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 September 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 October 31, 2016 was 452,664,759.
 
 
 
 
 


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)
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and temporary cash investments
$
5,949

 
$
4,114

Receivables, net
4,672

 
4,464

Inventories
5,979

 
5,898

Income taxes receivable
50

 
218

Prepaid expenses and other
228

 
204

Total current assets
16,878

 
14,898

Property, plant, and equipment, at cost
37,555

 
36,907

Accumulated depreciation
(11,037
)
 
(10,204
)
Property, plant, and equipment, net
26,518

 
26,703

Deferred charges and other assets, net
2,869

 
2,626

Total assets
$
46,265

 
$
44,227

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and capital lease obligations
$
1,064

 
$
127

Accounts payable
5,368

 
4,907

Accrued expenses
628

 
554

Taxes other than income taxes
1,036

 
1,069

Income taxes payable
128

 
337

Total current liabilities
8,224

 
6,994

Debt and capital lease obligations, less current portion
7,888

 
7,208

Deferred income taxes
7,369

 
7,060

Other long-term liabilities
1,654

 
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
7,108

 
7,064

Treasury stock, at cost;
220,417,088 and 200,462,208 common shares
(11,926
)
 
(10,799
)
Retained earnings
26,270

 
25,188

Accumulated other comprehensive loss
(1,120
)
 
(933
)
Total Valero Energy Corporation stockholders’ equity
20,339


20,527

Noncontrolling interests
791

 
827

Total equity
21,130

 
21,354

Total liabilities and equity
$
46,265

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Operating revenues (a)
$
19,649

 
$
22,579

 
$
54,947

 
$
69,027

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (excluding the lower of cost or market inventory
valuation adjustment)
17,033

 
18,677

 
47,660

 
58,234

Lower of cost or market inventory valuation adjustment
—

 
—

 
(747
)
 
—

Operating expenses
1,062

 
1,102

 
3,093

 
3,229

General and administrative expenses
192

 
179

 
507

 
504

Depreciation and amortization expense
470

 
482

 
1,426

 
1,348

Asset impairment loss
—

 
—

 
56

 
—

Total costs and expenses
18,757

 
20,440

 
51,995

 
63,315

Operating income
892

 
2,139

 
2,952

 
5,712

Other income, net
12

 
3

 
35

 
35

Interest and debt expense, net of capitalized interest
(115
)
 
(112
)
 
(334
)
 
(326
)
Income before income tax expense
789

 
2,030

 
2,653

 
5,421

Income tax expense
144

 
657

 
652

 
1,715

Net income
645

 
1,373

 
2,001

 
3,706

Less: Net income (loss) attributable to noncontrolling interests
32

 
(4
)
 
79

 
14

Net income attributable to Valero Energy Corporation stockholders
$
613

 
$
1,377

 
$
1,922

 
$
3,692

 
 
 
 
 
 
 
 
Earnings per common share
$
1.33

 
$
2.79

 
$
4.12

 
$
7.31

Weighted-average common shares outstanding (in millions)
458

 
491

 
465

 
503

 
 
 
 
 
 
 
 
Earnings per common share – assuming dilution
$
1.33

 
$
2.79

 
$
4.12

 
$
7.30

Weighted-average common shares outstanding –
assuming dilution (in millions)
460

 
494

 
467

 
506

 
 
 
 
 
 
 
 
Dividends per common share
$
0.60

 
$
0.40

 
$
1.80

 
$
1.20

_______________________________________________
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
(a)    Includes excise taxes on sales by certain of our international operations
$
1,398

 
$
1,538

 
$
4,263

 
$
4,477

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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
645

 
$
1,373

 
$
2,001

 
$
3,706

 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(117
)
 
(270
)
 
(197
)
 
(439
)
Net gain on pension
and other postretirement benefits
—

 
6

 
6

 
17

Other comprehensive loss before
income tax expense (benefit)
(117
)
 
(264
)
 
(191
)
 
(422
)
Income tax expense (benefit) related to
items of other comprehensive loss
1

 
2

 
(5
)
 
6

Other comprehensive loss
(118
)
 
(266
)
 
(186
)
 
(428
)
 
 
 
 
 
 
 
 
Comprehensive income
527

 
1,107

 
1,815

 
3,278

Less: Comprehensive income (loss) attributable to
noncontrolling interests
32

 
(4
)
 
80

 
14

Comprehensive income attributable to
Valero Energy Corporation stockholders
$
495

 
$
1,111

 
$
1,735

 
$
3,264

See Condensed Notes to Consolidated Financial Statements.



