10-Q
 
 
 
 
 
 
 
 
 
 
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 March 31, 2016
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, 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 þ
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 þ
The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of April 29, 2016 was 469,802,627.
 
 
 
 
 


VALERO ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 





i
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Par Value)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and temporary cash investments
$
3,778

 
$
4,114

Receivables, net
4,518

 
4,464

Inventories
6,056

 
5,898

Income taxes receivable
174

 
218

Prepaid expenses and other
335

 
204

Total current assets
14,861

 
14,898

Property, plant, and equipment, at cost
37,275

 
36,907

Accumulated depreciation
(10,530
)
 
(10,204
)
Property, plant, and equipment, net
26,745

 
26,703

Deferred charges and other assets, net
2,653

 
2,626

Total assets
$
44,259

 
$
44,227

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and capital lease obligations
$
128

 
$
127

Accounts payable
4,980

 
4,907

Accrued expenses
416

 
554

Taxes other than income taxes
957

 
1,069

Income taxes payable
294

 
337

Total current liabilities
6,775

 
6,994

Debt and capital lease obligations, less current portion
7,207

 
7,208

Deferred income taxes
7,192

 
7,060

Other long-term liabilities
1,590

 
1,611

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
7,057

 
7,064

Treasury stock, at cost;
203,711,810 and 200,462,208 common shares
(11,007
)
 
(10,799
)
Retained earnings
25,401

 
25,188

Accumulated other comprehensive loss
(802
)
 
(933
)
Total Valero Energy Corporation stockholders’ equity
20,656


20,527

Noncontrolling interests
839

 
827

Total equity
21,495

 
21,354

Total liabilities and equity
$
44,259

 
$
44,227

See Condensed Notes to Consolidated Financial Statements.



1
Table of Contents

VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
Operating revenues (a)
$
15,714

 
$
21,330

Costs and expenses:
 
 
 
Cost of sales (excluding the lower of cost or market inventory
valuation adjustment)
13,507

 
18,163

Lower of cost or market inventory valuation adjustment
(293
)
 
—

Operating expenses
1,030

 
1,084

General and administrative expenses
156

 
147

Depreciation and amortization expense
485

 
441

Total costs and expenses
14,885

 
19,835

Operating income
829

 
1,495

Other income, net
9

 
24

Interest and debt expense, net of capitalized interest
(108
)
 
(101
)
Income before income tax expense
730

 
1,418

Income tax expense
217

 
450

Net income
513

 
968

Less: Net income attributable to noncontrolling interests
18

 
4

Net income attributable to Valero Energy Corporation stockholders
$
495

 
$
964

 
 
 
 
Earnings per common share
$
1.05

 
$
1.87

Weighted-average common shares outstanding (in millions)
469

 
513

 
 
 
 
Earnings per common share – assuming dilution
$
1.05

 
$
1.87

Weighted-average common shares outstanding –
assuming dilution (in millions)
471

 
516

 
 
 
 
Dividends per common share
$
0.60

 
$
0.40

_______________________________________________
 
 
 
Supplemental information:
 
 
 
(a) Includes excise taxes on sales by certain of our international operations
$
1,395

 
$
1,426

See Condensed Notes to Consolidated Financial Statements.



2
Table of Contents

VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
Net income
$
513

 
$
968

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
122

 
(366
)
Net gain on pension
and other postretirement benefits
3

 
5

Other comprehensive income (loss) before
income tax expense (benefit)
125

 
(361
)
Income tax expense (benefit) related to
items of other comprehensive income (loss)
(7
)
 
2

Other comprehensive income (loss)
132

 
(363
)
 
 
 
 
Comprehensive income
645

 
605

Less: Comprehensive income attributable to
noncontrolling interests
19

 
4

Comprehensive income attributable to
Valero Energy Corporation stockholders
$
626

 
$
601

See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
513

 
$
968

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Depreciation and amortization expense
485

 
441

Lower of cost or market inventory valuation adjustment
(293
)
 
—

Deferred income tax expense (benefit)
121

 
(61
)
Changes in current assets and current liabilities
(177
)
 
57

Changes in deferred charges and credits and
other operating activities, net
(9
)
 
28

Net cash provided by operating activities
640

 
1,433

Cash flows from investing activities:
 
 
 
Capital expenditures
(316
)
 
(458
)
Deferred turnaround and catalyst costs
(161
)
 
(240
)
Other investing activities, net
(4
)
 
(15
)
Net cash used in investing activities
(481
)
 
(713
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuances or borrowings
—

 
1,446

Repayments of debt and capital lease obligations
(3
)
 
(403
)
Proceeds from the exercise of stock options
3

 
15

Purchase of common stock for treasury
(265
)
 
(325
)
Common stock dividends
(282
)
 
(206
)
Distributions to noncontrolling interests
(public unitholders) of Valero Energy Partners LP
(7
)
 
(5
)
Other financing activities, net
10

 
4

Net cash provided by (used in) financing activities
(544
)
 
526

Effect of foreign exchange rate changes on cash
49

 
(65
)
Net increase (decrease) in cash and temporary cash investments
(336
)
 
1,181

Cash and temporary cash investments at beginning of period
4,114

 
3,689

Cash and temporary cash investments at end of period
$
3,778

 
$
4,870

See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
BASIS OF PRESENTATION AND 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 months ended March 31, 2016 and 2015 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited financial statements. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The balance sheet as of December 31, 2015 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, 2015.

Reclassifications
Certain amounts reported as of December 31, 2015 have been reclassified in order to conform to the 2016 presentation, including the retrospective adoption of certain amendments to the Accounting Standards Codification (ASC) effective January 1, 2016. The adoption of the amendments to ASC Subtopic 835-30, “Interest–Imputation of Interest,” resulted in the reclassification of certain debt issuance costs from “deferred charges and other assets, net” to “debt and capital lease obligations, less current portion.” The adoption of the amendments to ASC Topic 740, “Income Taxes” resulted in the reclassification of current deferred income tax assets and current deferred income tax liabilities to noncurrent deferred income tax liabilities. The following table presents our previously reported balance sheet line items retrospectively adjusted for the adoption of these pronouncements (in millions):
 
December 31, 2015
 
Previously
Reported
 
Reclassifications
 
Currently
Reported
Assets
 
 
 
 
 
Current deferred income taxes
$
74

 
$
(74
)
 
$
—

Deferred charges and other assets, net
2,668

 
(42
)
 
2,626

Liabilities
 
 
 
 
 
Current deferred income taxes
366

 
(366
)
 
—

Debt and capital lease obligations,
less current portion
7,250

 
(42
)
 
7,208

Deferred income taxes
6,768

 
292

 
7,060




5
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 February 2015, the provisions of ASC Topic 810, “Consolidation,” were amended to improve consolidation guidance for certain types of legal entities. The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. With the adoption of this guidance effective January 1, 2016, we have determined that Valero Energy Partners LP (VLP) is a VIE. Since we previously consolidated the financial statements of VLP, the adoption of this guidance did not affect our financial position or results of operations. See Note 8 for disclosures related to our consolidated VIEs.

In April 2015, the provisions of ASC Subtopic 835-30, “Interest–Imputation of Interest,” were amended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a note be reported in the balance sheet as a direct deduction from the face amount of that note, consistent with debt discounts, and that amortization of debt issuance costs be reported as interest expense. In August 2015, these provisions were further amended with guidance from the Securities and Exchange Commission staff that they would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These provisions are to be applied retrospectively and are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. The adoption of this guidance effective January 1, 2016 did not materially affect our financial position and did not affect our results of operations because we already reported the amortization of debt issuance costs as interest expense. See “Basis of Presentation–Reclassifications” above for the reclassified presentation in our balance sheet. Debt issuance costs associated with our line-of-credit arrangements will continue to be reported in the balance sheet as “deferred charges and other assets, net.”

In May 2015, the provisions of ASC Topic 820, “Fair Value Measurements,” were amended to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured using the net asset value per share practical expedient and limits those disclosures to investments for which the entity has elected to measure the fair value using that practical expedient. These provisions are to be applied retrospectively and are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. The adoption of this guidance effective January 1, 2016 did not affect our financial position or results of operations, but will result in revised annual disclosures related to the fair value presentation of



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

certain assets of our defined benefit pension plans for which fair value is measured using net asset value per share as a practical expedient. In accordance with the new guidance, these investments will no longer be categorized within the fair value hierarchy. Changes to prior period disclosures will be applied retrospectively in accordance with the guidance.

In September 2015, the provisions of ASC Topic 805, “Business Combinations,” were amended to simplify the accounting and reporting of adjustments made to provisional amounts recognized in a business combination. The amendment requires that an acquirer (i) record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and (ii) present separately on the statement of income or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, and should be applied prospectively to adjustments made to provisional amounts that occur after the effective date. The adoption of this guidance effective January 1, 2016 did not affect our financial position or results of operations; however, it may result in changes to the manner in which adjustments to provisional amounts recognized in a future business combination, if any, are presented in our financial statements.

In November 2015, the provisions of ASC Topic 740, “Income Taxes,” were amended to simplify the presentation of deferred income taxes. The amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The amendments are effective for financial statements for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of any interim or annual period. The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Entities applying the guidance retrospectively should disclose in the first interim and first annual period of adoption the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods. Effective January 1, 2016, we adopted this guidance on a retrospective basis, but such adoption did not materially affect our financial position and it did not impact our results of operations. Upon adoption, our current deferred income tax assets of $74 million and current deferred income tax liabilities of $366 million as of December 31, 2015 were reclassified to noncurrent deferred income tax liabilities. See “Basis of Presentation–Reclassifications” above for the reclassified presentation. Adoption of this guidance simplifies the future presentation of our deferred income tax assets and liabilities.

Accounting Pronouncements Not Yet Adopted
In May 2014, the ASC was amended and a new accounting standard, ASC Topic 606, “Revenue from Contracts with Customers,” was issued to clarify the principles for recognizing revenue. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In July 2015, the provisions of ASC Topic 330, “Inventory” were amended to simplify the measurement of inventory measured using the first-in, first-out or average cost methods. These provisions are to be applied



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

prospectively and are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2017 will not affect our financial position or results of operations.

