Document
 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 29, 2016 was 461,340,907.
 
 
 
 
 


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)
 
June 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and temporary cash investments
$
4,925

 
$
4,114

Receivables, net
4,880

 
4,464

Inventories
6,137

 
5,898

Income taxes receivable
48

 
218

Prepaid expenses and other
190

 
204

Total current assets
16,180

 
14,898

Property, plant, and equipment, at cost
37,363

 
36,907

Accumulated depreciation
(10,774
)
 
(10,204
)
Property, plant, and equipment, net
26,589

 
26,703

Deferred charges and other assets, net
2,683

 
2,626

Total assets
$
45,452

 
$
44,227

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and capital lease obligations
$
864

 
$
127

Accounts payable
5,943

 
4,907

Accrued expenses
439

 
554

Taxes other than income taxes
1,050

 
1,069

Income taxes payable
356

 
337

Total current liabilities
8,652

 
6,994

Debt and capital lease obligations, less current portion
6,646

 
7,208

Deferred income taxes
7,279

 
7,060

Other long-term liabilities
1,471

 
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
7,055

 
7,064

Treasury stock, at cost;
211,195,867 and 200,462,208 common shares
(11,417
)
 
(10,799
)
Retained earnings
25,933

 
25,188

Accumulated other comprehensive loss
(1,002
)
 
(933
)
Total Valero Energy Corporation stockholders’ equity
20,576


20,527

Noncontrolling interests
828

 
827

Total equity
21,404

 
21,354

Total liabilities and equity
$
45,452

 
$
44,227

See Condensed Notes to Consolidated Financial Statements.



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Table of Contents

VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Operating revenues (a)
$
19,584

 
$
25,118

 
$
35,298

 
$
46,448

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (excluding the lower of cost or market inventory
valuation adjustment)
17,120

 
21,394

 
30,627

 
39,557

Lower of cost or market inventory valuation adjustment
(454
)
 
—

 
(747
)
 
—

Operating expenses
1,001

 
1,043

 
2,031

 
2,127

General and administrative expenses
159

 
178

 
315

 
325

Depreciation and amortization expense
471

 
425

 
956

 
866

Asset impairment loss
56

 
—

 
56

 
—

Total costs and expenses
18,353

 
23,040

 
33,238

 
42,875

Operating income
1,231

 
2,078

 
2,060

 
3,573

Other income, net
14

 
8

 
23

 
32

Interest and debt expense, net of capitalized interest
(111
)
 
(113
)
 
(219
)
 
(214
)
Income before income tax expense
1,134

 
1,973

 
1,864

 
3,391

Income tax expense
291

 
608

 
508

 
1,058

Net income
843

 
1,365

 
1,356

 
2,333

Less: Net income attributable to noncontrolling interests
29

 
14

 
47

 
18

Net income attributable to Valero Energy Corporation stockholders
$
814

 
$
1,351

 
$
1,309

 
$
2,315

 
 
 
 
 
 
 
 
Earnings per common share
$
1.74

 
$
2.67

 
$
2.79

 
$
4.53

Weighted-average common shares outstanding (in millions)
467

 
505

 
468

 
509

 
 
 
 
 
 
 
 
Earnings per common share – assuming dilution
$
1.73

 
$
2.66

 
$
2.78

 
$
4.52

Weighted-average common shares outstanding –
assuming dilution (in millions)
470

 
508

 
471

 
512

 
 
 
 
 
 
 
 
Dividends per common share
$
0.60

 
$
0.40

 
$
1.20

 
$
0.80

_______________________________________________
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
(a) Includes excise taxes on sales by certain of our international operations
$
1,470

 
$
1,513

 
$
2,865

 
$
2,939

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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
843

 
$
1,365

 
$
1,356

 
$
2,333

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(202
)
 
197

 
(80
)
 
(169
)
Net gain on pension
and other postretirement benefits
3

 
6

 
6

 
11

Other comprehensive income (loss) before
income tax expense (benefit)
(199
)
 
203

 
(74
)
 
(158
)
Income tax expense (benefit) related to
items of other comprehensive income (loss)
1

 
2

 
(6
)
 
4

Other comprehensive income (loss)
(200
)
 
201

 
(68
)
 
(162
)
 
 
 
 
 
 
 
 
Comprehensive income
643

 
1,566

 
1,288

 
2,171

Less: Comprehensive income attributable to
noncontrolling interests
29

 
14

 
48

 
18

Comprehensive income attributable to
Valero Energy Corporation stockholders
$
614

 
$
1,552

 
$
1,240

 
$
2,153

See Condensed Notes to Consolidated Financial Statements.



