CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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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.
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
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
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.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
$122 million
was for working capital. The amount paid for working capital is subject to adjustment pending the final working capital settlement that is expected to be completed in the third quarter of 2018. This acquisition, which is referred to as the Peru Acquisition, is consistent with our general business strategy and broadens the geographic diversity of our refining and marketing network.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, which are preliminary and subject to change after the completion of an independent appraisal and other evaluations (in millions).
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Current assets, net of cash acquired
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$
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147
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Property, plant, and equipment
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137
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Deferred charges and other assets
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451
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Current liabilities, excluding current portion of debt
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(25
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)
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Debt assumed, including current portion
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(137
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)
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Deferred income tax liabilities
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(81
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)
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Other long-term liabilities
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(21
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)
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Total consideration, net of cash acquired
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$
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471
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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.
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.
Inventories consisted of the following (in millions):
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June 30,
2018
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December 31,
2017
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Refinery feedstocks
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$
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2,213
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$
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2,427
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Refined petroleum products and blendstocks
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3,717
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3,459
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Ethanol feedstocks and products
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231
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242
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Materials and supplies
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259
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256
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Inventories
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$
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6,420
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$
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6,384
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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.
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4.
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DEBT AND CAPITAL LEASE OBLIGATIONS
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Debt
During the
six
months ended
June 30, 2018
, the following activity occurred:
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•
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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.
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•
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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.
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•
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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.
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•
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We retired
$137 million
of debt assumed in connection with the Peru Acquisition with available cash on hand.
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During the
six
months ended
June 30, 2017
, we had no significant debt activity.
We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (amounts in millions and currency in U.S. dollars, except as noted):
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June 30, 2018
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Facility
Amount
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Maturity Date
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Outstanding
Borrowings
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Letters of
Credit Issued
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Availability
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Committed facilities:
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Valero Revolver
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$
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3,000
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November 2020
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$
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—
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$
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119
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$
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2,881
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VLP Revolver
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750
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November 2020
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—
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—
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750
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IEnova Revolver
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340
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February 2028
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56
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n/a
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284
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Canadian Revolver
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C$
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75
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November 2018
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C$
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—
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C$
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6
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C$
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69
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Accounts receivable
sales facility (a)
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1,300
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July 2018
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100
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n/a
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1,200
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Letter of credit facility
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100
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November 2018
|
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n/a
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—
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100
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Uncommitted facilities:
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Letter of credit facilities
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n/a
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n/a
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n/a
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301
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n/a
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___________________
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(a)
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In July 2018, we amended this facility to extend the maturity date from
July 2018
to
July 2019
.
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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.
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):
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2018
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2017
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2018
|
|
2017
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Interest and debt expense
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$
|
144
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$
|
134
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$
|
283
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$
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268
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Less capitalized interest
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20
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15
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38
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28
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|
Interest and debt expense, net of
capitalized interest
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$
|
124
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|
$
|
119
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$
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245
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$
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240
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5.
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COMMITMENTS AND CONTINGENCIES
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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
.
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.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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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|
|
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
.
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
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.
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
.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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
|
|
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.
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.
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
|
|
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
|
|
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
|
|
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
1,402
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
1,436
|
|
|
$
|
(1,434
|
)
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Foreign currency
contracts
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
n/a
|
|
|
n/a
|
|
|
2
|
|
|
n/a
|
|
Investments of certain
benefit plans
|
61
|
|
|
—
|
|
|
9
|
|
|
70
|
|
|
n/a
|
|
|
n/a
|
|
|
70
|
|
|
n/a
|
|
Total
|
$
|
1,465
|
|
|
$
|
34
|
|
|
$
|
9
|
|
|
$
|
1,508
|
|
|
$
|
(1,434
|
)
|
|
$
|
—
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
1,430
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
1,467
|
|
|
$
|
(1,434
|
)
|
|
$
|
(32
|
)
|
|
$
|
1
|
|
|
$
|
(57
|
)
|
Environmental credit
obligations
|
—
|
|
|
70
|
|
|
—
|
|
|
70
|
|
|
n/a
|
|
|
n/a
|
|
|
70
|
|
|
n/a
|
|
Physical purchase
contracts
|
—
|
|
|
13
|
|
|
—
|
|
|
13
|
|
|
n/a
|
|
|
n/a
|
|
|
13
|
|
|
n/a
|
|
Total
|
$
|
1,430
|
|
|
$
|
120
|
|
|
$
|
—
|
|
|
$
|
1,550
|
|
|
$
|
(1,434
|
)
|
|
$
|
(32
|
)
|
|
$
|
84
|
|
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
$
|
875
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
894
|
|
|
$
|
(893
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Investments of certain
benefit plans
|
65
|
|
|
—
|
|
|
8
|
|
|
73
|
|
|
n/a
|
|
|
n/a
|
|
|
73
|
|
|
n/a
|
|
Total
|
$
|
940
|
|
|
$
|
19
|
|
|
$
|
8
|
|
|
$
|
967
|
|
|
$
|
(893
|
)
|
|
$
|
—
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
955
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
969
|
|
|
$
|
(893
|
)
|
|
$
|
(76
|
)
|
|
$
|
—
|
|
|
$
|
(102
|
)
|
Environmental credit
obligations
|
—
|
|
|
104
|
|
|
—
|
|
|
104
|
|
|
n/a
|
|
|
n/a
|
|
|
104
|
|
|
n/a
|
|
Physical purchase
contracts
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
n/a
|
|
|
n/a
|
|
|
6
|
|
|
n/a
|
|
Foreign currency
contracts
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
n/a
|
|
|
n/a
|
|
|
7
|
|
|
n/a
|
|
Total
|
$
|
962
|
|
|
$
|
124
|
|
|
$
|
—
|
|
|
$
|
1,086
|
|
|
$
|
(893
|
)
|
|
$
|
(76
|
)
|
|
$
|
117
|
|
|
|
|
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. 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), Quebec’s
Environmental Quality Act
(the Quebec cap-and-trade system), and Ontario’s
Climate Change Mitigation and Low-Carbon Economy Act
(the Ontario 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 14
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
June 30, 2018
and
December 31, 2017
that were measured at fair value on a recurring basis.
There was
no
significant activity during the three and
six
months ended
June 30, 2018
and
2017
related to the fair value amounts categorized in Level 3 as of
June 30, 2018
and
December 31, 2017
.
Nonrecurring Fair Value Measurements
There were
no
assets or liabilities that were measured at fair value on a nonrecurring basis as of
June 30, 2018
and
December 31, 2017
.
Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the following table along with their associated fair values (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Fair Value
Hierarchy
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
Level 1
|
|
$
|
4,451
|
|
|
$
|
4,451
|
|
|
$
|
5,850
|
|
|
$
|
5,850
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Debt (excluding capital leases)
|
Level 2
|
|
8,451
|
|
|
9,310
|
|
|
8,310
|
|
|
9,795
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
14.
|
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 13
), 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.