In January 2016, the provisions of ASC Subtopic 825-10, “Financial Instruments–Overall,” were amended to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In February 2016, the ASC was amended and a new accounting standard, ASC Topic 842, “Leases,” was issued 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 public companies for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In March 2016, the provisions of ASC Topic 718, “Compensation–Stock Compensation,” were amended to simplify the accounting and reporting for employee share-based payments. These amendments involve several aspects of the accounting for share-based payment transactions, including accounting for income taxes as it pertains to the timing of when excess tax benefits are recognized and to the recognition of excess tax benefits and tax deficiencies in the statements of income, forfeitures, minimum statutory tax withholding requirements, as well as classification of excess tax benefits and employee taxes paid on the statement of cash flows. These provisions are effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments provide specific transition and disclosure guidance for each provision. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

2.
INVENTORIES

Inventories consisted of the following (in millions):
 
March 31,
2016

December 31,
2015
Refinery feedstocks
$
2,574

 
$
2,404

Refined products and blendstocks
3,424

 
3,774

Ethanol feedstocks and products
264

 
242

Materials and supplies
249

 
244

Inventories, before lower of cost or market
inventory valuation reserve
6,511

 
6,664

Lower of cost or market inventory valuation reserve
(455
)
 
(766
)
Inventories
$
6,056

 
$
5,898





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

Inventories are valued at the lower of cost or market. As of March 31, 2016 and December 31, 2015, we had a valuation reserve of $455 million and $766 million, respectively, in order to state our inventories at market. During the three months ended March 31, 2016, 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 $293 million. The income statement benefit for the first quarter of 2016 differs from the change in the balance sheet reserve due to the foreign currency effect of inventories held for our international operations.

As of March 31, 2016 and December 31, 2015, our non-LIFO inventories accounted for $685 million and $668 million, respectively, of our total inventories.

3.
DEBT

Credit Facilities
Revolver
We have a $3 billion revolving credit facility (the Revolver) that matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $4.5 billion, subject to certain conditions. The Revolver also provides for the issuance of letters of credit of up to $2.0 billion. No amounts were outstanding under the Revolver as of March 31, 2016 or December 31, 2015, and we had no borrowings under the Revolver during the three months ended March 31, 2016 and 2015.

VLP Revolver
VLP has a $750 million senior unsecured revolving credit facility agreement (the VLP Revolver) that matures in November 2020. The VLP Revolver is available only to the operations of VLP, and creditors of VLP do not have recourse against Valero. VLP has the option to increase the aggregate commitments under the VLP Revolver to $1.0 billion, subject to certain conditions. The VLP Revolver also provides for the issuance of letters of credit of up to $100 million. Outstanding borrowings under the VLP Revolver bear interest at a variable rate, which was 1.75 percent as of March 31, 2016.

During the three months ended March 31, 2016, VLP had no borrowings or repayments under the VLP Revolver. During the three months ended March 31, 2015, VLP borrowed $200 million under the VLP Revolver in connection with VLP’s acquisition of the Houston and St. Charles Terminal Services Business from us.

On April 1, 2016, VLP borrowed $139 million under the VLP Revolver in connection with VLP’s acquisition of the McKee Terminal Services Business from us.

Canadian Revolver
One of our Canadian subsidiaries has a C$50 million committed revolving credit facility (the Canadian Revolver) that matures in November 2016. No amounts were outstanding under the Canadian Revolver as of March 31, 2016 or December 31, 2015, and we had no borrowings under the Canadian Revolver during the three months ended March 31, 2016 and 2015.

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 $1.4 billion of eligible trade receivables on a revolving basis. This facility matures in July 2016.



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

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.

During the three months ended March 31, 2016 and 2015, we had no proceeds from or repayments under the accounts receivable sales facility.

Summary of Credit Facilities
We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (in millions):
 
 
 
 
 
 
March 31, 2016
 
 
Facility
Amount
 
Maturity Date
 
Outstanding
Borrowings
 
Letters of
Credit
 
Availability
 
 
 
 
 
 
Committed facilities:
 
 
 
 
 
 
 
 
 
 
Revolver
 
$
3,000

 
November 2020
 
$
—

 
$
53

 
$
2,947

VLP Revolver
 
$
750

 
November 2020
 
$
175

 
$
—

 
$
575

Canadian Revolver
 
C$
50

 
November 2016
 
C$
—

 
C$
10

 
C$
40

Accounts receivable sales facility
 
$
1,400

 
July 2016
 
$
100

 
$
—

 
$
974

Letter of credit facilities
 
$
275

 
June 2016 and
November 2016
 
$
—

 
$
16

 
$
259

 
 
 
 
 
 
 
 
 
 
 
Uncommitted facilities:
 
 
 
 
 
 
 
 
 
 
Letter of credit facilities
 
$
700

 
N/A
 
$
—

 
$
61

 
$
639


As of March 31, 2016, the actual availability under the accounts receivable sales facility fell below the facility borrowing capacity to $1.1 billion primarily due to a decrease in eligible trade receivables as a result of the decline in the market prices of the finished products that we produce.

