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” 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. Operating results for the
three
months ended
March 31, 2017
are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The balance sheet as of
December 31, 2016
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, 2016
.
Reclassifications
As of January 1, 2017, we revised our reportable segments to reflect a new reportable segment — VLP. The results of the VLP segment include the results of Valero Energy Partners LP (VLP), our majority-owned master limited partnership. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation. See
Note 9
for additional information.
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 July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, “Inventory (Topic 330),” to simplify the measurement of inventory measured using the first-in, first-out or average cost methods. The provisions of this ASU require the inventory to be measured at the lower of cost and net realizable value rather than the lower of cost or market. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The provisions of this ASU are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. Our adoption of this ASU effective January 1, 2017 did not affect our financial position or results of operations since the majority of our inventory is stated at last-in, first-out (LIFO).
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740),” to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The provisions of this ASU 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 reporting periods within those annual periods, with early adoption permitted. The provisions should be applied on a modified retrospective basis with a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption to recognize the income tax consequences of intra-entity transfers of assets that occurred before the adoption date. Our early adoption of this ASU using the modified retrospective method effective January 1, 2017 did not have a material affect on our financial position or results of operations. Adoption of this guidance more accurately reflects the economics of an intra-entity asset transfer when it occurs by eliminating the previous exception that prohibited the recognition of the income tax consequences of an intra-entity asset transfer until the asset had been sold to an outside party.
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810),” 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. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. The provisions 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. Our adoption of this ASU effective January 1, 2017 did not affect our financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The provisions of this ASU provide a more robust framework to use in determining when a set of assets and activities is a business by clarifying the requirements related to inputs, processes, and outputs. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. Our early adoption of this ASU effective January 1, 2017 did not have an affect on our financial position or results of operations. However, more of our future acquisitions may be accounted for as asset acquisitions.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We recently completed our evaluation of the provisions of this ASU and concluded that our adoption of the ASU will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. The majority of our revenues are generated from the sale of refined petroleum products and ethanol. These revenues are largely based on the current spot (market) prices of the products sold, which represents consideration specifically allocable to the products being sold on a given day, and we recognize those revenues upon delivery and transfer of title to the products to our customers. The time at which delivery and transfer of title occurs is the point when our control of the products is transferred to our customers and when our performance obligation to our customers is fulfilled. We will adopt this ASU effective January 1, 2018, and
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
we expect to use the modified retrospective method of adoption as permitted by the ASU. Under that 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. During 2017, we are developing our revenue disclosures and enhancing our accounting systems.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this ASU effective January 1, 2018 will not affect our financial position or results of operations, but will result in revised disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (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. 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 anticipate adopting the new standard on January 1, 2019 and we expect to use the modified retrospective method of adoption as permitted by the ASU. We recently completed our evaluation of the provisions of this standard, and a multi-disciplined implementation team has gained an understanding of the standard’s accounting and disclosure provisions. This team is developing enhanced contracting and lease evaluation processes and information systems to support such processes, as well as new and enhanced accounting systems to account for our leases and support the required disclosures. We continue to evaluate the effect that adopting this standard will have on our financial statements and related disclosures.
In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The new standard requires that an employer report the service cost component 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 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU is to be applied retrospectively for income statement items and prospectively for any capitalized benefit costs. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2018 is not expected to materially affect our financial position or results of operations.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories consisted of the following (in millions):
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March 31,
2017
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|
December 31,
2016
|
Refinery feedstocks
|
$
|
2,318
|
|
|
$
|
2,068
|
|
Refined petroleum products and blendstocks
|
3,189
|
|
|
3,153
|
|
Ethanol feedstocks and products
|
268
|
|
|
238
|
|
Materials and supplies
|
250
|
|
|
250
|
|
Inventories
|
$
|
6,025
|
|
|
$
|
5,709
|
|
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. During the
three
months ended
March 31, 2016
, we recorded a change in our lower of cost or market inventory valuation reserve that resulted in a net
benefit to our results of operations of
$293 million
.
