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, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 31, 2018 was 427,398,027.
 
 
 
 
 


VALERO ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 





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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except par value)
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,451

 
$
5,850

Receivables, net
7,535

 
6,922

Inventories
6,420

 
6,384

Prepaid expenses and other
542

 
156

Total current assets
18,948

 
19,312

Property, plant, and equipment, at cost
41,266

 
40,010

Accumulated depreciation
(13,086
)
 
(12,530
)
Property, plant, and equipment, net
28,180

 
27,480

Deferred charges and other assets, net
3,550

 
3,366

Total assets
$
50,678

 
$
50,158

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and capital lease obligations
$
183

 
$
122

Accounts payable
8,963

 
8,348

Accrued expenses
641

 
712

Taxes other than income taxes payable
1,334

 
1,321

Income taxes payable
220

 
568

Total current liabilities
11,341

 
11,071

Debt and capital lease obligations, less current portion
8,876

 
8,750

Deferred income tax liabilities
4,760

 
4,708

Other long-term liabilities
2,897

 
2,729

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
7,032

 
7,039

Treasury stock, at cost;
245,078,683 and 239,603,534 common shares
(13,923
)
 
(13,315
)
Retained earnings
29,915

 
29,200

Accumulated other comprehensive loss
(1,262
)
 
(940
)
Total Valero Energy Corporation stockholders’ equity
21,769


21,991

Noncontrolling interests
1,035

 
909

Total equity
22,804

 
22,900

Total liabilities and equity
$
50,678

 
$
50,158

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,
 
2018
 
2017
 
2018
 
2017
Revenues (a)
$
31,015

 
$
22,254

 
$
57,454

 
$
44,026

Cost of sales:
 
 
 
 
 
 
 
Cost of materials and other
27,860

 
19,609

 
51,616

 
39,037

Operating expenses (excluding depreciation and amortization
expense reflected below)
1,110

 
1,111

 
2,246

 
2,235

Depreciation and amortization expense
510

 
485

 
995

 
973

Total cost of sales
29,480

 
21,205

 
54,857

 
42,245

Other operating expenses
21

 
—

 
31

 
—

General and administrative expenses (excluding depreciation and
amortization expense reflected below)
248

 
175

 
486

 
367

Depreciation and amortization expense
13

 
14

 
26

 
26

Operating income
1,253

 
860

 
2,054

 
1,388

Other income (expense), net
(5
)
 
27

 
46

 
53

Interest and debt expense, net of capitalized interest
(124
)
 
(119
)
 
(245
)
 
(240
)
Income before income tax expense
1,124

 
768

 
1,855

 
1,201

Income tax expense
249

 
196

 
398

 
308

Net income
875

 
572

 
1,457

 
893

Less: Net income attributable to noncontrolling interests
30

 
24

 
143

 
40

Net income attributable to Valero Energy Corporation stockholders
$
845

 
$
548

 
$
1,314

 
$
853

 
 
 
 
 
 
 
 
Earnings per common share
$
1.96

 
$
1.23

 
$
3.05

 
$
1.90

Weighted-average common shares outstanding (in millions)
429

 
444

 
430

 
446

Earnings per common share – assuming dilution
$
1.96

 
$
1.23

 
$
3.04

 
$
1.90

Weighted-average common shares outstanding –
assuming dilution (in millions)
431

 
446

 
432

 
448

Dividends per common share
$
0.80

 
$
0.70

 
$
1.60

 
$
1.40

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

 
$
1,384

 
$
2,934

 
$
2,656


See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions of dollars)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
875

 
$
572

 
$
1,457

 
$
893

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(291
)
 
208

 
(246
)
 
282

Net gain on pension and other postretirement
benefits
9

 
4

 
17

 
7

Other comprehensive income (loss) before
income tax expense
(282
)
 
212

 
(229
)
 
289

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

 
1

 
4

 
2

Other comprehensive income (loss)
(284
)
 
211

 
(233
)
 
287

Comprehensive income
591

 
783

 
1,224

 
1,180

Less: Comprehensive income attributable
to noncontrolling interests
25

 
24

 
141

 
40

Comprehensive income attributable to
Valero Energy Corporation stockholders
$
566

 
$
759

 
$
1,083

 
$
1,140


See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
(unaudited)
 
Six Months Ended
June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
1,457

 
$
893

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Depreciation and amortization expense
1,021

 
999

Deferred income tax expense (benefit)
(24
)
 
24

Changes in current assets and current liabilities
(445
)
 
859

Changes in deferred charges and credits and
other operating activities, net
188

 
10

Net cash provided by operating activities
2,197

 
2,785

Cash flows from investing activities:
 
 
 
Capital expenditures
(740
)
 
(572
)
Deferred turnaround and catalyst costs
(490
)
 
(308
)
Investments in joint ventures
(119
)
 
(222
)
Capital expenditures of certain variable interest entities
(78
)
 
—

Peru Acquisition, net of cash acquired
(471
)
 
—

Acquisitions of undivided interests
(145
)
 
(72
)
Minor acquisitions
(91
)
 
—

Other investing activities, net
2

 
—

Net cash used in investing activities
(2,132
)
 
(1,174
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuances and borrowings
1,314

 
—

Repayments of debt and capital lease obligations
(1,345
)
 
(11
)
Purchase of common stock for treasury
(647
)
 
(660
)
Common stock dividends
(690
)
 
(627
)
Proceeds from issuance of Valero Energy Partners LP common units
—

 
36

Contribution from noncontrolling interest
32

 
—

Distributions to noncontrolling interests
(50
)
 
(45
)
Other financing activities, net
(16
)
 
(21
)
Net cash used in financing activities
(1,402
)
 
(1,328
)
Effect of foreign exchange rate changes on cash
(62
)
 
108

Net increase (decrease) in cash and cash equivalents
(1,399
)
 
391

Cash and cash equivalents at beginning of period
5,850

 
4,816

Cash and cash equivalents at end of period
$
4,451

 
$
5,207


See Condensed Notes to Consolidated Financial Statements.