Non-Bank Debt
During the three months ended March 31, 2016, we made no scheduled debt repayments. During the three months ended March 31, 2015, we made a scheduled debt repayment of $400 million related to our 4.5 percent senior notes.

During the three months ended March 31, 2015, we issued $600 million of 3.65 percent senior notes due March 15, 2025 and $650 million of 4.9 percent senior notes due March 15, 2045. Proceeds from these debt issuances totaled $1.246 billion. We also incurred $12 million of debt issuance costs.




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

Capitalized Interest
Capitalized interest was $20 million and $16 million for the three months ended March 31, 2016 and 2015, respectively.

4.
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 between 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 and rights for contribution from the other responsible parties. We have recorded a liability for our own 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.




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

5.
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):
 
Three Months Ended March 31,
 
2016
 
2015
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
Balance as of
beginning of period
$
20,527

 
$
827

 
$
21,354

 
$
20,677

 
$
567

 
$
21,244

Net income
495

 
18

 
513

 
964

 
4

 
968

Dividends
(282
)
 
—

 
(282
)
 
(206
)
 
—

 
(206
)
Stock-based
compensation expense
12

 
—

 
12

 
9

 
—

 
9

Tax deduction in excess
of stock-based
compensation expense
10

 
—

 
10

 
15

 
—

 
15

Transactions
in connection with
stock-based
compensation plans:
 
 
 
 
 
 
 
 
 
 
 
Stock issuances
3

 
—

 
3

 
15

 
—

 
15

Stock purchases
(42
)
 
—

 
(42
)
 
(50
)
 
—

 
(50
)
Stock purchases under
purchase program
(198
)
 
—

 
(198
)
 
(287
)
 
—

 
(287
)
Contributions from
noncontrolling interests
—

 
—

 
—

 
—

 
2

 
2

Distributions to
noncontrolling interests
—

 
(7
)
 
(7
)
 
—

 
(5
)
 
(5
)
Other comprehensive
income (loss)
131

 
1

 
132

 
(363
)
 
—

 
(363
)
Balance as of end of period
$
20,656

 
$
839

 
$
21,495

 
$
20,774

 
$
568

 
$
21,342


The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See Note 8 for information about our consolidated VIEs.




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

Share Activity
Activity in the number of shares of common stock and treasury stock was as follows (in millions):
 
Three Months Ended March 31,
 
2016
 
2015
 
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
Balance as of beginning of period
673

 
(200
)
 
673

 
(159
)
Transactions in connection with
stock-based compensation plans:
 
 
 
 
 
 
 
Stock issuances
—

 
1

 
—

 
2

Stock purchases
—

 
(1
)
 
—

 
(1
)
Stock purchases under purchase program
—

 
(4
)
 
—

 
(5
)
Balance as of end of period
673

 
(204
)
 
673

 
(163
)

Treasury Stock
We purchase shares of our common stock as authorized under our common stock purchase program and to meet our obligations under employee stock-based compensation plans.
 
 
 
 
 
 
 
 
 
 
 
 
Income Tax Effects Related to Components of Other Comprehensive Income (Loss)
The tax effects allocated to each component of other comprehensive income (loss) were as follows (in millions):
 
Three Months Ended March 31,
 
2016
 
2015
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
Foreign currency translation adjustment
$
122

 
$
—

 
$
122

 
$
(366
)
 
$
—

 
$
(366
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Miscellaneous gain arising during the period
—

 
(8
)
 
8

 
—

 
—

 
—

Amounts reclassified into income related to:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial loss
12

 
4

 
8

 
15

 
5

 
10

Prior service credit
(9
)
 
(3
)
 
(6
)
 
(10
)
 
(3
)
 
(7
)
Net gain on pension and other
postretirement benefits
3

 
(7
)
 
10

 
5

 
2

 
3

Other comprehensive income (loss)
$
125

 
$
(7
)
 
$
132

 
$
(361
)
 
$
2

 
$
(363
)




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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):
 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
Items
 
Total
Balance as of December 31, 2015
$
(605
)
 
$
(328
)
 
$
(933
)
Other comprehensive income
before reclassifications
121

 
8

 
129

Amounts reclassified from accumulated
other comprehensive loss
—

 
2

 
2

Net other comprehensive income
121

 
10

 
131

Balance as of March 31, 2016
$
(484
)
 
$
(318
)
 
$
(802
)

 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
Items
 
Total
Balance as of December 31, 2014
$
1

 
$
(368
)
 
$
(367
)
Other comprehensive loss
before reclassifications
(366
)
 
—

 
(366
)
Amounts reclassified from accumulated
other comprehensive loss
—

 
3

 
3

Net other comprehensive income (loss)
(366
)
 
3

 
(363
)
Balance as of March 31, 2015
$
(365
)
 
$
(365
)
 
$
(730
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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

6.
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
 
2016
 
2015
 
2016
 
2015
Three months ended March 31:
 
 
 
 
 
 
 
Service cost
$
28

 
$
27

 
$
2

 
$
2

Interest cost
21

 
24

 
3

 
4

Expected return on plan assets
(35
)
 
(33
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service credit
(5
)
 
(5
)
 
(4
)
 
(5
)
Net actuarial loss
12

 
16

 
—

 
—

Net periodic benefit cost
$
21

 
$
29

 
$
1

 
$
1


Our anticipated contributions to our pension and other postretirement benefit plans during 2016 have not changed from amounts previously disclosed in our financial statements for the year ended December 31, 2015. We contributed $8 million and $7 million, respectively, to our pension plans and $4 million and $2 million, respectively, to our other postretirement benefit plans during the three months ended March 31, 2016 and 2015.