As of
March 31, 2017
and
December 31, 2016
, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by
$1.8 billion
and
$1.9 billion
, respectively. As of
March 31, 2017
and
December 31, 2016
, our non-LIFO inventories accounted for
$663 million
and
$641 million
, respectively, of our total inventories.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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3.
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DEBT AND CAPITAL LEASE OBLIGATIONS
|
There was no significant activity related to our debt during the
three
months ended
March 31, 2017
and
2016
.
Summary of Credit Facilities
We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (in millions):
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|
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|
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|
March 31, 2017
|
|
|
Facility
Amount
|
|
Maturity Date
|
|
Outstanding
Borrowings
|
|
Letters of
Credit
Issued
|
|
Availability
|
Committed facilities:
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|
|
|
|
|
|
|
|
|
|
Valero Revolver
|
|
$
|
3,000
|
|
|
November 2020
|
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
2,850
|
|
VLP Revolver
|
|
$
|
750
|
|
|
November 2020
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
720
|
|
Canadian Revolver
|
|
C$
|
25
|
|
|
November 2017
|
|
C$
|
—
|
|
|
C$
|
10
|
|
|
C$
|
15
|
|
Accounts receivable
sales facility
|
|
$
|
1,300
|
|
|
July 2017
|
|
$
|
100
|
|
|
n/a
|
|
|
$
|
1,183
|
|
Letter of credit facilities
|
|
$
|
225
|
|
|
June 2017 and
November 2017
|
|
n/a
|
|
|
$
|
—
|
|
|
$
|
225
|
|
Uncommitted facilities:
|
|
|
|
|
|
|
|
|
|
|
Letter of credit facilities
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
$
|
235
|
|
|
n/a
|
|
As of
March 31, 2017
and
December 31, 2016
, the weighted-average interest rate on the VLP Revolver was
2.3125
percent. As of
March 31, 2017
and
December 31, 2016
, the weighted-average interest rate on the accounts receivable sales facility was
1.4805
percent and
1.3422
percent, respectively.
Capital Leases
In
January 2017
, we recognized capital lease assets and related obligations of approximately
$490 million
for the lease of storage tanks located at three of our refineries. These lease agreements have initial terms of
10
years each with successive
10
-year automatic renewal terms.
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4
.
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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
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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):
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|
|
|
|
|
|
|
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|
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|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Valero
Stockholders’
Equity
|
|
Non-
controlling
Interests (a)
|
|
Total
Equity
|
|
Valero
Stockholders’
Equity
|
|
Non-
controlling
Interests (a)
|
|
Total
Equity
|
Balance as of
beginning of period
|
$
|
20,024
|
|
|
$
|
830
|
|
|
$
|
20,854
|
|
|
$
|
20,527
|
|
|
$
|
827
|
|
|
$
|
21,354
|
|
Net income
|
305
|
|
|
16
|
|
|
321
|
|
|
495
|
|
|
18
|
|
|
513
|
|
Dividends
|
(315
|
)
|
|
—
|
|
|
(315
|
)
|
|
(282
|
)
|
|
—
|
|
|
(282
|
)
|
Stock-based
compensation expense
|
13
|
|
|
—
|
|
|
13
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Stock purchases
in connection with
stock-based
compensation plans
|
(10
|
)
|
|
—
|
|
|
(10
|
)
|
|
(42
|
)
|
|
—
|
|
|
(42
|
)
|
Stock purchases under
purchase program
|
(292
|
)
|
|
—
|
|
|
(292
|
)
|
|
(198
|
)
|
|
—
|
|
|
(198
|
)
|
Distributions to
noncontrolling interests
|
—
|
|
|
(34
|
)
|
|
(34
|
)
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Other
|
24
|
|
|
14
|
|
|
38
|
|
|
13
|
|
|
—
|
|
|
13
|
|
Other comprehensive income
|
76
|
|
|
—
|
|
|
76
|
|
|
131
|
|
|
1
|
|
|
132
|
|
Balance as of end of period
|
$
|
19,825
|
|
|
$
|
826
|
|
|
$
|
20,651
|
|
|
$
|
20,656
|
|
|
$
|
839
|
|
|
$
|
21,495
|
|
___________________________
|
|
(a)
|
The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See
Note 6
for information about our consolidated VIEs.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share Activity
There was no significant share activity during the
three
months ended
March 31, 2017
and
2016
.