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VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
General
As used in this report, the terms “Valero,” “we,” “us,” or “our” 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. Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

The balance sheet as of December 31, 2017 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, 2017.

Reclassifications
Certain prior period amounts have been reclassified to conform to the 2018 presentation.

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.

Revenue Recognition
Background
We adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” (Topic 606) on January 1, 2018, as described below in “Accounting Pronouncements Adopted on January 1, 2018.” Accordingly, our revenue recognition accounting policy has been revised to reflect the adoption of this standard.

Revised Policy
Our revenues are primarily generated from contracts with customers. We generate revenue from contracts with customers from the sale of products by our refining and ethanol segments. Our VLP segment generates intersegment revenues from transportation and terminaling activities provided to our refining segment that are eliminated in consolidation. Revenues are recognized when we satisfy our performance obligation to transfer products to our customers, which typically occurs at a point in time upon shipment or delivery of the products, and for an amount that reflects the transaction price that is allocated to the performance obligation.




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

The customer is able to direct the use of, and obtain substantially all of the benefits from, the products at the point of shipment or delivery. As a result, we consider control to have transferred upon shipment or delivery because we have a present right to payment at that time, the customer has legal title to the asset, we have transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.

Our contracts with customers state the final terms of the sale, including the description, quantity, and price for goods sold. Payment is typically due in full within two to ten days of delivery. In the normal course of business, we generally do not accept product returns.

The transaction price is the consideration that we expect to be entitled to in exchange for our products. The transaction price for substantially all of our contracts is generally based on commodity market pricing (i.e., variable consideration). As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. Some of our contracts also contain variable consideration in the form of sales incentives to our customers, such as discounts and rebates. For contracts that include variable consideration, we estimate the factors that determine the variable consideration in order to establish the transaction price.

We have elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer (e.g., sales tax, use tax, value-added tax, etc.). We continue to include in the transaction price excise taxes that are imposed on certain inventories in our international operations. The amount of such taxes is provided in supplemental information in a footnote on the statements of income.

There are instances where we provide shipping services in relation to the goods sold to our customer. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are included in cost of materials and other. We have elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities rather than as a promised service and we have included these activities in cost of materials and other.

Accounting Pronouncements Adopted on January 1, 2018
Topic 606
As previously noted, we adopted the provisions of Topic 606 on January 1, 2018. Topic 606 clarifies the principles for recognizing revenue and supersedes previous revenue recognition requirements under “Revenue Recognition (Topic 605),” using the modified retrospective method of adoption as permitted by the standard. Under this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed. We elected to apply the transition guidance for Topic 606 only to contracts that were not completed as of the date of adoption. There was no material impact to our financial position as a result of adopting Topic 606; therefore, there was no cumulative-effect adjustment to retained earnings as of January 1, 2018. Additionally, there was no material impact to our financial position or results of operations as of and for the three and six months ended June 30, 2018. See “Revenue Recognition” above for a discussion of our accounting policy affected by our adoption of Topic 606. Also see Note 11 for further information on



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

our revenues. We implemented new processes in order to monitor ongoing compliance with accounting and disclosure requirements.
ASU No. 2016-01
In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” (ASU No. 2016-01) to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. Effective January 1, 2018, we adopted the provisions of ASU No. 2016-01 using the cumulative-effect method of adoption as required by the ASU. The adoption of this ASU did not affect our financial position or our results of operations as of or for the three and six months ended June 30, 2018, but it resulted in reduced disclosures as it eliminated the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments.

ASU No. 2017-07
In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715),” (ASU No. 2017-07) which requires employers to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost (non-service cost components) to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Effective January 1, 2018, we retrospectively adopted the provisions of ASU No. 2017-07. The adoption of this ASU did not affect our financial position or results of operations, but did result in the reclassification of non-service cost components from operating expenses (excluding depreciation and amortization expense) and general and administrative expenses (excluding depreciation and amortization expense) to other income (expense), net. This resulted in an increase of $14 million and $21 million in operating expenses (excluding depreciation and amortization expense) and a decrease of $3 million and $1 million in general and administrative expenses (excluding depreciation and amortization expense) for the three and six months ended June 30, 2017, respectively.

ASU No. 2017-09
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718),” (ASU No. 2017-09) to reduce diversity in practice, as well as reduce cost and complexity regarding a change to the terms or conditions of a share-based payment award. Effective January 1, 2018, we adopted ASU No. 2017-09. The adoption of this ASU did not have an immediate effect on our financial position or results of operations as it is applied prospectively to an award modified on or after adoption.

ASU No. 2018-02
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220),” (ASU No. 2018-02) which allows for the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform) to be reclassified from accumulated other comprehensive income to retained earnings. The provisions of ASU No. 2018-02 are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. This ASU shall be applied either at the beginning of the annual or interim period of adoption or retrospectively to each period in which the income tax effects of Tax Reform affects the items remaining in accumulated other comprehensive income. We elected to reclassify the stranded income tax effects of Tax Reform from accumulated other comprehensive loss to retained earnings as of the beginning of the interim



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

period of adoption. Effective January 1, 2018, we adopted ASU No. 2018-02 and such adoption did not affect our financial position or results of operations but resulted in the reclassification of $91 million of income tax benefits related to Tax Reform from accumulated other comprehensive loss to retained earnings as presented in Note 6 under “Accumulated Other Comprehensive Loss.” We release stranded income tax effects from accumulated other comprehensive loss to retained earnings on an individual item basis as those items are reclassified into income.

ASU No. 2018-05
In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118,” (ASU No. 2018-05) which amends certain Securities and Exchange Commission (SEC) material in Topic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under Topic 740 for certain income tax effects of Tax Reform for the reporting period in which Tax Reform was enacted. See Note 9 for a discussion of the impact of this ASU.

Accounting Pronouncements Not Yet Adopted
Topic 842
In February 2016, the FASB issued “Leases (Topic 842),” (Topic 842) 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. This 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 will adopt this new standard on January 1, 2019, and we expect to use the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. We are enhancing our contracting and lease evaluation systems and related processes, and we are developing a new lease accounting system to capture our leases and support the required disclosures. During 2018, we will continue to monitor the adoption process to ensure compliance with accounting and disclosure requirements. We also continue the integration of our lease accounting system with our general ledger, and we will make modifications to the related procurement and payment processes. We anticipate this standard will have a material impact on our financial position by increasing our assets and liabilities by equal amounts through the recognition of right-of-use assets and lease liabilities for our operating leases. However, we do not expect adoption to have a material impact on our results of operations or liquidity. We expect our accounting for capital leases to remain substantially unchanged.

ASU No. 2017-12
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815),” (ASU No. 2017-12) to improve and simplify accounting guidance for hedge accounting. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We use economic hedges to manage commodity price risk; however, we have not designated these hedges as fair value or cash flow hedges. As a result, the adoption of ASU No. 2017-12 effective January 1, 2019 is not expected to affect our financial position or results of operations.




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

2.
ACQUISITION

Peru Acquisition
On May 14, 2018, we acquired 100 percent of the issued and outstanding equity interests in Pure Biofuels del Peru S.A.C. (Pure Biofuels) from Pegasus Capital Advisors L.P. and various minority equity holders (collectively, the sellers). Pure Biofuels markets refined petroleum products through a network of logistics assets throughout Peru. Pure Biofuels owns a terminal at the Port of Callao, near Lima, with approximately 1 million barrels of storage capacity for refined petroleum and renewable products. Through one of its subsidiaries, Pure Biofuels also owns a 180,000-barrel storage terminal in Paita, in northern Peru, which is scheduled to commence operations later in 2018. We paid $471 million from available cash on hand, of which $122 million was for working capital. The amount paid for working capital is subject to adjustment pending the final working capital settlement that is expected to be completed in the third quarter of 2018. This acquisition, which is referred to as the Peru Acquisition, is consistent with our general business strategy and broadens the geographic diversity of our refining and marketing network.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, which are preliminary and subject to change after the completion of an independent appraisal and other evaluations (in millions).

Current assets, net of cash acquired
$
147

Property, plant, and equipment
137

Deferred charges and other assets
451

Current liabilities, excluding current portion of debt
(25
)
Debt assumed, including current portion
(137
)
Deferred income tax liabilities
(81
)
Other long-term liabilities
(21
)
Total consideration, net of cash acquired
$
471


Deferred charges and other assets primarily include identifiable intangible assets of $210 million and goodwill of $228 million. Identifiable intangible assets, which consist of customer contracts and relationships, are expected to be amortized on a straight-line basis over ten years. Goodwill is calculated as the excess of the consideration transferred over the estimated fair values of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill represents the future economic benefits expected to be recognized from our expansion into the South American refined petroleum products market arising from other assets acquired that were not individually identified and separately recognized. We determined that the entire balance of goodwill is related to the refining segment. None of the goodwill is expected to be deductible for tax purposes.

The Peru Acquisition purchase agreement provides for a potential earn-out payment based on Pure Biofuels’ earnings for the period from January 1, 2021 through December 31, 2021, or if certain events occur, for the period from January 1, 2020 through December 31, 2020. The sellers are entitled to receive the contingent earn-out payments if certain financial metrics are achieved by Pure Biofuels. As of June 30, 2018, we did not record a contingent liability with respect to this earn-out agreement based on our preliminary estimate of its fair value.



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

Other Disclosures
Our consolidated statements of income include the results of operations of Pure Biofuels since the date of acquisition, and such results are reflected in the refining segment. Results of operations since the date of acquisition, supplemental pro forma financial information, and acquisition-related costs have not been presented for the Peru Acquisition as such information is not material to our results of operations.

3.
INVENTORIES

Inventories consisted of the following (in millions):
 
June 30,
2018

December 31,
2017
Refinery feedstocks
$
2,213

 
$
2,427

Refined petroleum products and blendstocks
3,717

 
3,459

Ethanol feedstocks and products
231

 
242

Materials and supplies
259

 
256

Inventories
$
6,420

 
$
6,384


As of June 30, 2018 and December 31, 2017, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $3.9 billion and $3.0 billion, respectively, and our non-LIFO inventories accounted for $1.1 billion and $1.0 billion, respectively, of our total inventories.

4.
DEBT AND CAPITAL LEASE OBLIGATIONS

Debt
During the six months ended June 30, 2018, the following activity occurred:

•
We issued in a public offering $750 million aggregate principal amount of our 4.35 percent Senior Notes due June 1, 2028. Gross proceeds from this debt issuance were $749 million before deducting the underwriting discount and other debt issuance costs totaling $7 million. The proceeds were used to redeem our 9.375 percent Senior Notes due March 15, 2019 (9.375 percent Senior Notes) for $787 million, which includes an early redemption fee of $37 million that was charged to other income (expense), net.

•
VLP issued in a public offering $500 million aggregate principal amount of its 4.5 percent Senior Notes due March 15, 2028. Gross proceeds from this debt issuance were $498 million before deducting the underwriting discount and other debt issuance costs totaling $5 million. The proceeds are available only to the operations of VLP and were used to repay the outstanding balance of $410 million on VLP’s $750 million senior unsecured revolving credit facility (the VLP Revolver) and $85 million of its notes payable to us, which is eliminated in consolidation.

•
Central Mexico Terminals, which is the name used by us to refer to one of our consolidated variable interest entities (VIEs) and which is further described and defined in Note 7, entered into a combined $340 million unsecured revolving credit facility (IEnova Revolver) with IEnova (defined in Note 7). Central Mexico Terminals borrowed $56 million and had no repayments under the IEnova Revolver.



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

The IEnova Revolver matures in February 2028. However, IEnova may terminate the IEnova Revolver at any time and demand repayment of all outstanding amounts; therefore, such amounts are reflected in current portion of debt. The IEnova Revolver is available only to the operations of Central Mexico Terminals, and the creditors of Central Mexico Terminals do not have recourse against Valero.

Outstanding borrowings under the IEnova Revolver bear interest at the three-month LIBO rate for the applicable interest period in effect from time to time plus the applicable margin. The interest rate under the IEnova Revolver is subject to adjustment, with agreement by both parties, based upon changes in market conditions. As of June 30, 2018, the variable rate was 5.958 percent.

•
We retired $137 million of debt assumed in connection with the Peru Acquisition with available cash on hand.

During the six months ended June 30, 2017, we had no significant debt activity.

We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (amounts in millions and currency in U.S. dollars, except as noted):
 
 
 
 
 
 
June 30, 2018
 
 
Facility
Amount
 
Maturity Date
 
Outstanding
Borrowings
 
Letters of
Credit Issued
 
Availability
Committed facilities:
 
 
 
 
 
 
 
 
 
 
Valero Revolver
 
$
3,000

 
November 2020
 
$
—

 
$
119

 
$
2,881

VLP Revolver
 
750

 
November 2020
 
—

 
—

 
750

IEnova Revolver
 
340

 
February 2028
 
56

 
n/a

 
284

Canadian Revolver
 
C$
75

 
November 2018
 
C$
—

 
C$
6

 
C$
69

Accounts receivable
sales facility (a)
 
1,300

 
July 2018
 
100

 
n/a

 
1,200

Letter of credit facility
 
100

 
November 2018
 
n/a

 
—

 
100

Uncommitted facilities:
 
 
 
 
 
 
 
 
 
 
Letter of credit facilities
 
n/a

 
n/a
 
n/a

 
301

 
n/a

___________________
(a)
In July 2018, we amended this facility to extend the maturity date from July 2018 to July 2019.
Letters of credit issued as of June 30, 2018 expire at various times in 2018 through 2020.

As of June 30, 2018 and December 31, 2017, the variable interest rate on the accounts receivable sales facility was 2.7009 percent and 2.0387 percent, respectively.



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

Other Disclosures
Interest and debt expense, net of capitalized interest is comprised of the following (in millions):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Interest and debt expense
$
144

 
$
134

 
$
283

 
$
268

Less capitalized interest
20

 
15

 
38

 
28

Interest and debt expense, net of
capitalized interest
$
124

 
$
119

 
$
245

 
$
240


5.
COMMITMENTS AND CONTINGENCIES

Commitments
MVP Terminal
We have a 50 percent membership interest in MVP Terminalling, LLC (MVP), a Delaware limited liability company formed in September 2017 with a subsidiary of Magellan Midstream Partners LP (Magellan), to construct, own, and operate the Magellan Valero Pasadena marine terminal (MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. Construction of phases one and two of the project began in 2017 with a total estimated cost of $840 million of which we have committed to contribute 50 percent (approximately $420 million). The project could expand up to four phases with a total project cost of approximately $1.4 billion if warranted by additional demand and agreed to by Magellan and us. Since inception, we have contributed $185 million to MVP of which $104 million was contributed during the six months ended June 30, 2018.

Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal upon completion of phase two, which is expected to occur in early 2020. The terminaling agreement has an initial term of 12 years with two five-year automatic renewals, and year-to-year renewals thereafter.

Due to our membership interest in MVP and because we determined that the terminaling agreement was a capital lease, we are the accounting owner of the MVP Terminal during the construction period. Accordingly, as of June 30, 2018, we recorded an asset of $370 million in property, plant, and equipment representing 100 percent of the construction costs incurred by MVP, as well as capitalized interest incurred by us, and a long-term liability of $186 million payable to Magellan. The amounts recorded for the portion of the construction costs associated with the payable to Magellan are noncash investing and financing items, respectively.

Central Texas Pipeline
We have committed to a 40 percent undivided interest in a project with a subsidiary of Magellan to jointly build an estimated 135-mile, 20-inch refined petroleum products pipeline with a capacity of up to 150,000 barrels per day from Houston to Hearne, Texas. The pipeline is expected to be completed in mid-2019. The estimated cost of our 40 percent undivided interest in this pipeline is $170 million. Since inception, capital expenditures have totaled $49 million, of which $42 million was spent during the six months ended June 30, 2018.



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

Sunrise Pipeline System
Effective January 31, 2018, we entered into a joint ownership agreement with Sunrise Pipeline LLC, a subsidiary of Plains All American Pipeline, L.P. (Plains), that provides us a 20 percent undivided interest in the Sunrise Pipeline System expansion to be constructed by Plains. The Sunrise Pipeline System is expected to contain (i) an estimated 255-mile, 24-inch crude oil pipeline (the Sunrise Pipeline) that originates at Plains’ terminal in Midland, Texas and ends at Plains’ station in Wichita Falls, Texas with throughput capacity of approximately 500,000 barrels per day, and (ii) two 270,000 shell barrel capacity tanks located at the Colorado City, Texas station. The Sunrise Pipeline System expansion is currently under construction and is expected to be placed in service in 2019. The estimated cost of our 20 percent undivided interest in the Sunrise Pipeline System is $135 million. Capital expenditures totaled $103 million for the six months ended June 30, 2018.

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 environmental cleanup 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 our shutdown refinery site, which is adjacent to the Village. During the second quarter of 2018, we entered into a consent order with the Illinois EPA that we anticipate will be approved by the state court. In the consent order, we have assumed the underlying liability for full cleanup of our shutdown refinery site. As a result, we recorded an adjustment to our existing environmental liability related to this matter, which did not materially affect our financial position or results of operations as of or for the three and six months ended June 30, 2018. We continue to seek contribution under Illinois law in state court and are pursuing claims under the Comprehensive Environmental Response, Compensation and Liability Act in federal court from other potentially responsible parties. Factors underlying the expected cost of the cleanup are subject to change from time to time, and actual results may vary significantly from the current 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.

Texas City Refinery Fire
In April 2018, our Texas City Refinery experienced a fire in its alkylation unit. The costs to respond to and assess the damage caused by the fire are included in other operating expenses in the statements of income. This incident did not have a material adverse effect on our results of operations.




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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,
 
2018
 
2017
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests (a)
 
Total
Equity
 
Valero
Stockholders’
Equity
 
Non-
controlling
Interests (a)
 
Total
Equity
Balance as of
beginning of period
$
21,991

 
$
909

 
$
22,900

 
$
20,024

 
$
830

 
$
20,854

Net income
1,314

 
143

 
1,457

 
853

 
40

 
893

Dividends
(690
)
 
—

 
(690
)
 
(627
)
 
—

 
(627
)
Stock-based
compensation expense
29

 
—

 
29

 
25

 
—

 
25

Transactions in connection
with stock-based
compensation plans
(134
)
 
—

 
(134
)
 
(13
)
 
—

 
(13
)
Stock purchases under
purchase programs
(508
)
 
—

 
(508
)
 
(649
)
 
—

 
(649
)
Contribution from
noncontrolling interest
—

 
32

 
32

 
—

 
—

 
—

Distributions to
noncontrolling interests
—

 
(50
)
 
(50
)
 
—

 
(45
)
 
(45
)
Other
(2
)
 
3

 
1

 
23

 
17

 
40

Other comprehensive
income (loss)
(231
)
 
(2
)
 
(233
)
 
287

 
—

 
287

Balance as of end of period
$
21,769

 
$
1,035

 
$
22,804

 
$
19,923

 
$
842

 
$
20,765

___________________
(a)
The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See Note 7 for information about our consolidated VIEs.

Share Activity
There was no significant share activity during the six months ended June 30, 2018 and 2017.
 
 
 
 
 
 
 
 
Common Stock Dividends
On July 20, 2018, our board of directors declared a quarterly cash dividend of $0.80 per common share payable on September 5, 2018 to holders of record at the close of business on August 7, 2018.




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

Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows (in millions):
 
Six Months Ended June 30,
 
2018
 
2017
 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
Items
 
Total
 
Foreign
Currency
Translation
Adjustment
 
Defined
Benefit
Plans
Items
 
Total
Balance as of beginning of period
$
(507
)
 
$
(433
)
 
$
(940
)
 
$
(1,021
)
 
$
(389
)
 
$
(1,410
)
Other comprehensive income (loss)
before reclassifications
(244
)
 
—

 
(244
)
 
282

 
—

 
282

Amounts reclassified from
accumulated other
comprehensive loss
—

 
13

 
13

 
—

 
5

 
5

Other comprehensive income (loss)
(244
)
 
13

 
(231
)
 
282

 
5

 
287

Reclassification of stranded income
tax effects of Tax Reform
to retained earnings per
ASU 2018-02 (see Note 1)
—

 
(91
)
 
(91
)
 
—

 
—

 
—

Balance as of end of period
$
(751
)
 
$
(511
)
 
$
(1,262
)
 
$
(739
)
 
$
(384
)
 
$
(1,123
)

7.
VARIABLE INTEREST ENTITIES

Consolidated VIEs
We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary. Our significant consolidated VIE’s include:

•
VLP, a publicly traded master limited partnership formed to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets;

•
Diamond Green Diesel Holdings LLC (DGD), a joint venture formed to construct and operate a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel; and

•
Central Mexico Terminals (previously referred to by us as VPM Terminals), a collective group of three subsidiaries of Infraestructura Energetica Nova, S.A.B. de C.V. (IEnova), a Mexican company and subsidiary of Sempra Energy, a U.S. public company. We have terminaling agreements with Central Mexico Terminals that represent variable interests. We do not have an ownership interest in Central Mexico Terminals.

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 some of our VIEs in support of their construction or acquisition activities, these transactions are eliminated



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

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, 2018
 
VLP
 
DGD
 
Central
Mexico
Terminals
 
Other
 
Total
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
100

 
$
167

 
$
2

 
$
14

 
$
283

Other current assets
1

 
50

 
13

 
—

 
64

Property, plant, and equipment, net
1,413

 
529

 
107

 
119

 
2,168

Liabilities
 
 
 
 
 
 
 
 
 
Current liabilities
$
27

 
$
29

 
$
63

 
$
6

 
$
125

Debt and capital lease obligations,
less current portion
989

 
—

 
—

 
38

 
1,027

 
December 31, 2017
 
VLP
 
DGD
 
Central
Mexico
Terminals
 
Other
 
Total
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
42

 
$
123

 
$
1

 
$
13

 
$
179

Other current assets
2

 
66

 
4

 
—

 
72

Property, plant, and equipment, net
1,416

 
435

 
51

 
127

 
2,029

Liabilities
 
 
 
 
 
 
 
 
 
Current liabilities
$
27

 
$
33

 
$
26

 
$
9

 
$
95

Debt and capital lease obligations,
less current portion
905

 
—

 
—

 
43

 
948


Non-Consolidated VIEs
We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. These non-consolidated VIEs are not material to our financial position or results of operations and are primarily accounted for as equity investments. MVP is one of our non-consolidated VIEs and is accounted for under owner accounting as described in Note 5. As of June 30, 2018, our maximum exposure to loss was $185 million, which represents our equity investment in MVP. We have not provided any financial support to MVP other than amounts previously required by our membership interest.




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

8.
EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost (credit) related to our defined benefit plans were as follows (in millions):
 
Pension Plans
 
Other Postretirement
Benefit Plans
 
2018
 
2017
 
2018
 
2017
Three months ended June 30:
 
 
 
 
 
 
 
Service cost
$
33

 
$
30

 
$
2

 
$
2

Interest cost
23

 
22

 
3

 
2

Expected return on plan assets
(41
)
 
(38
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Net actuarial (gain) loss
17

 
14

 
(1
)
 
(1
)
Prior service credit
(4
)
 
(5
)
 
(3
)
 
(4
)
Special charges
3

 
—

 
—

 
—

Net periodic benefit cost (credit)
$
31

 
$
23

 
$
1

 
$
(1
)
 
 
 
 
 
 
 
 
Six months ended June 30:
 
 
 
 
 
 
 
Service cost
$
67

 
$
61

 
$
3

 
$
3

Interest cost
46

 
43

 
5

 
5

Expected return on plan assets
(82
)
 
(75
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Net actuarial (gain) loss
33

 
27

 
(1
)
 
(2
)
Prior service credit
(9
)
 
(10
)
 
(6
)
 
(8
)
Special charges
5

 
—

 
—

 
—

Net periodic benefit cost (credit)
$
60

 
$
46

 
$
1

 
$
(2
)

The components of net periodic benefit cost (credit) other than the service cost component (i.e., the non-service cost components) are included in the line item other income (expense), net in the statements of income.

We contributed $16 million and $14 million, respectively, to our pension plans and $9 million and $13 million, respectively, to our other postretirement benefit plans during the six months ended June 30, 2018 and 2017.

Management has elected to increase the discretionary contributions to our pension plans by $10 million during the second half of 2018, resulting in expected contributions to our pension plans of approximately $141 million for 2018, which includes discretionary contributions of $110 million. Our anticipated contributions to our other postretirement benefit plans during 2018 have not changed from the amount previously disclosed in our financial statements for the year ended December 31, 2017.




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

9.
INCOME TAXES

On December 22, 2017, Tax Reform was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the Code), and was effective beginning on January 1, 2018. Tax Reform introduced significant and complex changes to the Code, and regulatory guidance from the Internal Revenue Service (IRS) is needed in order to properly account for many of the changes. In response, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” that was codified through the issuance of ASU No. 2018-05 as described in Note 1, which requires that the effects of Tax Reform be recorded for items where the accounting is complete, as well as for items where a reasonable estimate can be made (referred to as provisional amounts). For items where reasonable estimates cannot be made, provisional amounts should not be recorded and those items should continue to be accounted for under the Code prior to changes from Tax Reform until a reasonable estimate can be made.

We recorded the effects of Tax Reform for the year ended December 31, 2017 in accordance with ASU No. 2018-05, which included provisional amounts associated with the one-time transition tax on the deemed repatriation of previously undistributed accumulated earnings and profits of our international subsidiaries. We also identified items where reasonable estimates could not be made at that time.

We did not revise our initial provisional estimate during the three and six months ended June 30, 2018, and we have not completed our accounting for the income tax effects of Tax Reform. We continue to gather additional information in order to revise our initial estimates and await regulatory guidance from the IRS. We anticipate this information and guidance will be available in the second half of 2018 and that any adjustments will be recorded at that time.




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

10.
EARNINGS PER COMMON SHARE

Earnings per common share were computed as follows (dollars and shares in millions, except per share amounts):
 
Three Months Ended June 30,
 
2018
 
2017
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
845

 
 
 
$
548

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
344

 
 
 
311

Participating securities
 
 
1

 
 
 
1

Undistributed earnings
 
 
$
500

 
 
 
$
236

Weighted-average common shares outstanding
1

 
429

 
2

 
444

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
0.80

 
$
0.80

 
$
0.70

 
$
0.70

Undistributed earnings
1.16

 
1.16

 
0.53

 
0.53

Total earnings per common share
$
1.96

 
$
1.96

 
$
1.23

 
$
1.23

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
845

 
 
 
$
548

Weighted-average common shares outstanding
 
 
429

 
 
 
444

Common equivalent shares
 
 
2

 
 
 
2

Weighted-average common shares outstanding –
assuming dilution
 
 
431

 
 
 
446

Earnings per common share – assuming dilution
 
 
$
1.96

 
 
 
$
1.23




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

 
Six Months Ended June 30,
 
2018
 
2017
 
Participating
Securities
 
Common
Stock
 
Participating
Securities
 
Common
Stock
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
1,314

 
 
 
$
853

Less dividends paid:
 
 
 
 
 
 
 
Common stock
 
 
688

 
 
 
625

Participating securities
 
 
2

 
 
 
2

Undistributed earnings
 
 
$
624

 
 
 
$
226

Weighted-average common shares outstanding
1

 
430

 
2

 
446

Earnings per common share:
 
 
 
 
 
 
 
Distributed earnings
$
1.60

 
$
1.60

 
$
1.40

 
$
1.40

Undistributed earnings
1.45

 
1.45

 
0.50

 
0.50

Total earnings per common share
$
3.05

 
$
3.05

 
$
1.90

 
$
1.90

 
 
 
 
 
 
 
 
Earnings per common share –
assuming dilution:
 
 
 
 
 
 
 
Net income attributable to Valero stockholders
 
 
$
1,314

 
 
 
$
853

Weighted-average common shares outstanding
 
 
430

 
 
 
446

Common equivalent shares
 
 
2

 
 
 
2

Weighted-average common shares outstanding –
assuming dilution
 
 
432

 
 
 
448

Earnings per common share – assuming dilution
 
 
$
3.04

 
 
 
$
1.90


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

11.
REVENUES AND SEGMENT INFORMATION

Revenue from Contracts with Customers
Disaggregation of Revenue
Revenue is presented in the table below under “Segment Information” disaggregated by product because this is the level of disaggregation that management has determined to be beneficial to users of the financial statements.

Receivables from Contracts with Customers
Our receivables from contracts with customers are included in receivables, net and totaled $5.7 billion as of June 30, 2018 and January 1, 2018.




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

Remaining Performance Obligations
The majority of our contracts with customers are spot contracts and therefore have no remaining performance obligations. All of our remaining contracts with customers are primarily term contracts, the majority of which expire by 2020. The transaction price for these term contracts includes an immaterial fixed amount and variable consideration (i.e., a commodity price). The variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance obligation; therefore, the variable consideration is not included in the remaining performance obligation. As of June 30, 2018, after excluding contracts with an original expected duration of one year or less, the aggregate amount of the transaction price allocated to our remaining performance obligations was immaterial as the transaction price for these contracts includes only an immaterial fixed amount.

Segment Information
We have three reportable segments – refining, ethanol, and VLP. Each segment is a strategic business unit that offers different products and services by employing unique technologies and marketing strategies and whose operations and operating performance are managed and evaluated separately. Operating performance is measured based on the operating income generated by the segment, which includes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates. The following is a description of each segment’s business operations.

•
The refining segment includes the operations of our 15 petroleum refineries, the associated marketing activities, and certain logistics assets that support our refining operations that are not owned by VLP. The principal products manufactured by our refineries and sold by this segment include gasolines and blendstocks (e.g., conventional gasolines, premium gasolines, and gasoline meeting the specifications of the California Air Resources Board (CARB)), distillates (e.g., diesel, low-sulfur diesel, ultra-low-sulfur diesel, CARB diesel, jet fuel, and other distillates), and other products (e.g., asphalt, petrochemicals, lubricants, and other refined petroleum products).
•
The ethanol segment includes the operations of our 11 ethanol plants, the associated marketing activities, and logistics assets that support our ethanol operations. The principal products manufactured by our ethanol plants are ethanol and distillers grains. We sell some ethanol to our refining segment for blending into gasoline, which is sold to that segment’s customers as a finished gasoline product.
•
The VLP segment includes the results of VLP. VLP generates revenue from transportation and terminaling activities provided to our refining segment. All of VLP’s revenues are intersegment revenues that are generated under commercial agreements with our refining segment. Revenues generated under these agreements are eliminated in consolidation.

Operations that are not included in any of the reportable segments are included in the corporate category.




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

The following table reflects the components of operating income by reportable segment (in millions):

 
Refining
 
Ethanol
 
VLP
 
Corporate
and
Eliminations
 
Total
Three months ended June 30, 2018:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
30,130

 
$
884

 
$
—

 
$
1

 
$
31,015

Intersegment revenues
1

 
42

 
135

 
(178
)
 
—

Total revenues
30,131

 
926

 
135

 
(177
)
 
31,015

Cost of sales:
 
 
 
 
 
 
 
 
 
Cost of materials and other
27,283

 
754

 
—

 
(177
)
 
27,860

Operating expenses (excluding depreciation
and amortization expense reflected below)
969

 
109

 
33

 
(1
)
 
1,110

Depreciation and amortization expense
471

 
20

 
19

 
—

 
510

Total cost of sales
28,723

 
883

 
52

 
(178
)
 
29,480

Other operating expenses
21

 
—

 
—

 
—

 
21

General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—

 
—

 
—

 
248

 
248

Depreciation and amortization expense
—

 
—

 
—

 
13

 
13

Operating income by segment
$
1,387

 
$
43

 
$
83

 
$
(260
)
 
$
1,253

 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
21,415

 
$
839

 
$
—

 
$
—

 
$
22,254

Intersegment revenues
—

 
28

 
110

 
(138
)
 
—

Total revenues
21,415

 
867

 
110

 
(138
)
 
22,254

Cost of sales:
 
 
 
 
 
 
 
 
 
Cost of materials and other
19,037

 
710

 
—

 
(138
)
 
19,609

Operating expenses (excluding depreciation
and amortization expense reflected below)
979

 
107

 
27

 
(2
)
 
1,111

Depreciation and amortization expense
454

 
19

 
12

 
—

 
485

Total cost of sales
20,470

 
836

 
39

 
(140
)
 
21,205

General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—

 
—

 
—

 
175

 
175

Depreciation and amortization expense
—

 
—

 
—

 
14

 
14

Operating income by segment
$
945

 
$
31

 
$
71

 
$
(187
)
 
$
860





22

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

 
Refining
 
Ethanol
 
VLP
 
Corporate
and
Eliminations
 
Total
Six months ended June 30, 2018:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
55,691

 
$
1,761

 
$
—

 
$
2

 
$
57,454

Intersegment revenues
5

 
88

 
267

 
(360
)
 
—

Total revenues
55,696

 
1,849

 
267

 
(358
)
 
57,454

Cost of sales:
 
 
 
 
 
 
 
 
 
Cost of materials and other
50,471

 
1,503

 
—

 
(358
)
 
51,616

Operating expenses (excluding depreciation
and amortization expense reflected below)
1,966

 
220

 
62

 
(2
)
 
2,246

Depreciation and amortization expense
919

 
38

 
38

 
—

 
995

Total cost of sales
53,356

 
1,761

 
100

 
(360
)
 
54,857

Other operating expenses
31

 
—

 
—

 
—

 
31

General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—

 
—

 
—

 
486

 
486

Depreciation and amortization expense
—

 
—

 
—

 
26

 
26

Operating income by segment
$
2,309

 
$
88

 
$
167

 
$
(510
)
 
$
2,054

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
42,302

 
$
1,724

 
$
—

 
$
—

 
$
44,026

Intersegment revenues
—

 
88

 
216

 
(304
)
 
—

Total revenues
42,302

 
1,812

 
216

 
(304
)
 
44,026

Cost of sales:
 
 
 
 
 
 
 
 
 
Cost of materials and other
37,844

 
1,497

 
—

 
(304
)
 
39,037

Operating expenses (excluding depreciation
and amortization expense reflected below)
1,970

 
216

 
51

 
(2
)
 
2,235

Depreciation and amortization expense
903

 
46

 
24

 
—

 
973

Total cost of sales
40,717

 
1,759

 
75

 
(306
)
 
42,245

General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—

 
—

 
—

 
367

 
367

Depreciation and amortization expense
—

 
—

 
—

 
26

 
26

Operating income by segment
$
1,585

 
$
53

 
$
141

 
$
(391
)
 
$
1,388




23

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

The following table provides a disaggregation of revenues by reportable segment (in millions). Refining and ethanol segment revenues are disaggregated for our principal products, and VLP segment revenues are disaggregated by activity type.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Refining:
 
 
 
 
 
 
 
Gasolines and blendstocks
$
12,514

 
$
9,723

 
$
23,143

 
$
19,058

Distillates
14,459

 
9,736

 
27,117

 
19,432

Other product revenues
3,157

 
1,956

 
5,431

 
3,812

Total refining revenues
30,130

 
21,415

 
55,691

 
42,302

Ethanol:
 
 
 
 
 
 
 
Ethanol
696

 
712

 
1,397

 
1,462

Distillers grains
188

 
127

 
364

 
262

Total ethanol revenues
884

 
839

 
1,761

 
1,724

VLP:
 
 
 
 
 
 
 
Pipeline transportation
31

 
25

 
62

 
48

Terminaling
103

 
84

 
202

 
167

Storage and other
1

 
1

 
3

 
1

Total VLP revenues
135

 
110

 
267

 
216

Corporate – other revenues
1

 
—

 
2

 
—

Elimination of intersegment revenues
(135
)
 
(110
)
 
(267
)
 
(216
)
Revenues
$
31,015

 
$
22,254

 
$
57,454

 
$
44,026


Total assets by reportable segment were as follows (in millions):
 
June 30,
2018
 
December 31,
2017
Refining
$
42,107

 
$
40,382

Ethanol
1,332

 
1,344

VLP
1,569

 
1,517

Corporate and eliminations
5,670

 
6,915

Total assets
$
50,678

 
$
50,158





24

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

12.
SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
 
Six Months Ended
June 30,
 
2018
 
2017
Decrease (increase) in current assets:
 
 
 
Receivables, net
$
(595
)
 
$
1,396

Inventories
(46
)
 
123

Prepaid expenses and other
(35
)
 
86

Increase (decrease) in current liabilities:
 
 
 
Accounts payable
661

 
(942
)
Accrued expenses
(83
)
 
262

Taxes other than income taxes payable
28

 
(41
)
Income taxes payable
(375
)
 
(25
)
Changes in current assets and current liabilities
$
(445
)
 
$
859


Cash flows related to interest and income taxes were as follows (in millions):
 
Six Months Ended
June 30,
 
2018
 
2017
Interest paid in excess of amount capitalized
$
248

 
$
235

Income taxes paid, net
817

 
263


There were no significant noncash investing and financing activities for the six months ended June 30, 2018. Noncash investing and financing activities during the six months ended June 30, 2017 included the recognition of capital lease assets and related obligations totaling approximately $490 million for the lease of storage tanks located at three of our refineries.




25

Table of Contents



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

13.
 FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements
The following tables 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, 2018 and December 31, 2017.

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 following tables 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, 2018
 
 
 
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: