VLO Form 10-Q - 9.30.2014

 
 
 
 
 
 
 
 
 
 
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 September 30, 2014
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 October 31, 2014 was 521,245,037.
 
 
 
 
 


VALERO ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 





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Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Par Value)
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and temporary cash investments
$
4,191

 
$
4,292

Receivables, net
8,175

 
8,751

Inventories
6,860

 
5,758

Income taxes receivable
79

 
72

Deferred income taxes
229

 
266

Prepaid expenses and other
132

 
138

Total current assets
19,666

 
19,277

Property, plant, and equipment, at cost
35,432

 
33,933

Accumulated depreciation
(8,983
)
 
(8,226
)
Property, plant, and equipment, net
26,449

 
25,707

Deferred charges and other assets, net
2,340

 
2,276

Total assets
$
48,455

 
$
47,260

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and capital lease obligations
$
600

 
$
303

Accounts payable
9,939

 
9,931

Accrued expenses
630

 
522

Taxes other than income taxes
1,282

 
1,345

Income taxes payable
641

 
773

Deferred income taxes
368

 
249

Total current liabilities
13,460

 
13,123

Debt and capital lease obligations, less current portion
5,783

 
6,261

Deferred income taxes
6,601

 
6,601

Other long-term liabilities
1,549

 
1,329

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
7,137

 
7,187

Treasury stock, at cost;
150,357,996 and 137,932,138 common shares
(7,773
)
 
(7,054
)
Retained earnings
21,034

 
18,970

Accumulated other comprehensive income
149

 
350

Total Valero Energy Corporation stockholders’ equity
20,554


19,460

Noncontrolling interests
508

 
486

Total equity
21,062

 
19,946

Total liabilities and equity
$
48,455

 
$
47,260

See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
34,408

 
$
36,137

 
$
102,985

 
$
103,645

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
31,023

 
33,931

 
93,820

 
96,139

Operating expenses:
 
 
 
 
 
 
 
Refining
987

 
954

 
2,926

 
2,742

Retail
—

 
—

 
—

 
226

Ethanol
118

 
102

 
358

 
281

General and administrative expenses
180

 
170

 
510

 
579

Depreciation and amortization expense
430

 
448

 
1,265

 
1,283

Total costs and expenses
32,738

 
35,605

 
98,879

 
101,250

Operating income
1,670

 
532

 
4,106

 
2,395

Other income, net
11

 
17

 
38

 
42

Interest and debt expense, net of capitalized interest
(98
)
 
(102
)
 
(296
)
 
(263
)
Income from continuing operations before income tax expense
1,583

 
447

 
3,848

 
2,174

Income tax expense
521

 
123

 
1,293

 
739

Income from continuing operations
1,062

 
324

 
2,555

 
1,435

Income (loss) from discontinued operations
—

 
—

 
(64
)
 
6

Net income
1,062

 
324

 
2,491

 
1,441

Less: Net income attributable to noncontrolling interests
3

 
12

 
16

 
9

Net income attributable to Valero Energy Corporation stockholders
$
1,059

 
$
312

 
$
2,475

 
$
1,432

 
 
 
 
 
 
 
 
Net income attributable to Valero Energy Corporation stockholders:
 
 
 
 
 
 
 
Continuing operations
$
1,059

 
$
312

 
$
2,539

 
$
1,426

Discontinued operations
—

 
—

 
(64
)
 
6

Total
$
1,059

 
$
312

 
$
2,475

 
$
1,432

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
2.01

 
$
0.58

 
$
4.78

 
$
2.61

Discontinued operations
—

 
—

 
(0.12
)
 
0.01

Total
$
2.01

 
$
0.58

 
$
4.66

 
$
2.62

Weighted-average common shares outstanding (in millions)
526

 
540

 
529

 
544

 
 
 
 
 
 
 
 
Earnings per common share – assuming dilution:
 
 
 
 
 
 
 
Continuing operations
$
2.00

 
$
0.57

 
$
4.76

 
$
2.60

Discontinued operations
—

 
—

 
(0.12
)
 
0.01

Total
$
2.00

 
$
0.57

 
$
4.64

 
$
2.61

Weighted-average common shares outstanding –
assuming dilution (in millions)
530

 
545

 
533

 
549

 
 
 
 
 
 
 
 
Dividends per common share
$
0.275

 
$
0.225

 
$
0.775

 
$
0.625


See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
1,062

 
$
324

 
$
2,491

 
$
1,441

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(274
)
 
181

 
(198
)
 
(87
)
Net gain (loss) on pension
and other postretirement benefits
(3
)
 
5

 
(5
)
 
347

Net gain (loss) on derivative instruments designated
and qualifying as cash flow hedges
—

 
(3
)
 
1

 
(7
)
Other comprehensive income (loss)
before income tax expense (benefit)
(277
)
 
183

 
(202
)
 
253

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

 
1

 
(1
)
 
119

Other comprehensive income (loss)
(277
)
 
182

 
(201
)
 
134

 
 
 
 
 
 
 
 
Comprehensive income
785

 
506

 
2,290

 
1,575

Less: Comprehensive income attributable to
noncontrolling interests
3

 
12

 
16

 
9

Comprehensive income attributable to
Valero Energy Corporation stockholders
$
782

 
$
494

 
$
2,274

 
$
1,566

See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
 
Nine Months Ended
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
2,491

 
$
1,441

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Depreciation and amortization expense
1,265

 
1,283

Aruba Refinery asset retirement expense and other
63

 
—

Deferred income tax expense
191

 
488

Changes in current assets and current liabilities
(808
)
 
(231
)
Changes in deferred charges and credits and
other operating activities, net
42

 
54

Net cash provided by operating activities
3,244

 
3,035

Cash flows from investing activities:
 
 
 
Capital expenditures
(1,453
)
 
(1,690
)
Deferred turnaround and catalyst costs
(492
)
 
(527
)
Other investing activities, net
(41
)
 
(56
)
Net cash used in investing activities
(1,986
)
 
(2,273
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(200
)
 
(480
)
Proceeds from the exercise of stock options
37

 
46

Purchase of common stock for treasury
(799
)
 
(589
)
Common stock dividends
(411
)
 
(342
)
Contributions from noncontrolling interests
14

 
45

Distributions to public unitholders of Valero Energy Partners LP
(8
)
 
—

Disposition of retail business:
 
 
 
Proceeds from short-term debt in anticipation of separation
—

 
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
51

 
27

Net cash used in financing activities
(1,316
)
 
(558
)
Effect of foreign exchange rate changes on cash
(43
)
 
(19
)
Net increase (decrease) in cash and temporary cash investments
(101
)
 
185

Cash and temporary cash investments at beginning of period
4,292

 
1,723

Cash and temporary cash investments at end of period
$
4,191

 
$
1,908

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 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 nine months ended September 30, 2014 and 2013 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited financial statements. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The balance sheet as of December 31, 2013 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, 2013.

Reclassification
As discussed in Note 3, in May 2014, we abandoned the Aruba Refinery. As a result, the refinery’s results of operations have been presented as discontinued operations in the consolidated statements of income for all periods presented.

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.

Income Taxes
In July 2013, the provisions of Accounting Standards Codification (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 did not affect our financial position or results of operations, nor did it require any additional disclosures.




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

New Accounting Pronouncements
In April 2014, the provisions of ASC Topic 205, “Presentation of Financial Statements,” and ASC Topic 360, “Property, Plant, and Equipment,” were amended to change the criteria for reporting discontinued operations. The provisions of these amendments modify the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity’s operations and financial results. These amendments require additional disclosures about discontinued operations and new disclosures for other disposals of individually material components of an organization that do not meet the definition of a discontinued operation. In addition, the guidance allows companies to have significant continuing involvement and continuing cash flows with the discontinued operation. These provisions are effective prospectively for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2015 will not affect our financial position or results of operations; however, it may result in changes to the manner in which future dispositions of operations or assets, if any, are presented in our financial statements, or it may require additional disclosures.