Common Stock Dividends
On
May 3, 2017
, our board of directors declared a quarterly cash dividend of
$0.70
per common share payable on
June 7, 2017
to holders of record at the close of business on
May 17, 2017
.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows (in millions):
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined
Benefit
Plans
Items
|
|
Total
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined
Benefit
Plans
Items
|
|
Total
|
Balance as of
beginning of period
|
$
|
(1,021
|
)
|
|
$
|
(389
|
)
|
|
$
|
(1,410
|
)
|
|
$
|
(605
|
)
|
|
$
|
(328
|
)
|
|
$
|
(933
|
)
|
Other comprehensive income
before reclassifications
|
74
|
|
|
—
|
|
|
74
|
|
|
121
|
|
|
8
|
|
|
129
|
|
Amounts reclassified from
accumulated other
comprehensive loss
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Net other comprehensive income
|
74
|
|
|
2
|
|
|
76
|
|
|
121
|
|
|
10
|
|
|
131
|
|
Balance as of end of period
|
$
|
(947
|
)
|
|
$
|
(387
|
)
|
|
$
|
(1,334
|
)
|
|
$
|
(484
|
)
|
|
$
|
(318
|
)
|
|
$
|
(802
|
)
|
|
|
6.
|
VARIABLE INTEREST ENTITIES
|
Overview
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.
Our significant 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; and
|
|
|
•
|
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.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
VLP
|
|
DGD
|
|
Other
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and temporary cash investments
|
$
|
66
|
|
|
$
|
159
|
|
|
$
|
15
|
|
|
$
|
240
|
|
Other current assets
|
2
|
|
|
48
|
|
|
—
|
|
|
50
|
|
Property, plant, and equipment, net
|
940
|
|
|
360
|
|
|
131
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
17
|
|
|
$
|
16
|
|
|
$
|
7
|
|
|
$
|
40
|
|
Debt and capital lease obligations,
less current portion
|
525
|
|
|
—
|
|
|
45
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
VLP
|
|
DGD
|
|
Other
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and temporary cash investments
|
$
|
71
|
|
|
$
|
167
|
|
|
$
|
15
|
|
|
$
|
253
|
|
Other current assets
|
3
|
|
|
87
|
|
|
—
|
|
|
90
|
|
Property, plant, and equipment, net
|
865
|
|
|
355
|
|
|
133
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
15
|
|
|
$
|
17
|
|
|
$
|
7
|
|
|
$
|
39
|
|
Debt and capital lease obligations,
less current portion
|
525
|
|
|
—
|
|
|
46
|
|
|
571
|
|
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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Three months ended March 31:
|
|
|
|
|
|
|
|
Service cost
|
$
|
31
|
|
|
$
|
28
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
21
|
|
|
21
|
|
|
3
|
|
|
3
|
|
Expected return on plan assets
|
(37
|
)
|
|
(35
|
)
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
13
|
|
|
12
|
|
|
(1
|
)
|
|
—
|
|
Prior service credit
|
(5
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Net periodic benefit cost
|
$
|
23
|
|
|
$
|
21
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
Our anticipated contributions to our pension and other post retirement benefit plans during 2017 have not changed from amounts previously disclosed in our financial statements for the year ended December 31, 2016. We contributed
$7 million
and
$8 million
, respectively, to our pension plans and
$5 million
and
$4 million
, respectively, to our other postretirement benefit plans during the
three
months ended
March 31, 2017
and
2016
.
