Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for Valero. Our management evaluated the effectiveness of Valero’s internal control over financial reporting as of December 31, 2013. In its evaluation, management used the criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management believes that as of December 31, 2013, our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which begins on page 58 of this report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

of Valero Energy Corporation and subsidiaries:

We have audited the accompanying consolidated balance sheets of Valero Energy Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valero Energy Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PCAOB, the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

San Antonio, Texas

February 27, 2014

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

of Valero Energy Corporation and subsidiaries:

We have audited Valero Energy Corporation and subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Valero Energy Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by COSO.

We also have audited, in accordance with the standards of the PCAOB, the consolidated balance sheets of Valero Energy Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated February 27, 2014 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Antonio, Texas

February 27, 2014

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Millions of Dollars, Except Par Value)

	December 31,
	2013				2012
ASSETS
Current assets:
Cash and temporary cash investments	$	4,292			$	1,723
Receivables, net	8,751				8,167
Inventories	5,758				5,973
Income taxes receivable	72				169
Deferred income taxes	266				274
Prepaid expenses and other	138				154
Total current assets	19,277				16,460
Property, plant, and equipment, at cost	33,933				34,132
Accumulated depreciation	(8,226		)		(7,832		)
Property, plant, and equipment, net	25,707				26,300
Intangible assets, net	156				213
Deferred charges and other assets, net	2,120				1,504
Total assets	$	47,260			$	44,477
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	303			$	586
Accounts payable	9,931				9,348
Accrued expenses	522				590
Taxes other than income taxes	1,345				1,026
Income taxes payable	773				1
Deferred income taxes	249				378
Total current liabilities	13,123				11,929
Debt and capital lease obligations, less current portion	6,261				6,463
Deferred income taxes	6,601				5,860
Other long-term liabilities	1,329				2,130
Commitments and contingencies
Equity:
Valero Energy Corporation stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 673,501,593 and 673,501,593 shares issued	7				7
Additional paid-in capital	7,187				7,322
Treasury stock, at cost; 137,932,138 and 121,406,520 common shares	(7,054		)		(6,437		)
Retained earnings	18,970				17,032
Accumulated other comprehensive income	350				108
Total Valero Energy Corporation stockholders’ equity	19,460				18,032
Noncontrolling interests	486				63
Total equity	19,946				18,095
Total liabilities and equity	$	47,260			$	44,477

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Millions of Dollars, Except per Share Amounts)

	Year Ended December 31,
	2013				2012				2011
Operating revenues	$	138,074			$	139,250			$	125,987
Costs and expenses:
Cost of sales	127,316				127,268				115,719
Operating expenses:
Refining	3,704				3,668				3,406
Retail	226				686				678
Ethanol	387				332				399
General and administrative expenses	758				698				571
Depreciation and amortization expense	1,720				1,574				1,534
Asset impairment losses	—				1,014				—
Total costs and expenses	134,111				135,240				122,307
Operating income	3,963				4,010				3,680
Gain on disposition of retained interest in CST Brands, Inc.	325				—				—
Other income, net	59				9				43
Interest and debt expense, net of capitalized interest	(365		)		(313		)		(401		)
Income from continuing operations before income tax expense	3,982				3,706				3,322
Income tax expense	1,254				1,626				1,226
Income from continuing operations	2,728				2,080				2,096
Loss from discontinued operations, net of income taxes	—				—				(7		)
Net income	2,728				2,080				2,089
Less: Net income (loss) attributable to noncontrolling interests	8				(3		)		(1		)
Net income attributable to Valero Energy Corporation stockholders	$	2,720			$	2,083			$	2,090
Net income attributable to Valero Energy Corporation stockholders:
Continuing operations	$	2,720			$	2,083			$	2,097
Discontinued operations	—				—				(7		)
Total	$	2,720			$	2,083			$	2,090
Earnings per common share:
Continuing operations	$	4.99			$	3.77			$	3.70
Discontinued operations	—				—				(0.01		)
Total	$	4.99			$	3.77			$	3.69
Weighted-average common shares outstanding (in millions)	542				550				563
Earnings per common share – assuming dilution:
Continuing operations	$	4.97			$	3.75			$	3.69
Discontinued operations	—				—				(0.01		)
Total	$	4.97			$	3.75			$	3.68
Weighted-average common shares outstanding – assuming dilution (in millions)	548				556				569
Dividends per common share	$	0.85			$	0.65			$	0.30

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Millions of Dollars)

	Year Ended December 31,
	2013				2012				2011
Net income	$	2,728			$	2,080			$	2,089
Other comprehensive income (loss):
Foreign currency translation adjustment	(98		)		164				(122		)
Net gain (loss) on pension and other postretirement benefits	763				(211		)		(292		)
Net gain (loss) on derivative instruments designated and qualifying as cash flow hedges	(2		)		(28		)		29
Other comprehensive income (loss) before income tax expense (benefit)	663				(75		)		(385		)
Income tax expense (benefit) related to items of other comprehensive income (loss)	262				(87		)		(93		)
Other comprehensive income (loss)	401				12				(292		)
Comprehensive income	3,129				2,092				1,797
Less: Comprehensive income (loss) attributable to noncontrolling interests	8				(3		)		(1		)
Comprehensive income attributable to Valero Energy Corporation stockholders	$	3,121			$	2,095			$	1,798

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(Millions of Dollars)

	Valero Energy Corporation Stockholders’ Equity
	Common Stock				Additional Paid-in Capital				Treasury Stock				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total				Non-controlling Interests				Total Equity
Balance as of December 31, 2010	$	7			$	7,704			$	(6,462	)		$	13,388			$	388			$	15,025			$	—			$	15,025
Net income (loss)	—				—				—				2,090				—				2,090				(1		)		2,089
Dividends on common stock	—				—				—				(169		)		—				(169		)		—				(169		)
Stock-based compensation expense	—				57				—				—				—				57				—				57
Tax deduction in excess of stock- based compensation expense	—				22				—				—				—				22				—				22
Transactions in connection with stock-based compensation plans:
Stock issuances	—				(287		)		336				—				—				49				—				49
Stock repurchases	—				(10		)		(349		)		—				—				(359		)		—				(359		)
Contributions from noncontrolling interest	—				—				—				—				—				—				23				23
Recognition of noncontrolling interests in Mainline Pipelines Limited in connection with Pembroke Acquisition	—				—				—				—				—				—				5				5
Acquisition of noncontrolling interests in Mainline Pipelines Limited	—				—				—				—				—				—				(5		)		(5		)
Other comprehensive loss	—				—				—				—				(292		)		(292		)		—				(292		)
Balance as of December 31, 2011	7				7,486				(6,475		)		15,309				96				16,423				22				16,445
Net income (loss)	—				—				—				2,083				—				2,083				(3		)		2,080
Dividends on common stock	—				—				—				(360		)		—				(360		)		—				(360		)
Stock-based compensation expense	—				57				—				—				—				57				—				57
Tax deduction in excess of stock- based compensation expense	—				29				—				—				—				29				—				29
Transactions in connection with stock-based compensation plans:
Stock issuances	—				(260		)		319				—				—				59				—				59
Stock repurchases	—				10				(163		)		—				—				(153		)		—				(153		)
Stock repurchases under buyback program	—				—				(118		)		—				—				(118		)		—				(118		)
Contributions from noncontrolling interest	—				—				—				—				—				—				44				44
Other comprehensive income	—				—				—				—				12				12				—				12
Balance as of December 31, 2012	7				7,322				(6,437		)		17,032				108				18,032				63				18,095
Net income	—				—				—				2,720				—				2,720				8				2,728
Dividends on common stock	—				—				—				(462		)		—				(462		)		—				(462		)
Stock-based compensation expense	—				64				—				—				—				64				—				64
Tax deduction in excess of stock- based compensation expense	—				47				—				—				—				47				—				47
Transactions in connection with stock-based compensation plans:
Stock issuances	—				(243		)		302				—				—				59				—				59
Stock repurchases	—				—				(236		)		—				—				(236		)		—				(236		)
Stock repurchases under buyback program	—				—				(692		)		—				—				(692		)		—				(692		)
Separation of retail business	—				(9		)		9				(320		)		(159		)		(479		)		—				(479		)
Net proceeds from initial public offering of common units of Valero Energy Partners LP	—				—				—				—				—				—				369				369
Contributions from noncontrolling interests	—				—				—				—				—				—				46				46
Other	—				6				—				—				—				6				—				6
Other comprehensive income	—				—				—				—				401				401				—				401
Balance as of December 31, 2013	$	7			$	7,187			$	(7,054	)		$	18,970			$	350			$	19,460			$	486			$	19,946

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of Dollars)

	Year Ended December 31,
	2013				2012				2011
Cash flows from operating activities:
Net income	$	2,728			$	2,080			$	2,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	1,720				1,574				1,534
Gain on disposition of retained interest in CST Brands, Inc.	(325		)		—				—
Asset impairment losses	—				1,014				—
Loss on sales of refinery assets, net	—				—				12
Stock-based compensation expense	64				58				58
Deferred income tax expense	501				963				461
Changes in current assets and current liabilities	922				(302		)		81
Changes in deferred charges and credits and other operating activities, net	(46		)		(117		)		(197		)
Net cash provided by operating activities	5,564				5,270				4,038
Cash flows from investing activities:
Capital expenditures	(2,121		)		(2,931		)		(2,355		)
Deferred turnaround and catalyst costs	(634		)		(479		)		(629		)
Acquisition of Pembroke Refinery, net of cash acquired	—				—				(1,691		)
Acquisition of Meraux Refinery	—				—				(547		)
Proceeds from the sale of the Paulsboro Refinery	—				160				—
Other investing activities, net	(57		)		(101		)		(76		)
Net cash used in investing activities	(2,812		)		(3,351		)		(5,298		)
Cash flows from financing activities:
Proceeds from debt borrowings	—				2,900				150
Repayments of debt	(480		)		(3,612		)		(778		)
Proceeds from the exercise of stock options	59				59				49
Purchase of common stock for treasury	(928		)		(281		)		(349		)
Common stock dividends	(462		)		(360		)		(169		)
Net proceeds from initial public offering of common units of Valero Energy Partners LP	369				—				—
Contributions from noncontrolling interests	45				44				22
Disposition of retail business:
Proceeds from short-term debt in anticipation of separation	550				—				—
Cash distributed to Valero by CST Brands, Inc.	500				—				—
Cash held and retained by CST Brands, Inc. upon separation	(315		)		—				—
Proceeds from short-term debt related to disposition of retained interest	525				—				—
Repayments of short-term debt related to disposition of retained interest	(58		)		—				—
Other financing activities, net	32				17				9
Net cash used in financing activities	(163		)		(1,233		)		(1,066		)
Effect of foreign exchange rate changes on cash	(20		)		13				16
Net increase (decrease) in cash and temporary cash investments	2,569				699				(2,310		)
Cash and temporary cash investments at beginning of year	1,723				1,024				3,334
Cash and temporary cash investments at end of year	$	4,292			$	1,723			$	1,024

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	BASIS OF PRESENTATION AND SUMMARY OF 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. We are an independent petroleum refining and marketing company and own 16 refineries with a combined throughput capacity of approximately 3.1 million barrels per day as of December 31, 2013. We market branded and unbranded refined products on a wholesale basis in the United States (U.S.), Canada, the Caribbean, the United Kingdom (U.K.), and Ireland through an extensive bulk and rack marketing network and through approximately 7,400 outlets that carry the Valero®, Shamrock®, Ultramar®, Beacon®, and Texaco® brand names. We also own 10 ethanol plants in the U.S. that primarily produce ethanol with a combined production capacity of approximately 1.2 billion gallons per year as of December 31, 2013. Our operations are affected by:

•	company-specific factors, primarily refinery utilization rates and refinery maintenance turnarounds;

•	seasonal factors, such as the demand for refined products during the summer driving season and heating oil during the winter season; and

•	industry factors, such as movements in and the level of crude oil prices including the effect of quality differentials between grades of crude oil, the demand for and prices of refined products, industry supply capacity, and competitor refinery maintenance turnarounds.

We have evaluated subsequent events that occurred after December 31, 2013 through the filing of this Form 10-K. Any material subsequent events that occurred during this time have been properly recognized or disclosed in these financial statements.

Significant Accounting Policies

Reclassifications

Certain amounts previously reported in our annual report on Form 10-K for the year ended December 31, 2012 have been reclassified to conform to the 2013 presentation.

Principles of Consolidation

General

These financial statements include the accounts of Valero and subsidiaries in which Valero has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in significant noncontrolled entities are accounted for using the equity method.

Noncontrolling Interests

Because of our controlling financial interest in each of the following entities, we have included their financial statements in our financial statements and have separately disclosed the related noncontrolling interests.

•

Valero Energy Partners LP (VLP) is a master limited partnership formed in July 2013 to own, operate, develop, and acquire primarily fee-based crude oil and refined petroleum product pipelines and terminals. As further described in Note 5, VLP completed an initial public offering of its common units on December 16, 2013 and we owned a 70.6 percent controlling financial interest in VLP as of December 31, 2013.

•	Diamond Green Diesel Holdings LLC (DGD Holdings) is a 50/50 joint venture with Darling Green Energy LLC, a subsidiary of Darling International, Inc., that constructed and now operates a biomass-

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

based diesel unit having a design feed capacity of 10,000 barrels per day that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel. As of December 31, 2013, we had loaned $221 million to a subsidiary of DGD Holdings to finance a portion of the construction costs of the unit. The unit began operations in June 2013.

•

PI Dock Facilities LLC (PI Dock) is a 50/50 joint venture with TGSD PI, LLC that will construct and operate crude oil docks and related facilities near our Port Arthur Refinery. In December 2012, we agreed to lend PI Dock up to $90 million to finance the construction of the initial crude dock, which is expected to be completed in late third quarter or early fourth quarter of 2014. As of December 31, 2013, we had loaned PI Dock $13 million to finance its construction projects.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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.

Cash and Temporary Cash Investments

Our temporary cash investments are highly liquid, low-risk debt instruments that have a maturity of three months or less when acquired.

Receivables

Trade receivables are carried at original invoice amount. We maintain an allowance for doubtful accounts, which is adjusted based on management’s assessment of our customers’ historical collection experience, known credit risks, and industry and economic conditions.

Inventories

Inventories are carried at the lower of cost or market. The cost of refinery feedstocks purchased for processing, refined products, and grain and ethanol inventories are determined under the last-in, first-out (LIFO) method using the dollar-value LIFO method, with any increments valued based on average purchase prices during the year. The cost of feedstocks and products purchased for resale and the cost of materials and supplies are determined principally under the weighted-average cost method.

Property, Plant, and Equipment

The cost of property, plant, and equipment (property assets) purchased or constructed, including betterments of property assets, is capitalized. However, the cost of repairs to and normal maintenance of property assets is expensed as incurred. Betterments of property assets are those that extend the useful life, increase the capacity or improve the operating efficiency of the asset, or improve the safety of our operations. The cost of property assets constructed includes interest and certain overhead costs allocable to the construction activities.