In May 2014, the Financial Accounting Standards Board amended the ASC and issued a new accounting standard, Topic 606, “Revenue from Contracts with Customers,” to clarify the principles for recognizing revenue. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The new standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period, and can be adopted either retrospectively to each prior reporting period presented using a practical expedient as allowed by the new standard or retrospectively with a cumulative effect adjustment to retained earnings as of the date of initial application. Early adoption is not permitted. We are currently evaluating the effect that adopting this new standard will have on our consolidated financial statements and related disclosures.

2.
VALERO ENERGY PARTNERS LP

In July 2013, we formed Valero Energy Partners LP (VLP), a master limited partnership, to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. On December 16, 2013, VLP completed its initial public offering (the Offering) of 17,250,000 common units at a price of $23.00 per unit. VLP received $369 million in net proceeds from the sale of the units, after deducting underwriting fees, structuring fees, and other offering costs. As of September 30, 2014, VLP’s assets included crude oil and refined petroleum products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of our Ardmore, McKee, Memphis, Port Arthur, and Three Rivers Refineries.

As of September 30, 2014 and December 31, 2013, we owned a 68.6 percent limited partner interest and a 2 percent general partner interest in VLP, and the public owned a 29.4 percent limited partner interest. VLP’s cash and temporary cash investments were $231 million and $375 million as of September 30, 2014 and December 31, 2013, respectively. Valero consolidates the financial statements of VLP into its financial statements and as such, VLP’s cash and temporary cash investments are included in Valero’s consolidated



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

cash and temporary cash investments. However, VLP’s cash and temporary cash investments can be used to settle only its obligations. In addition, VLP’s partnership capital attributable to the public’s ownership interest in VLP of $374 million and $370 million as of September 30, 2014 and December 31, 2013, respectively, is reflected in noncontrolling interests.

We have agreements with VLP that establish fees for certain general and administrative services, and operational and maintenance services provided by us. In addition, we have a master transportation services agreement and a master terminal services agreement with VLP under which VLP provides commercial transportation and terminaling services to us. These transactions are eliminated in consolidation.

On July 1, 2014, we sold to VLP our Texas Crude Systems Business, which is engaged in the business of transporting, terminaling, and storing crude oil and refined petroleum products through various pipeline and terminal systems that compose the McKee Crude System, the Three Rivers Crude System, and the Wynnewood Products System. In connection with this transaction, we entered into additional schedules under our existing master transportation services agreement and master terminal services agreement with VLP with respect to each system. Each system’s schedule constitutes a binding agreement between us and VLP for transportation or terminaling services (as applicable). Each schedule has an initial term of 10 years with one five-year renewal term at our option and contains minimum throughput requirements and inflation escalators. We also entered into an amended and restated omnibus agreement with VLP and an amended services and secondment agreement with the general partner of VLP. We sold the Texas Crude Systems Business for total cash consideration of $154 million. Because Valero consolidates the financial statements of VLP into its financial statements, this transaction was eliminated in consolidation and did not impact Valero’s consolidated financial position or cash flows.

3.
DISCONTINUED OPERATIONS

In May 2014, we decided to abandon our Aruba Refinery, except for the associated crude oil and refined products terminal assets that we continue to operate. As a result of our decision, the refinery’s results of operations have been presented in this report as discontinued operations for the three and nine months ended September 30, 2014 and 2013.
We had suspended operations of the refinery in 2012 and at that time we wrote off the entire carrying value of the refinery’s idled crude oil processing units and related infrastructure (refining assets) and supplies inventories that supported the refining operations. In addition, we terminated the employees who supported the refining operations and incurred severance costs at that time. Even though we suspended refining operations in 2012, we continued to maintain the refining assets to allow them to be restarted and did not abandon them until our recent decision to no longer pursue options to restart refining operations.
The Aruba Refinery resides on land leased from the Government of Aruba (GOA) and our agreements with the GOA require us to dismantle our leasehold improvements under certain conditions. Because of our May 2014 decision to abandon the refining assets, we believe the GOA will require us to dismantle those assets. As a result, we recognized an asset retirement obligation of $59 million, which was charged to expense during the second quarter of 2014 and is reflected in discontinued operations. We had not recognized an asset retirement obligation previously due to our belief that we would not be required to dismantle the assets as long as we intended to operate them. During the second quarter of 2014, we also recognized liabilities of



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

$4 million relating to obligations under certain contracts, including a liability for the remaining lease payments for the land on which the refining assets reside.
Selected results of operations of the Aruba Refinery are shown below (in millions).
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
2014
 
2013
Operating revenues
$
—

 
$
—

 
$
—

 
$
—

Income (loss) before income taxes
—

 
—

 
(64
)
 
6


There was no tax benefit recognized for the loss from discontinued operations for the nine months ended September 30, 2014 as we do not expect to realize this tax benefit.