3
Table of Contents

VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
2,001

 
$
3,706

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Depreciation and amortization expense
1,426

 
1,348

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

Asset impairment loss
56

 
—

Deferred income tax expense
193

 
77

Changes in current assets and current liabilities
953

 
46

Changes in deferred charges and credits and
other operating activities, net
(60
)
 
(53
)
Net cash provided by operating activities
3,822

 
5,124

Cash flows from investing activities:
 
 
 
Capital expenditures
(912
)
 
(1,186
)
Deferred turnaround and catalyst costs
(474
)
 
(509
)
Other investing activities, net
2

 
16

Net cash used in investing activities
(1,384
)
 
(1,679
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuances or borrowings
1,653

 
1,446

Repayments of debt and capital lease obligations
(28
)
 
(509
)
Purchase of common stock for treasury
(1,167
)
 
(2,071
)
Common stock dividends
(840
)
 
(608
)
Contributions from noncontrolling interests
—

 
4

Distributions to noncontrolling interests
(public unitholders) of Valero Energy Partners LP
(22
)
 
(14
)
Distributions to other noncontrolling interest
(32
)
 
(25
)
Other financing activities, net
(143
)
 
50

Net cash used in financing activities
(579
)
 
(1,727
)
Effect of foreign exchange rate changes on cash
(24
)
 
(106
)
Net increase in cash and temporary cash investments
1,835

 
1,612

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

 
3,689

Cash and temporary cash investments at end of period
$
5,949

 
$
5,301

See Condensed Notes to Consolidated Financial Statements.



4
Table of Contents


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 nine months ended September 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 nine months ended September 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 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.




6
Table of Contents



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

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. 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. 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.




7
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures. A multi-disciplined implementation team has gained an understanding of the standard’s revenue recognition model, is completing the review and documentation of our contracts, and is analyzing whether enhancements are needed to our business and accounting systems.

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 annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures. A multi-disciplined implementation team has gained an understanding of the accounting and disclosure provisions of the standard and is in the process of analyzing the impacts to our business and accounting systems, including the development of new accounting systems to account for our leases and support the required disclosures.

In October 2016, the provisions of ASC Topic 740, “Income Taxes,” were amended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The amendments require an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory immediately when the transfer occurs. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The amendments should be applied on a modified retrospective basis with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption for the recognition of income tax consequences of intra-entity transfers of assets other than inventory that occur before the adoption date. The adoption of this guidance effective January 1, 2018 is not expected to materially affect our financial position or results of operations; however, certain deferred charges associated with intra-entity transfers of assets other than inventory will be reported in our balance sheet primarily as a reduction to our deferred income tax liabilities.



8
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In October 2016, the provisions of ASC Topic 810, “Consolidation,” were amended to provide guidance on how a reporting entity that is a single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary. These provisions are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The amendments should be applied on a retrospective basis to all relevant prior periods beginning with the fiscal year in which the VIE guidance was adopted with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this guidance effective January 1, 2017 will not affect our financial position or results of operations.

2.
ARUBA DISPOSITION

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

In June 2016, we recognized an asset impairment loss of $56 million representing all of the remaining carrying value of our long-lived assets in Aruba. These assets were primarily related to our crude oil and refined products terminal and transshipment facility in Aruba (collectively, the Aruba Terminal), which were included in our refining segment. We recognized the impairment loss at that time because we concluded that it was more likely than not that we would ultimately transfer ownership of these assets to the GOA as a result of agreements entered into in June 2016 between the GOA and CITGO providing for, among other things, the GOA’s lease of those assets to CITGO. (See Note 12 for disclosure related to the method to determine fair value.) We had previously written off all of the carrying value of the long-lived assets of the refining operations (the Aruba Refinery) and recognized an asset retirement obligation upon the suspension of operations of those assets in 2012. Therefore, there was no other significant effect to our results of operations from the Aruba Disposition during the three and nine months ended September 30, 2016, except with respect to income taxes, which are discussed below. In addition, the net cash impact to us upon effectiveness of the Aruba Disposition on October 1, 2016, was not significant.

In September 2016 and in connection with the Aruba Disposition, our U.S. subsidiaries were unable to collect any outstanding debt obligations owed to them by our Aruba subsidiaries, which resulted in the recognition by us of an income tax benefit in the U.S. of $42 million during the three and nine months ended September 30, 2016. We had no income tax effect in Aruba from the cancellation of debt or other effects of the Aruba Disposition because of net operating loss carryforwards associated with our operations in Aruba against which we had previously recorded a full valuation allowance.




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

3.
INVENTORIES

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

December 31,
2015
Refinery feedstocks
$
2,244

 
$
2,404

Refined products and blendstocks
3,283

 
3,774

Ethanol feedstocks and products
202

 
242

Materials and supplies
250

 
244

Inventories, before lower of cost or market
inventory valuation reserve
5,979

 
6,664

Lower of cost or market inventory valuation reserve
—

 
(766
)
Inventories
$
5,979

 
$
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 September 30, 2016, we reevaluated our inventories and determined that our cost was lower than market. As a result, for the nine months ended September 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 nine months ended September 30, 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 September 30, 2016, the replacement cost (market value) of last-in, first-out (LIFO) inventories exceeded their LIFO carrying amounts by $1.2 billion. As of September 30, 2016 and December 31, 2015, our non-LIFO inventories accounted for $675 million and $668 million, respectively, of our total inventories.

4.
DEBT AND CAPITAL LEASE OBLIGATIONS

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 September 30, 2016 or December 31, 2015, and we had no borrowings under the Revolver during the nine months ended September 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 1.8125 percent as of September 30, 2016.




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

During the nine months ended September 30, 2016, VLP borrowed $139 million and $210 million under the VLP Revolver in connection with VLP’s acquisitions from us of the McKee Terminal Services Business in April 2016 and the Meraux and Three Rivers Terminal Services Business in September 2016, respectively, and made no repayments under the VLP Revolver. During the nine months ended September 30, 2015, VLP borrowed $200 million under the VLP Revolver in connection with VLP’s acquisition from us of the Houston and St. Charles Terminal Services Business and repaid $25 million on the VLP Revolver. Borrowings outstanding under the VLP Revolver were $524 million and $175 million as of September 30, 2016 and December 31, 2015, respectively.

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 September 30, 2016 or December 31, 2015, and we had no borrowings under the Canadian Revolver during the nine months ended September 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 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, 2016 and 2015, we had no proceeds from or repayments under the accounts receivable sales facility.




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

Summary of Credit Facilities
We had outstanding borrowings, letters of credit issued, and availability under our revolving credit facilities as follows (in millions):
 
 
 
 
 
 
September 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
 
$
524

 
$
—

 
$
226

Canadian Revolver
 
C$
50

 
November 2016
 
C$
—

 
C$
10

 
C$
40

Accounts receivable
sales facility (a)
 
$
1,300

 
July 2017
 
$
100

 
$
—

 
$
1,051

Letter of credit facilities
 
$
275

 
November 2016 and June 2017
 
$
—

 
$
—

 
$
275

Uncommitted facilities:
 
 
 
 
 
 
 
 
 
 
Letter of credit facilities
 
$
650

 
N/A
 
$
—

 
$
185

 
$
465

___________________
(a)
As of September 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.

Non-Bank Debt
During the nine months ended September 30, 2016, we issued $1.25 billion of 3.4 percent senior notes due September 15, 2026. Proceeds from this debt issuance totaled $1.246 billion. We also incurred $10 million of debt issuance costs. During the nine months ended September 30, 2016, we had no repayments under our non-bank debt.

In October 2016, we redeemed our 6.125 percent senior notes with a maturity date of June 15, 2017 for$778 million, or 103.70 percent of stated value, and our 7.2 percent senior notes with a maturity date of October 15, 2017 for $213 million, or 106.27 percent of stated value.

During the nine months ended September 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. In addition, 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.

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. During the nine months ended September 30, 2016, borrowings under this facility totaled C$72 million and debt repayments totaled C$2 million. As of September 30, 2016, the effective interest rate of this facility was 3.85 percent.




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

Capitalized Interest
Capitalized interest was $14 million and $18 million for the three months ended September 30, 2016 and 2015, respectively, and $53 million and $50 million for the nine months ended September 30, 2016 and 2015, respectively.

Capital Lease Obligations
In October 2016, we entered into agreements under which we expect to lease storage tanks located at three of our refineries. The leases will not commence until certain required regulatory permitting occurs. The lease agreements will be accounted for as capital leases and we expect to recognize capital lease assets and related obligations of approximately $490 million. These capital lease agreements have initial terms of 10 years each and each agreement has successive 10-year automatic renewal terms.

5.
COMMITMENTS AND CONTINGENCIES

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

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




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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):
 
Nine Months Ended September 30,
 
2016
 
2015
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests (a)
 
Total
Equity
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests (a)
 
Total
Equity
Balance as of
beginning of period
$
20,527

 
$
827

 
$
21,354

 
$
20,677

 
$
567

 
$
21,244

Net income
1,922

 
79

 
2,001

 
3,692

 
14

 
3,706

Dividends
(840
)
 
—

 
(840
)
 
(608
)
 
—

 
(608
)
Stock-based
compensation expense
33

 
—

 
33

 
27

 
—

 
27

Tax deduction in excess
of stock-based
compensation expense
—

 
—

 
—

 
33

 
—

 
33

Transactions
in connection with
stock-based
compensation plans:
 
 
 
 
 
 
 
 
 
 
 
Stock issuances
4

 
—

 
4

 
29

 
—

 
29

Stock purchases
(43
)
 
—

 
(43
)
 
(136
)
 
—

 
(136
)
Stock purchases under
purchase program
(1,120
)
 
—

 
(1,120
)
 
(1,965
)
 
—

 
(1,965
)
Issuance of Valero
Energy Partners LP
common units
—

 
6

 
6

 
—

 
—

 
—

Contributions from
noncontrolling interests
—

 
—

 
—

 
—

 
5

 
5

Distributions to
noncontrolling interests
—

 
(54
)
 
(54
)
 
—

 
(39
)
 
(39
)
Transfers from
noncontrolling interests,
net of tax (b)
43

 
(68
)
 
(25
)
 
—

 
—

 
—

Other comprehensive
income (loss)
(187
)
 
1

 
(186
)
 
(428
)
 
—

 
(428
)
Balance as of end of period
$
20,339

 
$
791

 
$
21,130

 
$
21,321

 
$
547

 
$
21,868

___________________________ 
(a)
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.
(b)
“Transfers from noncontrolling interests, net of tax” reflects an adjustment to reallocate VLP equity activity between our ownership interest in VLP and that of the noncontrolling interests. This reallocation occurred due to the expiration of the subordination period on August 10, 2016 and as a result of a change in ownership interest resulting from VLP’s issuances of equity following that date. During the subordination period, we held certain common units in VLP that were subordinate to other common units held by us and VLP’s public unitholders. Upon expiration of the subordination period, all unitholders have equal ownership rights.




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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,
 
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

 
—

 
3

Stock purchases
—

 
(1
)
 
—

 
(2
)
Stock purchases under purchase program
—

 
(20
)
 
—

 
(32
)
Balance as of end of period
673

 
(220
)
 
673

 
(190
)

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.

On September 21, 2016, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding common stock with no expiration date.

Common Stock Dividends
On November 2, 2016, our board of directors declared a quarterly cash dividend of $0.60 per common share payable on December 15, 2016 to holders of record at the close of business on November 22, 2016.

Income Tax Effects Related to Components of Other Comprehensive Loss
The tax effects allocated to each component of other comprehensive loss were as follows (in millions):
 
Three Months Ended September 30,
 
2016
 
2015
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
Foreign currency translation adjustment
$
(117
)
 
$
—

 
$
(117
)
 
$
(270
)
 
$
—

 
$
(270
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified into income related to:
 
 
 
 

 
 
 
 
 
 
Prior service credit
(9
)
 
(3
)
 
(6
)
 
(10
)
 
(3
)
 
(7
)
Net actuarial loss
12

 
4

 
8

 
16

 
5

 
11

Settlement
(3
)
 
—

 
(3
)
 
—

 
—

 
—

Net gain (loss) on pension and other
postretirement benefits
—

 
1

 
(1
)
 
6

 
2

 
4

Other comprehensive loss
$
(117
)
 
$
1

 
$
(118
)
 
$
(264
)
 
$
2

 
$
(266
)



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

 
Nine Months Ended September 30,
 
2016
 
2015
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
 
Before-
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net
Amount
Foreign currency translation adjustment
$
(197
)
 
$
—

 
$
(197
)
 
$
(439
)
 
$
—

 
$
(439
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Miscellaneous gain arising during the period
—

 
(8
)
 
8

 
—

 
—

 
—

Amounts reclassified into income related to:
 
 
 
 
 
 
 
 
 
 
 
Prior service credit
(27
)
 
(10
)
 
(17
)
 
(30
)
 
(10
)
 
(20
)
Net actuarial loss
36

 
13

 
23

 
47

 
16

 
31

Settlement
(3
)
 
—

 
(3
)
 
—

 
—

 
—

Net gain on pension and other
postretirement benefits
6

 
(5
)
 
11

 
17

 
6

 
11

Other comprehensive loss
$
(191
)
 
$
(5
)
 
$
(186
)
 
$
(422
)
 
$
6

 
$
(428
)

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
(198
)
 
8

 
(190
)
Amounts reclassified from accumulated
other comprehensive loss
—

 
3

 
3

Net other comprehensive income (loss)
(198
)
 
11

 
(187
)
Balance as of September 30, 2016
$
(803
)
 
$
(317
)
 
$
(1,120
)

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

 
$
(368
)
 
$
(367
)
Other comprehensive loss
before reclassifications
(439
)
 
—

 
(439
)
Amounts reclassified from accumulated
other comprehensive loss
—

 
11

 
11

Net other comprehensive income (loss)
(439
)
 
11

 
(428
)
Balance as of September 30, 2015
$
(438
)
 
$
(357
)
 
$
(795
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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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 September 30:
 
 
 
 
 
 
 
Service cost
$
28

 
$
27

 
$
2

 
$
2

Interest cost
21

 
24

 
3

 
4

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

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service credit
(5
)
 
(5
)
 
(4
)
 
(5
)
Net actuarial (gain) loss
13

 
16

 
(1
)
 
—

Special credits
(7
)
 
—

 
—

 
—

Net periodic benefit cost
$
15

 
$
29

 
$
—

 
$
1

 
 
 
 
 
 
 
 
Nine months ended September 30:
 
 
 
 
 
 
 
Service cost
$
84

 
$
82

 
$
5

 
$
6

Interest cost
63

 
73

 
9

 
11

Expected return on plan assets
(104
)
 
(100
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service credit
(15
)
 
(16
)
 
(12
)
 
(14
)
Net actuarial (gain) loss
37

 
47

 
(1
)
 
—

Special charges (credits)
(7
)
 
5

 
—

 
—

Net periodic benefit cost
$
58

 
$
91

 
$
1

 
$
3


We contributed $132 million and $114 million, respectively, to our pension plans and $12 million and $11 million, respectively, to our other postretirement benefit plans during the nine months ended September 30, 2016 and 2015. Of the $132 million contributed to our pension plans during the nine months ended September 30, 2016, $100 million was discretionary and was contributed during the third quarter of 2016.

As a result of the discretionary pension contributions discussed above, our expected contributions to our pension plans have increased to $136 million for 2016. Our anticipated contributions to our other postretirement benefit plans during 2016 have not changed from the amount previously disclosed in our financial statements for the year ended December 31, 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 September 30,
 
2016
 
2015
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
613

 
 
 
$
1,377

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
275

 
 
 
198

Participating securities
 
 
1

 
 
 
1

Undistributed earnings
 
 
$
337

 
 
 
$
1,178

Weighted-average common shares outstanding
1

 
458

 
2

 
491

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
0.60

 
$
0.60

 
$
0.40

 
$
0.40

Undistributed earnings
0.73

 
0.73

 
2.39

 
2.39

Total earnings per common share
$
1.33

 
$
1.33

 
$
2.79

 
$
2.79

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
613

 
 
 
$
1,377

Weighted-average common shares outstanding
 
 
458

 
 
 
491

Common equivalent shares:
 
 
 
 
 
 
 
Stock options
 
 
1

 
 
 
1

Performance awards and
nonvested restricted stock
 
 
1

 
 
 
2

Weighted-average common shares outstanding –
assuming dilution
 
 
460

 
 
 
494

Earnings per common share – assuming dilution
 
 
$
1.33

 
 
 
$
2.79




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

 
Nine Months Ended September 30,
 
2016
 
2015
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
1,922

 
 
 
$
3,692

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
837

 
 
 
606

Participating securities
 
 
3

 
 
 
2

Undistributed earnings
 
 
$
1,082

 
 
 
$
3,084

Weighted-average common shares outstanding
1

 
465

 
2

 
503

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
1.80

 
$
1.80

 
$
1.20

 
$
1.20

Undistributed earnings
2.32

 
2.32

 
6.11

 
6.11

Total earnings per common share
$
4.12

 
$
4.12

 
$
7.31

 
$
7.31

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
1,922

 
 
 
$
3,692

Weighted-average common shares outstanding
 
 
465

 
 
 
503

Common equivalent shares:
 
 
 
 
 
 
 
Stock options
 
 
1

 
 
 
2

Performance awards and
nonvested restricted stock
 
 
1

 
 
 
1

Weighted-average common shares outstanding –
assuming dilution
 
 
467

 
 
 
506

Earnings per common share – assuming dilution
 
 
$
4.12

 
 
 
$
7.30


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 ten of our refineries. As of September 30, 2016, we owned a 66.6 percent limited partner interest and a 2 percent general partner interest in VLP, and public unitholders owned a 31.4 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 66.6 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).

 
September 30, 2016
 
VLP
 
DGD
 
Other
 
Total
Assets
 
 
 
 
 
 
 
Cash and temporary cash investments
$
35

 
$
121

 
$
19

 
$
175

Other current assets
4

 
81

 
—

 
85

Property, plant, and equipment, net
854

 
354

 
136

 
1,344

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
$
11

 
$
17

 
$
7

 
$
35

Debt and capital lease obligations,
less current portion
524

 
—

 
48

 
572




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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 September 30, 2016:
 
 
 
 
 
 
 
Total segment revenues
$
18,718

 
$
987

 
$
—

 
$
19,705

Less intersegment revenues
—

 
56

 
—

 
56

Operating revenues from external
customers
$
18,718

 
$
931

 
$
—

 
$
19,649

Operating income (loss)
$
990

 
$
106

 
$
(204
)
 
$
892

 
 
 
 
 
 
 
 
Three months ended September 30, 2015:
 
 
 
 
 
 
 
Total segment revenues
$
21,739

 
$
879

 
$
—

 
$
22,618

Less intersegment revenues
—

 
39

 
—

 
39

Operating revenues from external
customers
$
21,739

 
$
840

 
$
—

 
$
22,579

Operating income (loss)
$
2,295

 
$
35

 
$
(191
)
 
$
2,139

 
 
 
 
 
 
 
 
Nine months ended September 30, 2016:
 
 
 
 
 
 
 
Total segment revenues
$
52,302

 
$
2,780

 
$
—

 
$
55,082

Less intersegment revenues
—

 
135

 
—

 
135

Operating revenues from external
customers
$
52,302

 
$
2,645

 
$
—

 
$
54,947

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

 
$
(747
)
Asset impairment loss
56

 
—

 
—

 
56

Operating income (loss)
3,280

 
214

 
(542
)
 
2,952

 
 
 
 
 
 
 
 
Nine months ended September 30, 2015:
 
 
 
 
 
 
 
Total segment revenues
$
66,618

 
$
2,513

 
$
—

 
$
69,131

Less intersegment revenues
—

 
104

 
—

 
104

Operating revenues from external
customers
$
66,618

 
$
2,409

 
$
—

 
$
69,027

Operating income (loss)
$
6,097

 
$
155

 
$
(540
)
 
$
5,712





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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,
2016
 
December 31,
2015
Refining
$
37,993

 
$
38,068

Ethanol
1,277

 
1,016

Corporate
6,995

 
5,143

Total assets
$
46,265

 
$
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):
 
Nine Months Ended
September 30,
 
2016
 
2015
Decrease (increase) in current assets:
 
 
 
Receivables, net
$
(278
)
 
$
1,093

Inventories
557

 
(45
)
Income taxes receivable
165

 
88

Prepaid expenses and other
(28
)
 
(11
)
Increase (decrease) in current liabilities:
 
 
 
Accounts payable
494

 
(1,007
)
Accrued expenses
46

 
(5
)
Taxes other than income taxes
8

 
(50
)
Income taxes payable
(11
)
 
(17
)
Changes in current assets and current liabilities
$
953

 
$
46


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 activities for the nine months ended September 30, 2016. Noncash financing activities for the nine months ended September 30, 2016 included:

•
an accrual of $20 million for the purchase of 382,935 of our common stock, which was settled in early October 2016, and

•
a noncash transfer of $68 million between additional paid-in capital and noncontrolling interests for ownership changes in VLP, and the establishment of a $25 million deferred tax liability on the equity transfer. This noncash transaction is further described in Note 6.

Noncash investing and financing activities for the nine months ended September 30, 2015 included the recognition of a capital lease asset and related obligation associated with an agreement for storage tanks near one of our refineries. Noncash financing activities for the nine months ended September 30, 2015 also included an accrual of $30 million for the purchase of 506,100 shares of our common stock, which was settled in early October 2015.

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

Cash flows related to interest and income taxes were as follows (in millions):
 
Nine Months Ended
September 30,
 
2016
 
2015
Interest paid in excess of amount capitalized
$
312

 
$
301

Income taxes paid, net
305

 
1,532





25
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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.



26
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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recurring Fair Value Measurements
The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of September 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.
 
September 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
$
753

 
$
25

 
$
—

 
$
778

 
$
(706
)
 
$
—

 
$
72

 
$
—

Physical purchase
contracts
—

 
1

 
—

 
1

 
n/a

 
n/a

 
1

 
n/a

Foreign currency
contracts
1

 
—

 
—

 
1

 
n/a

 
n/a

 
1

 
n/a

Investments of certain
benefit plans
57

 
—

 
11

 
68

 
n/a

 
n/a

 
68

 
n/a

Total
$
811

 
$
26

 
$
11

 
$
848

 
$
(706
)
 
$
—

 
$
142

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 

 
 
 
 
 

 
 
Commodity derivative
contracts
$
706

 
$
18

 
$
—

 
$
724