Our operations, especially those of our refining segment, are highly capital intensive. Each of our refineries comprises a large base of property assets, consisting of a series of interconnected, highly integrated and interdependent crude oil processing facilities and supporting logistical infrastructure (Units), and these Units are continuously improved. Improvements consist of the addition of new Units and betterments of existing

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Units. We plan for these improvements by developing a multi-year capital program that is updated and revised based on changing internal and external factors.

Depreciation of property assets used in our refining segment is recorded on a straight-line basis over the estimated useful lives of these assets primarily using the composite method of depreciation. We maintain a separate composite group of property assets for each of our refineries. We estimate the useful life of each group based on an evaluation of the property assets comprising the group, and such evaluations consist of, but are not limited to, the physical inspection of the assets to determine their condition, consideration of the manner in which the assets are maintained, assessment of the need to replace assets, and evaluation of the manner in which improvements impact the useful life of the group. The estimated useful lives of our composite groups range primarily from 25 to 30 years.

Under the composite method of depreciation, the cost of an improvement is added to the composite group to which it relates and is depreciated over that group’s estimated useful life. We design improvements to our refineries in accordance with engineering specifications, design standards and practices accepted in our industry, and these improvements have design lives consistent with our estimated useful lives. Therefore, we believe the use of the group life to depreciate the cost of improvements made to the group is reasonable because the estimated useful life of each improvement is consistent with that of the group. It should be noted, however, that factors such as competition, regulation, or environmental matters could cause us to change our estimates, thus impacting depreciation expense in the future.

Also under the composite method of depreciation, the historical cost of a minor property asset (net of salvage value) that is retired or replaced is charged to accumulated depreciation and no gain or loss is recognized in income. However, a gain or loss is recognized in income for a major property asset that is retired, replaced or sold and for an abnormal disposition of a property asset (primarily involuntary conversions). Gains and losses are reflected in depreciation and amortization expense, unless such amounts are reported separately due to materiality.

Depreciation of property assets used in our ethanol segment and our former retail segment (see Note 3) is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset. Assets acquired under capital leases are amortized on a straight-line basis over (i) the lease term if transfer of ownership does not occur at the end of the lease term or (ii) the estimated useful life of the asset if transfer of ownership does occur at the end of the lease term.

Deferred Charges and Other Assets

“Deferred charges and other assets, net” include the following:

•	turnaround costs, which are incurred in connection with planned major maintenance activities at our refineries and ethanol plants and which are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs;

•	fixed-bed catalyst costs, representing the cost of catalyst that is changed out at periodic intervals when the quality of the catalyst has deteriorated beyond its prescribed function, which are deferred when incurred and amortized on a straight-line basis over the estimated useful life of the specific catalyst;

•	investments in entities that we do not control; and

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•	other noncurrent assets such as investments of certain benefit plans (related primarily to certain U.S. nonqualified defined benefit plans whose plan assets are not protected from our creditors and therefore cannot be reflected as a reduction from our obligations under those pension plans), debt issuance costs, and various other costs.

Impairment of Assets

Long-lived assets, which include property, plant, and equipment, intangible assets, and refinery turnaround and catalysts costs, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods. See Note 4 for our impairment analysis of our long-lived assets.

We evaluate our equity method investments for impairment when there is evidence that we may not be able to recover the carrying amount of our investments or the investee is unable to sustain an earnings capacity that justifies the carrying amount. A loss in the value of an investment that is other than a temporary decline is recognized currently in income, and is based on the difference between the estimated current fair value of the investment and its carrying amount.

Environmental Matters

Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties and have not been measured on a discounted basis.

Asset Retirement Obligations

We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time we incur that liability, which is generally when the asset is purchased, constructed, or leased. We record the liability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.

Foreign Currency Translation

The functional currency of each of our international operations is generally the respective local currency, which includes the Canadian dollar, the Aruban florin, the pound sterling, and the euro. Balance sheet accounts are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the year presented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue Recognition

Revenues for products sold by the refining and ethanol segments and our former retail segment (see Note 3) are recorded upon delivery of the products to our customers, which is the point at which title to the products is transferred, and when payment has either been received or collection is reasonably assured.

Excise taxes on sales by our U.S. retail system were presented on a gross basis. All other excise taxes are presented on a net basis.

We enter into certain purchase and sale arrangements with the same counterparty that are deemed to be made in contemplation of one another. We combine these transactions and, as a result, revenues and cost of sales are not recognized in connection with these arrangements. We also enter into refined product exchange transactions to fulfill sales contracts with our customers by accessing refined products in markets where we do not operate our own refineries. These refined product exchanges are accounted for as exchanges of non-monetary assets, and no revenues are recorded on these transactions.

Product Shipping and Handling Costs

Costs incurred for shipping and handling of products are included in cost of sales.

Cost of Biofuel Credits

We purchase biofuel credits (primarily Renewable Identification Numbers (RINs) in the U.S.) to comply with government regulations that require us to blend a certain percentage of biofuels into the products we produce, as further described in Note 21 under “Compliance Program Price Risk.” To the degree that we are unable to blend biofuels at the required percentage, we must purchase biofuel credits in the open market to meet our obligation. The cost of purchased biofuel credits is charged to cost of sales as such credits are needed to satisfy our obligation. To the extent we have not purchased enough biofuel credits to satisfy our obligation as of the balance sheet date, we charge cost of sales for such deficiency based on the market price of the biofuel credits as of the balance sheet date, and we record a liability for our obligation to purchase those credits. See Note 20 for disclosure of our fair value liability.

Stock-Based Compensation

Compensation expense for our share-based compensation plans is based on the fair value of the awards granted and is recognized in income on a straight-line basis over the requisite service period of each award. For new grants that have retirement-eligibility provisions, we use the non-substantive vesting period approach, under which compensation cost is recognized immediately for awards granted to retirement-eligible employees or over the period from the grant date to the date retirement eligibility is achieved if that date is expected to occur during the nominal vesting period.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We have elected to classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.

Earnings per Common Share

Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the year. Participating share-based payment awards, including shares of restricted stock granted under certain of our stock-based compensation plans, are included in the computation of basic earnings per share using the two-class method. Earnings per common share – assuming dilution reflects the potential dilution arising from our outstanding stock options and nonvested shares granted to employees in connection with our stock-based compensation plans. Potentially dilutive securities are excluded from the computation of earnings per common share – assuming dilution when the effect of including such shares would be antidilutive.

Financial Instruments

Our financial instruments include cash and temporary cash investments, receivables, payables, debt, capital lease obligations, commodity derivative contracts, and foreign currency derivative contracts. The estimated fair values of these financial instruments approximate their carrying amounts, except for certain debt as discussed in Note 20.

Derivatives and Hedging

All derivative instruments are recorded in the balance sheet as either assets or liabilities measured at their fair values. When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading derivative. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedging relationships (derivative instruments not designated as fair value or cash flow hedges) and for derivative instruments entered into for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. The cash flow effects of all of our derivative instruments are reflected in operating activities in the statements of cash flows.

New Accounting Pronouncements

In July 2013, the provisions of Accounting Standards Codification Topic 740, “Income Taxes,” were amended to provide specific guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendment requires entities to present an unrecognized tax benefit as a reduction to the deferred tax asset generated by the net operating loss carryforward, similar tax loss, or tax credit carryforward, if such items are available to be used to offset the unrecognized tax benefit. These provisions are effective for interim and annual reporting periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date, with retrospective application permitted. The adoption of this guidance effective January 1, 2014 will not affect our financial position or results of

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

operations, nor will it require any additional disclosures, but may result in a change in presentation to our consolidated balance sheets.

2.	ACQUISITIONS

Acquisitions of Refineries

The acquired refining and marketing businesses discussed below involve the production and marketing of refined petroleum products. These acquisitions are consistent with our general business strategy and complement our existing refining and marketing network.

Meraux Acquisition

On October 1, 2011, we acquired the Meraux Refinery and related logistics assets from Murphy Oil Corporation for an initial payment of $586 million, which was funded from available cash. This acquisition is referred to as the Meraux Acquisition. The Meraux Refinery has a total throughput capacity of 135,000 barrels per day and is located in Meraux, Louisiana.

In the fourth quarter of 2011, we recorded an adjustment related to inventories acquired that reduced the purchase price to $547 million. In the fourth quarter of 2012, an independent appraisal of the assets acquired and liabilities assumed and certain other evaluations of the fair values related to the Meraux Acquisition were completed and finalized. The purchase price of the Meraux Acquisition was allocated based on the fair values of the assets acquired and the liabilities assumed at the date of acquisition resulting from this final appraisal and other evaluations. The primary adjustments to the preliminary purchase price allocation disclosed in 2011 consisted of an $8 million increase in materials and supplies inventories, a $27 million decrease in property, plant, and equipment, and a $19 million increase in deferred charges and other assets, net. The final amounts assigned to the assets acquired and liabilities assumed in the Meraux Acquisition were recognized at their acquisition-date fair values as follows (in millions):

Inventories	$	227
Property, plant, and equipment	293
Deferred charges and other assets, net	28
Other long-term liabilities	(1		)
Purchase price	$	547

Pembroke Acquisition

On August 1, 2011, we acquired 100 percent of the outstanding shares of a subsidiary of Chevron Corporation (Chevron) that owned and operated the Pembroke Refinery. The refinery has a total throughput capacity of 270,000 barrels per day and is located in Wales, U.K. We also acquired an extensive network of marketing and logistics assets throughout the U.K. and Ireland as part of this acquisition. On the acquisition date, we initially paid $1.8 billion from available cash, of which $1.1 billion was for working capital. Subsequent to the acquisition date, we recorded an adjustment to working capital (primarily inventory), resulting in an adjusted purchase price of $1.7 billion. This acquisition is referred to as the Pembroke Acquisition.

In the third quarter of 2012, an independent appraisal of the assets acquired and liabilities assumed and certain other evaluations of the fair values related to the Pembroke Acquisition were completed and finalized.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The purchase price of the Pembroke Acquisition was allocated based on the fair values of the assets acquired and the liabilities assumed at the date of acquisition resulting from this final appraisal and other evaluations. The primary adjustments to the preliminary purchase price allocation disclosed in 2011 consisted of a $143 million increase in property, plant, and equipment, a $124 million increase in deferred income taxes, and a $17 million increase in other long-term liabilities. The final amounts assigned to the assets acquired and liabilities assumed in the Pembroke Acquisition were recognized at their acquisition-date fair values as follows (in millions):

Current assets, net of cash acquired	$	2,215
Property, plant, and equipment	947
Intangible assets	22
Deferred charges and other assets, net	37
Current liabilities, less current portion of debt and capital lease obligations	(1,294		)
Debt and capital leases assumed, including current portion	(12		)
Deferred income taxes	(159		)
Other long-term liabilities	(60		)
Noncontrolling interest	(5		)
Purchase price, net of cash acquired	$	1,691

Because of the adjustment to property, plant, and equipment discussed above, we recorded an additional $6 million of depreciation expense in the third quarter of 2012 to true-up depreciation expense for the period from the date of the Pembroke Acquisition (August 1, 2011) through July 31, 2012.

In connection with the Pembroke Acquisition, we acquired an 85 percent interest in Mainline Pipelines Limited (MLP). MLP owns a pipeline that distributes refined products from the Pembroke Refinery to terminals in the U.K. In the fourth quarter of 2011, we acquired the remaining 15 percent interest in MLP.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.	DISPOSITIONS OF BUSINESSES

Separation of Retail Business

On May 1, 2013, we completed the separation of our retail business by creating an independent public company named CST Brands, Inc. (CST) and distributing 80 percent of the outstanding shares of CST common stock to our stockholders. Each Valero stockholder received one share of CST common stock for every nine shares of Valero common stock held at the close of business on the record date of April 19, 2013. Fractional shares of CST common stock were not distributed, but instead were aggregated and sold in the open market at prevailing rates with net cash proceeds then distributed pro rata to each Valero stockholder who was entitled to receive fractional shares.

In connection with the separation, we received an aggregate of $1.05 billion in cash, consisting of $550 million from the issuance of short-term debt to a third-party financial institution on April 16, 2013 and $500 million distributed to us by CST on May 1, 2013. The cash distributed to us by CST was borrowed by CST on May 1, 2013 under its senior secured credit facility. See Note 11 for further discussion of that credit facility. Also on May 1, 2013, CST issued $550 million of its senior unsecured bonds to us, and we exchanged those bonds with the third-party financial institution in satisfaction of our short-term debt. Immediately prior to May 1, 2013, subsidiaries of CST held $315 million of cash, and CST retained that cash following the distribution on May 1, 2013. Also in connection with the separation, we incurred a tax liability of approximately $189 million primarily related to the manner in which the transaction is treated for tax purposes in Canada; the majority of this liability was paid during 2013 and the remaining amounts will be paid in the first quarter of 2014. Therefore, the cash we received as a result of the separation, net of our tax liability, was $546 million. We also incurred $30 million in costs during the three months ended June 30, 2013 to effect the separation, which are included in general and administrative expenses.

We also entered into long-term motor fuel supply agreements with CST in the U.S. and Canada. The nature and significance of our agreements to supply motor fuel to CST through 2028 represents a continuation of activities with CST for accounting purposes. As such, the historical results of operations of our retail business have not been reported as discontinued operations in our statements of income.

On November 14, 2013, we disposed of our 20 percent retained interest in CST by transferring all remaining shares of CST common stock owned by us to a third-party financial institution in exchange for $467 million of our short-term debt and recognized a $325 million nontaxable gain, as further described in Note 11.

Selected historical results of operations of our retail business prior to the separation are disclosed in Note 18. Subsequent to May 1, 2013 and through November 14, 2013, our share of CST’s results of operations is reflected in “other income, net.” Our share of income taxes incurred directly by CST during this period is reported in the equity in earnings from CST, and as such is not included in income taxes in our statements of income.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the carrying values of the major categories of assets and liabilities of our retail business, immediately preceding its separation on May 1, 2013, which are excluded from our consolidated balance sheet as of December 31, 2013 (in millions):

Assets
Cash and temporary cash investments	$	315
Credit card receivables from Valero	44
Other receivables, net	109
Inventories	170
Deferred income taxes	14
Prepaid expenses and other	13
Total current assets	665
Property, plant, and equipment, at cost	1,891
Accumulated depreciation	(611		)
Property, plant, and equipment, net	1,280
Intangible assets, net	38
Deferred charges and other assets, net	191
Total assets	$	2,174
Liabilities
Current portion of capital lease obligations	$	2
Trade payable to Valero	242
Other accounts payable	96
Accrued expenses	31
Taxes other than income taxes	20
Total current liabilities	391
Debt and capital lease obligations, less current portion	1,053
Deferred income taxes	83
Other long-term liabilities	112
Total liabilities	$	1,639

We retained certain environmental and other liabilities related to our former retail business and we have indemnified CST for certain self-insurance liabilities related to its employees and property.

Sales of Refineries

In 2010, we sold our Paulsboro and our Delaware City Refineries. The results of operations of these refineries have been presented as discontinued operations for the year ended December 31, 2011.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.	IMPAIRMENTS

Benicia Refinery

We evaluated the Benicia Refinery for potential impairment as of December 31, 2013 due to its actual operating and cash flow results during 2013 and its forecasted results over the next five years. We developed cash flows expected to be generated by the refinery, considering the probability of both current disposition of the refinery and realization through operations, using various scenarios of forecasted throughput volumes and refined product margins, with refined product margins based on our expectation of future margins coupled with historical margins realized by the refinery. The undiscounted cash flows exceeded the carrying amount of the refinery as of December 31, 2013; therefore, we concluded that the refinery was not impaired.

Aruba Refinery

In March 2012, we suspended the operations of the Aruba Refinery because of its inability to generate positive cash flows on a sustained basis subsequent to its restart in January 2011 and the sensitivity of its profitability to sour crude oil differentials, which had narrowed significantly in the fourth quarter of 2011. Shortly thereafter, we received a non-binding offer to purchase the refinery for $350 million, plus working capital as of the closing date. Because of our decision to suspend operations and the possibility of selling the refinery, we evaluated the refinery for potential impairment as of March 31, 2012 and concluded that it was impaired. We recognized an asset impairment loss of $595 million in March 2012. We did not, however, classify the Aruba Refinery as “held for sale” in our balance sheet because all of the accounting criteria required for that classification had not been met.

In September 2012, we decided to reorganize the Aruba Refinery into a crude oil and refined products terminal in response to the withdrawal of the non-binding offer to purchase the refinery. We bifurcated the idled crude oil processing units and related infrastructure (refining assets) from the terminal assets and evaluated the refining assets for potential impairment as of September 30, 2012. We concluded that the refining assets were impaired and recognized an asset impairment loss of $308 million that was recorded in September 2012. We also recognized an asset impairment loss of $25 million related to materials and supplies inventories that supported the refining operations, resulting in a total asset impairment loss of $333 million in September 2012 related to the Aruba Refinery. The terminal assets were not impaired.

We have continued to maintain the refining assets to allow them to be restarted and do not consider them to be abandoned. Therefore, we have not reflected the Aruba Refinery as a discontinued operation in our financial statements. It is possible, however, that we may abandon these assets in the future. Should we ultimately decide to abandon these assets, we may be required under our land lease agreement with the Government of Aruba to dismantle and remove the abandoned assets, which would require us to recognize an asset retirement obligation that would be immediately charged to expense. We do not expect these amounts to be material to our financial position or results of operations.

Cancelled Capital Projects

During 2012, we wrote down the carrying value of equipment associated with permanently cancelled capital projects at several of our refineries and recognized asset impairment losses of $65 million.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Retail Stores

During 2012, we evaluated certain of our convenience stores operated by our former retail segment for potential impairment and concluded that they were impaired, and we wrote down the carrying values of these stores to their estimated fair values and recognized asset impairment losses of $21 million.

5.	INITIAL PUBLIC OFFERING OF VALERO ENERGY PARTNERS LP

In July 2013, we formed VLP, a master limited partnership, to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. On December 16, 2013, VLP completed its initial public offering (the Offering) of 17,250,000 common units at a price of $23.00 per unit, which included a 2,250,000 common unit over-allotment option that was fully exercised by the underwriters. VLP received $369 million in net proceeds from the sale of the units, after deducting underwriting fees, structuring fees, and other offering costs. VLP’s assets include crude oil and refined petroleum products pipeline and terminal systems in the U.S Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of our Port Arthur, McKee and Memphis Refineries.

As of December 31, 2013, we owned a 68.6 percent limited partner interest and a 2 percent general partner interest in VLP, and the public owned a 29.4 percent limited partner interest. VLP’s cash and temporary cash investments was $375 million as of December 31, 2013, which can be used only to settle its obligations. The public’s ownership interest in VLP of $370 million is reflected in noncontrolling interests as of December 31, 2013.

The following table is a reconciliation of net proceeds from the Offering (in millions):

Total proceeds from the Offering	$	397
Less offering costs	(28		)
Net proceeds from the Offering	$	369

We have agreements with VLP, which establish fees for certain general and administrative services, and operational and maintenance services provided by us. In addition, we have a master transportation services agreement and a master terminal services agreement with VLP where VLP provides commercial transportation and terminaling services to us. These transactions are eliminated in consolidation.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.	RECEIVABLES

Receivables consisted of the following (in millions):

	December 31,
	2013				2012
Accounts receivable	$	8,650			$	8,061
Commodity derivative and foreign currency contract receivables	98				136
Notes receivable and other	49				26
	8,797				8,223
Allowance for doubtful accounts	(46		)		(56		)
Receivables, net	$	8,751			$	8,167

Changes in the allowance for doubtful accounts consisted of the following (in millions):

	Year Ended December 31,
	2013				2012				2011
Balance as of beginning of year	$	56			$	48			$	42
Increase in allowance charged to expense	13				21				21
Accounts charged against the allowance, net of recoveries	(23		)		(13		)		(14		)
Foreign currency translation	—				—				(1		)
Balance as of end of year	$	46			$	56			$	48

7.	INVENTORIES

Inventories consisted of the following (in millions):

	December 31,
	2013				2012
Refinery feedstocks	$	2,135			$	2,458
Refined products and blendstocks	3,231				2,995
Ethanol feedstocks and products	166				191
Convenience store merchandise	—				112
Materials and supplies	226				217
Inventories	$	5,758			$	5,973

During the years ended December 31, 2013, 2012, and 2011, we had net liquidations of LIFO inventory layers that were established in prior years, which decreased cost of sales in each of those years by $17 million, $134 million, and $247 million, respectively.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2013 and 2012, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by approximately $6.9 billion and $6.7 billion, respectively. As of December 31, 2013 and 2012, our non-LIFO inventories accounted for $851 million and $878 million, respectively, of our total inventories.

8.	PROPERTY, PLANT, AND EQUIPMENT

Major classes of property, plant, and equipment, which include capital lease assets, consisted of the following (in millions):

		December 31,
		2013				2012
Land		$	404			$	802
Crude oil processing facilities		27,260				24,865
Pipeline and terminal facilities		1,513				1,471
Grain processing equipment		719				694
Retail facilities		—				1,480
Administrative buildings		800				734
Other		2,109				1,457
Construction in progress		1,128				2,629
Property, plant, and equipment, at cost		33,933				34,132
Accumulated depreciation		(8,226		)		(7,832		)
Property, plant, and equipment, net		$	25,707			$	26,300

We have miscellaneous assets under capital leases that primarily support our refining operations totaling $74 million and $83 million as of December 31, 2013 and 2012, respectively. Accumulated amortization on assets under capital leases was $35 million and $35 million, respectively, as of December 31, 2013 and 2012.

Depreciation expense for the years ended December 31, 2013, 2012, and 2011 was $1.2 billion, $1.1 billion, and $1.1 billion, respectively.

9.	DEFERRED CHARGES AND OTHER ASSETS

“Deferred charges and other assets, net” primarily includes turnaround and catalyst costs, which are deferred and amortized as discussed in Note 1. Amortization expense for deferred refinery turnaround and catalyst costs and other assets was $498 million, $459 million, and $444 million for the years ended December 31, 2013, 2012, and 2011, respectively.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.	ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES

Accrued expenses and other long-term liabilities consisted of the following (in millions):

		Accrued Expenses								Other Long- Term Liabilities
		December 31,
		2013				2012				2013				2012
Defined benefit plan liabilities (see Note 14)		$	30			$	32			$	507			$	982
Wage and other employee-related liabilities		257				282				97				91
Uncertain income tax position liabilities, including related penalties and interest (see Note 16) (a)		—				—				205				391
Environmental liabilities		24				27				277				242
Accrued interest expense		90				96				—				—
Derivative liabilities		13				14				—				—
Asset retirement obligations		5				5				26				103
Other accrued liabilities		103				134				217				321
Accrued expenses and other long-term liabilities		$	522			$	590			$	1,329			$	2,130

---

(a) As of December 31, 2013, our total liability for uncertain tax positions, including related penalties and interest, was $443 million, with $238 million classified as a current liability and reflected in “Income taxes payable” and the remaining $205 million classified as a long-term liability and reflected in “Other long-term liabilities” as detailed in this table. As of December 31, 2012, our total liability for uncertain tax positions, including related penalties and interest, was classified as a long-term liability and reflected in “Other long-term liabilities” as detailed in this table.

Environmental Liabilities

Changes in our environmental liabilities were as follows (in millions):

	Year Ended December 31,
	2013				2012				2011
Balance as of beginning of year	$	269			$	274			$	268
Pembroke Acquisition	—				—				30
Additions to liability	67				23				18
Reductions to liability	(1		)		(1		)		(5		)
Payments, net of third-party recoveries	(28		)		(29		)		(35		)
Separation of retail business	(4		)		—				—
Foreign currency translation	(2		)		2				(2		)
Balance as of end of year	$	301			$	269			$	274

In connection with our Pembroke Acquisition, we assumed certain environmental liabilities including, but not limited to, certain remediation obligations, site restoration costs, and certain liabilities relating to soil and groundwater remediation. There were no significant environmental liabilities assumed in connection with the Meraux Acquisition. See Note 12 for further information regarding environmental matters.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Asset Retirement Obligations

We have asset retirement obligations with respect to certain of our refinery assets due to various legal obligations to clean and/or dispose of various component parts of each refinery at the time they are retired. However, these component parts can be used for extended and indeterminate periods of time as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain our refinery assets and continue making improvements to those assets based on technological advances. As a result, we believe that our refineries have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire refinery assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery, we estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using established present value techniques.

Prior to the separation of our retail business, we also had asset retirement obligations for the removal of underground storage tanks (USTs) at owned and leased retail sites. There is no legal obligation to remove USTs while they remain in service. However, environmental laws in the U.S. and Canada require that unused USTs be removed within certain periods of time after the USTs are no longer in service, usually one to two years depending on the jurisdiction in which the USTs are located. We had previously estimated that USTs at our formerly owned retail sites would remain in service approximately 20 years and that we would then have an obligation to remove those USTs. For our formerly leased retail sites, our lease agreements generally required that we remove certain improvements, primarily USTs and signage, upon termination of the lease. All of the USTs and the related asset retirement obligations were retained by CST after the separation from us. Therefore, we have no asset retirement obligations in connection with the USTs subsequent to the separation of our retail business on May 1, 2013.

Changes in our asset retirement obligations were as follows (in millions).

	Year Ended December 31,
	2013				2012				2011
Balance as of beginning of year	$	108			$	87			$	101
Additions to accrual	2				14				3
Revisions in estimated cash flows	—				13				1
Accretion expense	2				5				4
Settlements	(1		)		(11		)		(22		)
Separation of retail business	(80		)		—				—
Balance as of end of year	$	31			$	108			$	87

There are no assets that are legally restricted for purposes of settling our asset retirement obligations.

One-Time Severance Benefits

As described in Note 4, we decided to reorganize the Aruba Refinery into a crude oil and refined products terminal in September 2012 resulting in a decrease in required personnel for our operations in Aruba. We notified 495 employees in September 2012 of the termination of their employment effective November 15, 2012. Benefits to each terminated employee consisted primarily of a cash payment based on a formula that

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

considered the employee’s current compensation and years of service, among other factors. We recognized a severance liability of $41 million in September 2012, which approximated fair value. We paid $31 million of these benefits in the fourth quarter of 2012. We paid the remaining termination benefits of $10 million in the first quarter of 2013. Total severance expense of $41 million is included in refining operating expenses for the year ended December 31, 2012 and relates to our refining segment.

11.	DEBT AND CAPITAL LEASE OBLIGATIONS

Debt, at stated values, and capital lease obligations consisted of the following (in millions):

	Final Maturity		December 31,
		2013				2012
Bank credit facilities	Various		$	—			$	—
Senior Notes:
4.5%	2015		400				400
4.75%	2013		—				300
4.75%	2014		200				200
6.125%	2017		750				750
6.125%	2020		850				850
6.625%	2037		1,500				1,500
6.7%	2013		—				180
6.75%	2037		24				24
7.2%	2017		200				200
7.45%	2097		100				100
7.5%	2032		750				750
8.75%	2030		200				200
9.375%	2019		750				750
10.5%	2039		250				250
Debentures:
7.65%	2026		100				100
8.75%	2015		75				75
Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.0%	2040		300				300
Accounts receivable sales facility	2014		100				100
Net unamortized discount, including fair value adjustments			(24		)		(29		)
Total debt			6,525				7,000
Capital lease obligations, including unamortized fair value adjustments			39				49
Total debt and capital lease obligations			6,564				7,049
Less current portion			(303		)		(586		)
Debt and capital lease obligations, less current portion			$	6,261			$	6,463

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit Facilities

Revolver

We have a $3 billion revolving credit facility (the Revolver) with a group of financial institution lenders that has a maturity date of November 2018. We have the option to increase the aggregate commitments under the Revolver to $4.5 billion, subject to, among other things, the consent of the existing lenders whose commitments will be increased or any additional lenders providing such additional capacity. We may request additional one-year extensions, subject to certain conditions, including the consent of the lenders holding the majority of the commitments and each lender extending its individual commitment. The Revolver includes sub-facilities for swingline loans and letters of credit. Outstanding borrowings under the Revolver bear interest, at our option, at either (a) the adjusted LIBO rate (as defined in the Revolver) for the applicable interest period in effect from time to time plus the applicable margin or (b) the alternate base rate (as defined in the Revolver) plus the applicable margin. The interest rate and fees under the Revolver are subject to adjustment based upon the credit ratings assigned to our senior unsecured debt. We are also charged various fees and expenses in connection with the Revolver, including facility fees and letter of credit fees. The Revolver has certain restrictive covenants, including a maximum debt-to-capitalization ratio of 60 percent. As of December 31, 2013 and 2012, our debt-to-capitalization ratios, calculated in accordance with the terms of the Revolver, were 12 percent and 23 percent, respectively. We believe that we will remain in compliance with this covenant.

VLP Revolver

On November 14, 2013, VLP entered into a $300 million senior unsecured revolving credit facility agreement (the VLP Revolver) with a group of lenders. The VLP Revolver is available only to the operations of VLP, and creditors of VLP do not have recourse against Valero. VLP has the option to increase the aggregate commitments under the VLP Revolver to $500 million, subject to, among other things, the consent of the existing lenders whose commitments will be increased or any additional lenders providing such additional capacity. The VLP Revolver has a maturity date of December 2018 and VLP may request two additional one-year extensions, subject to certain conditions. VLP may terminate the VLP Revolver with notice to the lenders of at least three business days prior to termination. The VLP Revolver includes sub-facilities for swingline loans and letters of credit. VLP’s obligations under the VLP Revolver will be jointly and severally guaranteed by all of VLP’s directly owned material subsidiaries. As of December 31, 2013, the only guarantor under the VLP Revolver was Valero Partners Operating Co. LLC.

Outstanding borrowings under the VLP Revolver bear interest, at VLP’s option, at either (a) the adjusted LIBO rate (as described in the VLP Revolver) for the applicable interest period in effect from time to time plus the applicable margin or (b) the alternate base rate (as described in the VLP Revolver) plus the applicable margin. The VLP Revolver also provides for customary fees, including administrative agent fees, participation fees, and commitment fees. The VLP Revolver contains certain restrictive covenants, including a ratio of total debt to EBITDA (as defined in the VLP Revolver) for the prior four fiscal quarters of not greater than 5.0 to 1.0 as of the last day of each fiscal quarter, and limitations on VLP’s ability to pay distributions to its unitholders.

Canadian Facility

In addition to the Revolver and the VLP Revolver, one of our Canadian subsidiaries has a C$50 million committed revolving credit facility under which it may borrow and obtain letters of credit that has a maturity

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

date of November 2014. This facility replaced the maturing C$115 million Canadian revolving credit facility in November 2012.

Activities of Our Credit Facilities

During the years ended December 31, 2013 and 2011, we had no borrowings or repayments under the Revolver, the VLP Revolver, or under our Canadian credit facility. During the year ended December 31, 2012, we borrowed and repaid $1.1 billion under the Revolver and had no borrowings or repayments under the Canadian credit facility.

We had outstanding letters of credit under our committed lines of credit as follows (in millions):

								Amounts Outstanding
		Borrowing Capacity				Expiration		December 31, 2013				December 31, 2012
Letter of credit facilities		$	550			June 2014		$	278			$	418
Revolver		$	3,000			November 2018		$	59			$	59
Canadian revolving credit facility		C$	50			November 2014		C$	10			C$	10

We also have various other uncommitted short-term bank credit facilities. As of December 31, 2013 and 2012, we had no borrowings outstanding under our uncommitted short-term bank credit facilities; however, there were letters of credit outstanding under such facilities of $189 million and $275 million, respectively, for which we are charged letter of credit issuance fees. The uncommitted credit facilities have no commitment fees or compensating balance requirements.

Bank Debt

On March 20, 2013, in anticipation of the separation of our retail business as described in Note 3, CST entered into an $800 million senior secured credit agreement. This credit agreement was retained by CST after the separation from us. Therefore, we have no rights to obtain credit under nor any liabilities in connection with this credit agreement.

On April 16, 2013, also in anticipation of the separation of our retail business, we borrowed $550 million under a short-term debt agreement with a third-party financial institution. On May 1, 2013, CST issued $550 million of its senior unsecured bonds to us, and we exchanged those bonds with the third-party financial institution in satisfaction of our short-term debt.

On October 24, 2013, we borrowed $525 million under a short-term debt agreement with a third-party financial institution in anticipation of liquidating our retained interest in CST. This liquidation was completed on November 14, 2013 by transferring all remaining shares of CST common stock owned by us to the financial institution in exchange for $467 million of our short-term debt, and we paid the remaining $58 million of short-term debt in cash. After paying $19 million of fees, we recognized a $325 million nontaxable gain.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Non-Bank Debt

During the year ended December 31, 2013, the following activity occurred:

•	in January 2013, we made a scheduled debt repayment of $180 million related to our 6.7% senior notes; and

•	in June 2013, we made a scheduled debt repayment of $300 million related to our 4.75% senior notes.

During the year ended December 31, 2012, the following activity occurred:

•	in March 2012, we exercised the call provisions on our Series 1997 5.6%, Series 1998 5.6%, Series 1999 5.7%, Series 2001 6.65%, and Series 1997A 5.45% industrial revenue bonds, which were redeemed on May 3, 2012 for $108 million, or 100% of their outstanding stated values;

•	in April 2012, we made scheduled debt repayments of $4 million related to our Series 1997A 5.45% industrial revenue bonds and $750 million related to our 6.875% notes; and

•	in June 2012, we remarketed and received proceeds of $300 million related to the 4.0% Gulf Opportunity Zone Revenue Bonds Series 2010 issued by the Parish of St. Charles, State of Louisiana (GO Zone Bonds), which are due December 1, 2040, but are subject to mandatory tender on June 1, 2022.

During the year ended December 31, 2011, the following activity occurred:

•	in February 2011, we paid $300 million to acquire the GO Zone Bonds, which had originally been issued in December 2010. These bonds were remarketed in June 2012, as previously discussed;

•	in February 2011, we made a scheduled debt repayment of $210 million related to our 6.75% senior notes;

•	in April 2011, we made scheduled debt repayments of $8 million related to our Series 1997A 5.45%, Series 1997B 5.4%, and Series 1997C 5.4% industrial revenue bonds;

•	in May 2011, we made a scheduled debt repayment of $200 million related to our 6.125% senior notes; and

•	in December 2011, we redeemed our Series 1997B 5.4% and Series 1997C 5.4% industrial revenue bonds for $56 million, or 100% of their stated values.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell up to $1.5 billion of eligible trade receivables on a revolving basis. In July 2013, we amended this facility to extend the maturity date to July 2014. Under this program, one of our marketing subsidiaries (Valero Marketing) sells eligible receivables, without recourse, to another of our subsidiaries (Valero Capital), whereupon the receivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells an undivided percentage ownership interest in the eligible receivables, without recourse, to the third-party entities and financial institutions. To the extent that Valero Capital retains an ownership interest in the receivables it has purchased from Valero Marketing, such interest is included in our financial statements solely as a result of the consolidation of the financial statements of Valero Capital with those of Valero Energy Corporation; the receivables are not available to satisfy the claims of the creditors of Valero Marketing or Valero Energy Corporation.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2013 and 2012, $3.3 billion and $3.2 billion, respectively, of our accounts receivable composed the designated pool of accounts receivable included in the program. All amounts outstanding under the accounts receivable sales facility are reflected as debt on our balance sheets and proceeds and repayments are reflected as cash flows from financing activities on the statements of cash flows. Changes in the amounts outstanding under our accounts receivable sales facility were as follows (in millions):

	Year Ended December 31,
	2013				2012				2011
Balance as of beginning of year	$	100			$	250			$	100
Proceeds from the sale of receivables	—				1,500				150
Repayments	—				(1,650		)		—
Balance as of end of year	$	100			$	100			$	250

Capitalized Interest

For the years ended December 31, 2013, 2012, and 2011, capitalized interest was $118 million, $221 million, and $152 million, respectively.

Other Disclosures

In addition to the maximum debt-to-capitalization ratio applicable to the Revolver discussed above under “Bank Credit Facilities,” our bank credit facilities and other debt arrangements contain various customary restrictive covenants, including cross-default and cross-acceleration clauses.

Principal payments on our debt obligations and future minimum rentals on capital lease obligations as of December 31, 2013 were as follows (in millions):

	Debt				Capital Lease Obligations
2014	$	300			$	8
2015	475				8
2016	—				7
2017	950				7
2018	—				6
Thereafter	4,824				27
Net unamortized discount and fair value adjustments	(24		)		1
Less interest expense	—				(25		)
Total	$	6,525			$	39

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.	COMMITMENTS AND CONTINGENCIES

Operating Leases

We have long-term operating lease commitments for land, office facilities and equipment, transportation equipment, time charters for ocean-going tankers and coastal vessels, dock facilities, and various facilities and equipment used in the storage, transportation, production, and sale of refinery feedstocks, refined product and corn inventories.

Certain leases for processing equipment and feedstock and refined product storage facilities provide for various contingent payments based on, among other things, throughput volumes in excess of a base amount. Certain leases for vessels contain renewal options and escalation clauses, which vary by charter, and provisions for the payment of chartering fees, which either vary based on usage or provide for payments, in addition to established minimums, that are contingent on usage. In most cases, we expect that in the normal course of business, our leases will be renewed or replaced by other leases.

As of December 31, 2013, our future minimum rentals and minimum rentals to be received under subleases for leases having initial or remaining noncancelable lease terms in excess of one year were as follows (in millions):

2014	$	305
2015	230
2016	162
2017	111
2018	95
Thereafter	321
Total minimum rental payments	$	1,224
Minimum rentals to be received under subleases	$	21

Rental expense was as follows (in millions):

	Year Ended December 31,
	2013				2012				2011
Minimum rental expense	$	574			$	508			$	523
Contingent rental expense	7				23				23
Total rental expense	581				531				546
Less sublease rental income	—				(2		)		(2		)
Net rental expense	$	581			$	529			$	544

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Purchase Obligations

We have various purchase obligations under certain industrial gas and chemical supply arrangements (such as hydrogen supply arrangements), crude oil and other feedstock supply arrangements, and various throughput and terminalling agreements. We enter into these contracts to ensure an adequate supply of utilities and feedstock and adequate storage capacity to operate our refineries. Substantially all of our purchase obligations are based on market prices or adjustments based on market indices. Certain of these purchase obligations include fixed or minimum volume requirements, while others are based on our usage requirements. None of these obligations are associated with suppliers’ financing arrangements. These purchase obligations are not reflected as liabilities.

Environmental Matters

Hartford Matters

We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and the adjacent shutdown refinery site, which we acquired as part of a prior acquisition. In cooperation with some of the other companies, we have been conducting initial mitigation and cleanup response pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The EPA is seeking further cleanup obligations from us and other potentially responsible parties for the Village. In parallel with the Village cleanup, we are also in litigation with the State of Illinois Environmental Protection Agency and other potentially responsible parties relating to the remediation of the shutdown refinery site. In each of these matters, we have various defenses and rights for contribution from the other responsible parties. We have accrued for our own expected contribution obligations. However, because of the unpredictable nature of these cleanups and the methodology for allocation of liabilities, 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.

Regulation of Greenhouse Gases

The EPA began regulating greenhouse gases on January 2, 2011, under the Clean Air Act Amendments of 1990 (Clean Air Act). Any new construction or material expansions will require that, among other things, a greenhouse gas permit be issued at either or both the state or federal level in accordance with the Clean Air Act regulations, and we will be required to undertake a technology review to determine appropriate controls to be implemented with the project in order to reduce greenhouse gas emissions. The determination would be on a case by case basis, and the EPA has provided only general guidance for which controls will be required or delegated to the states through State Implementation Plans.

Furthermore, the EPA is currently developing refinery-specific greenhouse gas regulations and performance standards that are expected to impose, on new and modified operations, greenhouse gas emission limits and/or technology requirements. These control requirements may affect a wide range of refinery operations but have not yet been delineated. Any such controls, however, could result in material increased compliance costs, additional operating restrictions for our business, and an increase in the cost of the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.

Certain states and foreign governments have pursued regulation of greenhouse gases independent of the EPA. For example, the California Global Warming Solutions Act, also known as AB 32, directs the California Air Resources Board (CARB) to develop and issue regulations to reduce greenhouse gas emissions in

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

California to 1990 levels by 2020. CARB has issued a variety of regulations aimed at reaching this goal, including a Low Carbon Fuel Standard (LCFS) as well as a statewide cap-and-trade program.

•

The LCFS is currently subject to legal challenges in both state and federal court. The program currently is in effect, but the progressive reductions in the carbon intensity of fuel required under the LCFS currently are frozen at 2013 levels by order of a California state court until the CARB addresses certain deficiencies under the California Environmental Quality Act. Meanwhile, the Ninth Circuit Court of Appeals recently reversed a lower-court finding that the LCFS violates the Commerce Clause of the U.S. Constitution. It is anticipated that this case will be appealed to the U.S. Supreme Court, although it remains unclear whether the U.S. Supreme Court will agree to review the case.

•

The California statewide cap-and-trade program became effective in 2012, with the auctioning of emission credits commencing in the fourth quarter of 2012. Initially, the program will apply only to stationary sources of greenhouse gases (e.g., refinery and power plant greenhouse gas emissions). Greenhouse gas emissions from fuels that we sell in California will be covered by the program beginning in 2015. We anticipate that free allocations of credits will be available in the early years of the program, but we expect that compliance costs will escalate as free allocations compromise a smaller portion of the progressive compliance obligation. Further, overall cap-and-trade program costs are expected to increase significantly beginning in 2015, when transportation fuels are included in the program.

•

Complying with AB 32, including the LCFS and the cap-and-trade program, could result in material increased compliance costs for us, increased capital expenditures, increased operating costs, and additional operating restrictions for our business, resulting in an increase in the cost of, and decreases in the demand for, the products we produce. To the degree we are unable to recover these increased costs, these matters could have a material adverse effect on our financial position, results of operations, and liquidity.

Title V Permitting Matters

The EPA has objected to numerous Title V permits, including permits at our Port Arthur, Texas City, Meraux, Corpus Christi East, and McKee Refineries. Environmental activist groups have filed notices of intent to sue and/or sued the EPA, seeking to require the EPA to assume control of these permits from the Texas Commission on Environmental Quality. All of these developments have created substantial uncertainty regarding existing and future permitting. Because of this uncertainty, we are unable to determine the costs or effects of the EPA’s actions on our permitting activity. The greenhouse gas permitting regime and the EPA’s objections to Title V permits could result in material increased compliance costs for us, increased capital expenditures, increased operating costs, and additional operating restrictions for our business, resulting in an increase in the cost of, and decreases in the demand for, the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Tax Matters

General

We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use, gross receipts, and value-added taxes), payroll taxes, franchise taxes, withholding taxes, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Many of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.

IRS Audits

As of December 31, 2013, the Internal Revenue Service (IRS) has ongoing tax audits related to our U.S. federal tax returns from 2002 through 2011, as discussed in Note 16. We have received Revenue Agent Reports on our tax years for 2002 through 2009 and we are vigorously contesting many of the tax positions and assertions from the IRS. We are continuing to work with the IRS to resolve these matters and we believe that they will be resolved for amounts consistent with the recorded amounts of unrecognized tax benefits associated with these matters.

Self-Insurance

We are self-insured for certain medical and dental, workers’ compensation, automobile liability, general liability, and property liability claims up to applicable retention limits. Liabilities are accrued for self-insured claims, or when estimated losses exceed coverage limits, and when sufficient information is available to reasonably estimate the amount of the loss. These liabilities are included in accrued expenses and other long-term liabilities.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.	EQUITY

Share Activity

For the years ended December 31, 2013, 2012, and 2011, activity in the number of shares of common stock and treasury stock was as follows (in millions):

	Common Stock			Treasury Stock
Balance as of December 31, 2010	673			(105	)
Transactions in connection with stock-based compensation plans:
Stock issuances	—			5
Stock repurchases	—			(17	)
Balance as of December 31, 2011	673			(117	)
Transactions in connection with stock-based compensation plans:
Stock issuances	—			6
Stock repurchases	—			(6	)
Stock repurchases under buyback program	—			(4	)
Balance as of December 31, 2012	673			(121	)
Transactions in connection with stock-based compensation plans:
Stock issuances	—			6
Stock repurchases	—			(6	)
Stock repurchases under buyback program	—			(17	)
Balance as of December 31, 2013	673			(138	)

Preferred Stock

We have 20 million shares of preferred stock authorized with a par value of $0.01 per share. No shares of preferred stock were outstanding as of December 31, 2013 and 2012.

Treasury Stock

We purchase shares of our common stock in open market transactions to meet our obligations under employee stock-based compensation plans. We also purchase shares of our common stock from our employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock, and other stock compensation transactions.

On February 28, 2008, our board of directors approved a $3 billion common stock purchase program, which is in addition to the remaining amount under a $6 billion program previously authorized. This additional $3 billion program has no expiration date. During 2013, we completed the $6 billion program. During the years ended December 31, 2013 and 2012, we purchased $692 million and $118 million, respectively, of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

our common stock under our programs. There were no stock repurchases under the buyback program during the year ended December 31, 2011. As of December 31, 2013, we have approvals under the $3 billion program to purchase approximately $2.6 billion of our common stock. In January 2014, we purchased 4 million shares for $208 million.

Common Stock Dividends

On January 22, 2014, our board of directors declared a quarterly cash dividend of $0.25 per common share payable March 12, 2014 to holders of record at the close of business on February 12, 2014.

Income Tax Effects Related to Components of Other Comprehensive Income

The following table reflects the tax effects allocated to each component of other comprehensive income for the years ended December 31, 2013, 2012, and 2011 (in millions):

	Before-Tax Amount				Tax Expense (Benefit)				Net Amount
Year Ended December 31, 2013:
Foreign currency translation adjustment	$	(98	)		$	—			$	(98	)
Pension and other postretirement benefits:
Gain arising during the year related to:
Net actuarial gain	367				125				242
Plan amendments	371				130				241
(Gain) loss reclassified into income related to:
Net actuarial loss	57				20				37
Prior service credit	(33		)		(12		)		(21		)
Settlement	1				—				1
Net gain on pension and other postretirement benefits	763				263				500
Derivative instruments designated and qualifying as cash flow hedges:
Net loss arising during the year	(4		)		(2		)		(2		)
Net loss reclassified into income	2				1				1
Net loss on cash flow hedges	(2		)		(1		)		(1		)
Other comprehensive income	$	663			$	262			$	401

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Before-Tax Amount				Tax Expense (Benefit)				Net Amount
Year Ended December 31, 2012:
Foreign currency translation adjustment	$	164			$	—			$	164
Pension and other postretirement benefits:
Loss arising during the year related to:
Net actuarial loss	(228		)		(79		)		(149		)
Prior service cost	(9		)		(3		)		(6		)
(Gain) loss reclassified into income related to:
Net actuarial loss	34				12				22
Prior service credit	(20		)		(7		)		(13		)
Settlement	12				—				12
Net loss on pension and other postretirement benefits	(211		)		(77		)		(134		)
Derivative instruments designated and qualifying as cash flow hedges:
Net gain arising during the year	45				16				29
Net gain reclassified into income	(73		)		(26		)		(47		)
Net loss on cash flow hedges	(28		)		(10		)		(18		)
Other comprehensive income (loss)	$	(75	)		$	(87	)		$	12

Year Ended December 31, 2011:
Foreign currency translation adjustment	$	(122	)		$	—			$	(122	)
Pension and other postretirement benefits:
Loss arising during the year related to:
Net actuarial loss	(285		)		(100		)		(185		)
Prior service cost	(4		)		(1		)		(3		)
(Gain) loss reclassified into income related to:
Net actuarial loss	14				4				10
Prior service credit	(21		)		(7		)		(14		)
Settlement	4				1				3
Net loss on pension and other postretirement benefits	(292		)		(103		)		(189		)
Derivative instruments designated and qualifying as cash flow hedges:
Net gain arising during the year	32				11				21
Net gain reclassified into income	(3		)		(1		)		(2		)
Net gain on cash flow hedges	29				10				19
Other comprehensive loss	$	(385	)		$	(93	)		$	(292	)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income by component, net of tax, were as follows (in millions):

	Foreign Currency Translation Adjustment				Defined Benefit Pension Items				Gains and (Losses) on Cash Flow Hedges				Total
Balance as of December 31, 2010	$	623			$	(235	)		$	—			$	388
Other comprehensive income (loss)	(122		)		(189		)		19				(292		)
Balance as of December 31, 2011	501				(424		)		19				96
Other comprehensive income (loss)	164				(134		)		(18		)		12
Balance as of December 31, 2012	665				(558		)		1				108
Other comprehensive income (loss) before reclassifications	(98		)		483				(2		)		383
Amounts reclassified from accumulated other comprehensive income (loss)	—				17				1				18
Net other comprehensive income (loss)	(98		)		500				(1		)		401
Separation of retail business	(159		)		—				—				(159		)
Balance as of December 31, 2013	$	408			$	(58	)		$	—			$	350

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Gains (losses) reclassified out of accumulated other comprehensive income (loss) and into net income were as follows (in millions):

Details about Accumulated Other Comprehensive Income (Loss) Components		Year Ended December 31, 2013				Affected Line Item in the Statement of Income
Amortization of items related to defined benefit pension plans:
Net actuarial loss		$	(57	)		(a)
Prior service credit		33				(a)
Settlement		(1		)		(a)
		(25		)		Total before tax
		8				Tax benefit
		$	(17	)		Net of tax
Losses on cash flow hedges:
Commodity contracts		$	(2	)		Cost of sales
		(2		)		Total before tax
		1				Tax benefit
		$	(1	)		Net of tax
Total reclassifications for the year		$	(18	)		Net of tax

---

(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost, as further discussed in Note 14. Net periodic benefit cost is reflected in operating expenses and general and administrative expenses.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14 .	EMPLOYEE BENEFIT PLANS

Defined Benefit Plans

We have defined benefit pension plans, some of which are subject to collective bargaining agreements, that cover most of our employees. These plans provide eligible employees with retirement income based primarily on years of service and compensation during specific periods under final average pay and cash balance formulas. We fund our pension plans as required by local regulations. In the U.S., all qualified pension plans are subject to the Employee Retirement Income Security Act (ERISA) minimum funding standard. We typically do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements because contributions to these pension plans may be less economic and investment returns may be less attractive than our other investment alternatives.

In February 2013, we announced changes to certain of our U.S. qualified pension plans that cover the majority of our U.S. employees who work in our refining segment and corporate operations. Benefits under our primary pension plan changed from a final average pay formula to a cash balance formula with staged effective dates that commence either on July 1, 2013 or January 1, 2015 depending on the age and service of the affected employees. All final average pay benefits will be frozen as of December 31, 2014, with all future benefits to be earned under the new cash balance formula. These plan amendments resulted in a $328 million decrease to pension liabilities and a related increase to other comprehensive income during the year ended December 31, 2013. The benefit of this remeasurement will be amortized into income through 2025.

We also provide health care and life insurance benefits for certain retired employees through our postretirement benefit plans. Most of our employees become eligible for these benefits if, while still working for us, they reach normal retirement age or take early retirement. These plans are unfunded, and retired employees share the cost with us. Individuals who became our employees as a result of an acquisition became eligible for other postretirement benefits under our plans as determined by the terms of the relevant acquisition agreement.

In October 2013, we announced changes to our U.S. retiree health care plans to utilize more efficient insurance products for Medicare eligible retirees. These plan changes resulted in a $43 million decrease to our benefit obligations for other postretirement benefit plans and a related increase to other comprehensive income during the year ended December 31, 2013.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The changes in benefit obligation related to all of our defined benefit plans, the changes in fair value of plan assets(a), and the funded status of our defined benefit plans as of and for the years ended were as follows (in millions):

	Pension Plans								Other Postretirement Benefit Plans
	December 31,								December 31,
	2013				2012				2013				2012
Changes in benefit obligation:
Benefit obligation as of beginning of year	$	2,307			$	1,881			$	436			$	438
Service cost	137				140				12				12
Interest cost	86				93				18				21
Participant contributions	—				—				15				14
Plan amendments	(274		)		9				(43		)		—
Curtailment gain	(6		)		(16		)		—				—
Benefits paid	(170		)		(90		)		(37		)		(35		)
Actuarial (gain) loss	(169		)		289				(77		)		(17		)
Other	3				1				—				3
Benefit obligation as of end of year	$	1,914			$	2,307			$	324			$	436
Changes in plan assets(a):
Fair value of plan assets as of beginning of year	$	1,729			$	1,487			$	—			$	—
Actual return on plan assets	306				167				—				—
Valero contributions	41				164				19				19
Participant contributions	—				—				15				14
Benefits paid	(170		)		(90		)		(37		)		(35		)
Other	3				1				3				2
Fair value of plan assets as of end of year	$	1,909			$	1,729			$	—			$	—
Reconciliation of funded status(a):
Fair value of plan assets as of end of year	$	1,909			$	1,729			$	—			$	—
Less benefit obligation as of end of year	1,914				2,307				324				436
Funded status as of end of year	$	(5	)		$	(578	)		$	(324	)		$	(436	)
Accumulated benefit obligation	$	1,811			$	1,857			n/a				n/a

---

(a)

Plan assets include only the assets associated with pension plans subject to legal minimum funding standards. Plan assets associated with U.S. nonqualified pension plans are not included here because they are not protected from our creditors and therefore cannot be reflected as a reduction from our obligations under the pension plans. As a result, the reconciliation of funded status does not reflect the effect of plan assets that exist for all of our defined benefit plans. See Note 20 for the assets associated with certain U.S. nonqualified pension plans.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts recognized in our balance sheet for our pension and other postretirement benefits plans as of December 31, 2013 and 2012 include (in millions):

	Pension Plans								Other Postretirement Benefit Plans
	2013				2012				2013				2012
Deferred charges and other assets, net	$	208			$	—			$	—			$	—
Accrued expenses	(11		)		(11		)		(19		)		(21		)
Other long-term liabilities	(202		)		(567		)		(305		)		(415		)
	$	(5	)		$	(578	)		$	(324	)		$	(436	)

The accumulated benefit obligations for certain of our pension plans exceed the fair values of the assets of those plans. For those plans, the table below presents the total projected benefit obligation, accumulated benefit obligation, and fair value of the plan assets (in millions).

	December 31,
	2013				2012
Projected benefit obligation	$	215			$	250
Accumulated benefit obligation	168				191
Fair value of plan assets	3				31

Benefit payments that we expect to pay, including amounts related to expected future services, and the anticipated Medicare subsidies that we expect to receive are as follows for the years ending December 31 (in millions):

	Pension Benefits				Other Postretirement Benefits
2014	$	100			$	19
2015	125				19
2016	116				20
2017	127				20
2018	146				21
2019-2023	820				107

We plan to contribute approximately $38 million to our pension plans and $19 million to our other postretirement benefit plans during 2014.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The components of net periodic benefit cost were as follows for the years ended (in millions):

	Pension Plans												Other Postretirement Benefit Plans
	December 31,												December 31,
	2013				2012				2011				2013				2012				2011
Components of net periodic benefit cost:
Service cost	$	137			$	140			$	104			$	12			$	12			$	11
Interest cost	86				93				85				18				21				22
Expected return on plan assets	(131		)		(125		)		(112		)		—				—				—
Amortization of:
Prior service cost (credit)	(19		)		3				2				(14		)		(23		)		(23		)
Net actuarial loss	57				33				12				—				1				2
Special charges (credits)	(5		)		(3		)		4				—				—				4
Net periodic benefit cost	$	125			$	141			$	95			$	16			$	11			$	16

Amortization of prior service cost (credit) shown in the above table was based on a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under each respective plan. Amortization of the net actuarial loss shown in the above table was based on the straight-line amortization of the excess of the unrecognized loss over 10 percent of the greater of the projected benefit obligation or market-related value of plan assets (smoothed asset value) over the average remaining service period of active employees expected to receive benefits under each respective plan. Special credits in 2013 and 2012 include curtailments and settlements related to our employees at our Aruba Refinery, partially offset by settlements related to lump sum payments in excess of thresholds. Special charges in 2011 related to purchase accounting for the Meraux Acquisition and settlements related to lump sum payments in excess of thresholds.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pre-tax amounts recognized in other comprehensive income for the years ended were as follows (in millions):

	Pension Plans												Other Postretirement Benefit Plans
	December 31,												December 31,
	2013				2012				2011				2013				2012				2011
Net gain (loss) arising during the year:
Net actuarial gain (loss)	$	290			$	(245	)		$	(294	)		$	77			$	17			$	9
Prior service cost	—				(9		)		(4		)		—				—				—
Remeasurement due to plan amendments	328				—				—				43				—				—
Net (gain) loss reclassified into income:
Net actuarial loss	57				33				12				—				1				2
Prior service cost (credit)	(19		)		3				2				(14		)		(23		)		(23		)
Curtailment and settlement loss	1				12				4				—				—				—
Total changes in other comprehensive income (loss)	$	657			$	(206	)		$	(280	)		$	106			$	(5	)		$	(12	)

The pre-tax amounts in accumulated other comprehensive income as of December 31, 2013 and 2012 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):

	Pension Plans								Other Postretirement Benefit Plans
	2013				2012				2013				2012
Prior service cost (credit)	$	(233	)		$	21			$	(110	)		$	(81	)
Net actuarial loss (gain)	479				882				(44		)		34
Total	$	246			$	903			$	(154	)		$	(47	)

The following pre-tax amounts included in accumulated other comprehensive income as of December 31, 2013 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2014 (in millions):

	Pension Plans				Other Postretirement Benefit Plans
Amortization of prior service credit	$	(22	)		$	(18	)
Amortization of net actuarial loss (gain)	35				(1		)
Total	$	13			$	(19	)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average assumptions used to determine the benefit obligations as of December 31, 2013 and 2012 were as follows:

	Pension Plans						Other Postretirement Benefit Plans
	2013			2012			2013			2012
Discount rate	4.92	%		4.28	%		4.88	%		4.19	%
Rate of compensation increase	3.81	%		3.73	%		—	%		—	%

The discount rate assumption used to determine the benefit obligations as of December 31, 2013 and 2012 for the majority of our pension plans and other postretirement benefit plans was based on the Aon Hewitt AA Only Above Median yield curve and considered the timing of the projected cash outflows under our plans. This curve was designed by Aon Hewitt to provide a means for plan sponsors to value the liabilities of their pension plans or postretirement benefit plans. It is a hypothetical double-A yield curve represented by a series of annualized individual discount rates with maturities from one-half year to 99 years. Each bond issue underlying the curve is required to have an average rating of double-A when averaging all available ratings by Moody’s Investor Services (Moody’s), Standard and Poor’s Ratings Service (S&P), and Fitch Ratings. Only the bonds representing the 50 percent highest yielding issuances among those with average ratings of double-A are included in this yield curve.

We based our December 31, 2013, 2012, and 2011 discount rate assumption on the Aon Hewitt AA Only Above Median yield curve because we believe it is representative of the types of bonds we would use to settle our pension and other postretirement benefit plan liabilities as of those dates. We believe that the yields associated with the bonds used to develop this yield curve reflect the current level of interest rates.

The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2013, 2012, and 2011 were as follows:

	Pension Plans									Other Postretirement Benefit Plans
	2013			2012			2011			2013			2012			2011
Discount rate	4.33	%		5.08	%		5.40	%		4.19	%		4.97	%		5.22	%
Expected long-term rate of return on plan assets	7.62	%		7.67	%		7.69	%		—	%		—	%		—	%
Rate of compensation increase	3.73	%		3.68	%		3.56	%		—	%		—	%		—	%

The assumed health care cost trend rates as of December 31, 2013 and 2012 were as follows:

	2013			2012
Health care cost trend rate assumed for the next year	7.39	%		7.32	%
Rate to which the cost trend rate was assumed to decline (the ultimate trend rate)	5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate	2020			2020

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Assumed health care cost trend rates impact the amounts reported for retiree health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects on other postretirement benefits (in millions):

	1% Increase				1% Decrease
Effect on total of service and interest cost components	$	—			$	—
Effect on accumulated postretirement benefit obligation	3				(3		)

The tables below present the fair values of the assets of our pension plans (in millions) as of December 31, 2013 and 2012 by level of the fair value hierarchy. Assets categorized in Level 1 of the hierarchy are measured at fair value using a market approach based on quotations from national securities exchanges. Assets categorized in Level 2 of the hierarchy are measured at net asset value as a practical expedient for fair value. As previously noted, we do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements, and we do not fund our other postretirement benefit plans.

	Fair Value Measurements Using
	Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total as of December 31, 2013
Equity securities:
U.S. companies(a)	$	529			$	—			$	—			$	529
International companies	155				—				—				155
Preferred stock	3				—				—				3
Mutual funds:
International growth	131				—				—				131
Index funds(b)	160				—				—				160
Corporate debt instruments	—				260				—				260
Government securities:
U.S. Treasury securities	81				—				—				81
Other government securities	—				79				—				79
Common collective trusts	—				373				—				373
Private fund	—				38				—				38
Insurance contracts	—				17				—				17
Interest and dividends receivable	5				—				—				5
Cash and cash equivalents	72				6				—				78
Total	$	1,136			$	773			$	—			$	1,909

---

See notes on page 102.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fair Value Measurements Using
	Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total as of December 31, 2012
Equity securities:
U.S. companies(a)	$	441			$	—			$	—			$	441
International companies	135				—				—				135
Preferred stock	2				1				—				3
Mutual funds:
International growth	127				—				—				127
Index funds(b)	117				—				—				117
Corporate debt instruments	—				290				—				290
Government securities:
U.S. Treasury securities	107				—				—				107
Other government securities	3				65				—				68
Common collective trusts	—				294				—				294
Insurance contracts	—				17				—				17
Interest and dividends receivable	5				—				—				5
Cash and cash equivalents	98				27				—				125
Total	$	1,035			$	694			$	—			$	1,729

---

(a)	Equity securities are held in a wide range of industrial sectors, including consumer goods, information technology, healthcare, industrials, and financial services.

(b)	This class includes primarily investments in approximately 60 percent equities and 40 percent bonds.

The investment policies and strategies for the assets of our pension plans incorporate a well-diversified approach that is expected to earn long-term returns from capital appreciation and a growing stream of current income. This approach recognizes that assets are exposed to risk and the market value of the pension plans’ assets may fluctuate from year to year. Risk tolerance is determined based on our financial ability to withstand risk within the investment program and the willingness to accept return volatility. In line with the investment return objective and risk parameters, the pension plans’ mix of assets includes a diversified portfolio of equity and fixed-income investments. As of December 31, 2013, the target allocations for plan assets are 70 percent equity securities and 30 percent fixed income investments. Equity securities include international stocks and a blend of U.S. growth and value stocks of various sizes of capitalization. Fixed income securities include bonds and notes issued by the U.S. government and its agencies, corporate bonds, and mortgage-backed securities. The aggregate asset allocation is reviewed on an annual basis.

The expected long-term rate of return on plan assets is based on a forward-looking expected asset return model. This model derives an expected rate of return based on the target asset allocation of a plan’s assets. The underlying assumptions regarding expected rates of return for each asset class reflect Aon Hewitt’s best

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

expectations for these asset classes. The model reflects the positive effect of periodic rebalancing among diversified asset classes. We select an expected asset return that is supported by this model.

Defined Contribution Plans

We have defined contribution plans that cover most of our employees. Our contributions to these plans are based on employees’ compensation and/or a partial match of employee contributions to the plans. Our contributions to these defined contribution plans were $62 million, $61 million, and $59 million for the years ended December 31, 2013, 2012, and 2011, respectively.

15.	STOCK-BASED COMPENSATION

We maintain the 2011 Omnibus Stock Incentive Plan (the OSIP) under which various stock and stock-based awards are granted to employees and non-employee directors. Awards available under the OSIP include options to purchase shares of common stock, performance awards that vest upon the achievement of an objective performance goal, stock appreciation rights, and restricted stock that vests over a period determined by our compensation committee. The OSIP was approved by our stockholders on April 28, 2011. As of December 31, 2013, 15,340,981 shares of our common stock remained available to be awarded under the OSIP.

We also maintain other stock-based compensation plans under which previously granted equity awards remain outstanding. No additional grants may be awarded under these plans.

In connection with the separation of our retail business on May 1, 2013 (as further described in Note 3), we entered into an employee matters agreement with CST, which provides that employees of CST no longer participate in our benefit plans. Under this agreement, we made certain adjustments to the exercise price and the number of our share-based compensation awards, the effect of which preserved the intrinsic value of the awards immediately prior to the separation; no incremental value resulted from these adjustments. Also upon the separation, awards of restricted stock and performance shares made to Valero employees who became employees of CST were either vested or forfeited. These adjustments are reflected in the activity tables below.

The following table reflects activity related to our stock-based compensation arrangements (in millions):

	Year Ended December 31,
	2013				2012				2011
Stock-based compensation expense	$	64			$	58			$	58
Tax benefit recognized on stock-based compensation expense	22				20				20
Tax benefit realized for tax deductions resulting from exercises and vestings	66				45				35
Effect of tax deductions in excess of recognized stock-based compensation expense reported as a financing cash flow	47				27				23

Each of our stock-based compensation arrangements is discussed below.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options

Under the terms of our various stock-based compensation plans, the exercise price of options granted is not less than the fair market value of our common stock on the date of grant. Stock options become exercisable pursuant to the individual written agreements between the participants and us, usually in three equal annual installments beginning one year after the date of grant, with unexercised options generally expiring seven or ten years from the date of grant.

The fair value of stock options granted during 2013 and 2012 were estimated using the Monte Carlo simulation model, as these options contain both a service condition and a market condition in order to be exercised. Prior to 2012, the fair value of each stock option grant was estimated on the grant date using the Black-Scholes option-pricing model. The expected life of options granted is the period of time from the grant date to the date of expected exercise or other expected settlement. The expected life for each of the years in the table below was calculated using the safe harbor provisions of SEC Staff Accounting Bulletin No. 107 and No. 110 related to share-based payments. Because the stock options granted in 2012 and later contain a market condition, historical exercise patterns did not provide a reasonable basis for estimating the expected life. Expected volatility is based on closing prices of our common stock for periods corresponding to the expected life of options granted. Expected dividend yield is based on annualized dividends at the date of grant. The risk-free interest rate used is the implied yield currently available from the U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options at the grant date.

A summary of the weighted-average assumptions used in our fair value measurements is presented in the table below.

	Year Ended December 31,
	2013			2012			2011
Expected life in years	6.0			6.0			6.0
Expected volatility	49.63	%		49.11	%		49.30	%
Expected dividend yield	2.27	%		2.39	%		2.28	%
Risk-free interest rate	1.77	%		0.85	%		1.44	%

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the status of our stock option awards is presented in the table below.

	Number of Stock Options			Weighted- Average Exercise Price Per Share				Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
								(in years)		(in millions)
Outstanding as of January 1, 2013	13,214,728			$	28.54
Granted	201,300			39.67
Exercised	(3,837,090	)		15.21
Expired	(1,780,113	)		49.45
Options granted on conversion related to separation of retail business	759,268			28.84
Outstanding as of December 31, 2013	8,558,093			27.88				3.5		$	216
Exercisable as of December 31, 2013	8,037,807			27.66				3.1		206

The following table reflects activity related to our stock options granted (in millions, except per share data):

	Year Ended December 31,
	2013				2012				2011
Weighted average grant-date fair value price per share	$	15.83			$	10.98			$	10.10
Intrinsic value of stock options exercised	101				78				63
Cash received from stock option exercises	59				59				49

As of December 31, 2013, there was $1 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of approximately two years.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Stock

Restricted stock is granted to employees and non-employee directors. Restricted stock granted to employees vests in accordance with individual written agreements between the participants and us, usually in equal annual installments over a period of three to five years beginning one year after the date of grant. Restricted stock granted to our non-employee directors generally vests in three years following the date of grant. A summary of the status of our restricted stock awards is presented in the table below.

	Number of Shares			Weighted- Average Grant-Date Fair Value Per Share
Nonvested shares as of January 1, 2013	2,920,288			$	24.76
Granted	1,255,742			39.55
Vested	(2,113,647	)		23.73
Forfeited	(31,546	)		23.73
Shares granted on conversion related to separation of retail business	174,477			23.42
Nonvested shares as of December 31, 2013	2,205,314			32.23

As of December 31, 2013, there was $40 million of unrecognized compensation cost related to outstanding unvested restricted stock awards, which is expected to be recognized over a weighted-average period of approximately two years. The total fair value of restricted stock that vested during the years ended December 31, 2013, 2012, and 2011 was $74 million, $47 million, and $32 million, respectively.

Performance Awards

Performance awards are issued to certain of our key employees and represent rights to receive shares of our common stock upon the achievement by us of an objective performance measure. The objective performance measure is our total shareholder return, which is ranked among the total shareholder returns of a defined peer group of companies. Our ranking determines the rate at which the performance awards convert into our common shares. Conversion rates can range from zero to 200 percent.

Performance awards vest in equal one-third increments (tranches) on an annual basis. Our compensation committee establishes the peer group of companies for each tranche of awards at the beginning of the one year vesting period for that tranche. Therefore, performance awards are not considered to be granted for accounting purposes until our compensation committee establishes the peer group of companies for each tranche of awards. The fair value of each tranche of awards is determined at the time the awards are considered to be granted and is based on the expected conversion rate for those awards and the fair value per share. Fair value per share is equal to the market price of our common stock on the grant date reduced by expected dividends over that tranche’s vesting period.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the status of our performance awards considered granted is presented below.

	Nonvested Awards			Vested Awards
Awards outstanding as of January 1, 2013	989,414			208,916
Granted	415,317			—
Vested	(442,274	)		442,274
Converted	—			(534,515	)
Forfeited	(50,076	)		(116,675	)
Shares granted on conversion related to separation of retail business	34,784			—
Awards outstanding as of December 31, 2013	947,165			—

There were three tranches of performance awards granted during the year ended December 31, 2013 as follows:

	Awards Granted			Expected Conversion Rate		Fair Value Per Share
Third tranche of 2011 awards	227,565			100%		$	38.77
Second tranche of 2012 awards	105,030			100%		38.77
First tranche of 2013 awards	82,722			100%		38.77
Total	415,317

As of December 31, 2013, there was $16 million of unrecognized compensation cost related to outstanding unvested performance awards, which will be recognized during 2014. The total fair value of performance awards that vested during the years ended December 31, 2013, 2012, and 2011 was $12 million, $3 million, and $4 million, respectively.

Performance awards converted during the year ended December 31, 2013 were as follows:

	Vested Awards Converted			Actual Conversion Rate		Number of Shares Issued			Awards Forfeited
2010 awards	417,833			100%		417,833			—
2011 awards	233,357			50%		116,682			116,675
Total	651,190					534,515			116,675

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.	INCOME TAXES

Income Tax Expense

Income from continuing operations before income tax expense from U.S. and international operations was as follows (in millions):

	Year Ended December 31,
	2013				2012				2011
U.S. operations	$	3,531			$	4,015			$	3,190
International operations	451				(309		)		132
Income from continuing operations before income tax expense	$	3,982			$	3,706			$	3,322

The following is a reconciliation of income tax expense computed by applying the U.S. federal statutory income tax rate (35 percent for all years presented) to actual income tax expense related to continuing operations (in millions):

	Year Ended December 31,
	2013				2012				2011
Federal income tax expense at the U.S. federal statutory rate	$	1,394			$	1,297			$	1,163
U.S. state income tax expense, net of U.S. federal income tax effect	62				64				29
U.S. manufacturing deduction	(36		)		(33		)		(28		)
International operations	(71		)		266				46
Permanent differences	(104		)		20				8
Change in tax law	(32		)		—				—
Other, net	41				12				8
Income tax expense	$	1,254			$	1,626			$	1,226

The variation in the customary relationship between income tax expense and income from continuing operations before income tax expense for the year ended December 31, 2013 was primarily due to the $325 million nontaxable gain on the disposition of our retained interest in CST as described in Notes 3 and 11. For the year ended December 31, 2012, the variation in the customary relationship between income tax expense and income from continuing operations before income tax expense was primarily due to not recognizing the tax benefit associated with the asset impairment loss of $928 million related to the Aruba Refinery, as described in Note 4, as we do not expect to realize this tax benefit.

There were no discontinued operations or related income tax benefit for the years ended December 31, 2013 and 2012. The income tax benefit related to discontinued operations for the year ended December 31, 2011 was $4 million.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Components of income tax expense related to continuing operations were as follows (in millions):

	Year Ended December 31,
	2013				2012				2011
Current:
U.S. federal	$	635			$	515			$	562
U.S. state	36				22				13
International	82				126				186
Total current	753				663				761
Deferred:
U.S. federal	459				854				527
U.S. state	59				77				32
International	(17		)		32				(94		)
Total deferred	501				963				465
Income tax expense	$	1,254			$	1,626			$	1,226

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Income Tax Assets and Liabilities

The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):

	December 31,
	2013				2012
Deferred income tax assets:
Tax credit carryforwards	$	48			$	61
Net operating losses (NOLs)	338				247
Inventories	264				258
Property, plant, and equipment	8				78
Compensation and employee benefit liabilities	178				383
Environmental liabilities	92				83
Other	187				157
Total deferred income tax assets	1,115				1,267
Less: Valuation allowance	(347		)		(304		)
Net deferred income tax assets	768				963
Deferred income tax liabilities:
Property, plant, and equipment	6,536				6,143
Deferred turnaround costs	331				300
Inventories	310				381
Investments, primarily in VLP and DGD	94				—
Other	81				103
Total deferred income tax liabilities	7,352				6,927
Net deferred income tax liabilities	$	6,584			$	5,964

We had the following income tax credit and loss carryforwards as of December 31, 2013 (in millions):

	Amount				Expiration
U.S. state income tax credits	$	71			2014 through 2027
U.S. state NOLs (gross amount)	5,609				2014 through 2033
International NOLs	1,289				Unlimited

We have recorded a valuation allowance as of December 31, 2013 and 2012 due to uncertainties related to our ability to utilize some of our deferred income tax assets, primarily consisting of certain U.S. state income tax credits and NOLs, and international NOLs, before they expire. The valuation allowance is based on our estimates of taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. During 2013, the valuation allowance increased by $43 million, primarily due to increases in U.S. state NOLs. The realization of net deferred income tax assets

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

recorded as of December 31, 2013 is primarily dependent upon our ability to generate future taxable income in certain U.S. states and international jurisdictions.

Should we ultimately recognize tax benefits related to the valuation allowance for deferred income tax assets as of December 31, 2013, such amounts will be allocated as follows (in millions):

Income tax benefit	$	340
Additional paid-in capital	7
Total	$	347

Deferred income taxes have not been provided on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases of our international subsidiaries based on the determination that such differences are essentially permanent in duration in that the earnings of these subsidiaries are expected to be indefinitely reinvested in the international operations. As of December 31, 2013, the cumulative undistributed earnings of these subsidiaries were approximately $3.5 billion. If those earnings were not considered indefinitely reinvested, deferred income taxes would have been recorded after consideration of U.S. foreign tax credits. It is not practicable to estimate the amount of additional tax that might be payable on those earnings, if distributed.

Unrecognized Tax Benefits

The following is a reconciliation of the change in unrecognized tax benefits, excluding related penalties, interest (net of the U.S. federal and state income tax effects) and the U.S. federal income tax effect of state unrecognized tax benefits (in millions):

	Year Ended December 31,
	2013				2012				2011
Balance as of beginning of year	$	341			$	326			$	330
Additions based on tax positions related to the current year	64				11				14
Additions for tax positions related to prior years	576				40				55
Reductions for tax positions related to prior years	(26		)		(36		)		(66		)
Reductions for tax positions related to the lapse of applicable statute of limitations	(4		)		—				(3		)
Settlements	(1		)		—				(4		)
Balance as of end of year	$	950			$	341			$	326

The reconciliation of the change in unrecognized tax benefits for the year ended December 31, 2013 includes $556 million of additions for tax positions related to prior years for tax refunds that we intend to claim by amending our income tax returns for 2005 through 2012 and Premcor Inc.’s separate income tax return for 2005. We intend to propose that incentive payments received from the U.S. federal government for blending biofuels into refined products be excluded from taxable income during these periods. However, due to the complexity of this matter and uncertainties with respect to the interpretation of the Internal Revenue Code, we concluded that the $556 million refund claim cannot be recognized in our financial statements as of

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013. As a result, this amount is not included in our uncertain tax position liabilities as of December 31, 2013, even though it is reflected in the table above.

The following is a reconciliation of unrecognized tax benefits reflected in the table above to our uncertain tax position liabilities as of December 31, 2013 and 2012 that are reflected in Note 10 (in millions):

	December 31,
	2013				2012
Unrecognized tax benefits	$	950			$	341
Tax refund claim not recognized in our financial statements	(556		)		—
Penalties, interest (net of U.S. federal and state income tax effect), and the U.S. federal income tax effect of state unrecognized tax benefits	49				50
Uncertain tax position liabilities	$	443			$	391

As of December 31, 2013 and 2012, there were $763 million and $144 million, respectively, of unrecognized tax benefits that if recognized would affect our annual effective tax rate. During the next 12 months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by between $100 million and $180 million, either because the tax positions are sustained on audit or because we agree to their disallowance. We do not expect these reductions to have a significant impact on our financial statements because such reductions would not significantly affect our annual effective rate.

During the years ended December 31, 2013, 2012, and 2011, we recognized $12 million, $23 million, and $1 million in penalties and interest, which is reflected within income tax expense. Accrued penalties and interest totaled $145 million and $133 million as of December 31, 2013 and 2012, respectively, excluding the U.S. federal and state income tax effects related to interest.

Tax Returns Under Audit

As of December 31, 2013, our tax years for 2002 through 2011 and Premcor Inc.’s separate tax years for 2004 and 2005 were under audit by the IRS. Premcor Inc. was merged into Valero effective September 1, 2005. The IRS has proposed adjustments to our taxable income for certain open years. We are protesting the proposed adjustments and do not expect that the ultimate disposition of these adjustments will result in a material change to our financial position, results of operations, or liquidity. We are continuing to work with the IRS to resolve these matters and we believe that they will be resolved for amounts consistent with recorded amounts of unrecognized tax benefits associated with these matters.

In January 2014, we paid the Premcor Inc. final IRS assessment for the tax years 2004 and 2005 and closed the audit related to all proposed adjustments. The amount paid was consistent with the recorded amount of unrecognized tax benefits associated with that audit.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.	EARNINGS PER COMMON SHARE

Earnings per common share from continuing operations were computed as follows (dollars and shares in millions, except per share amounts):

	Year Ended December 31,
	2013								2012								2011
	Restricted Stock				Common Stock				Restricted Stock				Common Stock				Restricted Stock				Common Stock
Earnings per common share from continuing operations:
Net income attributable to Valero stockholders from continuing operations					$	2,720							$	2,083							$	2,097
Less dividends paid:
Common stock					460								358								168
Nonvested restricted stock					2								2								1
Undistributed earnings					$	2,258							$	1,723							$	1,928
Weighted-average common shares outstanding	3				542				3				550				3				563
Earnings per common share from continuing operations:
Distributed earnings	$	0.85			$	0.85			$	0.65			$	0.65			$	0.30			$	0.30
Undistributed earnings	4.14				4.14				3.12				3.12				3.40				3.40
Total earnings per common share from continuing operations	$	4.99			$	4.99			$	3.77			$	3.77			$	3.70			$	3.70
Earnings per common share from continuing operations – assuming dilution:
Net income attributable to Valero stockholders from continuing operations					$	2,720							$	2,083							$	2,097
Weighted-average common shares outstanding					542								550								563
Common equivalent shares:
Stock options					4								4								4
Performance awards and nonvested restricted stock					2								2								2
Weighted-average common shares outstanding – assuming dilution					548								556								569
Earnings per common share from continuing operations – assuming dilution					$	4.97							$	3.75							$	3.69

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reflects potentially dilutive securities (in millions) that were excluded from the calculation of “earnings per common share from continuing operations – assuming dilution” as the effect of including such securities would have been antidilutive. These potentially dilutive securities included stock options for which the exercise prices were greater than the average market price of our common shares during each respective reporting period.

	Year Ended December 31,
	2013			2012			2011
Stock options	1			4			6

18.	SEGMENT INFORMATION

We have two reportable segments, refining and ethanol, as of December 31, 2013. Prior to May 1, 2013, we also had a retail segment. As discussed in Note 3, we completed the separation of our retail business on May 1, 2013. Segment information related to our retail business prior to the separation is reflected in the retail segment results below. Motor fuel sales to CST (our former retail business), which were eliminated in consolidation prior to the separation, are reported as refining segment operating revenues from external customers after May 1, 2013.

Our refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations in the U.S., Canada, the U.K., Aruba, and Ireland. Our ethanol segment primarily includes sales of internally produced ethanol and distillers grains. The retail segment included company-operated convenience stores in the U.S. and Canada; filling stations, truckstop facilities, cardlock facilities, and home heating oil operations in Canada; and credit card operations in the U.S. Operations that are not included in any of the reportable segments are included in the corporate category.

The reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires unique technology and marketing strategies. Performance is evaluated based on operating income. Intersegment sales are generally derived from transactions made at prevailing market rates.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reflects activity related to continuing operations (in millions):

	Refining				Retail				Ethanol				Corporate				Total
Year ended December 31, 2013:
Operating revenues from external customers	$	129,064			$	3,896			$	5,114			$	—			$	138,074
Intersegment revenues	2,876				—				128				—				3,004
Depreciation and amortization expense	1,566				41				45				68				1,720
Operating income (loss)	4,217				81				491				(826		)		3,963
Total expenditures for long-lived assets	2,597				62				33				65				2,757
Year ended December 31, 2012:
Operating revenues from external customers	122,925				12,008				4,317				—				139,250
Intersegment revenues	8,946				—				115				—				9,061
Depreciation and amortization expense	1,370				119				42				43				1,574
Operating income (loss)	4,450				348				(47		)		(741		)		4,010
Total expenditures for long-lived assets	3,147				164				36				66				3,413
Year ended December 31, 2011:
Operating revenues from external customers	109,138				11,699				5,150				—				125,987
Intersegment revenues	8,665				—				145				—				8,810
Depreciation and amortization expense	1,338				115				39				42				1,534
Operating income (loss)	3,516				381				396				(613		)		3,680
Total expenditures for long-lived assets	2,708				134				32				113				2,987

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our principal products include conventional and CARB gasolines, RBOB (reformulated gasoline blendstock for oxygenate blending), ultra-low-sulfur diesel, and gasoline blendstocks. We also produce a substantial slate of middle distillates, jet fuel, and petrochemicals, in addition to lube oils and asphalt. Other product revenues include such products as gas oils, No. 6 fuel oil, and petroleum coke. Operating revenues from external customers for our principal products were as follows (in millions):

	Year Ended December 31,
	2013				2012				2011
Refining:
Gasolines and blendstocks	$	57,806			$	55,647			$	49,019
Distillates	56,921				51,504				43,713
Petrochemicals	4,281				3,908				4,253
Lubes and asphalts	1,643				2,033				1,948
Other product revenues	8,413				9,833				10,205
Total refining operating revenues	129,064				122,925				109,138
Retail:
Fuel sales (gasoline and diesel)	3,226				10,045				9,730
Merchandise sales and other	524				1,649				1,635
Home heating oil	146				314				334
Total retail operating revenues	3,896				12,008				11,699
Ethanol:
Ethanol	4,245				3,545				4,436
Distillers grains	869				772				714
Total ethanol operating revenues	5,114				4,317				5,150
Total operating revenues	$	138,074			$	139,250			$	125,987

Operating revenues by geographic area are shown in the table below (in millions). The geographic area is based on location of customer and no customer accounted for more than 10 percent of our operating revenues.

	Year Ended December 31,
	2013				2012				2011
U.S.	$	100,418			$	100,733			$	98,806
Canada	9,974				10,376				10,110
U.K.	11,358				10,779				4,297
Other countries	16,324				17,362				12,774
Total operating revenues	$	138,074			$	139,250			$	125,987

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long-lived assets include property, plant, and equipment, intangible assets, and certain long-lived assets included in “deferred charges and other assets, net.” Geographic information by country for long-lived assets consisted of the following (in millions):

	December 31,
	2013				2012
U.S.	$	23,572			$	23,760
Canada	2,260				2,639
U.K.	1,148				1,110
Aruba	53				41
Ireland	26				37
Total long-lived assets	$	27,059			$	27,587

Total assets by reportable segment were as follows (in millions):

	December 31,
	2013				2012
Refining	$	40,834			$	38,858
Retail	—				2,043
Ethanol	889				929
Corporate	5,537				2,647
Total assets	$	47,260			$	44,477

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19.	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):

	Year Ended December 31,
	2013				2012				2011
Decrease (increase) in current assets:
Receivables, net	$	(753	)		$	437			$	(3,110	)
Inventories	(13		)		(282		)		643
Income taxes receivable	10				51				128
Prepaid expenses and other	2				(28		)		(2		)
Increase (decrease) in current liabilities:
Accounts payable	977				(113		)		2,004
Accrued expenses	53				13				(18		)
Taxes other than income taxes	337				(260		)		312
Income taxes payable	309				(120		)		124
Changes in current assets and current liabilities	$	922			$	(302	)		$	81

The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable balance sheets for the respective periods for the following reasons:

•	the amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of debt and capital lease obligations, as well as the effect of certain noncash investing and financing activities discussed below;

•	the amounts shown above for the year ended December 31, 2013 exclude the change in current assets and current liabilities resulting from the separation of our retail business as described in Note 3;

•	the amounts shown above exclude the current assets and current liabilities acquired in connection with the Meraux Acquisition in October 2011 and the Pembroke Acquisition in August 2011;

•	amounts accrued for capital expenditures and deferred turnaround and catalyst costs are reflected in investing activities when such amounts are paid;

•	amounts accrued for common stock purchases in the open market that are not settled as of the balance sheet date are reflected in financing activities when the purchases are settled and paid; and

•	certain differences between balance sheet changes and the changes reflected above result from translating foreign currency denominated balances at the applicable exchange rates as of each balance sheet date.

There were no significant noncash investing activities for the years ended December 31, 2013, 2012 and 2011.

Noncash financing activities for the year ended December 31, 2013 included the exchange of CST’s senior unsecured bonds and the exchange of all of our remaining shares of CST common stock with third-party financial institutions in satisfaction of our short-term debt agreements as described in Note 11. There were no significant noncash financing activities for the years ended December 31, 2012 and 2011.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash flows related to interest and income taxes paid were as follows (in millions):

	Year Ended December 31,
	2013				2012				2011
Interest paid in excess of amount capitalized	$	361			$	302			$	397
Income taxes paid, net	387				705				486

20.	FAIR VALUE MEASUREMENTS

General

GAAP requires that certain assets and liabilities be measured at fair value on a recurring or nonrecurring basis in our balance sheets, which are presented below under “Recurring Fair Value Measurements” and “Nonrecurring Fair Value Measurements.” Recurring fair value measurements of assets or liabilities are those that GAAP requires or permits in the balance sheet at the end of each reporting period, such as derivative financial instruments. Nonrecurring fair value measurements of assets or liabilities are those that GAAP requires or permits in the balance sheet in particular circumstances, such as the impairment of property, plant, and equipment.

GAAP also requires the disclosure of the fair values of financial instruments when an option to elect fair value accounting has been provided, but such election has not been made. A debt obligation is an example of such a financial instrument. The disclosure of the fair values of financial instruments not recognized at fair value in our balance sheet is presented below under “Other Financial Instruments.”

GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. Following is a description of each of the levels of the fair value hierarchy.

•	Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.

•	Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•

Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recurring Fair Value Measurements

The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of December 31, 2013 and 2012.

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 on a gross basis in the tables below. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.

	December 31, 2013
													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	$	499			$	38			$	—			$	537			$	(505	)		$	(7	)		$	25			$	—
Investments of certain benefit plans	98				—				11				109				n/a				n/a				109				n/a
Total	$	597			$	38			$	11			$	646			$	(505	)		$	(7	)		$	134
Liabilities:
Commodity derivative contracts	$	492			$	24			$	—			$	516			$	(505	)		$	(6	)		$	5			$	(76	)
Biofuels blending obligation	—				11				—				11				n/a				n/a				11				n/a
Physical purchase contracts	—				5				—				5				n/a				n/a				5				n/a
Foreign currency contracts	8				—				—				8				n/a				n/a				8				n/a
Total	$	500			$	40			$	—			$	540			$	(505	)		$	(6	)		$	29

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	December 31, 2012
													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	$	1,143			$	60			$	—			$	1,203			$	(1,189	)		$	—			$	14			$	—
Physical purchase contracts	—				11				—				11				n/a				n/a				11				n/a
Foreign currency contracts	1				—				—				1				n/a				n/a				1				n/a
Investments of certain benefit plans	87				—				11				98				n/a				n/a				98				n/a
Total	$	1,231			$	71			$	11			$	1,313			$	(1,189	)		$	—			$	124
Liabilities:
Commodity derivative contracts	$	1,138			$	70			$	—			$	1,208			$	(1,189	)		$	(13	)		$	6			$	(114	)
Biofuels blending obligation	—				10				—				10				n/a				n/a				10				n/a
Foreign currency contracts	1				—				—				1				n/a				n/a				1				n/a
Total	$	1,139			$	80			$	—			$	1,219			$	(1,189	)		$	(13	)		$	17

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 21, 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 firm commitments to purchase crude oil feedstocks and the fair value of fixed-price corn purchase contracts, and as disclosed in Note 21, some of these contracts are designated as hedging instruments. The fair values of these firm commitments and 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•

Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into by 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.

•

Our biofuels blending obligation represents a liability for the purchase of biofuel credits (primarily RINs in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce. To the degree we are unable to blend at percentages required under various governmental and regulatory programs, we must purchase biofuel credits to comply with these programs. These programs are further described in Note 21 under “Compliance Program Risk.” This liability is based on our deficit in biofuel credits as of the balance sheet date, if any, after considering any biofuel credits acquired or under contract, and is equal to the product of the biofuel credits deficit and the market price of these credits as of the balance sheet date. This liability is categorized in Level 2 of the fair value hierarchy and is measured at fair value using the market approach based on quoted prices from an independent pricing service.

There were no transfers between Level 1 and Level 2 for assets and liabilities held as of December 31, 2013 and 2012 that were measured at fair value on a recurring basis.

The following is a reconciliation of the beginning and ending balances (in millions) for fair value measurements developed using significant unobservable inputs (Level 3).

	Investments of Certain Benefit Plans												Other Investments
	2013				2012				2011				2013				2012				2011
Balance as of beginning of year	$	11			$	11			$	10			$	—			$	—			$	—
Purchases	—				—				1				—				—				21
Total losses included in refining operating expense	—				—				—				—				—				(21		)
Transfers in and/or out of Level 3	—				—				—				—				—				—
Balance as of end of year	$	11			$	11			$	11			$	—			$	—			$	—
The amount of total losses included in income attributable to the change in unrealized losses relating to assets still held at end of year	$	—			$	—			$	—			$	—			$	—			$	(21	)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Nonrecurring Fair Value Measurements

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2013.

The table below presents the fair value of certain assets that were measured at fair value on a nonrecurring basis as of December 31, 2012 (in millions) and the related impairment losses recognized. See Note 4 for our impairment analysis for these assets.

													Total Fair Value as of December 31, 2012				Total Losses Recognized During the Year Ended December 31, 2012
	Fair Value Hierarchy
	Level 1				Level 2				Level 3
Assets:
Long-lived assets of the Aruba Refinery	$	—			$	—			$	—			$	—			$	903
Materials and supplies inventories of the Aruba Refinery	—				—				—				—				25
Cancelled capital projects	—				—				2				2				65
Property, plant, and equipment of convenience stores	—				—				8				8				21

There were no liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2012.

Other Financial Instruments

Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below (in millions):

	December 31, 2013								December 31, 2012
	Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and temporary cash investments	$	4,292			$	4,292			$	1,723			$	1,723
Financial liabilities:
Debt (excluding capital leases)	6,525				7,659				7,000				8,621

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).

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21.	PRICE RISK MANAGEMENT ACTIVITIES

We are exposed to market risks related to the volatility in the price of commodities, interest rates, and foreign currency exchange rates. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, interest rate swaps, 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 20), as summarized below under “Fair Values of Derivative Instruments.” In addition, the effect of these derivative instruments on our income is summarized below under “Effect of Derivative Instruments on Income and Other Comprehensive Income.”

When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading derivative. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedges (derivative instruments not designated as fair value or cash flow hedges) and for derivative instruments entered into by us for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. The cash flow effects of all of our derivative instruments are reflected in operating activities in our statements of cash flows for all periods presented.

We are also exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory 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.

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 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 a risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

For risk management purposes, we use fair value hedges, cash flow hedges, and economic hedges. In addition to the use of derivative instruments to manage commodity price risk, we also enter into certain commodity derivative instruments for trading purposes. Our objective for entering into each type of hedge or trading derivative is described below.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•	Fair Value Hedges – Fair value hedges are used to hedge price volatility in certain refining inventories and firm commitments to purchase inventories. The level of activity for our fair value hedges is based on the level of our operating inventories, and generally represents the amount by which our inventories differ from our previous year-end LIFO inventory levels.

As of December 31, 2013, we had the following outstanding commodity derivative instruments that were entered into to hedge crude oil and refined product inventories and commodity derivative instruments related to the physical purchase of crude oil and refined products 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).

		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2014
Crude oil and refined products:
Futures – long		11,857
Futures – short		12,169
Physical contracts – long		312

•	Cash Flow Hedges – Cash flow hedges are used to hedge price volatility in certain forecasted feedstock and refined product purchases, refined product sales, and natural gas purchases. The objective of our cash flow hedges is to lock in the price of forecasted feedstock, refined product or natural gas purchases, or refined product sales at existing market prices that we deem favorable.

As of December 31, 2013, we had the following outstanding commodity derivative instruments that were entered into to hedge forecasted purchases or sales of crude oil and refined products. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels).

		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2014
Crude oil and refined products:
Futures – long		7,629
Futures – short		2,314
Physical contracts – short		5,315

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•

Economic Hedges – Economic hedges represent commodity derivative instruments that are not designated as fair value or cash flow hedges and are used to manage price volatility in certain (i) refinery feedstock, refined product, and corn inventories, (ii) forecasted refinery feedstock, refined product, and corn purchases, and refined product sales, and (iii) fixed-price corn purchase contracts. Our objective for entering into economic hedges is consistent with the objectives discussed above for fair value hedges and cash flow hedges. However, the economic hedges are not designated as a fair value hedge or a cash flow hedge for accounting purposes, usually due to the difficulty of establishing the required documentation at the date that the derivative instrument is entered into that would allow us to achieve “hedge deferral accounting.”

As of December 31, 2013, we had the following outstanding commodity derivative instruments that were used as economic hedges and 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		2014			2015
Crude oil and refined products:
Swaps – long		7,261			—
Swaps – short		7,276			—
Futures – long		42,205			—
Futures – short		52,158			—
Corn:
Futures – long		17,110			—
Futures – short		26,095			145
Physical contracts – long		12,554			156
Soybean oil:
Futures – short		25,320			—

VALERO ENERGY CORPORATION

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 related to future results of operations and cash flows.

As of December 31, 2013, 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 natural gas contracts that are presented in billions of British thermal units and corn contracts that are presented in thousands of bushels).

		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2014			2015
Crude oil and refined products:
Swaps – long		25,200			—
Swaps – short		25,200			—
Futures – long		84,766			3,490
Futures – short		84,397			3,665
Options – long		28,850			—
Options – short		28,600			—
Natural gas:
Futures – long		600			1,000
Futures – short		1,150			—
Options – short		250			—
Corn:
Futures – long		435			—
Futures – short		435			—

Interest Rate Risk

Our primary market risk exposure for changes in interest rates relates to our debt obligations. We manage our exposure to changing interest rates through the use of a combination of fixed-rate and floating-rate debt. In addition, at times we have used interest rate swap agreements to manage our fixed to floating interest rate position by converting certain fixed-rate debt to floating-rate debt. We had no interest rate derivative instruments outstanding as of December 31, 2013 and 2012, or during the years ended December 31, 2013, 2012, or 2011.

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 these 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 they are classified as economic hedges. As of December 31, 2013, we had commitments to purchase $716 million

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of U.S. dollars. The majority of these commitments matured on or before January 31, 2014 resulting in a gain of $12 million in the first quarter of 2014.

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 programs. The most significant programs impacting our operations are those that 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 favorable. For the years ended December 31, 2013, 2012, and 2011, the cost of meeting our obligations under these compliance programs was $517 million, $250 million, and $231 million, respectively. These amounts are reflected in cost of sales.

Maintaining Minimum Inventory Quantities

In the U.K., we are required to maintain a minimum quantity of crude oil and refined products as a reserve against shortages or interruptions in the supply of these products. To the degree we decide not to physically hold the minimum quantity of crude oil and refined products, we must purchase Compulsory Stock Obligation (CSO) tickets from other suppliers of refined products in the U.K. or other European Union (EU) member countries, and we make economic decisions as to the cost of maintaining certain quantities of crude oil and refined products versus the cost of purchasing CSO tickets. We have not entered into derivative instruments to manage the price volatility of CSO tickets. For the years ended December 31, 2013 and 2012, the cost of purchasing CSO tickets to help meet our obligations under this compliance program was $3 million and $8 million, respectively, and these amounts were reflected in cost of sales. We had no obligations under this compliance program prior to completing the Pembroke Acquisition in 2011.

Emission Allowances

Our Pembroke Refinery is subject to a maximum amount of carbon dioxide that it can emit each year under the EU Emissions Trading Scheme. Under this cap-and-trade program, we purchase emission allowances on the open market for the difference between the amount of carbon dioxide emitted and the maximum amount allowed under the program. Therefore, we are exposed to the volatility in the market price of these allowances. For the years ended December 31, 2013, 2012, and 2011 the cost of meeting our obligation under this compliance program was immaterial. We had no obligations under this compliance program prior to completing the Pembroke Acquisition in 2011.

We enter into derivative instruments (futures) to reduce the impact of this risk on our results of operations and cash flows. Our positions in these derivative instruments are monitored and managed on a daily basis by a risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors. As of December 31, 2013 and 2012, we had no futures contracts outstanding related to this compliance program. For the year ended December 31, 2011, the loss recognized in income on compliance program derivative instruments designated as economic hedges was immaterial and therefore not separately presented in the table below under “Effect of Derivative Instruments on Statements of Income and Other Comprehensive Income.”

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of December 31, 2013 and 2012 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 20 for additional information related to the fair values of our derivative instruments.

As indicated in Note 20, 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		December 31, 2013
		Asset Derivatives				Liability Derivatives
Derivatives designated as hedging instruments
Commodity contracts:
Futures	Receivables, net		$	25			$	36
Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net		$	474			$	455
Swaps	Receivables, net		33				18
Swaps	Prepaid expenses and other		3				—
Swaps	Accrued expenses		—				5
Options	Receivables, net		2				2
Physical purchase contracts	Inventories		—				5
Foreign currency contracts	Accrued expenses		—				8
Total			$	512			$	493
Total derivatives			$	537			$	529

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Balance Sheet Location		December 31, 2012
		Asset Derivatives				Liability Derivatives
Derivatives designated as hedging instruments
Commodity contracts:
Futures	Receivables, net		$	77			$	64
Swaps	Receivables, net		15				13
Swaps	Prepaid expenses and other		2				2
Total			$	94			$	79
Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net		$	1,066			$	1,073
Swaps	Receivables, net		9				6
Swaps	Accrued expenses		32				46
Options	Receivables, net		1				4
Options	Accrued expenses		1				—
Physical purchase contracts	Inventories		11				—
Foreign currency contracts	Receivables, net		1				—
Foreign currency contracts	Accrued expenses		—				1
Total			$	1,121			$	1,130
Total derivatives			$	1,215			$	1,209

Market and Counterparty 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 a risk control group to ensure compliance with our stated risk management policy. Concentrations of customers in the refining industry may impact our overall exposure to counterparty risk because these customers may be similarly affected by changes in economic or other conditions. In addition, financial services companies are the counterparties in certain of our price risk management activities, and such financial services companies may be adversely affected by periods of uncertainty and illiquidity in the credit and capital markets.

There were no material amounts due from counterparties in the refining or financial services industry as of December 31, 2013 or 2012. 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Effect of Derivative Instruments on Income and Other Comprehensive Income

The following tables provide information about the gain or loss recognized in income and other comprehensive income (OCI) on our derivative instruments and the line items in the financial statements in which such gains and losses are reflected (in millions).

Derivatives in Fair Value Hedging Relationships		Location of Gain (Loss) Recognized in Income on Derivatives		Year Ended December 31,
		2013				2012				2011
Commodity contracts:
Loss recognized in income on derivatives		Cost of sales		$	(12	)		$	(250	)		$	(6	)
Gain (loss) recognized in income on hedged item		Cost of sales		18				183				(23		)
Gain (loss) recognized in income on derivatives (ineffective portion)		Cost of sales		6				(67		)		(29		)

For fair value hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the years ended December 31, 2013, 2012, and 2011. There were no amounts recognized in income for hedged firm commitments that no longer qualified as fair value hedges during the years ended December 31, 2013 and 2011; however, a gain of $28 million was recognized in income during the year ended December 31, 2012 for hedged firm commitments that no longer qualified as fair value hedges.

Derivatives in Cash Flow Hedging Relationships		Location of Gain (Loss) Recognized in Income on Derivatives		Year Ended December 31,
		2013				2012				2011
Commodity contracts:
Gain (loss) recognized in OCI on derivatives (effective portion)				$	(4	)		$	45			$	32
Gain (loss) reclassified from accumulated OCI into income (effective portion)		Cost of sales		(2		)		73				3
Gain recognized in income on derivatives (ineffective portion)		Cost of sales		21				48				5

For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the years ended December 31, 2013, 2012, and 2011. For the year ended December 31, 2013, cash flow hedges primarily related to forward sales of gasoline and distillates, and associated forward purchases of crude oil, with $1 million of cumulative after-tax losses on cash flow hedges remaining in accumulated other comprehensive income. We estimate that $1 million of the deferred loss as of December 31, 2013 will be reclassified into cost of sales over the next 12 months as a result of hedged transactions that are forecasted to occur. For the years ended December 31, 2013, 2012, and 2011,

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

there were no amounts reclassified from accumulated other comprehensive income into income as a result of the discontinuance of cash flow hedge accounting.

Derivatives Designated as Economic Hedges and Other Derivative Instruments		Location of Gain (Loss) Recognized in Income on Derivatives		Year Ended December 31,
		2013				2012				2011
Commodity contracts		Cost of sales		$	193			$	1			$	(349	)
Foreign currency contracts		Cost of sales		14				(38		)		18
Other contract		Cost of sales		—				—				29
Total				$	207			$	(37	)		$	(302	)

The gain of $29 million on the other contract for the year ended December 31, 2011 is related to the difference between the fair value of inventories acquired in connection with the Pembroke Acquisition and the amount paid for such inventories based on the terms of the purchase agreement. The loss of $349 million on commodity contracts for the year ended December 31, 2011 includes a $542 million loss related to forward sales of refined products.

Trading Derivatives		Location of Gain (Loss) Recognized in Income on Derivatives		Year Ended December 31,
		2013				2012				2011
Commodity contracts		Cost of sales		$	21			$	(16	)		$	23
RINs fixed-price contracts		Cost of sales		(20		)		—				—

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22.	QUARTERLY FINANCIAL DATA (Unaudited)

The following table summarizes quarterly financial data for the years ended December 31, 2013 and 2012 (in millions, except per share amounts).

	2013 Quarter Ended
	March 31				June 30 (a)				September 30				December 31
Operating revenues	$	33,474			$	34,034			$	36,137			$	34,429
Operating income	1,061				808				532				1,562
Net income	652				465				324				1,287
Net income attributable to Valero Energy Corporation stockholders	654				466				312				1,288
Earnings per common share – assuming dilution	1.18				0.85				0.57				2.38
	2012 Quarter Ended
	March 31 (b)				June 30				September 30				December 31
Operating revenues	$	35,167			$	34,662			$	34,726			$	34,695
Operating income (loss)	(244		)		1,361				1,309				1,584
Net income (loss)	(432		)		830				673				1,009
Net income (loss) attributable to Valero Energy Corporation stockholders	(432		)		831				674				1,010
Earnings (loss) per common share – assuming dilution	(0.78		)		1.50				1.21				1.82

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(a)	The separation of our retail business was completed on May 1, 2013.

(b)	The operations of the Aruba Refinery were suspended in March 2012.