—			—
Contributions from noncontrolling interests	—			45			45			—			25			25
Other comprehensive income (loss)	(48		)	—			(48		)	23			—			23
Balance as of end of period	$	17,920		$	105		$	18,025		$	16,577		$	46		$	16,623

The noncontrolling interests relate to third-party ownership interests in two joint venture companies, whose financial statements we consolidate due to our controlling interests.

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Share Activity

Activity in the number of shares of common stock and treasury stock was as follows for the six months ended June 30, 2013 and 2012 (in millions):



	2013			2012
	Common Stock	Treasury Stock		Common Stock	Treasury Stock
Balance as of beginning of period	673	(121	)	673	(117	)
Transactions in connection with stock-based compensation plans:
Stock issuances	—	3		—	1
Stock purchases	—	(5	)	—	(6	)
Stock repurchases under buyback program	—	(8	)	—	—
Balance as of end of period	673	(131	)	673	(122	)

Common Stock Dividends

On July 25, 2013, our board of directors declared a quarterly cash dividend of $0.225 per common share payable on September 11, 2013 to holders of record at the close of business on August 14, 2013.

Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows for the six months ended June 30, 2013 (in millions):



	Foreign Currency Translation Adjustment			Defined Benefit Pension Items			Gains and (Losses) on Cash Flow Hedges			Total
Balance as of December 31, 2012	$	665		$	(558	)	$	1		$	108
Other comprehensive income (loss) before reclassifications	(268		)	214			(6		)	(60		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			9			3			12
Net other comprehensive income (loss)	(268		)	223			(3		)	(48		)
Separation of retail business	(159		)	—			—			(159		)
Balance as of June 30, 2013	$	238		$	(335	)	$	(2	)	$	(99	)

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Gains (losses) reclassified out of accumulated other comprehensive income (loss) and into net income were as follows (in millions):



Details about Accumulated Other Comprehensive Income (Loss) Components	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013			Affected Line Item in the Statement of Income
Amortization of items related to defined benefit pension plans:
Net actuarial loss	$	(15	)	$	(29	)	(a)
Prior service credit	9			15			(a)
	(6		)	(14		)	Total before tax
	2			5			Tax benefit
	$	(4	)	$	(9	)	Net of tax

Losses on cash flow hedges:
Commodity contracts	$	(8	)	$	(5	)	Cost of sales
	(8		)	(5		)	Total before tax
	3			2			Tax benefit
	$	(5	)	$	(3	)	Net of tax

Total reclassifications for the period	$	(9	)	$	(12	)	Net of tax

_________________________

(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost, as further discussed in Note 8. Net periodic benefit cost is reflected in operating expenses and general and administrative expenses.

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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
	2013			2012			2013			2012
Three months ended June 30:
Service cost	$	35		$	35		$	3		$	3
Interest cost	22			23			5			6
Expected return on plan assets	(34		)	(31		)	—			—
Amortization of:
Net actuarial loss	15			9			—			—
Prior service credit	(6		)	—			(3		)	(6		)
Net periodic benefit cost	$	32		$	36		$	5		$	3

Six months ended June 30:
Service cost	$	71		$	70		$	6		$	6
Interest cost	44			46			9			11
Expected return on plan assets	(66		)	(62		)	—			—
Amortization of:
Net actuarial loss	29			17			—			—
Prior service cost (credit)	(9		)	1			(6		)	(11		)
Net periodic benefit cost	$	69		$	72		$	9		$	6

On February 15, 2013, we announced changes to certain of our U.S. qualified pension plans that cover the majority of our U.S. employees who work in our refining segment and corporate operations. Benefits under our primary pension plan will change from a final average pay formula to a cash balance formula with staged effective dates that commence either on July 1, 2013 or January 1, 2015 depending on the age and service of the affected employees. All final average pay benefits will be frozen as of December 31, 2014, with all future benefits to be earned under the new cash balance formula. These plan amendments resulted in a $328 million decrease to pension liabilities and a related increase to other comprehensive income during the six months ended June 30, 2013. The benefit of this remeasurement will be amortized into income through 2025.

As a result of these plan amendments, management reduced its discretionary contributions to our pension plans by $100 million, resulting in expected contributions to our pension plans of $45 million for 2013. During the six months ended June 30, 2013 and 2012, we contributed $18 million and $16 million, respectively, to our pension plans and $8 million and $10 million, respectively, to our other postretirement benefit plans.