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 March 31,
|
|
2017
|
|
2016
|
|
Participating
Securities
|
|
Common
Stock
|
|
Participating
Securities
|
|
Common
Stock
|
Earnings per common share:
|
|
|
|
|
|
|
|
Net income attributable to Valero stockholders
|
|
|
$
|
305
|
|
|
|
|
$
|
495
|
|
Less dividends paid:
|
|
|
|
|
|
|
|
Common stock
|
|
|
314
|
|
|
|
|
281
|
|
Participating securities
|
|
|
1
|
|
|
|
|
1
|
|
Undistributed earnings (excess distributions
over earnings)
|
|
|
$
|
(10
|
)
|
|
|
|
$
|
213
|
|
Weighted-average common shares outstanding
|
2
|
|
|
448
|
|
|
2
|
|
|
469
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
Distributed earnings
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
$
|
0.60
|
|
|
$
|
0.60
|
|
Undistributed earnings (excess distributions
over earnings)
|
—
|
|
|
(0.02
|
)
|
|
0.45
|
|
|
0.45
|
|
Total earnings per common share
|
$
|
0.70
|
|
|
$
|
0.68
|
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
Earnings per common share –
assuming dilution:
|
|
|
|
|
|
|
|
Net income attributable to Valero stockholders
|
|
|
$
|
305
|
|
|
|
|
$
|
495
|
|
Weighted-average common shares outstanding
|
|
|
448
|
|
|
|
|
469
|
|
Common equivalent shares
|
|
|
3
|
|
|
|
|
2
|
|
Weighted-average common shares outstanding –
assuming dilution
|
|
|
451
|
|
|
|
|
471
|
|
Earnings per common share – assuming dilution
|
|
|
$
|
0.68
|
|
|
|
|
$
|
1.05
|
|
Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — VLP. The results of the VLP segment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.
As a result, we have
three
reportable segments as follows:
|
|
•
|
Refining segment
includes our refining operations, the associated marketing activities, and certain logistics assets that support our refining operations that are not owned by VLP;
|
|
|
•
|
Ethanol segment
includes our ethanol operations, the associated marketing activities, and logistics assets that support our ethanol operations; and
|
|
|
•
|
VLP segment
includes the results of VLP, which provides transportation and terminaling services in support our refining segment.
|
Operations that are not included in any of the reportable segments are included in the corporate category.
Our reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires unique technologies and marketing strategies. Performance is evaluated based on segment operating income, which includes revenues and expenses that are directly attributable to management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reflects activity related to our reportable segments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Ethanol
|
|
VLP
|
|
Corporate
and
Eliminations
|
|
Total
|
Three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
Operating revenues from external customers
|
$
|
20,887
|
|
|
$
|
885
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,772
|
|
Intersegment revenues
|
—
|
|
|
60
|
|
|
106
|
|
|
(166
|
)
|
|
—
|
|
Total operating revenues
|
20,887
|
|
|
945
|
|
|
106
|
|
|
(166
|
)
|
|
21,772
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
Cost of sales from external customers
|
18,641
|
|
|
787
|
|
|
—
|
|
|
—
|
|
|
19,428
|
|
Intersegment cost of sales
|
166
|
|
|
—
|
|
|
—
|
|
|
(166
|
)
|
|
—
|
|
Total cost of sales
|
18,807
|
|
|
787
|
|
|
—
|
|
|
(166
|
)
|
|
19,428
|
|
Operating expenses
|
984
|
|
|
109
|
|
|
24
|
|
|
—
|
|
|
1,117
|
|
General and administrative expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
190
|
|
|
190
|
|
Depreciation and amortization expense
|
449
|
|
|
27
|
|
|
12
|
|
|
12
|
|
|
500
|
|
Total costs and expenses
|
20,240
|
|
|
923
|
|
|
36
|
|
|
36
|
|
|
21,235
|
|
Operating income (loss)
|
$
|
647
|
|
|
$
|
22
|
|
|
$
|
70
|
|
|
$
|
(202
|
)
|
|
$
|
537
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
Operating revenues from external customers
|
$
|
14,920
|
|
|
$
|
794
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,714
|
|
Intersegment revenues
|
—
|
|
|
34
|
|
|
79
|
|
|
(113
|
)
|
|
—
|
|
Total operating revenues
|
14,920
|
|
|
828
|
|
|
79
|
|
|
(113
|
)
|
|
15,714
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales (excluding the lower of cost or
market inventory valuation adjustment):
|
|
|
|
|
|
|
|
|
|
Cost of sales from external customers
|
12,799
|
|
|
708
|
|
|
—
|
|
|
—
|
|
|
13,507
|
|
Intersegment cost of sales
|
113
|
|
|
—
|
|
|
—
|
|
|
(113
|
)
|
|
—
|
|
Total cost of sales (excluding the lower
of cost or market inventory
valuation adjustment)
|
12,912
|
|
|
708
|
|
|
—
|
|
|
(113
|
)
|
|
13,507
|
|
Lower of cost or market inventory
valuation adjustment
|
(263
|
)
|
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
(293
|
)
|
Operating expenses (a)
|
907
|
|
|
99
|
|
|
24
|
|
|
—
|
|
|
1,030
|
|
General and administrative expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
156
|
|
|
156
|
|
Depreciation and amortization expense (a)
|
449
|
|
|
12
|
|
|
12
|
|
|
12
|
|
|
485
|
|
Total costs and expenses
|
14,005
|
|
|
789
|
|
|
36
|
|
|
55
|
|
|
14,885
|
|
Operating income (loss)
|
$
|
915
|
|
|
$
|
39
|
|
|
$
|
43
|
|
|
$
|
(168
|
)
|
|
$
|
829
|
|
___________________________
|
|
(a)
|
The VLP segment information for the three months ended March 31, 2016 has been retrospectively adjusted for VLP’s acquisitions that occurred subsequent to March 31, 2016.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by reportable segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Refining
|
$
|
38,219
|
|
|
$
|
38,095
|
|
Ethanol
|
1,338
|
|
|
1,316
|
|
VLP
|
1,039
|
|
|
972
|
|
Corporate
|
5,451
|
|
|
5,790
|
|
Total assets
|
$
|
46,047
|
|
|
$
|
46,173
|
|
|
|
10
.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Decrease (increase) in current assets:
|
|
|
|
Receivables, net
|
$
|
817
|
|
|
$
|
(47
|
)
|
Inventories
|
(291
|
)
|
|
147
|
|
Income taxes receivable
|
41
|
|
|
45
|
|
Prepaid expenses and other
|
12
|
|
|
(126
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
Accounts payable
|
(306
|
)
|
|
108
|
|
Accrued expenses
|
20
|
|
|
(137
|
)
|
Taxes other than income taxes
|
(123
|
)
|
|
(113
|
)
|
Income taxes payable
|
(19
|
)
|
|
(54
|
)
|
Changes in current assets and current liabilities
|
$
|
151
|
|
|
$
|
(177
|
)
|
Noncash investing and financing activities during the
three
months ended
March 31, 2017
included the recognition of a capital lease asset and related obligation associated with an agreement for storage tanks near three of our refineries. This noncash transaction is further described in
Note 3
. There were no significant noncash investing or financing activities during the
three
months ended
March 31, 2016
.
Cash flows related to interest and income taxes were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Interest paid in excess of amount capitalized
|
$
|
128
|
|
|
$
|
95
|
|
Income taxes paid, net
|
96
|
|
|
95
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
11.
|
FAIR VALUE MEASUREMENTS
|
Recurring Fair Value Measurements
The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of
March 31, 2017
and
December 31, 2016
.
We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the tables below on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
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
|
$
|
661
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
673
|
|
|
$
|
(637
|
)
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
Investments of certain
benefit plans
|
59
|
|
|
—
|
|
|
11
|
|
|
70
|
|
|
n/a
|
|
|
n/a
|
|
|
70
|
|
|
n/a
|
|
Total
|
$
|
720
|
|
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
743
|
|
|
$
|
(637
|
)
|
|
$
|
—
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
636
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
645
|
|
|
$
|
(637
|
)
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
(61
|
)
|
Environmental credit
obligations
|
—
|
|
|
289
|
|
|
—
|
|
|
289
|
|
|
n/a
|
|
|
n/a
|
|
|
289
|
|
|
n/a
|
|
Physical purchase
contracts
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
n/a
|
|
|
n/a
|
|
|
3
|
|
|
n/a
|
|
Foreign currency
contracts
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
n/a
|
|
|
n/a
|
|
|
2
|
|
|
n/a
|
|
Total
|
$
|
638
|
|
|
$
|
301
|
|
|
$
|
—
|
|
|
$
|
939
|
|
|
$
|
(637
|
)
|
|
$
|
(8
|
)
|
|
$
|
294
|
|
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Total
Gross
Fair
Value
|
|
Effect of
Counter-
party
Netting
|
|
Effect of
Cash
Collateral
Netting
|
|
Net
Carrying
Value on
Balance
Sheet
|
|
Cash
Collateral
Paid or
Received
Not Offset
|
|
Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
874
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
912
|
|
|
$
|
(875
|
)
|
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
—
|
|
Foreign currency
contracts
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
n/a
|
|
|
n/a
|
|
|
3
|
|
|
n/a
|
|
Investments of certain
benefit plans
|
58
|
|
|
—
|
|
|
11
|
|
|
69
|
|
|
n/a
|
|
|
n/a
|
|
|
69
|
|
|
n/a
|
|
Total
|
$
|
935
|
|
|
$
|
38
|
|
|
$
|
11
|
|
|
$
|
984
|
|
|
$
|
(875
|
)
|
|
$
|
—
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
872
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
895
|
|
|
$
|
(875
|
)
|
|
$
|
(20
|
)
|
|
$
|
—
|
|
|
$
|
(88
|
)
|
Environmental credit
obligations
|
—
|
|
|
188
|
|
|
—
|
|
|
188
|
|
|
n/a
|
|
|
n/a
|
|
|
188
|
|
|
n/a
|
|
Physical purchase
contracts
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
n/a
|
|
|
n/a
|
|
|
5
|
|
|
n/a
|
|
Total
|
$
|
872
|
|
|
$
|
216
|
|
|
$
|
—
|
|
|
$
|
1,088
|
|
|
$
|
(875
|
)
|
|
$
|
(20
|
)
|
|
$
|
193
|
|
|
|
|
A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:
|
|
•
|
Commodity derivative contracts consist primarily of exchange-traded futures and swaps, and as disclosed in
Note 12
, some of these contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but because they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.
|
|
|
•
|
Physical purchase contracts represent the fair value of fixed-price corn purchase contracts. The fair values of these purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.
|
|
|
•
|
Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.
|
|
|
•
|
Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily Renewable Identification Numbers (RINs) in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California Global Warming Solutions Act (the California cap-and-trade system, also known as AB 32) and Quebec’s
Regulation respecting the cap-and-trade system for greenhouse gas emission allowances
(the Quebec cap-and-trade system), (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. These programs are further described in
Note 12
under “Environmental Compliance Program Price Risk.” The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using the market approach based on quoted prices from an independent pricing service.
|
There were no transfers between levels for assets and liabilities held as of
March 31, 2017
and
December 31, 2016
that were measured at fair value on a recurring basis.
There was
no
activity during the
three
months ended
March 31, 2017
and
2016
related to the fair value amounts categorized in Level 3 as of
March 31, 2017
and
December 31, 2016
.
Nonrecurring Fair Value Measurements
There were
no
assets or liabilities that were measured at fair value on a nonrecurring basis as of
March 31, 2017
and
December 31, 2016
.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below along with their associated fair values (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and temporary cash investments
|
$
|
4,463
|
|
|
$
|
4,463
|
|
|
$
|
4,816
|
|
|
$
|
4,816
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Debt (excluding capital leases)
|
7,926
|
|
|
8,935
|
|
|
7,926
|
|
|
8,882
|
|
The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:
|
|
•
|
The fair value of cash and temporary cash investments approximates the carrying value due to the low level of credit risk of these assets combined with their short maturities and market interest rates (Level 1).
|
|
|
•
|
The fair value of debt is determined primarily using the market approach based on quoted prices provided by third-party brokers and vendor pricing services (Level 2).
|
|
|
12.
|
PRICE RISK MANAGEMENT ACTIVITIES
|
We are exposed to market risks primarily related to the volatility in the price of commodities, and foreign currency exchange rates, and the price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under
“Risk Management Activities by Type of Risk.”
These derivative instruments are recorded as either assets or liabilities measured at their fair values (see
Note 11
), as summarized below under
“Fair Values of Derivative Instruments,”
with changes in fair value recognized currently in income. The effect of these derivative instruments on our income is summarized below under
“Effect of Derivative Instruments on Income.”
Risk Management Activities by Type of Risk
Commodity Price Risk
We are exposed to market risks related to the volatility in the price of crude oil, refined petroleum products (primarily gasoline and distillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fair value and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for trading purposes. Our objectives for entering into hedges or trading derivatives are described below.
|
|
•
|
Economic Hedges
– Economic hedges represent commodity derivative instruments that are used to manage price volatility in certain (i) feedstock and refined petroleum product inventories, (ii) fixed-price purchase contracts, and (iii) forecasted feedstock, refined petroleum product or natural gas purchases and refined petroleum product sales. The objectives of our economic hedges are to hedge price volatility in certain feedstock and refined petroleum product inventories and to lock in the price of forecasted feedstock, refined petroleum product, or natural gas purchases or refined petroleum product sales at existing market prices that we deem favorable. Economic hedges are not designated as fair value or cash flow hedges for accounting purposes, usually due to the difficulty of establishing the required documentation at the date the derivative instrument is entered into for them to qualify as hedging instruments for accounting purposes.
|
As of
March 31, 2017
, we had the following outstanding commodity derivative instruments that were used as economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels and soybean oil contracts that are presented in thousands of pounds).
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by
Year of Maturity
|
Derivative Instrument
|
|
2017
|
|
2018
|
Crude oil and refined petroleum products:
|
|
|
|
|
Swaps – long
|
|
22,246
|
|
|
—
|
|
Swaps – short
|
|
22,660
|
|
|
—
|
|
Futures – long
|
|
110,287
|
|
|
2,100
|
|
Futures – short
|
|
115,080
|
|
|
6,981
|
|
Corn:
|
|
|
|
|
Futures – long
|
|
18,040
|
|
|
5
|
|
Futures – short
|
|
40,575
|
|
|
2,185
|
|
Physical contracts – long
|
|
16,273
|
|
|
2,177
|
|
Soybean oil:
|
|
|
|
|
Futures – long
|
|
125,338
|
|
|
—
|
|
Futures – short
|
|
158,758
|
|
|
—
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
Trading Derivatives
– Our objective for entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions for crude oil and refined petroleum products.
|
As of
March 31, 2017
, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels).
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by
Year of Maturity
|
Derivative Instrument
|
|
2017
|
|
2018
|
Crude oil and refined
petroleum
products:
|
|
|
|
|
Swaps – long
|
|
3,105
|
|
|
—
|
|
Swaps – short
|
|
3,105
|
|
|
—
|
|
Futures – long
|
|
24,358
|
|
|
4,300
|
|
Futures – short
|
|
22,304
|
|
|
6,400
|
|
Options – long
|
|
106,990
|
|
|
29,700
|
|
Options – short
|
|
104,990
|
|
|
29,700
|
|
Corn:
|
|
|
|
|
Futures – long
|
|
2,250
|
|
|
—
|
|
Futures – short
|
|
2,000
|
|
|
—
|
|
We had no commodity derivative contracts outstanding as of
March 31, 2017
and
2016
or during the
three
months ended
March 31, 2017
and
2016
that were designated as fair value or cash flow hedges.
Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated in currencies other than the local (functional) currencies of those operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes and therefore are classified as economic hedges. As of
March 31, 2017
, we had forward contracts to purchase
$350 million
of U.S. dollars. These commitments matured on or before
April 30, 2017
.
Environmental Compliance Program Price Risk
We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. Certain of these programs require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. The cost of meeting our obligations under these compliance programs was
$146 million
and
$161 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. These amounts are reflected in cost of sales.
We are subject to additional requirements under greenhouse gas (GHG) emission programs, including the cap-and-trade systems, as discussed in
Note 11
. Under these cap-and-trade systems, we purchase various GHG emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we recovered the majority of these costs from our customers for the
three
months ended
March 31, 2017
and
2016
and expect to continue to recover the majority of these costs in the future. For the
three
months ended
March 31, 2017
and
2016
, the net cost of meeting our obligations under these compliance programs was immaterial.
Fair Values of Derivative Instruments
The following tables provide information about the fair values of our derivative instruments as of
March 31, 2017
and
December 31, 2016
(in millions) and the line items in the balance sheets in which the fair values are reflected. See
Note 11
for additional information related to the fair values of our derivative instruments.
As indicated in
Note 11
, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
|
March 31, 2017
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
|
Futures
|
Receivables, net
|
|
$
|
661
|
|
|
$
|
636
|
|
Swaps
|
Receivables, net
|
|
7
|
|
|
7
|
|
Options
|
Receivables, net
|
|
5
|
|
|
2
|
|
Physical purchase contracts
|
Inventories
|
|
—
|
|
|
3
|
|
Foreign currency contracts
|
Accrued expenses
|
|
—
|
|
|
2
|
|
Total
|
|
|
$
|
673
|
|
|
$
|
650
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
|
December 31, 2016
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
|
Futures
|
Receivables, net
|
|
$
|
874
|
|
|
$
|
872
|
|
Swaps
|
Receivables, net
|
|
32
|
|
|
21
|
|
Options
|
Receivables, net
|
|
6
|
|
|
2
|
|
Physical purchase contracts
|
Inventories
|
|
—
|
|
|
5
|
|
Foreign currency contracts
|
Receivables, net
|
|
3
|
|
|
—
|
|
Total
|
|
|
$
|
915
|
|
|
$
|
900
|
|
Market Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.
Effect of Derivative Instruments on Income
The following tables provide information about the gain or loss recognized in income on our derivative instruments and the income statement line items in which such gains and losses are reflected (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as
Economic Hedges
|
|
Location of Loss
Recognized in Income
on Derivatives
|
|
Three Months Ended
March 31,
|
2017
|
|
2016
|
Commodity contracts
|
|
Cost of sales
|
|
$
|
(97
|
)
|
|
$
|
(139
|
)
|
Foreign currency contracts
|
|
Cost of sales
|
|
(6
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Derivatives
|
|
Location of Gain
Recognized in Income
on Derivatives
|
|
Three Months Ended
March 31,
|
2017
|
|
2016
|
Commodity contracts
|
|
Cost of sales
|
|
$
|
1
|
|
|
$
|
41
|
|