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Table of Contents

VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
 
Six Months Ended
June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
1,356

 
$
2,333

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Depreciation and amortization expense
956

 
866

Lower of cost or market inventory valuation adjustment
(747
)
 
—

Asset impairment loss
56

 
—

Deferred income tax expense (benefit)
195

 
(82
)
Changes in current assets and current liabilities
1,130

 
615

Changes in deferred charges and credits and
other operating activities, net
13

 
30

Net cash provided by operating activities
2,959

 
3,762

Cash flows from investing activities:
 
 
 
Capital expenditures
(610
)
 
(828
)
Deferred turnaround and catalyst costs
(325
)
 
(400
)
Other investing activities, net
4

 
14

Net cash used in investing activities
(931
)
 
(1,214
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuances or borrowings
197

 
1,446

Repayments of debt and capital lease obligations
(24
)
 
(479
)
Proceeds from the exercise of stock options
3

 
20

Purchase of common stock for treasury
(665
)
 
(992
)
Common stock dividends
(564
)
 
(409
)
Distributions to noncontrolling interests
(public unitholders) of Valero Energy Partners LP
(14
)
 
(9
)
Distributions to other noncontrolling interest
(33
)
 
(25
)
Other financing activities, net
(137
)
 
16

Net cash used in financing activities
(1,237
)
 
(432
)
Effect of foreign exchange rate changes on cash
20

 
(41
)
Net increase in cash and temporary cash investments
811

 
2,075

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

 
3,689

Cash and temporary cash investments at end of period
$
4,925

 
$
5,764

See Condensed Notes to Consolidated Financial Statements.



4
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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 and six months ended June 30, 2016 and 2015 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited financial statements. Operating results for the three and six months ended June 30, 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 9 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, which provides that the staff 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



6
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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.

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 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 in 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.



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

Effective January 1, 2016, we adopted this guidance on a prospective basis, and such adoption did not materially affect our financial position, results of operations, or cash flows. Excess tax benefits, which were previously reported in cash flows from financing activities, are currently reported in cash flows from operating activities.

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 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.




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

2.
IMPAIRMENT

In 2012, we suspended the operations of the Aruba Refinery and reorganized the associated crude oil and refined products terminal assets into a terminaling and transshipment facility (collectively, the Aruba Terminal), which we continue to operate. We also wrote off all of the carrying value of the refining assets at that time because we determined they had no value after considering estimated salvage costs, and in 2014, we formally abandoned those refining assets. (We now refer to those refining assets as the Aruba Refinery.) Since that time, we have been in negotiations with the Government of Aruba (GOA) to settle our obligations under various agreements, including agreements that require us to dismantle our leasehold improvements under certain conditions.

In June 2016, the GOA entered into definitive agreements with an unrelated third party that provide for such third party to lease the Aruba Refinery and Aruba Terminal from the GOA, restart and operate the Aruba Refinery, and operate the Aruba Terminal. Because of this development, we now believe that it is more likely than not that we will ultimately transfer ownership of the Aruba Refinery and Aruba Terminal to the GOA and settle the obligations mentioned above. Therefore, we evaluated the Aruba Terminal for potential impairment as of June 30, 2016 and concluded that it was impaired, resulting in an asset impairment loss of $56 million related to our refining segment. See Note 12 for disclosure related to the method to determine fair value. No income tax benefit was recorded for this asset impairment loss as we do not expect to realize a tax benefit.

We are continuing to negotiate with the GOA regarding the matters discussed above and with the unrelated third party, but the resolution of those matters is not yet known. In addition, a negotiated resolution, if reached, must ultimately be voted on and approved by the Aruba Parliament.

3.
INVENTORIES

Inventories consisted of the following (in millions):
 
June 30,
2016

December 31,
2015
Refinery feedstocks
$
2,389

 
$
2,404

Refined products and blendstocks
3,271

 
3,774

Ethanol feedstocks and products
226

 
242

Materials and supplies
251

 
244

Inventories, before lower of cost or market
inventory valuation reserve
6,137

 
6,664

Lower of cost or market inventory valuation reserve
—

 
(766
)
Inventories
$
6,137

 
$
5,898


Inventories are valued at the lower of cost or market. As of December 31, 2015, we had a valuation reserve of $766 million in order to state our inventories at market. As of June 30, 2016, we reevaluated our inventories and determined that our cost was lower than market. As a result, for the six months ended June 30, 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 $747 million. The income statement benefit for the six months ended June 30,



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

2016 differs from the change in the balance sheet reserve due to the foreign currency effect of inventories held by our international operations.

As of June 30, 2016, the replacement cost (market value) of last-in, first-out (LIFO) inventories exceeded their LIFO carrying amounts by $713 million. As of June 30, 2016 and December 31, 2015, our non-LIFO inventories accounted for $681 million and $668 million, respectively, of our total inventories.

4.
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 June 30, 2016 or December 31, 2015, and we had no borrowings under the Revolver during the six months ended June 30, 2016 and 2015.

VLP Revolver
VLP has a $750 million senior unsecured revolving credit facility (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 June 30, 2016.

During the six months ended June 30, 2016, VLP borrowed $139 million under the VLP Revolver in connection with VLP’s acquisition of the McKee Terminal Services Business from us in April 2016. During the six months ended June 30, 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. During the six months ended June 30, 2016 and 2015, VLP made no repayments under the VLP Revolver.

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 June 30, 2016 or December 31, 2015, and we had no borrowings under the Canadian Revolver during the six months ended June 30, 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 eligible trade receivables on a revolving basis. In July 2016, we amended our agreement to decrease the facility from $1.4 billion to $1.3 billion and extended the maturity date to July 2017. 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



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

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 six months ended June 30, 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 revolving credit facilities as follows (in millions):
 
 
 
 
 
 
June 30, 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
 
$
314

 
$
—

 
$
436

Canadian Revolver
 
C$
50

 
November 2016
 
C$
—

 
C$
10

 
C$
40

Accounts receivable
sales facility (a)
 
$
1,400

 
July 2016
 
$
100

 
$
—

 
$
1,110

Letter of credit facilities (b)
 
$
275

 
June 2016 and
November 2016
 
$
—

 
$
16

 
$
259

 
 
 
 
 
 
 
 
 
 
 
Uncommitted facilities:
 
 
 
 
 
 
 
 
 
 
Letter of credit facilities
 
$
700

 
N/A
 
$
—

 
$
189

 
$
511

___________________
(a)
As of June 30, 2016, the actual availability under the accounts receivable sales facility fell below the facility borrowing capacity to $1.2 billion primarily due to a decrease in eligible trade receivables as a result of the current market price environment for the finished products that we produce.
(b)
In July 2016, we amended one of our committed letter of credit facilities to extend the maturity date from June 2016 to June 2017.

Non-Bank Debt
During the six months ended June 30, 2016, we had no borrowings or repayments under our non-bank debt.

During the six months ended June 30, 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.

During the six months ended June 30, 2015, we made scheduled debt repayments of $400 million related to our 4.5 percent senior notes and $75 million related to our 8.75 percent debentures.




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

Other Debt
In June 2016, a joint venture in Canada that we consolidate entered into a C$72 million senior secured credit facility. This non-revolving credit facility bears interest at a fixed rate (as defined by the lender) plus the applicable margin and matures in June 2023. Borrowings under this facility totaled C$72 million for the six months ended June 30, 2016. As of June 30, 2016, the effective interest rate of this facility was 3.85 percent.

Capitalized Interest
Capitalized interest was $19 million and $16 million for the three months ended June 30, 2016 and 2015, respectively, and $39 million and $32 million for the six months ended June 30, 2016 and 2015, respectively.

5.
COMMITMENTS AND CONTINGENCIES

Environmental Matters
We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and during 2015, one of these companies assumed the ongoing remediation in the Village pursuant to a federal court order. We had previously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The parties involved in the initial response may have further claims 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)

6.
EQUITY

Reconciliation of Balances
The following is a reconciliation of the beginning and ending balances of equity attributable to our stockholders, equity attributable to noncontrolling interests, and total equity (in millions):
 
Six Months Ended June 30,
 
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
1,309

 
47

 
1,356

 
2,315

 
18

 
2,333

Dividends
(564
)
 
—

 
(564
)
 
(409
)
 
—

 
(409
)
Stock-based
compensation expense
23

 
—

 
23

 
18

 
—

 
18

Tax deduction in excess
of stock-based
compensation expense
—

 
—

 
—

 
27

 
—

 
27

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

 
—

 
3

 
20

 
—

 
20

Stock purchases
(43
)
 
—

 
(43
)
 
(105
)
 
—

 
(105
)
Stock purchases under
purchase program
(610
)
 
—

 
(610
)
 
(928
)
 
—

 
(928
)
Contributions from
noncontrolling interests
—

 
—

 
—

 
—

 
2

 
2

Distributions to
noncontrolling interests
—

 
(47
)
 
(47
)
 
—

 
(34
)
 
(34
)
Other comprehensive
income (loss)
(69
)
 
1

 
(68
)
 
(162
)
 
—

 
(162
)
Balance as of end of period
$
20,576

 
$
828

 
$
21,404

 
$
21,453

 
$
553

 
$
22,006


The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See Note 9 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):
 
Six Months Ended June 30,
 
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
)
 
—

 
(2
)
Stock purchases under purchase program
—

 
(11
)
 
—

 
(15
)
Balance as of end of period
673

 
(211
)
 
673

 
(174
)

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.

Common Stock Dividends
On July 28, 2016, our board of directors declared a quarterly cash dividend of $0.60 per common share payable on September 8, 2016 to holders of record at the close of business on August 11, 2016.

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 June 30,
 
2016
 
2015
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
Foreign currency translation adjustment
$
(202
)
 
$
—

 
$
(202
)
 
$
197

 
$
—

 
$
197

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

 
 
 
 
 
 
Net actuarial loss
12

 
5

 
7

 
16

 
6

 
10

Prior service credit
(9
)
 
(4
)
 
(5
)
 
(10
)
 
(4
)
 
(6
)
Net gain on pension and other
postretirement benefits
3

 
1

 
2

 
6

 
2

 
4

Other comprehensive income (loss)
$
(199
)
 
$
1

 
$
(200
)
 
$
203

 
$
2

 
$
201




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

 
Six Months Ended June 30,
 
2016
 
2015
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
Foreign currency translation adjustment
$
(80
)
 
$
—

 
$
(80
)
 
$
(169
)
 
$
—

 
$
(169
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Miscellaneous gain arising during the period
—

 
(8
)
 
8

 
—

 
—

 
—

Amounts reclassified into income related to:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial loss
24

 
9

 
15

 
31

 
11

 
20

Prior service credit
(18
)
 
(7
)
 
(11
)
 
(20
)
 
(7
)
 
(13
)
Net gain on pension and other
postretirement benefits
6

 
(6
)
 
12

 
11

 
4

 
7

Other comprehensive income (loss)
$
(74
)
 
$
(6
)
 
$
(68
)
 
$
(158
)
 
$
4

 
$
(162
)

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 (loss)
before reclassifications
(81
)
 
8

 
(73
)
Amounts reclassified from accumulated
other comprehensive loss
—

 
4

 
4

Net other comprehensive income (loss)
(81
)
 
12

 
(69
)
Balance as of June 30, 2016
$
(686
)
 
$
(316
)
 
$
(1,002
)

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

 
$
(368
)
 
$
(367
)
Other comprehensive loss
before reclassifications
(169
)
 
—

 
(169
)
Amounts reclassified from accumulated
other comprehensive loss
—

 
7

 
7

Net other comprehensive income (loss)
(169
)
 
7

 
(162
)
Balance as of June 30, 2015
$
(168
)
 
$
(361
)
 
$
(529
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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

7.
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 June 30:
 
 
 
 
 
 
 
Service cost
$
28

 
$
28

 
$
1

 
$
2

Interest cost
21

 
25

 
3

 
3

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

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service credit
(5
)
 
(6
)
 
(4
)
 
(4
)
Net actuarial loss
12

 
15

 
—

 
—

Net periodic benefit cost
$
22

 
$
28

 
$
—

 
$
1

 
 
 
 
 
 
 
 
Six months ended June 30:
 
 
 
 
 
 
 
Service cost
$
56

 
$
55

 
$
3

 
$
4

Interest cost
42

 
49

 
6

 
7

Expected return on plan assets
(69
)
 
(67
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service credit
(10
)
 
(11
)
 
(8
)
 
(9
)
Net actuarial loss
24

 
31

 
—

 
—

Net periodic benefit cost
$
43

 
$
57

 
$
1

 
$
2


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 $14 million and $21 million, respectively, to our pension plans and $8 million and $6 million, respectively, to our other postretirement benefit plans during the six months ended June 30, 2016 and 2015.



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

8.
EARNINGS PER COMMON SHARE

Earnings per common share were computed as follows (dollars and shares in millions, except per share amounts):
 
Three Months Ended June 30,
 
2016
 
2015
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
814

 
 
 
$
1,351

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
281

 
 
 
203

Participating securities
 
 
1

 
 
 
—

Undistributed earnings
 
 
$
532

 
 
 
$
1,148

Weighted-average common shares outstanding
1

 
467

 
2

 
505

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
0.60

 
$
0.60

 
$
0.40

 
$
0.40

Undistributed earnings
1.14

 
1.14

 
2.27

 
2.27

Total earnings per common share
$
1.74

 
$
1.74

 
$
2.67

 
$
2.67

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
814

 
 
 
$
1,351

Weighted-average common shares outstanding
 
 
467

 
 
 
505

Common equivalent shares:
 
 
 
 
 
 
 
Stock options
 
 
2

 
 
 
2

Performance awards and
nonvested restricted stock
 
 
1

 
 
 
1

Weighted-average common shares outstanding –
assuming dilution
 
 
470

 
 
 
508

Earnings per common share – assuming dilution
 
 
$
1.73

 
 
 
$
2.66




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

 
Six Months Ended June 30,
 
2016
 
2015
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
1,309

 
 
 
$
2,315

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
562

 
 
 
408

Participating securities
 
 
2

 
 
 
1

Undistributed earnings
 
 
$
745

 
 
 
$
1,906

Weighted-average common shares outstanding
1

 
468

 
2

 
509

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
1.20

 
$
1.20

 
$
0.80

 
$
0.80

Undistributed earnings
1.59

 
1.59

 
3.73

 
3.73

Total earnings per common share
$
2.79

 
$
2.79

 
$
4.53

 
$
4.53

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
1,309

 
 
 
$
2,315

Weighted-average common shares outstanding
 
 
468

 
 
 
509

Common equivalent shares:
 
 
 
 
 
 
 
Stock options
 
 
2

 
 
 
2

Performance awards and
nonvested restricted stock
 
 
1

 
 
 
1

Weighted-average common shares outstanding –
assuming dilution
 
 
471

 
 
 
512

Earnings per common share – assuming dilution
 
 
$
2.78

 
 
 
$
4.52


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)

9.
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 June 30, 2016, we owned a 66.1 percent limited partner interest and a 2 percent general partner interest in VLP, and public unitholders owned a 31.9 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 because 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 and because 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 66.1 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. Our significant agreements with DGD 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 that we are the primary beneficiary



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

of DGD. DGD has risk associated with its operations because 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 that we are 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).

 
June 30, 2016
 
VLP
 
DGD
 
Other
 
Total
Assets
 
 
 
 
 
 
 
Cash and temporary cash investments
$
67

 
$
83

 
$
18

 
$
168

Other current assets
1

 
86

 
—

 
87

Property, plant, and equipment, net
801

 
356

 
139

 
1,296

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
$
10

 
$
16

 
$
7

 
$
33

Debt and capital lease obligations,
less current portion
314

 
—

 
50

 
364




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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





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

10.
SEGMENT INFORMATION

The following table reflects activity related to our reportable segments (in millions):
 
Refining
 
Ethanol
 
Corporate
 
Total
Three months ended June 30, 2016:
 