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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,
	2013				2012
	Restricted Stock		Common Stock		Restricted Stock		Common Stock
Earnings per common share:
Net income attributable to Valero stockholders			$	466			$	831
Less dividends paid:
Common stock			109				82
Nonvested restricted stock			—				1
Undistributed earnings			$	357			$	748
Weighted-average common shares outstanding	3		543		3		550
Earnings per common share:
Distributed earnings	$	0.20	$	0.20	$	0.15	$	0.15
Undistributed earnings	0.66		0.66		1.35		1.35
Total earnings per common share	$	0.86	$	0.86	$	1.50	$	1.50

Earnings per common share – assuming dilution:
Net income attributable to Valero stockholders			$	466			$	831
Weighted-average common shares outstanding			543				550
Common equivalent shares:
Stock options			3				3
Performance awards and nonvested restricted stock			2				2
Weighted-average common shares outstanding – assuming dilution			548				555
Earnings per common share – assuming dilution			$	0.85			$	1.50

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	Six Months Ended June 30,
	2013				2012
	Restricted Stock		Common Stock		Restricted Stock		Common Stock
Earnings per common share:
Net income attributable to Valero stockholders			$	1,120			$	399
Less dividends paid:
Common stock			219				165
Nonvested restricted stock			1				1
Undistributed earnings			$	900			$	233
Weighted-average common shares outstanding	3		546		3		550
Earnings per common share:
Distributed earnings	$	0.40	$	0.40	$	0.30	$	0.30
Undistributed earnings	1.64		1.64		0.42		0.42
Total earnings per common share	$	2.04	$	2.04	$	0.72	$	0.72

Earnings per common share – assuming dilution:
Net income attributable to Valero stockholders			$	1,120			$	399
Weighted-average common shares outstanding			546				550
Common equivalent shares:
Stock options			4				4
Performance awards and nonvested restricted stock			2				2
Weighted-average common shares outstanding – assuming dilution			552				556
Earnings per common share – assuming dilution			$	2.03			$	0.72

The following table reflects potentially dilutive securities (in millions) that were excluded from the calculation of “earnings per common share – assuming dilution” as the effect of including such securities would have been antidilutive. Stock options were excluded from weighted-average common shares outstanding – assuming dilution because the exercise price of the stock option was greater than the average market price of our common shares during each reporting period.



	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2012	2013	2012
Stock options	3	6	3	6

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10.	SEGMENT INFORMATION

As discussed in Note 2, we completed the separation of our retail business on May 1, 2013. Segment activity related to our retail business prior to the separation is reflected in the retail segment results below. Motor fuel sales to CST (our former retail business), which were eliminated in consolidation prior to the separation, are reported as refining segment operating revenues from external customers after May 1, 2013.

The following table reflects activity related to our reportable segments (in millions):



	Refining		Retail		Ethanol		Corporate			Total
Three months ended June 30, 2013:
Operating revenues from external customers	$	31,564	$	979	$	1,491	$	—		$	34,034
Intersegment revenues	671		—		15		—			686
Operating income (loss)	921		39		95		(247		)	808

Three months ended June 30, 2012:
Operating revenues from external customers	30,488		3,062		1,112		—			34,662
Intersegment revenues	2,203		—		46		—			2,249
Operating income (loss)	1,364		172		5		(180		)	1,361

Six months ended June 30, 2013:
Operating revenues from external customers	61,117		3,896		2,495		—			67,508
Intersegment revenues	2,876		—		70		—			2,946
Operating income (loss)	2,133		81		109		(454		)	1,869

Six months ended June 30, 2012:
Operating revenues from external customers	61,638		5,997		2,194		—			69,829
Intersegment revenues	4,458		—		60		—			4,518
Operating income (loss)	1,245		212		14		(354		)	1,117

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Total assets by reportable segment were as follows (in millions):



	June 30, 2013		December 31, 2012
Refining	$	40,527	$	39,490
Retail	—		2,043
Ethanol	867		929
Corporate	2,783		2,015
Total assets	$	44,177	$	44,477


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,
	2013			2012
Decrease (increase) in current assets:
Receivables, net	$	412		$	1,927
Inventories	(824		)	198
Income taxes receivable	31			(79		)
Prepaid expenses and other	2			(15		)
Increase (decrease) in current liabilities:
Accounts payable	625			(1,413		)
Accrued expenses	(44		)	(60		)
Taxes other than income taxes	268			67
Income taxes payable	(26		)	(60		)
Changes in current assets and current liabilities	$	444		$	565

The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable balance sheets for the respective periods for the following reasons:


•	the amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of debt and capital lease obligations, as well as the effect of certain noncash investing and financing activities discussed below;


•	the amounts shown above for the six months ended June 30, 2013 exclude the change in current assets and current liabilities resulting from the separation of our retail business as described in Note 2;


•	amounts accrued for capital expenditures and deferred turnaround and catalyst costs are reflected in investing activities when such amounts are paid;


•	amounts accrued for common stock purchases in the open market that are not settled as of the balance sheet date are reflected in financing activities when the purchases are settled and paid; and

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•	certain differences between balance sheet changes and the changes reflected above result from translating foreign currency denominated balances at the applicable exchange rates as of each balance sheet date.

There were no significant noncash investing activities for the six months ended June 30, 2013. Noncash financing activities for the six months ended June 30, 2013 included the exchange of CST’s senior unsecured bonds with the third-party financial institution in satisfaction of our short-term debt as described in Note 2.

There were no significant noncash investing or financing activities for the six months ended June 30, 2012.

Cash flows related to interest and income taxes were as follows (in millions):



	Six Months Ended June 30,
	2013		2012
Interest paid in excess of amount capitalized	$	160	$	164
Income taxes paid, net	243		204


12.	FAIR VALUE MEASUREMENTS

General

GAAP requires that certain assets and liabilities be measured at fair value on a recurring or nonrecurring basis in our balance sheets, which are presented below under “Recurring Fair Value Measurements” and “Nonrecurring Fair Value Measurements.” Recurring fair value measurements of assets or liabilities are those that GAAP requires or permits in the balance sheet at the end of each reporting period, such as derivative financial instruments. Nonrecurring fair value measurements of assets or liabilities are those that GAAP requires or permits in the balance sheet in particular circumstances, such as the impairment of property, plant and equipment.

GAAP also requires the disclosure of the fair values of financial instruments when an option to elect fair value accounting has been provided, but such election has not been made. A debt obligation is an example of such a financial instrument. The disclosure of the fair values of financial instruments not recognized at fair value in our balance sheet is presented below under “Other Financial Instruments.”

GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. Following is a description of each of the levels of the fair value hierarchy.


•	Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.


•	Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

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•

Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment.

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, 2013 and December 31, 2012.

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 on a gross basis in the tables below. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.



	June 30, 2013
							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	$	1,015	$	28	$	—	$	1,043	$	(997	)	$	(3	)	$	43	$	—
Physical purchase contracts	—		5		—		5		N/A			N/A			5		N/A
Foreign currency contracts	10		—		—		10		N/A			N/A			10		N/A
Investments of certain benefit plans	92		—		11		103		N/A			N/A			103		N/A
Total	$	1,117	$	33	$	11	$	1,161	$	(997	)	$	(3	)	$	161

Liabilities:
Commodity derivative contracts	$	997	$	28	$	—	$	1,025	$	(997	)	$	(23	)	$	5	$	(109	)
Physical purchase contracts	—		11		—		11		N/A			N/A			11		N/A
RINs fixed-price contracts	—		22		—		22		N/A			N/A			22		N/A
Total	$	997	$	61	$	—	$	1,058	$	(997	)	$	(23	)	$	38

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	December 31, 2012
							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	$	1,143	$	60	$	—	$	1,203	$	(1,189	)	$	—		$	14	$	—
Physical purchase contracts	—		11		—		11		N/A			N/A			11		N/A
Foreign currency contracts	1		—		—		1		N/A			N/A			1		N/A
Investments of certain benefit plans	87		—		11		98		N/A			N/A			98		N/A
Total	$	1,231	$	71	$	11	$	1,313	$	(1,189	)	$	—		$	124

Liabilities:
Commodity derivative contracts	$	1,138	$	70	$	—	$	1,208	$	(1,189	)	$	(13	)	$	6	$	(114	)
Biofuels blending obligation	—		10		—		10		N/A			N/A			10		N/A
Foreign currency contracts	1		—		—		1		N/A			N/A			1		N/A
Total	$	1,139	$	80	$	—	$	1,219	$	(1,189	)	$	(13	)	$	17

A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:

•

Commodity derivative contracts consist primarily of exchange-traded futures and swaps, and as disclosed in Note 13, some of these contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but because they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.

•

Physical purchase contracts represent the fair value of firm commitments to purchase crude oil feedstocks and the fair value of fixed-price corn purchase contracts, and as disclosed in Note 13, some of these contracts are designated as hedging instruments. The fair values of these firm commitments and purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.


•	Renewable Identification Numbers (RINs) fixed-price contracts represent the fair value of fixed-price purchase and sale contracts of RINs entered into for trading purposes. The fair values of these contracts are measured using a market approach based on quoted prices from an independent pricing service and are categorized in Level 2 of the fair value hierarchy.

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•

Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.

•

Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into by our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.

•

Our biofuels blending obligation represents a liability for the purchase of biofuel credits (primarily RINs in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce. To the degree we are unable to blend at percentages required under various governmental and regulatory programs, we must purchase biofuel credits to comply with these programs. These programs are further described in Note 13 under “Compliance Program Risk.” This liability is based on our deficit in biofuel credits as of the balance sheet date, if any, after considering any biofuel credits acquired or under contract, and is equal to the product of the biofuel credits deficit and the market price of these credits as of the balance sheet date. This liability is categorized in Level 2 of the fair value hierarchy and is measured at fair value using the market approach based on quoted prices from an independent pricing service.

There were no transfers between Level 1 and Level 2 for assets and liabilities held as of June 30, 2013 and December 31, 2012 that were measured at fair value on a recurring basis.

There was no activity during the three and six months ended June 30, 2013 and 2012 related to