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

7.
EARNINGS PER COMMON SHARE

Earnings per common share were computed as follows (dollars and shares in millions, except per share amounts):
 
Three Months Ended March 31,
 
2016
 
2015
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
495

 
 
 
$
964

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
281

 
 
 
205

Participating securities
 
 
1

 
 
 
1

Undistributed earnings
 
 
$
213

 
 
 
$
758

Weighted-average common shares outstanding
2

 
469

 
2

 
513

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
0.60

 
$
0.60

 
$
0.40

 
$
0.40

Undistributed earnings
0.45

 
0.45

 
1.47

 
1.47

Total earnings per common share
$
1.05

 
$
1.05

 
$
1.87

 
$
1.87

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
495

 
 
 
$
964

Weighted-average common shares outstanding
 
 
469

 
 
 
513

Common equivalent shares:
 
 
 
 
 
 
 
Stock options
 
 
1

 
 
 
2

Performance awards and
nonvested restricted stock
 
 
1

 
 
 
1

Weighted-average common shares outstanding –
assuming dilution
 
 
471

 
 
 
516

Earnings per common share – assuming dilution
 
 
$
1.05

 
 
 
$
1.87

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




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

8.
VARIABLE INTEREST ENTITIES

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.

The following discussion summarizes our involvement with our VIEs:

•
VLP is a publicly traded master limited partnership whose common limited partner units are traded on the New York Stock Exchange under “VLP.” We formed VLP in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. VLP’s assets include crude oil and refined products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of nine of our refineries. As of March 31, 2016, we owned a 65.7 percent limited partner interest and a 2 percent general partner interest in VLP, and public unitholders owned a 32.3 percent limited partner interest.

VLP was determined to be a VIE because the public limited partners of VLP (i.e., parties other than entities under common control with the general partner) lack the power to direct the activities of VLP that most significantly impact its economic performance since they do not have substantive kick-out rights over the general partner or substantive participating rights in VLP. Furthermore, we determined that we are the primary beneficiary of VLP because (a) we are the single decision maker as our general partner interest provides us with the sole power to direct the activities that most significantly impact VLP’s economic performance and (b) our 65.7 percent limited partner interest and 2 percent general partner interest provide us with significant economic rights and obligations. All of VLP’s revenues are derived from us; therefore, there is limited risk to us associated with VLP’s operations.

•
Diamond Green Diesel Holdings LLC (DGD) is a joint venture with Darling Green Energy LLC, a subsidiary of Darling Ingredients Inc., that was formed to construct and operate a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel. The plant is located next to our St. Charles Refinery and began operations in June 2013. The significant agreements between DGD and us include a debt agreement whereby we financed approximately 60 percent of the construction costs of the plant, an operations agreement that outlines our responsibilities as operator of the plant, and a marketing agreement.

In the event of certain conditions, the debt agreement provides us (as lender) with certain power to direct the activities that most significantly impact DGD’s economic performance. Because the loan agreement conveys such power to us and is separate from our ownership rights, DGD was determined to be a VIE. For this reason and because we hold a 50 percent ownership interest that provides us with significant economic rights and obligations, we determined we are the primary beneficiary of



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

DGD. DGD has risk associated with its operations as it generates revenues from third-party customers.

•
We also have financial interests in other entities in which we hold a 50 percent ownership interest, which is a significant variable interest. These entities were determined to be VIEs because the entities’ contractual arrangements transfer the power to direct the activities that most significantly impact their economic performance or reduce the exposure to operational variability and risk of loss created by the entity that otherwise would be held exclusively by the equity owners. Furthermore, we determined we were the primary beneficiary of these VIEs because (a) certain contractual arrangements (exclusive of our ownership rights) provide us with the power to direct the activities that most significantly impact the economic performance of these entities and (b) our 50 percent ownership interests provide us with significant economic rights and obligations. The financial position, results of operations, and cash flows of these VIEs are not material to us.

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.

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).

 
March 31, 2016
 
VLP
 
DGD
 
Other
 
Total
Assets
 
 
 
 
 
 
 
Cash and temporary cash investments
$
102

 
$
17

 
$
11

 
$
130

Other current assets
—

 
231

 
—

 
231

Property, plant, and equipment, net
749

 
357

 
141

 
1,247

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
$
10

 
$
14

 
$
19

 
$
43

Debt and capital lease obligations,
less current portion
175

 
—

 
—

 
175




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

 
December 31, 2015
 
VLP
 
DGD
 
Other
 
Total
Assets
 
 
 
 
 
 
 
Cash and temporary cash investments
$
81

 
$
44

 
$
7

 
$
132

Other current assets
—

 
211

 
—

 
211

Property, plant, and equipment, net
747

 
356

 
140

 
1,243

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
$
13

 
$
12

 
$
18

 
$
43

Debt and capital lease obligations,
less current portion
175

 
—

 
—

 
175


9.
SEGMENT INFORMATION

The following table reflects activity related to our reportable segments (in millions):
 
Refining
 
Ethanol
 
Corporate
 
Total
Three months ended March 31, 2016:
 
 
 
 
 
 
 
Total segment revenues
$
14,920

 
$
828

 
$
—

 
$
15,748

Less intersegment revenues
—

 
34

 
—

 
34

Operating revenues from external customers
$
14,920

 
$
794

 
$
—

 
$
15,714

Lower of cost or market inventory
valuation adjustment
$
(263
)
 
$
(30
)
 
$
—

 
$
(293
)
Operating income (loss)
958

 
39

 
(168
)
 
829

 
 
 
 
 
 
 
 
Three months ended March 31, 2015:
 
 
 
 
 
 
 
Total segment revenues
$
20,529

 
$
829

 
$
—

 
$
21,358

Less intersegment revenues
—

 
28

 
—

 
28

Operating revenues from external customers
$
20,529

 
$
801

 
$
—

 
$
21,330

Operating income (loss)
$
1,641

 
$
12

 
$
(158
)
 
$
1,495


Total assets by reportable segment were as follows (in millions):
 
March 31,
2016
 
December 31,
2015
Refining
$
38,427

 
$
38,068

Ethanol
1,040

 
1,016

Corporate
4,792

 
5,143

Total assets
$
44,259

 
$
44,227





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

10.
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):
 
Three Months Ended
March 31,
 
2016
 
2015
Decrease (increase) in current assets:
 
 
 
Receivables, net
$
(47
)
 
$
892

Inventories
147

 
(166
)
Income taxes receivable
45

 
39

Prepaid expenses and other
(126
)
 
8

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
108

 
(688
)
Accrued expenses
(137
)
 
(80
)
Taxes other than income taxes
(113
)
 
(107
)
Income taxes payable
(54
)
 
159

Changes in current assets and current liabilities
$
(177
)
 
$
57


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;
•
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
•
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 or financing activities for the three months ended March 31, 2016 and 2015.

Cash flows related to interest and income taxes were as follows (in millions):
 
Three Months Ended
March 31,
 
2016
 
2015
Interest paid in excess of amount capitalized
$
95

 
$
78

Income taxes paid, net
95

 
298




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

11.
 FAIR VALUE MEASUREMENTS

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

U.S. 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.”

U.S. 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.
•
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.




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

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 March 31, 2016 and December 31, 2015.

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.

 
March 31, 2016
 
 
 
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
$
702

 
$
17

 
$
—

 
$
719

 
$
(681
)
 
$
(21
)
 
$
17

 
$
—

Investments of certain
benefit plans
61

 
—

 
11

 
72

 
n/a

 
n/a

 
72

 
n/a

Total
$
763

 
$
17

 
$
11

 
$
791

 
$
(681
)
 
$
(21
)
 
$
89

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 

 
 
 
 
 

 
 
Commodity derivative
contracts
$
722

 
$
18

 
$
—

 
$
740

 
$
(681
)
 
$
(59
)
 
$
—

 
$
(120
)
Environmental credit
obligations
—

 
20

 
—

 
20

 
n/a

 
n/a

 
20

 
n/a

Physical purchase
contracts
—

 
5

 
—

 
5

 
n/a

 
n/a

 
5

 
n/a

Foreign currency
contracts
3

 
—

 
—

 
3

 
n/a

 
n/a

 
3

 
n/a

Total
$
725

 
$
43

 
$
—

 
$
768

 
$
(681
)
 
$
(59
)
 
$
28

 





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

 
December 31, 2015
 
 
 
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
$
649

 
$
33

 
$
—

 
$
682

 
$
(557
)
 
$
(12
)
 
$
113

 
$
—

Foreign currency
contracts
3

 
—

 
—

 
3

 
n/a

 
n/a

 
3

 
n/a

Investments of certain
benefit plans
64

 
—

 
11

 
75

 
n/a

 
n/a

 
75

 
n/a

Total
$
716

 
$
33

 
$
11

 
$
760

 
$
(557
)
 
$
(12
)
 
$
191

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative
contracts
$
522

 
$
35

 
$
—

 
$
557

 
$
(557
)
 
$
—

 
$
—

 
$
(31
)
Environmental credit
obligations
—

 
2

 
—

 
2

 
n/a

 
n/a

 
2

 
n/a

Physical purchase
contracts
—

 
6

 
—

 
6

 
n/a

 
n/a

 
6

 
n/a

Total
$
522

 
$
43

 
$
—

 
$
565

 
$
(557
)
 
$
—

 
$
8

 



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 12, 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 fixed-price corn purchase contracts. The fair values of these 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.
•
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.



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

•
Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for 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.
•
Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily Renewable Identification Numbers (RINs) in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California Global Warming Solutions Act (the California cap-and-trade system, also known as AB 32) and Quebec’s Regulation respecting the cap-and-trade system for greenhouse gas emission allowances (the Quebec cap-and-trade system), (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. These programs are further described in Note 12 under “Environmental Compliance Program Price Risk.” The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are 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 March 31, 2016 and December 31, 2015 that were measured at fair value on a recurring basis.

There was no activity during the three months ended March 31, 2016 and 2015 related to the fair value amounts categorized in Level 3 as of March 31, 2016 and December 31, 2015.

Nonrecurring Fair Value Measurements
There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of March 31, 2016 and December 31, 2015.




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

Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below along with their associated fair values (in millions):
 
March 31, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
Cash and temporary cash investments
$
3,778

 
$
3,778

 
$
4,114

 
$
4,114

Financial liabilities:
 
 
 
 
 
 
 
Debt (excluding capital leases)
7,252

 
8,005

 
7,292

 
7,759


The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:
•
The fair value of cash and temporary cash investments approximates the carrying value due to the low level of credit risk of these assets combined with their short maturities and market interest rates (Level 1).
•
The fair value of debt is determined primarily using the market approach based on quoted prices provided by third-party brokers and vendor pricing services (Level 2).

12.
PRICE RISK MANAGEMENT ACTIVITIES

We are exposed to market risks primarily related to the volatility in the price of commodities and foreign currency exchange rates. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note 11), as summarized below under “Fair Values of Derivative Instruments.” In addition, the effect of these derivative instruments on our income is summarized below under “Effect of Derivative Instruments on Income.”

When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading derivative. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded into income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedges (derivative instruments not designated as fair value or cash flow hedges) and for derivative instruments entered into by us for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. The cash flow effects of all of our derivative instruments are reflected in operating activities in our statements of cash flows for all periods presented.



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

We are also exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values.

Risk Management Activities by Type of Risk
Commodity Price Risk
We are exposed to market risks related to the volatility in the price of crude oil, refined products (primarily gasoline and distillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

For risk management purposes, we use fair value hedges, cash flow hedges, and economic hedges, from time to time. In addition to the use of derivative instruments to manage commodity price risk, we also enter into certain commodity derivative instruments for trading purposes. Our objective for entering into each type of hedge or trading derivative is described below.

•
Fair Value Hedges – Fair value hedges are used to hedge price volatility in certain refining inventories and firm commitments to purchase inventories. The level of activity for our fair value hedges is based on the level of our operating inventories, and generally represents the amount by which our inventories exceed our previous year-end LIFO inventory levels. We had no commodity derivative instruments outstanding that were entered into as fair value hedges as of March 31, 2016 or during the three months ended March 31, 2016 and 2015.

•
Cash Flow Hedges – Cash flow hedges are used to hedge price volatility in certain forecasted feedstock and refined product purchases, refined product sales, and natural gas purchases. The objective of our cash flow hedges is to lock in the price of forecasted feedstock, refined product, or natural gas purchases or refined product sales at existing market prices that we deem favorable. We had no commodity derivative instruments outstanding that were entered into as cash flow hedges as of March 31, 2016 or during the three months ended March 31, 2016 and 2015.




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

•
Economic Hedges – Economic hedges represent commodity derivative instruments that are not designated as fair value or cash flow hedges and are used to manage price volatility in certain (i) feedstock and refined product inventories, (ii) forecasted feedstock and product purchases, and product sales, and (iii) fixed-price purchase contracts. Our objective for entering into economic hedges is consistent with the objectives discussed above for fair value hedges and cash flow hedges. However, the economic hedges are not designated as a fair value hedge or a cash flow hedge for accounting purposes, usually due to the difficulty of establishing the required documentation at the date that the derivative instrument is entered into that would qualify as hedging instruments for accounting purposes.

As of March 31, 2016, we had the following outstanding commodity derivative instruments that were used as economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels and soybean oil contracts that are presented in thousands of pounds).

 
 
Notional Contract Volumes by
Year of Maturity
Derivative Instrument
 
2016
 
2017
Crude oil and refined products:
 
 
 
 
Swaps – long
 
24,120

 
—

Swaps – short
 
23,676

 
—

Futures – long
 
85,898

 
—

Futures – short
 
89,219

 
—

Corn:
 
 
 
 
Futures – long
 
18,180

 
10

Futures – short
 
36,810

 
345

Physical contracts – long
 
15,770

 
335

Soybean oil:
 
 
 
 
Futures – long
 
67,920

 
—

Futures – short
 
122,880

 
—




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

•
Trading Derivatives – Our objective for entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions related to future results of operations and cash flows.

As of March 31, 2016, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units and corn contracts that are presented in thousands of bushels).

 
 
Notional Contract Volumes by
Year of Maturity
Derivative Instrument
 
2016
 
2017
Crude oil and refined products:
 
 
 
 
Swaps – long
 
5,240

 
300

Swaps – short
 
5,240

 
300

Futures – long
 
33,036

 
3,550

Futures – short
 
32,792

 
3,550

Options – long
 
22,800

 
55,000

Options – short
 
22,200

 
55,000

Natural gas:
 
 
 
 
Futures – long
 
1,400

 
—

Corn:
 
 
 
 
Futures – long
 
3

 
—

Futures – short
 
3

 
—


Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated in currencies other than the local (functional) currencies of those operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes, and therefore they are classified as economic hedges. As of March 31, 2016, we had commitments to purchase $261 million of U.S. dollars. These commitments matured on or before April 30, 2016.

Environmental Compliance Program Price Risk
We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. Certain of these programs require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the market price of these credits, and we manage that risk



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

by purchasing biofuel credits when prices are deemed favorable. The cost of meeting our obligations under these compliance programs was $161 million and $133 million for the three months ended March 31, 2016 and 2015, respectively. These amounts are reflected in cost of sales.

Effective January 1, 2015, we became subject to additional requirements under greenhouse gas emission programs, including the cap-and-trade systems, as discussed in Note 11. Under these cap-and-trade systems, we purchase various greenhouse gas emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we recovered the majority of these costs from our customers for the three months ended March 31, 2016 and 2015 and expect to continue to recover the majority of these costs in the future. For the three months ended March 31, 2016 and 2015, the net cost of meeting our obligations under these compliance programs was immaterial.

Fair Values of Derivative Instruments
The following tables provide information about the fair values of our derivative instruments as of March 31, 2016 and December 31, 2015 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 11 for additional information related to the fair values of our derivative instruments.

As indicated in Note 11, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.

 
Balance Sheet
Location
 
March 31, 2016
 
 
Asset
Derivatives
 
Liability
Derivatives
Derivatives not designated as
hedging instruments
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
Futures
Receivables, net
 
$
700

 
$
720

Swaps
Receivables, net
 
11

 
17

Options
Receivables, net
 
8

 
3

Physical purchase contracts
Inventories
 
—

 
5

Foreign currency contracts
Accrued expenses
 
—

 
3

Total
 
 
$
719

 
$
748




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

 
Balance Sheet
Location
 
December 31, 2015
 
 
Asset
Derivatives
 
Liability
Derivatives
Derivatives not designated as
hedging instruments
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
Futures
Receivables, net
 
$
648

 
$
522

Swaps
Receivables, net
 
30

 
33

Options
Receivables, net
 
4

 
2

Physical purchase contracts
Inventories
 
—

 
6

Foreign currency contracts
Receivables, net
 
3

 
—

Total
 
 
$
685

 
$
563


Market and Counterparty Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.

Effect of Derivative Instruments on Income
The following tables provide information about the gain or loss recognized in income on our derivative instruments and the income statement line items in which such gains and losses are reflected (in millions).

Derivatives Designated as
Economic Hedges and Other
Derivative Instruments
 
Location of Gain (Loss)
Recognized in Income
on Derivatives
 
Three Months Ended
March 31,
2016
 
2015
Commodity contracts
 
Cost of sales
 
$
(139
)
 
$
64

Foreign currency contracts
 
Cost of sales
 
(3
)
 
22


Trading Derivatives
 
Location of Gain
Recognized in Income
on Derivatives
 
Three Months Ended
March 31,
2016
 
2015
Commodity contracts
 
Cost of sales
 
$
41

 
$
20





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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Form 10-Q, including without limitation our disclosures below under the heading “OVERVIEW AND OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “should,” “may,” and similar expressions.

These forward-looking statements include, among other things, statements regarding:

•
future refining margins, including gasoline and distillate margins;
•
future ethanol margins;
•
expectations regarding feedstock costs, including crude oil differentials, and operating expenses;
•
anticipated levels of crude oil and refined product inventories;
•
our anticipated level of capital investments, including deferred costs for refinery turnarounds and catalyst, capital expenditures for environmental and other purposes, and joint venture investments, and the effect of those capital investments on our results of operations;
•
anticipated trends in the supply of and demand for crude oil and other feedstocks and refined products in the regions where we operate, as well as globally;
•
expectations regarding environmental, tax, and other regulatory initiatives; and
•
the effect of general economic and other conditions on refining and ethanol industry fundamentals.

We based our forward-looking statements on our current expectations, estimates, and projections about ourselves and our industry. We caution that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:

•
acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined products or receive feedstocks;
•
political and economic conditions in nations that produce crude oil or consume refined products;
•
demand for, and supplies of, refined products such as gasoline, diesel, jet fuel, petrochemicals, and ethanol;
•
demand for, and supplies of, crude oil and other feedstocks;
•
the ability of the members of the Organization of Petroleum Exporting Countries to agree on and to maintain crude oil price and production controls;
•
the level of consumer demand, including seasonal fluctuations;
•
refinery overcapacity or undercapacity;
•
our ability to successfully integrate any acquired businesses into our operations;
•
the actions taken by competitors, including both pricing and adjustments to refining capacity in response to market conditions;
•
the level of competitors’ imports into markets that we supply;



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•
accidents, unscheduled shutdowns, or other catastrophes affecting our refineries, machinery, pipelines, equipment, and information systems, or those of our suppliers or customers;
•
changes in the cost or availability of transportation for feedstocks and refined products;
•
the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;
•
the levels of government subsidies for alternative fuels;
•
the volatility in the market price of biofuel credits (primarily Renewable Identification Numbers (RINs) needed to comply with the U.S. federal Renewable Fuel Standard) and greenhouse gas (GHG) emission credits needed to comply with the requirements of various GHG emission programs;
•
delay of, cancellation of, or failure to implement planned capital projects and reali