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.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
June 30, 2018
, 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
|
|
2018
|
|
2019
|
Crude oil and refined petroleum products:
|
|
|
|
|
Swaps – long
|
|
9,892
|
|
|
135
|
|
Swaps – short
|
|
10,115
|
|
|
—
|
|
Futures – long
|
|
93,569
|
|
|
—
|
|
Futures – short
|
|
95,354
|
|
|
6
|
|
Corn:
|
|
|
|
|
Futures – long
|
|
48,500
|
|
|
150
|
|
Futures – short
|
|
86,310
|
|
|
8,415
|
|
Physical contracts – long
|
|
41,029
|
|
|
8,264
|
|
Soybean oil:
|
|
|
|
|
Futures – long
|
|
65,519
|
|
|
—
|
|
Futures – short
|
|
169,018
|
|
|
—
|
|
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
June 30, 2018
, 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 in 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
|
|
2018
|
|
2019
|
Crude oil and refined
petroleum
products:
|
|
|
|
|
Swaps – long
|
|
300
|
|
|
—
|
|
Swaps – short
|
|
300
|
|
|
—
|
|
Futures – long
|
|
55,504
|
|
|
7,701
|
|
Futures – short
|
|
55,402
|
|
|
7,751
|
|
Options – long
|
|
75,800
|
|
|
—
|
|
Options – short
|
|
75,400
|
|
|
—
|
|
Corn:
|
|
|
|
|
Futures – long
|
|
150
|
|
|
—
|
|
We had no commodity derivative contracts outstanding as of
June 30, 2018
and
2017
or during the three and
six
months ended
June 30, 2018
and
2017
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
June 30, 2018
, we had forward contracts to purchase
$487 million
of U.S. dollars. All of these commitments matured on or before
July 31, 2018
.
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 market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
favorable. The cost of meeting our obligations under these compliance programs was
$131 million
and
$255 million
for the three months ended
June 30, 2018
and
2017
, respectively, and
$337 million
and
$401 million
for the
six
months ended
June 30, 2018
and
2017
, respectively. These amounts are reflected in cost of materials and other.
We are subject to additional requirements under greenhouse gas (GHG) emission programs, including the cap-and-trade systems, as discussed in
Note 13
. 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 and
six
months ended
June 30, 2018
and
2017
and expect to continue to recover the majority of these costs in the future. For the three and
six
months ended
June 30, 2018
and
2017
, 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
June 30, 2018
and
December 31, 2017
(in millions) and the line items in the balance sheets in which the fair values are reflected. See
Note 13
for additional information related to the fair values of our derivative instruments.
As indicated in
Note 13
, 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 following tables, 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
|
|
June 30, 2018
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
|
Futures
|
Receivables, net
|
|
$
|
1,398
|
|
|
$
|
1,426
|
|
Swaps
|
Receivables, net
|
|
11
|
|
|
11
|
|
Swaps
|
Accounts payable
|
|
—
|
|
|
1
|
|
Options
|
Receivables, net
|
|
27
|
|
|
29
|
|
Physical purchase contracts
|
Inventories
|
|
—
|
|
|
13
|
|
Foreign currency contracts
|
Receivables, net
|
|
2
|
|
|
—
|
|
Total
|
|
|
$
|
1,438
|
|
|
$
|
1,480
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
|
December 31, 2017
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
|
Futures
|
Receivables, net
|
|
$
|
875
|
|
|
$
|
955
|
|
Swaps
|
Receivables, net
|
|
11
|
|
|
11
|
|
Options
|
Receivables, net
|
|
8
|
|
|
3
|
|
Physical purchase contracts
|
Inventories
|
|
—
|
|
|
6
|
|
Foreign currency contracts
|
Accrued expenses
|
|
—
|
|
|
7
|
|
Total
|
|
|
$
|
894
|
|
|
$
|
982
|
|
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 line items in the statements of income in which such gains and losses are reflected (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as
Economic Hedges
|
|
Location of Gain (Loss)
Recognized in Income
on Derivatives
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
2018
|
|
2017
|
2018
|
|
2017
|
Commodity contracts
|
|
Cost of materials and other
|
|
$
|
(66
|
)
|
|
$
|
25
|
|
|
$
|
(114
|
)
|
|
$
|
(72
|
)
|
Foreign currency contracts
|
|
Cost of materials and other
|
|
17
|
|
|
(20
|
)
|
|
14
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Derivatives
|
|
Location of Gain (Loss)
Recognized in Income
on Derivatives
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
2018
|
|
2017
|
2018
|
|
2017
|
Commodity contracts
|
|
Cost of materials and other
|
|
$
|
51
|
|
|
$
|
(3
|
)
|
|
$
|
87
|
|
|
$
|
(2
|
)
|