4.
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. 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.

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. 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. We also incurred $30 million in costs during the three months ended June 30, 2013 to effect the separation, which were included in general and administrative expenses.

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.

In November 2013, we disposed of our 20 percent retained interest in CST.

Selected historical results of operations of our retail business prior to the separation are disclosed in Note 11. Subsequent to May 1, 2013 and through September 30, 2013, our share of CST’s results of operations was reflected in “other income, net.” Our share of income taxes incurred directly by CST during this period was 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
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.
INVENTORIES

Inventories consisted of the following (in millions):
 
September 30,
2014
 
December 31,
2013
Refinery feedstocks
$
3,100

 
$
2,135

Refined products and blendstocks
3,374

 
3,231

Ethanol feedstocks and products
156

 
166

Materials and supplies
230

 
226

Inventories
$
6,860

 
$
5,758


As of September 30, 2014 and December 31, 2013, the replacement cost (market value) of last in, first out (LIFO) inventories exceeded their LIFO carrying amounts by approximately $5.8 billion and $6.9 billion, respectively. As of September 30, 2014 and December 31, 2013, our non-LIFO inventories accounted for $1.2 billion and $851 million, respectively, of our total inventories.

6.
DEBT

Credit Facilities
Revolver
We have a $3 billion revolving credit facility (the Revolver) that has a maturity date of November 2018. We have the option to increase the aggregate commitments under the Revolver to $4.5 billion, subject to, among other things, the consent of the existing lenders whose commitments will be increased or any additional lenders providing such additional capacity. The Revolver has certain restrictive covenants, including a maximum debt-to-capitalization ratio of 60 percent. As of September 30, 2014 and December 31, 2013, our debt-to-capitalization ratios, calculated in accordance with the terms of the Revolver, were 10 percent and 12 percent, respectively.

VLP Revolver
VLP has a $300 million senior unsecured revolving credit facility agreement (the VLP Revolver) that has a maturity date of December 2018. The VLP Revolver is available only to the operations of VLP, and creditors of VLP do not have recourse against Valero.

Canadian Revolver
In addition to the Revolver and the VLP Revolver, one of our Canadian subsidiaries has a C$50 million committed revolving credit facility (Canadian Revolver) under which it may borrow and obtain letters of credit.

Activities Under Our Credit Facilities
During the nine months ended September 30, 2014 and 2013, we had no borrowings or repayments under the Revolver, the VLP Revolver, or our Canadian Revolver. As of September 30, 2014 and December 31, 2013, we had no borrowings outstanding under these credit facilities.



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

Letters of Credit
We had outstanding letters of credit under our committed credit facilities as follows (in millions):
 
 
 
 
 
Amounts Outstanding
 
Borrowing
Capacity
 
Expiration
 
September 30,
2014
 
December 31,
2013
Letter of credit facilities
$
550

 
June 2015
 
$
86

 
$
278

Revolver
$
3,000

 
November 2018
 
$
54

 
$
59

VLP Revolver
$
300

 
December 2018
 
$
—

 
$
—

Canadian Revolver
C$
50

 
November 2015
 
C$
10

 
C$
10


As of September 30, 2014 and December 31, 2013, we had $191 million and $189 million, respectively, of letters of credit outstanding under our uncommitted short-term bank credit facilities.

Non-Bank Debt
During the nine months ended September 30, 2014, we made a scheduled debt repayment of $200 million related to our 4.75% senior notes. During the nine months ended September 30, 2013, we made scheduled debt repayments of $300 million related to our 4.75% senior notes and $180 million related to our 6.7% senior notes.

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 2014, we amended this facility to extend the maturity date to July 2015. 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 nine months ended September 30, 2014 and 2013, we had no proceeds from or repayments under our accounts receivable sales facility. As of September 30, 2014 and December 31, 2013, we had $100 million outstanding under our accounts receivable sales facility.

Capitalized Interest
Capitalized interest was $17 million and $16 million for the three months ended September 30, 2014 and 2013, respectively, and $52 million and $101 million for the nine months ended September 30, 2014 and 2013, respectively.




10
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.
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 U.S. 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 EPA 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 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, results of operations, or liquidity.




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

8.
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 (in millions):
 
Nine Months Ended September 30,
 
2014
 
2013
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
Balance as of
beginning of period
$
19,460

 
$
486

 
$
19,946

 
$
18,032

 
$
63

 
$
18,095

Net income
2,475

 
16

 
2,491

 
1,432

 
9

 
1,441

Dividends
(411
)
 
—

 
(411
)
 
(342
)
 
—

 
(342
)
Stock-based
compensation expense
30

 
—

 
30

 
31

 
—

 
31

Tax deduction in excess
of stock-based
compensation expense
33

 
—

 
33

 
31

 
—

 
31

Transactions
in connection with
stock-based
compensation plans:
 
 
 
 
 
 
 
 
 
 
 
Stock issuances
37

 
—

 
37

 
47

 
—

 
47

Stock repurchases
(177
)
 
—

 
(177
)
 
(220
)
 
—

 
(220
)
Stock repurchases under
buyback program
(692
)
 
—

 
(692
)
 
(396
)
 
—

 
(396
)
Separation of retail
business
—

 
—

 
—

 
(479
)
 
—

 
(479
)
Contributions from
noncontrolling interests
—

 
14

 
14

 
—

 
45

 
45

Distributions to public
unitholders of
Valero Energy Partners LP
—

 
(8
)
 
(8
)
 
—

 
—

 
—

Other comprehensive
income (loss)
(201
)
 
—

 
(201
)
 
134

 
—

 
134

Balance as of end of period
$
20,554

 
$
508

 
$
21,062

 
$
18,270

 
$
117

 
$
18,387


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




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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):
 
Nine Months Ended September 30,
 
2014
 
2013
 
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
Balance as of beginning of period
673

 
(138
)
 
673

 
(121
)
Transactions in connection with
stock-based compensation plans:
 
 
 
 
 
 
 
Stock issuances
—

 
3

 
—

 
3

Stock repurchases
—

 
(2
)
 
—

 
(5
)
Stock repurchases under buyback program
—

 
(13
)
 
—

 
(9
)
Balance as of end of period
673

 
(150
)
 
673

 
(132
)

Common Stock Dividends
On October 23, 2014, our board of directors declared a quarterly cash dividend of $0.275 per common share payable on December 17, 2014 to holders of record at the close of business on November 19, 2014.

Income Tax Effects Related to Components of Other Comprehensive Income
The tax effects allocated to each component of other comprehensive income (loss) were as follows (in millions):
 
Three Months Ended September 30,
 
2014
 
2013
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
Foreign currency translation adjustment
$
(274
)
 
$
—

 
$
(274
)
 
$
181

 
$
—

 
$
181

Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified into income related to:
 
 
 
 

 
 
 
 
 
 
Net actuarial loss
8

 
3

 
5

 
14

 
5

 
9

Prior service credit
(11
)
 
(3
)
 
(8
)
 
(9
)
 
(3
)
 
(6
)
Net gain (loss) on pension and other
postretirement benefits
(3
)
 
—

 
(3
)
 
5

 
2

 
3

Derivative instruments designated and
qualifying as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) arising during the period
(5
)
 
(2
)
 
(3
)
 
3

 
1

 
2

Net (gain) loss reclassified into income
5

 
2

 
3

 
(6
)
 
(2
)
 
(4
)
Net loss on cash flow hedges
—

 
—

 
—

 
(3
)
 
(1
)
 
(2
)
Other comprehensive income (loss)
$
(277
)
 
$
—

 
$
(277
)
 
$
183

 
$
1

 
$
182





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

 
Nine Months Ended September 30,
 
2014
 
2013
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
Foreign currency translation adjustment
$
(198
)
 
$
—

 
$
(198
)
 
$
(87
)
 
$
—

 
$
(87
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Gain arising during the period related to
plan amendments
—

 
—

 
—

 
328

 
115

 
213

Amounts reclassified into income related to:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial loss
25

 
9

 
16

 
43

 
15

 
28

Prior service credit
(30
)
 
(11
)
 
(19
)
 
(24
)
 
(9
)
 
(15
)
Net gain (loss) on pension and other
postretirement benefits
(5
)
 
(2
)
 
(3
)
 
347

 
121

 
226

Derivative instruments designated and
qualifying as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Net loss arising during the period
(1
)
 
—

 
(1
)
 
(6
)
 
(2
)
 
(4
)
Net (gain) loss reclassified into income
2

 
1

 
1

 
(1
)
 
—

 
(1
)
Net gain (loss) on cash flow hedges
1

 
1

 
—

 
(7
)
 
(2
)
 
(5
)
Other comprehensive income (loss)
$
(202
)
 
$
(1
)
 
$
(201
)
 
$
253

 
$
119

 
$
134


Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component, net of tax, were as follows (in millions):
 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
Items
 
Gains and
(Losses) on
Cash Flow
Hedges
 
Total
Balance as of December 31, 2013
$
408

 
$
(58
)
 
$
—

 
$
350

Other comprehensive loss
before reclassifications
(198
)
 
—

 
(1
)
 
(199
)
Amounts reclassified from
accumulated other comprehensive
income (loss)
—

 
(3
)
 
1

 
(2
)
Net other comprehensive loss
(198
)
 
(3
)
 
—

 
(201
)
Balance as of September 30, 2014
$
210

 
$
(61
)
 
$
—

 
$
149





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

 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
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
(87
)
 
213

 
(4
)
 
122

Amounts reclassified from
accumulated other comprehensive
income (loss)
—

 
13

 
(1
)
 
12

Net other comprehensive income (loss)
(87
)
 
226

 
(5
)
 
134

Separation of retail business
(159
)
 
—

 
—

 
(159
)
Balance as of September 30, 2013
$
419

 
$
(332
)
 
$
(4
)
 
$
83

 
 
 
 
 
 
 
 
 
 
 
 
 
 



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

9.
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
 
2014
 
2013
 
2014
 
2013
Three months ended September 30:
 
 
 
 
 
 
 
Service cost
$
30

 
$
34

 
$
3

 
$
3

Interest cost
23

 
21

 
4

 
4

Expected return on plan assets
(34
)
 
(33
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service credit
(6
)
 
(5
)
 
(5
)
 
(4
)
Net actuarial (gain) loss
9

 
14

 
(1
)
 
—

Net periodic benefit cost
$
22

 
$
31

 
$
1

 
$
3

 
 
 
 
 
 
 
 
Nine months ended September 30:
 
 
 
 
 
 
 
Service cost
$
90

 
$
105

 
$
6

 
$
9

Interest cost
69

 
65

 
12

 
13

Expected return on plan assets
(100
)
 
(99
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service credit
(16
)
 
(14
)
 
(14
)
 
(10
)
Net actuarial (gain) loss
26

 
43

 
(1
)
 
—

Net periodic benefit cost
$
69

 
$
100

 
$
3

 
$
12


In February 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 changed 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 nine months ended September 30, 2013. The benefit of this remeasurement will be amortized into income through 2025.

Our anticipated contributions to our pension and other postretirement benefit plans during 2014 have not changed from amounts previously disclosed in our financial statements for the year ended December 31, 2013. We contributed $31 million and $29 million, respectively, to our pension plans and $14 million and $13 million, respectively, to our other postretirement benefit plans during the nine months ended September 30, 2014 and 2013.




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

10.
EARNINGS PER COMMON SHARE

Earnings per common share were computed as follows (dollars and shares in millions, except per share amounts):
 
Three Months Ended September 30,
 
2014
 
2013
 
Restricted
Stock
 
Common
Stock
 
Restricted
Stock
 
Common
Stock
Earnings per common share from
continuing operations:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
from continuing operations
 
 
$
1,059

 
 
 
$
312

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
145

 

 
121

Nonvested restricted stock
 
 
—

 

 
1

Undistributed earnings
 
 
$
914

 

 
$
190

Weighted-average common shares outstanding
2

 
526

 
3

 
540

Earnings per common share from
continuing operations:
 
 
 
 
 
 
 
Distributed earnings
$
0.28

 
$
0.28

 
$
0.23

 
$
0.23

Undistributed earnings
1.73

 
1.73

 
0.35

 
0.35

Total earnings per common share from
continuing operations
$
2.01

 
$
2.01

 
$
0.58

 
$
0.58

 
 
 
 
 
 
 
 
Earnings per common share from
continuing operations – assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
from continuing operations
 
 
$
1,059

 
 
 
$
312

Weighted-average common shares outstanding
 
 
526

 
 
 
540

Common equivalent shares:
 
 
 
 
 
 
 
Stock options
 
 
2

 
 
 
3

Performance awards and
nonvested restricted stock
 
 
2

 
 
 
2

Weighted-average common shares outstanding –
assuming dilution
 
 
530

 
 
 
545

Earnings per common share from
continuing operations – assuming dilution
 
 
$
2.00

 
 
 
$
0.57




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

 
Nine Months Ended September 30,
 
2014
 
2013
 
Restricted
Stock
 
Common
Stock
 
Restricted
Stock
 
Common
Stock
Earnings per common share from
continuing operations:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
from continuing operations
 
 
$
2,539

 
 
 
$
1,426

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
410

 
 
 
340

Nonvested restricted stock
 
 
1

 
 
 
2

Undistributed earnings
 
 
$
2,128

 
 
 
$
1,084

Weighted-average common shares outstanding
2

 
529

 
3

 
544

Earnings per common share from
continuing operations:
 
 
 
 
 
 
 
Distributed earnings
$
0.77

 
$
0.77

 
$
0.63

 
$
0.63

Undistributed earnings
4.01

 
4.01

 
1.98

 
1.98

Total earnings per common share from
continuing operations
$
4.78

 
$
4.78

 
$
2.61

 
$
2.61

 
 
 
 
 
 
 
 
Earnings per common share from
continuing operations – assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
from continuing operations
 
 
$
2,539

 
 
 
$
1,426

Weighted-average common shares outstanding
 
 
529

 
 
 
544

Common equivalent shares:
 
 
 
 
 
 
 
Stock options
 
 
3

 
 
 
3

Performance awards and
nonvested restricted stock
 
 
1

 
 
 
2

Weighted-average common shares outstanding –
assuming dilution
 
 
533

 
 
 
549

Earnings per common share from
continuing operations – assuming dilution
 
 
$
4.76

 
 
 
$
2.60







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

11.
SEGMENT INFORMATION

In May 2013, we completed the separation of our retail business, CST, and as a result, we no longer operate a retail business or report retail segment operating results. Segment activity related to our retail business prior to the separation is reflected in the retail segment results below. Motor fuel sales to CST, 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
 
Ethanol
 
Retail
 
Corporate
 
Total
Three months ended September 30, 2014:
 
 
 
 
 
 
 
 
 
Operating revenues from external
customers
$
33,274

 
$
1,134

 
$
—

 
$
—

 
$
34,408

Intersegment revenues
—

 
21

 
—

 
—

 
21

Operating income (loss)
1,664

 
198

 
—

 
(192
)
 
1,670

 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
Operating revenues from external
customers
34,747

 
1,390

 
—

 
—

 
36,137

Intersegment revenues
—

 
16

 
—

 
—

 
16

Operating income (loss)
600

 
113

 
—

 
(181
)
 
532

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014:
 
 
 
 
 
 
 
 
 
Operating revenues from external
customers
99,183

 
3,802

 
—

 
—

 
102,985

Intersegment revenues
—

 
55

 
—

 
—

 
55

Operating income (loss)
4,023

 
628

 
—

 
(545
)
 
4,106

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013:
 
 
 
 
 
 
 
 
 
Operating revenues from external
customers
95,864

 
3,885

 
3,896

 
—

 
103,645

Intersegment revenues
2,876

 
86

 
—

 
—

 
2,962

Operating income (loss)
2,727

 
222

 
81

 
(635
)
 
2,395





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

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

 
September 30,
2014
 
December 31,
2013
Refining
$
42,378

 
$
41,227

Ethanol
916

 
889

Corporate
5,161

 
5,144

Total assets
$
48,455

 
$
47,260


In March 2014, we purchased an idled corn ethanol plant in Mount Vernon, Indiana for $34 million from a wholly owned subsidiary of Aventine Renewable Energy Holdings, Inc. We resumed production at that plant during the third quarter of 2014. We will finalize our purchase accounting once a determination of the fair values of the assets acquired and liabilities assumed is available, pending the completion of independent appraisals and other evaluations.

12.
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):
 
Nine Months Ended
September 30,
 
2014
 
2013
Decrease (increase) in current assets:
 
 
 
Receivables, net
$
503

 
$
(1,135
)
Inventories
(1,164
)
 
(1,335
)
Income taxes receivable
(8
)
 
(122
)
Prepaid expenses and other
2

 
8

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
(57
)
 
2,031

Accrued expenses
73

 
51

Taxes other than income taxes
(24
)
 
276

Income taxes payable
(133
)
 
(5
)
Changes in current assets and current liabilities
$
(808
)
 
$
(231
)

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;



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

•
the amounts shown above for the nine months ended September 30, 2013 exclude the change in current assets and current liabilities resulting from the separation of our retail business as described in Note 4;
•
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 activities for the nine months ended September 30, 2014 and 2013.

Noncash financing activities for the nine months ended September 30, 2014 included an accrual of $70 million for the purchase of 1,500,000 shares of our common stock, which was settled in early October 2014. Noncash financing activities for the nine months ended September 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 4.

Cash flows related to interest and income taxes were as follows (in millions):
 
Nine Months Ended
September 30,
 
2014
 
2013
Interest paid in excess of amount capitalized
$
271

 
$
237

Income taxes paid, net
1,209

 
347


Cash flows related to the discontinued operations of the Aruba Refinery were immaterial for the nine months ended September 30, 2014 and 2013.




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

13.
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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Table of Contents



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 September 30, 2014 and December 31, 2013.

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.
 
September 30, 2014
 
 
 
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
$
1,334

 
$
42

 
$
—

 
$
1,376

 
$
(1,222
)
 
$
(84
)
 
$
70

 
$
—

Foreign currency
contracts
8

 
—

 
—

 
8

 
n/a

 
n/a

 
8

 
n/a

Investments of certain
benefit plans
101

 
—

 
11

 
112

 
n/a

 
n/a

 
112

 
n/a

Total
$
1,443

 
$
42

 
$
11

 
$
1,496

 
$
(1,222
)
 
$
(84
)
 
$
190

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 

 
 
 
 
 

 
 
Commodity derivative
contracts
$
1,185

 
$
51

 
$
—

 
$
1,236

 
$
(1,222
)
 
$
(14
)
 
$
—

 
$
(49
)
Biofuels blending
obligation
—

 
8

 
—

 
8

 
n/a

 
n/a

 
8

 
n/a

Physical purchase
contracts
—

 
17

 
—

 
17

 
n/a

 
n/a

 
17

 
n/a

Total
$
1,185

 
$
76

 
$
—

 
$
1,261

 
$
(1,222
)
 
$
(14
)
 
$
25

 





23
Table of Contents



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

 
December 31, 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
$
499

 
$
38

 
$
—

 
$
537

 
$
(505
)
 
$
(7
)
 
$
25

 
$
—

Investments of certain
benefit plans
98

 
—

 
11

 
109

 
n/a

 
n/a

 
109

 
n/a

Total
$
597

 
$
38

 
$
11

 
$
646

 
$
(505
)
 
$
(7
)
 
$
134