 
 
 
 
 
 
Total segment revenues
$
18,664

 
$
965

 
$
—

 
$
19,629

Less intersegment revenues
—

 
45

 
—

 
45

Operating revenues from external customers
$
18,664

 
$
920

 
$
—

 
$
19,584

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

 
$
(454
)
Asset impairment loss
56

 
—

 
—

 
56

Operating income (loss)
1,332

 
69

 
(170
)
 
1,231

 
 
 
 
 
 
 
 
Three months ended June 30, 2015:
 
 
 
 
 
 
 
Total segment revenues
$
24,350

 
$
805

 
$
—

 
$
25,155

Less intersegment revenues
—

 
37

 
—

 
37

Operating revenues from external customers
$
24,350

 
$
768

 
$
—

 
$
25,118

Operating income (loss)
$
2,161

 
$
108

 
$
(191
)
 
$
2,078

 
 
 
 
 
 
 
 
Six months ended June 30, 2016:
 
 
 
 
 
 
 
Total segment revenues
$
33,584

 
$
1,793

 
$
—

 
$
35,377

Less intersegment revenues
—

 
79

 
—

 
79

Operating revenues from external customers
$
33,584

 
$
1,714

 
$
—

 
$
35,298

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

 
$
(747
)
Asset impairment loss
56

 
—

 
—

 
56

Operating income (loss)
2,290

 
108

 
(338
)
 
2,060

 
 
 
 
 
 
 
 
Six months ended June 30, 2015:
 
 
 
 
 
 
 
Total segment revenues
$
44,879

 
$
1,634

 
$
—

 
$
46,513

Less intersegment revenues
—

 
65

 
—

 
65

Operating revenues from external customers
$
44,879

 
$
1,569

 
$
—

 
$
46,448

Operating income (loss)
$
3,802

 
$
120

 
$
(349
)
 
$
3,573





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

Total assets by reportable segment were as follows (in millions):
 
June 30,
2016
 
December 31,
2015
Refining
$
38,634

 
$
38,068

Ethanol
1,005

 
1,016

Corporate
5,813

 
5,143

Total assets
$
45,452

 
$
44,227


11.
SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
 
Six Months Ended
June 30,
 
2016
 
2015
Decrease (increase) in current assets:
 
 
 
Receivables, net
$
(467
)
 
$
77

Inventories
422

 
(19
)
Income taxes receivable
169

 
79

Prepaid expenses and other
14

 
7

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

 
575

Accrued expenses
(113
)
 
(75
)
Taxes other than income taxes
7

 
15

Income taxes payable
8

 
(44
)
Changes in current assets and current liabilities
$
1,130

 
$
615


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.



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

There were no significant noncash investing and financing activities for the six months ended June 30, 2016 and 2015.

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

Cash flows related to interest and income taxes were as follows (in millions):
 
Six Months Ended
June 30,
 
2016
 
2015
Interest paid in excess of amount capitalized
$
213

 
$
202

Income taxes paid, net
137

 
1,079


12.
 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



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

occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment.
Recurring Fair Value Measurements
The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of June 30, 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.
 
June 30, 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
$
565

 
$
30

 
$
—

 
$
595

 
$
(570
)
 
$
—

 
$
25

 
$
—

Foreign currency
contracts
5

 
—

 
—

 
5

 
n/a

 
n/a

 
5

 
n/a

Investments of certain
benefit plans
63

 
—

 
11

 
74

 
n/a

 
n/a

 
74

 
n/a

Total
$
633

 
$
30

 
$
11

 
$
674

 
$
(570
)
 
$
—

 
$
104

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 

 
 
 
 
 

 
 
Commodity derivative
contracts
$
606

 
$
25

 
$
—

 
$
631

 
$
(570
)
 
$
(61
)
 
$
—

 
$
(108
)
Environmental credit
obligations
—

 
30

 
—

 
30

 
n/a

 
n/a

 
30

 
n/a

Physical purchase
contracts
—

 
19

 
—

 
19

 
n/a

 
n/a

 
19

 
n/a

Total
$
606

 
$
74

 
$
—

 
$
680

 
$
(570
)
 
$
(61
)
 
$
49

 





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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: