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, 2014. In its evaluation, management used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management believes that as of December 31, 2014, 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 56 of this report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

San Antonio, Texas

February 26, 2015

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Valero Energy Corporation and subsidiaries:

We have audited Valero Energy Corporation’s (the Company’s) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) 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 maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) 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, 2014 and 2013, 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, 2014, and our report dated February 26, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Antonio, Texas

February 26, 2015

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Millions of Dollars, Except Par Value)

	December 31,
	2014				2013
ASSETS
Current assets:
Cash and temporary cash investments	$	3,689			$	4,292
Receivables, net	5,879				8,751
Inventories	6,623				5,758
Income taxes receivable	97				72
Deferred income taxes	162				266
Prepaid expenses and other	164				138
Total current assets	16,614				19,277
Property, plant, and equipment, at cost	35,933				33,933
Accumulated depreciation	(9,198		)		(8,226		)
Property, plant, and equipment, net	26,735				25,707
Deferred charges and other assets, net	2,201				2,276
Total assets	$	45,550			$	47,260
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	606			$	303
Accounts payable	6,760				9,931
Accrued expenses	596				522
Taxes other than income taxes	1,209				1,345
Income taxes payable	433				773
Deferred income taxes	376				249
Total current liabilities	9,980				13,123
Debt and capital lease obligations, less current portion	5,780				6,261
Deferred income taxes	6,607				6,601
Other long-term liabilities	1,939				1,329
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	7,116				7,187
Treasury stock, at cost; 159,202,872 and 137,932,138 common shares	(8,125		)		(7,054		)
Retained earnings	22,046				18,970
Accumulated other comprehensive income (loss)	(367		)		350
Total Valero Energy Corporation stockholders’ equity	20,677				19,460
Noncontrolling interests	567				486
Total equity	21,244				19,946
Total liabilities and equity	$	45,550			$	47,260

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Millions of Dollars, Except per Share Amounts)

	Year Ended December 31,
	2014				2013				2012
Operating revenues	$	130,844			$	138,074			$	138,393
Costs and expenses:
Cost of sales	118,141				127,316				126,485
Operating expenses:
Refining	3,900				3,710				3,513
Retail	—				226				686
Ethanol	487				387				332
General and administrative expenses	724				758				698
Depreciation and amortization expense	1,690				1,720				1,549
Asset impairment losses	—				—				86
Total costs and expenses	124,942				134,117				133,349
Operating income	5,902				3,957				5,044
Gain on disposition of retained interest in CST Brands, Inc.	—				325				—
Other income, net	47				59				10
Interest and debt expense, net of capitalized interest	(397		)		(365		)		(314		)
Income from continuing operations before income tax expense	5,552				3,976				4,740
Income tax expense	1,777				1,254				1,626
Income from continuing operations	3,775				2,722				3,114
Income (loss) from discontinued operations	(64		)		6				(1,034		)
Net income	3,711				2,728				2,080
Less: Net income (loss) attributable to noncontrolling interests	81				8				(3		)
Net income attributable to Valero Energy Corporation stockholders	$	3,630			$	2,720			$	2,083
Net income attributable to Valero Energy Corporation stockholders:
Continuing operations	$	3,694			$	2,714			$	3,117
Discontinued operations	(64		)		6				(1,034		)
Total	$	3,630			$	2,720			$	2,083
Earnings per common share:
Continuing operations	$	7.00			$	4.98			$	5.64
Discontinued operations	(0.12		)		0.01				(1.87		)
Total	$	6.88			$	4.99			$	3.77
Weighted-average common shares outstanding (in millions)	526				542				550
Earnings per common share – assuming dilution:
Continuing operations	$	6.97			$	4.96			$	5.61
Discontinued operations	(0.12		)		0.01				(1.86		)
Total	$	6.85			$	4.97			$	3.75
Weighted-average common shares outstanding – assuming dilution (in millions)	530				548				556
Dividends per common share	$	1.05			$	0.85			$	0.65

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Millions of Dollars)

	Year Ended December 31,
	2014				2013				2012
Net income	$	3,711			$	2,728			$	2,080
Other comprehensive income (loss):
Foreign currency translation adjustment	(407		)		(98		)		164
Net gain (loss) on pension and other postretirement benefits	(475		)		763				(211		)
Net gain (loss) on derivative instruments designated and qualifying as cash flow hedges	1				(2		)		(28		)
Other comprehensive income (loss) before income tax expense (benefit)	(881		)		663				(75		)
Income tax expense (benefit) related to items of other comprehensive income (loss)	(164		)		262				(87		)
Other comprehensive income (loss)	(717		)		401				12
Comprehensive income	2,994				3,129				2,092
Less: Comprehensive income (loss) attributable to noncontrolling interests	81				8				(3		)
Comprehensive income attributable to Valero Energy Corporation stockholders	$	2,913			$	3,121			$	2,095

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, 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
Net income	—				—				—				3,630				—				3,630				81				3,711
Dividends on common stock	—				—				—				(554		)		—				(554		)		—				(554		)
Stock-based compensation expense	—				60				—				—				—				60				—				60
Tax deduction in excess of stock- based compensation expense	—				47				—				—				—				47				—				47
Transactions in connection with stock-based compensation plans:
Stock issuances	—				(178		)		225				—				—				47				—				47
Stock repurchases	—				—				(128		)		—				—				(128		)		—				(128		)
Stock repurchases under buyback program	—				—				(1,168		)		—				—				(1,168		)		—				(1,168		)
Contributions from noncontrolling interests	—				—				—				—				—				—				12				12
Distributions to public unitholders of Valero Energy Partners LP	—				—				—				—				—				—				(12		)		(12		)
Other comprehensive loss	—				—				—				—				(717		)		(717		)		—				(717		)
Balance as of December 31, 2014	$	7			$	7,116			$	(8,125	)		$	22,046			$	(367	)		$	20,677			$	567			$	21,244

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of Dollars)

	Year Ended December 31,
	2014				2013				2012
Cash flows from operating activities:
Net income	$	3,711			$	2,728			$	2,080
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	1,690				1,720				1,574
Aruba Refinery asset retirement expense and other	63				—				—
Gain on disposition of retained interest in CST Brands, Inc.	—				(325		)		—
Asset impairment losses	—				—				1,014
Stock-based compensation expense	60				64				58
Deferred income tax expense	445				501				963
Changes in current assets and current liabilities	(1,810		)		922				(302		)
Changes in deferred charges and credits and other operating activities, net	82				(46		)		(117		)
Net cash provided by operating activities	4,241				5,564				5,270
Cash flows from investing activities:
Capital expenditures	(2,153		)		(2,121		)		(2,931		)
Deferred turnaround and catalyst costs	(649		)		(634		)		(479		)
Proceeds from the sale of the Paulsboro Refinery	—				—				160
Other investing activities, net	(42		)		(57		)		(101		)
Net cash used in investing activities	(2,844		)		(2,812		)		(3,351		)
Cash flows from financing activities:
Proceeds from debt borrowings	28				—				2,900
Repayments of debt	(200		)		(480		)		(3,612		)
Proceeds from the exercise of stock options	47				59				59
Purchase of common stock for treasury	(1,296		)		(928		)		(281		)
Common stock dividends	(554		)		(462		)		(360		)
Net proceeds from initial public offering of common units of Valero Energy Partners LP	—				369				—
Contributions from noncontrolling interests	12				45				44
Distributions to public unitholders of Valero Energy Partners LP	(12		)		—				—
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	45				32				17
Net cash used in financing activities	(1,930		)		(163		)		(1,233		)
Effect of foreign exchange rate changes on cash	(70		)		(20		)		13
Net increase (decrease) in cash and temporary cash investments	(603		)		2,569				699
Cash and temporary cash investments at beginning of year	4,292				1,723				1,024
Cash and temporary cash investments at end of year	$	3,689			$	4,292			$	1,723

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 15 refineries with a combined throughput capacity of approximately 2.9 million barrels per day as of December 31, 2014. 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 11 ethanol plants in the U.S. that primarily produce ethanol with a combined production capacity of approximately 1.3 billion gallons per year as of December 31, 2014. 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.

Reclassifications

Certain amounts reported as of and for the year ended December 31, 2013 have been reclassified to conform to the 2014 presentation. As discussed in Note 2, in May 2014, we abandoned the Aruba Refinery. As a result, the refinery’s results of operations have been presented as discontinued operations in the consolidated statements of income for all years presented.

Significant Accounting Policies

Principles of Consolidation

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

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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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;

•	intangible assets;

•	investments in entities that we do not control; and

•	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 deferred 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 Notes 2 and 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 shorter of (a) the requisite service period of each award or (b) 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. Deferred tax assets are reduced by unrecognized tax benefits, if such items may be available to offset the unrecognized tax benefit.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 April 2014, the provisions of Accounting Standards Codification (ASC) Topic 205, “Presentation of Financial Statements,” and ASC Topic 360, “Property, Plant, and Equipment,” were amended to change the criteria for reporting discontinued operations. The provisions of these amendments modify the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity’s operations and financial results. These amendments require additional disclosures about discontinued operations and new disclosures for other disposals of individually material components of an organization that do not meet the definition of a discontinued operation. In addition, the guidance allows companies to have significant continuing involvement and continuing cash flows with the discontinued operation. These provisions are effective prospectively for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2015 will not affect our financial position or results of operations; however, it may result in changes to the manner in which future dispositions of operations or assets, if any, are presented in our financial statements, or it may require additional disclosures.

In May 2014, the Financial Accounting Standards Board (FASB) amended the ASC and issued a new accounting standard, Topic 606, “Revenue from Contracts with Customers,” to clarify the principles for recognizing revenue. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The new standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period, and can be adopted either retrospectively to each prior reporting period presented using a practical expedient, as allowed by the new standard, or retrospectively with a cumulative effect adjustment to retained earnings as of the date of initial application. Early adoption is not permitted. We are currently evaluating the effect that adopting this new standard will have on our financial statements and related disclosures.

In January 2015, the provisions of ASC Subtopic 225-20, “Income Statement–Extraordinary and Unusual Items” were amended to eliminate the concept of extraordinary items from U.S. GAAP as part of the FASB’s simplification initiative. The guidance eliminates the separate presentation of extraordinary items on the income statement, net of tax and the related earnings per share, but does not affect the requirement to disclose material items that are unusual in nature or infrequently occurring or to exclude those items from the estimated annual effective tax rate for interim reporting purposes. These provisions may be applied prospectively or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

retrospectively and are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2016 will not affect our financial position or results of operations; however, it may affect the manner in which future extraordinary or unusual items, if any, are presented in our financial statements.

In February 2015, the provisions of ASC Topic 810, “Consolidation” were amended to improve consolidation guidance for certain types of legal entities. The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and provides a scope exception from consolidation guidance for certain money market funds. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. These provisions may also be adopted retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. We are currently evaluating the effect that adopting this new accounting standard will have on our consolidated financial statements and related disclosures.

2.	DISCONTINUED OPERATIONS

In May 2014, we abandoned our Aruba Refinery, except for the associated crude oil and refined products terminal assets that we continue to operate. As a result, the refinery’s results of operations have been presented in this report as discontinued operations for all years presented.

We had suspended operations of the refinery in 2012 and at that time we wrote off the entire carrying value of the refinery’s idled crude oil processing units and related infrastructure (refining assets) and supplies inventories that supported the refining operations; as a result, we recognized an asset impairment loss of $928 million. In addition, we terminated the employees who supported the refining operations and incurred severance costs of $41 million at that time. Even though we suspended refining operations in 2012, we continued to maintain the refining assets to allow them to be restarted and did not abandon them until our recent decision to no longer pursue options to restart refining operations.

The Aruba Refinery resides on land leased from the Government of Aruba (GOA) and our agreements with the GOA require us to dismantle our leasehold improvements under certain conditions. Because of our May 2014 decision to abandon the refining assets, we believe the GOA will require us to dismantle those assets. As a result, we recognized an asset retirement obligation of $59 million, which was charged to expense during the second quarter of 2014 and is reflected in discontinued operations. We had not recognized an asset retirement obligation previously due to our belief that we would not be required to dismantle the assets as long as we intended to operate them. During the second quarter of 2014, we also recognized liabilities of $4 million relating to obligations under certain contracts, including a liability for the remaining lease payments for the land on which the refining assets reside.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Selected results of operations of the Aruba Refinery are shown below (in millions).

	Year Ended December 31,
	2014				2013				2012
Operating revenues	$	—			$	—			$	857
Income (loss) before income taxes	(64		)		6				(1,034		)

There was no tax benefit recognized for the loss from discontinued operations for the years ended December 31, 2014 and 2012 as we do not expect to realize this tax benefit.

3.	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.

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. We also incurred $30 million in costs during the three months ended June 30, 2013 to effect the separation, which were 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 was reflected in “other income, net.” Our share of income taxes incurred directly by CST during this period was reported in the equity in earnings from CST, and as such was 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 were 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.	IMPAIRMENTS

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.

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.	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. VLP received $369 million in net proceeds from the sale of the units, after deducting underwriting fees, structuring fees, and other offering costs. As of December 31, 2014, VLP’s assets included 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 Ardmore, McKee, Memphis, Port Arthur, and Three Rivers Refineries.

As of December 31, 2014 and 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 were $237 million and $375 million as of December 31, 2014 and 2013, respectively. Valero consolidates the financial statements of VLP into its financial statements and as such, VLP’s cash and temporary cash investments are included in Valero’s consolidated cash and temporary cash investments. However, VLP’s cash and temporary cash investments can be used to settle only its obligations. In addition, VLP’s partnership capital attributable to the public’s ownership interest in VLP of $375 million and $370 million as of December 31, 2014 and 2013, respectively, is reflected in noncontrolling interests.

We have agreements with VLP that 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 under which VLP provides commercial transportation and terminaling services to us. These transactions are eliminated in consolidation.

On July 1, 2014, we sold our Texas Crude Systems Business to VLP. That business is engaged in transporting, terminaling, and storing crude oil and refined petroleum products through various pipeline and terminal systems that compose the McKee Crude System, the Three Rivers Crude System, and the Wynnewood Products System. We sold the Texas Crude Systems Business for total cash consideration of $154 million. Because we consolidate the financial statements of VLP into our financial statements, this transaction was eliminated in consolidation and did not impact our consolidated financial position or cash flows.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.	RECEIVABLES

Receivables consisted of the following (in millions):

	December 31,
	2014				2013
Accounts receivable	$	5,509			$	8,582
Commodity derivative and foreign currency contract receivables	151				98
Other receivables	256				117
	5,916				8,797
Allowance for doubtful accounts	(37		)		(46		)
Receivables, net	$	5,879			$	8,751

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

	Year Ended December 31,
	2014				2013				2012
Balance as of beginning of year	$	46			$	56			$	48
Increase in allowance charged to expense	7				13				21
Accounts charged against the allowance, net of recoveries	(15		)		(23		)		(13		)
Foreign currency translation	(1		)		—				—
Balance as of end of year	$	37			$	46			$	56

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.	INVENTORIES

Inventories consisted of the following (in millions):

	December 31,
	2014				2013
Refinery feedstocks	$	2,269			$	2,135
Refined products and blendstocks	3,926				3,231
Ethanol feedstocks and products	195				166
Materials and supplies	233				226
Inventories	$	6,623			$	5,758

As of December 31, 2014, the volumes of our refinery feedstocks and refined products and blendstocks held as inventory increased, which resulted in a LIFO increment. During the years ended December 31, 2013 and 2012, we had net liquidations of LIFO inventory layers that decreased cost of sales in each of those years by $17 million and $134 million, respectively.

As of December 31, 2014 and 2013, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by approximately $857 million and $6.9 billion, respectively. As of December 31, 2014 and 2013, our non-LIFO inventories accounted for $906 million and $681 million, respectively, of our total inventories.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,
		2014				2013
Land		$	396			$	404
Crude oil processing facilities		28,054				27,260
Pipeline and terminal facilities		1,955				1,513
Grain processing equipment		779				719
Administrative buildings		800				800
Other		2,596				2,109
Construction in progress		1,353				1,128
Property, plant, and equipment, at cost		35,933				33,933
Accumulated depreciation		(9,198		)		(8,226		)
Property, plant, and equipment, net		$	26,735			$	25,707

We have various assets under capital leases that primarily support our refining operations totaling $72 million and $74 million as of December 31, 2014 and 2013, respectively. Accumulated amortization on assets under capital leases was $40 million and $35 million as of December 31, 2014 and 2013, respectively.

Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was $1.2 billion, $1.2 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 $489 million, $498 million, and $447 million for the years ended December 31, 2014, 2013, and 2012, 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,
		2014				2013				2014				2013
Defined benefit plan liabilities (see Note 14)		$	48			$	30			$	792			$	507
Wage and other employee-related liabilities		294				257				104				97
Uncertain income tax position liabilities, including related penalties and interest (see Note 16) (a)		—				—				316				205
Environmental liabilities		26				24				269				277
Accrued interest expense		88				90				—				—
Derivative liabilities		—				13				—				—
Asset retirement obligations		20				5				71				26
Other accrued liabilities		120				103				387				217
Accrued expenses and other long-term liabilities		$	596			$	522			$	1,939			$	1,329

---

(a) As of December 31, 2014, our total liability for uncertain tax positions, including related penalties and interest, was $484 million, with $168 million classified as a current liability and reflected in “Income taxes payable” and the remaining $316 million classified as a long-term liability and reflected in “Other long-term liabilities” as detailed in this table. 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.

Environmental Liabilities

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

	Year Ended December 31,
	2014				2013				2012
Balance as of beginning of year	$	301			$	269			$	274
Additions to liability	26				67				23
Reductions to liability	—				(1		)		(1		)
Payments, net of third-party recoveries	(27		)		(28		)		(29		)
Separation of retail business	—				(4		)		—
Foreign currency translation	(5		)		(2		)		2
Balance as of end of year	$	295			$	301			$	269

See Note 12 for further information regarding environmental matters.

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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,
	2014				2013				2012
Balance as of beginning of year	$	31			$	108			$	87
Additions to accrual	60				2				14
Revisions in estimated cash flows	—				—				13
Accretion expense	1				2				5
Settlements	(1		)		(1		)		(11		)
Separation of retail business	—				(80		)		—
Balance as of end of year	$	91			$	31			$	108

See Note 2 for further information regarding the 2014 additions to accrual related to our Aruba Refinery.

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.	DEBT AND CAPITAL LEASE OBLIGATIONS

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

	Final Maturity		December 31,
		2014				2013
Bank credit facilities	Various		$	—			$	—
Senior Notes:
4.5%	2015		400				400
4.75%	2014		—				200
6.125%	2017		750				750
6.125%	2020		850				850
6.625%	2037		1,500				1,500
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	2015		100				100
Other debt	2015		26				—
Net unamortized discount, including fair value adjustments			(21		)		(24		)
Total debt			6,354				6,525
Capital lease obligations, including unamortized fair value adjustments			32				39
Total debt and capital lease obligations			6,386				6,564
Less current portion			(606		)		(303		)
Debt and capital lease obligations, less current portion			$	5,780			$	6,261

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. Our debt-to-capitalization ratio, calculated in accordance with the terms of the Revolver, was 12 percent as of December 31, 2014 and 2013.

VLP Revolver

VLP has a $300 million senior unsecured revolving credit facility agreement (the VLP Revolver) with a group of lenders that has a maturity date of December 2018. 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. 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, 2014, 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 defined 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 defined 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 Revolver

One of our Canadian subsidiaries has a C$50 million committed revolving credit facility (the Canadian Revolver) under which it may borrow and obtain letters of credit that has a maturity date of November 2015.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Activities Under Our Credit Facilities

During the years ended December 31, 2014 and 2013, we had no borrowings or repayments under the Revolver, the VLP Revolver, or the Canadian Revolver. 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 Revolver.

Letters of Credit

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

								Amounts Outstanding
		Borrowing Capacity				Expiration		December 31,
				2014				2013
Letter of credit facilities		$	550			June 2015		$	56			$	278
Revolver		$	3,000			November 2018		$	54			$	59
VLP Revolver		$	300			December 2018		$	—			$	—
Canadian Revolver		C$	50			November 2015		C$	10			C$	10

We also have various other uncommitted short-term bank credit facilities. As of December 31, 2014 and 2013, we had no borrowings outstanding under our uncommitted short-term bank credit facilities; however, there were letters of credit outstanding under such facilities of $80 million and $189 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

In February 2015, we made a scheduled debt repayment of $400 million related to our 4.5% senior notes.

During the year ended December 31, 2014, we made a scheduled debt repayment of $200 million related to our 4.75% senior notes.

During the year ended December 31, 2013, we made scheduled debt repayments of $180 million related to our 6.7% senior notes and $300 million related to our 4.75% senior notes.

During the year ended December 31, 2012,

•	we redeemed 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 for $108 million, or 100% of their outstanding stated values;

•	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

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

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 2014, we amended this facility to extend the maturity date to July 2015. Proceeds from the sale of receivables under this facility are reflected as debt. Under this program, one of our marketing subsidiaries (Valero Marketing) sells eligible receivables, without recourse, to another of our subsidiaries (Valero Capital), whereupon the receivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells an undivided percentage ownership interest in the eligible receivables, without recourse, to the third-party entities and financial institutions. To the extent that Valero Capital retains an ownership interest in the receivables it has purchased from Valero Marketing, such interest is included in our financial statements solely as a result of the consolidation of the financial statements of Valero Capital with those of Valero Energy Corporation; the receivables are not available to satisfy the claims of the creditors of Valero Marketing or Valero Energy Corporation.

As of December 31, 2014 and 2013, $1.7 billion and $3.3 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,
	2014				2013				2012
Balance as of beginning of year	$	100			$	100			$	250
Proceeds from the sale of receivables	—				—				1,500
Repayments	—				—				(1,650		)
Balance as of end of year	$	100			$	100			$	100

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Capitalized Interest

For the years ended December 31, 2014, 2013, and 2012, capitalized interest was $70 million, $118 million, and $220 million, respectively.

Other Disclosures

In addition to the maximum debt-to-capitalization ratio applicable to the Revolver discussed above under “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, 2014 were as follows (in millions):

	Debt				Capital Lease Obligations
2015	$	601			$	8
2016	—				8
2017	950				6
2018	—				6
2019	750				6
Thereafter	4,074				18
Net unamortized discount and fair value adjustments	(21		)		1
Less interest expense	—				(21		)
Total	$	6,354			$	32

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 feedstock, 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2014, 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):

2015	$	314
2016	229
2017	159
2018	131
2019	75
Thereafter	275
Total minimum rental payments	$	1,183
Minimum rentals to be received under subleases	$	14

Rental expense was as follows (in millions):

	Year Ended December 31,
	2014				2013				2012
Minimum rental expense	$	618			$	588			$	512
Contingent rental expense	43				47				67
Total rental expense	661				635				579
Less sublease rental income	—				—				(2		)
Net rental expense	$	661			$	635			$	577

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. We have been conducting initial mitigation and cleanup with other companies pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The U.S. EPA is seeking further cleanup obligations from us and other potentially responsible parties (PRPs) for the Village. In parallel with the Village cleanup, we are in litigation with the Illinois EPA and other PRPs 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,

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 U.S. EPA began regulating greenhouse gases (GHG) on January 2, 2011, under the Clean Air Act Amendments of 1990 (Clean Air Act). The U.S. EPA is developing refinery-specific GHG regulations and performance standards that are expected to impose GHG emission limits and/or technology requirements on new and modified operations. 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 GHG independent of the U.S. 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 GHG emissions in 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 cap-and-trade program costs are expected to increase significantly beginning in 2015 with the inclusion of transportation fuels 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 compliance costs, these matters 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 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

IRS Audits

As of December 31, 2014, the Internal Revenue Service (IRS) has ongoing tax audits related to our U.S. federal tax returns from 2004 through 2011, as discussed in Note 16. We have received Revenue Agent Reports on our tax years for 2004 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. During the year ended December 31, 2014, we settled the audit related to our 2002 and 2003 tax years and the audit related to a group of our subsidiaries for their 2004 and 2005 tax years consistent with the recorded amounts of uncertain tax position liabilities associated with those audits.

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, 2014, 2013, and 2012, 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, 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	)
Transactions in connection with stock-based compensation plans:
Stock issuances	—			4
Stock repurchases	—			(2	)
Stock repurchases under buyback program	—			(23	)
Balance as of December 31, 2014	673			(159	)

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, 2014 or 2013.

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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On February 28, 2008, our board of directors approved a $3 billion common stock purchase program, which was in addition to 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, 2014, 2013, and 2012, we purchased $1.2 billion, $692 million, and $118 million, respectively, of our common stock under our programs. As of December 31, 2014, we have approvals under the $3 billion program to purchase approximately $1.5 billion of our common stock. Year to date through February 20, 2015, we have purchased one million shares for $57 million.

Common Stock Dividends

On January 23, 2015, our board of directors declared a quarterly cash dividend of $0.40 per common share payable March 3, 2015 to holders of record at the close of business on February 11, 2015.

Income Tax Effects Related to Components of Other Comprehensive Income (Loss)

The following table reflects the tax effects allocated to each component of other comprehensive income (loss) for the years ended December 31, 2014, 2013, and 2012 (in millions):

	Before-Tax Amount				Tax Expense (Benefit)				Net Amount
Year Ended December 31, 2014:
Foreign currency translation adjustment	$	(407	)		$	—			$	(407	)
Pension and other postretirement benefits:
Loss arising during the year related to:
Net actuarial loss	(471		)		(162		)		(309		)
Prior service cost	(1		)		(1		)		—
(Gain) loss reclassified into income related to:
Net actuarial loss	34				12				22
Prior service credit	(40		)		(14		)		(26		)
Curtailment and settlement	3				—				3
Net loss on pension and other postretirement benefits	(475		)		(165		)		(310		)
Derivative instruments designated and qualifying as cash flow hedges:
Net loss arising during the year	(1		)		—				(1		)
Net loss reclassified into income	2				1				1
Net gain on cash flow hedges	1				1				—
Other comprehensive loss	$	(881	)		$	(164	)		$	(717	)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	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

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Income (Loss)

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

	Foreign Currency Translation Adjustment				Defined Benefit Plan Items				Gains and (Losses) on Cash Flow Hedges				Total
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
Other comprehensive loss before reclassifications	(407		)		(309		)		(1		)		(717		)
Amounts reclassified from accumulated other comprehensive income (loss)	—				(1		)		1				—
Net other comprehensive loss	(407		)		(310		)		—				(717		)
Balance as of December 31, 2014	$	1			$	(368	)		$	—			$	(367	)

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										Affected Line Item in the Statement of Income
	Year Ended December 31,
	2014				2013
Amortization of items related to defined benefit pension plans:
Net actuarial loss		$	(34	)		$	(57	)		(a)
Prior service credit		40				33				(a)
Curtailment and settlement		(3		)		(1		)		(a)
		3				(25		)		Total before tax
		(2		)		8				Tax (expense) benefit
		$	1			$	(17	)		Net of tax
Losses on cash flow hedges:
Commodity contracts		$	(2	)		$	(2	)		Cost of sales
		(2		)		(2		)		Total before tax
		1				1				Tax benefit
		$	(1	)		$	(1	)		Net of tax
Total reclassifications for the year		$	—			$	(18	)		Net of tax

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(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 commenced either on July 1, 2013 or January 1, 2015 depending on the age and service of the affected employees. All final average pay benefits were 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,
	2014				2013				2014				2013
Changes in benefit obligation:
Benefit obligation as of beginning of year	$	1,914			$	2,307			$	324			$	436
Service cost	120				137				7				12
Interest cost	91				86				15				18
Participant contributions	—				—				7				15
Plan amendments	2				(274		)		—				(43		)
Curtailment gain	—				(6		)		—				—
Benefits paid	(109		)		(170		)		(30		)		(37		)
Actuarial (gain) loss	440				(169		)		37				(77		)
Other	(8		)		3				1				—
Benefit obligation as of end of year	$	2,450			$	1,914			$	361			$	324
Changes in plan assets(a):
Fair value of plan assets as of beginning of year	$	1,909			$	1,729			$	—			$	—
Actual return on plan assets	139				306				—				—
Valero contributions	46				41				20				19
Participant contributions	—				—				7				15
Benefits paid	(109		)		(170		)		(30		)		(37		)
Other	(7		)		3				3				3
Fair value of plan assets as of end of year	$	1,978			$	1,909			$	—			$	—
Reconciliation of funded status(a):
Fair value of plan assets as of end of year	$	1,978			$	1,909			$	—			$	—
Less benefit obligation as of end of year	2,450				1,914				361				324
Funded status as of end of year	$	(472	)		$	(5	)		$	(361	)		$	(324	)
Accumulated benefit obligation	$	2,354			$	1,811			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)

For the year ended December 31, 2014, the funded status of our pension and other postretirement benefit plans were negatively impacted by a combined actuarial loss of $477 million primarily due to approximately $300 million related to the change in the discount rates of our pension plans to 4.10% from 4.92% and our other postretirement benefit plans to 4.13% from 4.88% as of December 31, 2014 and 2013, respectively, and approximately $100 million related to our adoption of the updated mortality table that reflects longer life expectancies.

Amounts recognized in our balance sheet for our pension and other postretirement benefits plans as of December 31, 2014 and 2013 include (in millions):

	Pension Plans								Other Postretirement Benefit Plans
	2014				2013				2014				2013
Deferred charges and other assets, net	$	7			$	208			$	—			$	—
Accrued expenses	(28		)		(11		)		(20		)		(19		)
Other long-term liabilities	(451		)		(202		)		(341		)		(305		)
	$	(472	)		$	(5	)		$	(361	)		$	(324	)

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,
	2014				2013
Projected benefit obligation	$	2,288			$	215
Accumulated benefit obligation	2,217				168
Fair value of plan assets	1,812				3

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
2015	$	131			$	20
2016	127				20
2017	132				21
2018	142				21
2019	189				21
2020-2024	845				108

We plan to contribute approximately $47 million to our pension plans and $20 million to our other postretirement benefit plans during 2015.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The components of net periodic benefit cost related to our defined benefit plans were as follows (in millions):

	Pension Plans												Other Postretirement Benefit Plans
	Year Ended December 31,												Year Ended December 31,
	2014				2013				2012				2014				2013				2012
Components of net periodic benefit cost:
Service cost	$	120			$	137			$	140			$	7			$	12			$	12
Interest cost	91				86				93				15				18				21
Expected return on plan assets	(133		)		(131		)		(125		)		—				—				—
Amortization of:
Prior service cost (credit)	(22		)		(19		)		3				(18		)		(14		)		(23		)
Net actuarial (gain) loss	35				57				33				(1		)		—				1
Special charges (credits)	3				(5		)		(3		)		—				—				—
Net periodic benefit cost	$	94			$	125			$	141			$	3			$	16			$	11

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.

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

	Pension Plans												Other Postretirement Benefit Plans
	Year Ended December 31,												Year Ended December 31,
	2014				2013				2012				2014				2013				2012
Net gain (loss) arising during the year:
Net actuarial gain (loss)	$	(434	)		$	290			$	(245	)		$	(37	)		$	77			$	17
Prior service cost	(1		)		—				(9		)		—				—				—
Remeasurement due to plan amendments	—				328				—				—				43				—
Net (gain) loss reclassified into income:
Net actuarial (gain) loss	35				57				33				(1		)		—				1
Prior service cost (credit)	(22		)		(19		)		3				(18		)		(14		)		(23		)
Curtailment and settlement loss	3				1				12				—				—				—
Total changes in other comprehensive income (loss)	$	(419	)		$	657			$	(206	)		$	(56	)		$	106			$	(5	)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The pre-tax amounts in accumulated other comprehensive income as of December 31, 2014 and 2013 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):

	Pension Plans								Other Postretirement Benefit Plans
	2014				2013				2014				2013
Prior service credit	$	(210	)		$	(233	)		$	(92	)		$	(110	)
Net actuarial (gain) loss	876				479				(6		)		(44		)
Total	$	666			$	246			$	(98	)		$	(154	)

The following pre-tax amounts included in accumulated other comprehensive income as of December 31, 2014 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2015 (in millions):

	Pension Plans				Other Postretirement Benefit Plans
Amortization of prior service credit	$	(22	)		$	(18	)
Amortization of net actuarial loss	63				—
Total	$	41			$	(18	)

The weighted-average assumptions used to determine the benefit obligations as of December 31, 2014 and 2013 were as follows:

	Pension Plans						Other Postretirement Benefit Plans
	2014			2013			2014			2013
Discount rate	4.10	%		4.92	%		4.13	%		4.88	%
Rate of compensation increase	3.78	%		3.81	%		—	%		—	%

The discount rate assumption used to determine the benefit obligations as of December 31, 2014 and 2013 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, Standard and Poor’s Ratings Service, 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, 2014, 2013, and 2012 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2014, 2013, and 2012 were as follows:

	Pension Plans									Other Postretirement Benefit Plans
	2014			2013			2012			2014			2013			2012
Discount rate	4.92	%		4.33	%		5.08	%		4.88	%		4.19	%		4.97	%
Expected long-term rate of return on plan assets	7.61	%		7.62	%		7.67	%		—	%		—	%		—	%
Rate of compensation increase	3.81	%		3.73	%		3.68	%		—	%		—	%		—	%

The assumed health care cost trend rates as of December 31, 2014 and 2013 were as follows:

	2014			2013
Health care cost trend rate assumed for the next year	7.36	%		7.39	%
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

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	5				(4		)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The tables below present the fair values of the assets of our pension plans (in millions) as of December 31, 2014 and 2013 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												Total as of December 31, 2014
	Level 1				Level 2				Level 3
Equity securities:
U.S. companies(a)	$	541			$	—			$	—			$	541
International companies	144				—				—				144
Preferred stock	1				1				—				2
Mutual funds:
International growth	119				—				—				119
Index funds(b)	199				—				—				199
Corporate debt instruments	—				263				—				263
Government securities:
U.S. Treasury securities	71				—				—				71
Other government securities	—				100				—				100
Common collective trusts	—				379				—				379
Private fund	—				40				—				40
Insurance contracts	—				18				—				18
Interest and dividends receivable	5				—				—				5
Cash and cash equivalents	75				22				—				97
Total	$	1,155			$	823			$	—			$	1,978

---

See notes on page 98.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fair Value Measurements Using												Total as of December 31, 2013
	Level 1				Level 2				Level 3
Equity securities:
U.S. companies(a)	$	529			$	—			$	—			$	529
International companies	155				—				—				155
Preferred stock	2				1				—				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	$	1,135			$	774			$	—			$	1,909

---

(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, 2014, 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 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 $61 million, $62 million, and $61 million for the years ended December 31, 2014, 2013, and 2012, respectively.

15.	STOCK-BASED COMPENSATION

Under our 2011 Omnibus Stock Incentive Plan (the OSIP), various stock and stock-based awards may be 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, restricted stock that vests over a period determined by our compensation committee, and dividend equivalent rights (DERs). The OSIP was approved by our stockholders on April 28, 2011. As of December 31, 2014, 13,536,081 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.

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

	Year Ended December 31,
	2014				2013				2012
Stock-based compensation expense	$	60			$	64			$	58
Tax benefit recognized on stock-based compensation expense	21				22				20
Tax benefit realized for tax deductions resulting from exercises and vestings	64				66				45
Effect of tax deductions in excess of recognized stock-based compensation expense reported as a financing cash flow	47				47				27

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

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 2014, 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. 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,
	2014			2013			2012
Expected life in years	6.0			6.0			6.0
Expected volatility	43.21	%		49.63	%		49.11	%
Expected dividend yield	2.27	%		2.27	%		2.39	%
Risk-free interest rate	1.74	%		1.77	%		0.85	%

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, 2014	8,558,093			$	27.88
Granted	126,095			48.57
Exercised	(2,564,125	)		18.64
Expired	(1,449,986	)		66.67
Forfeited	(856	)		17.68
Outstanding as of December 31, 2014	4,669,221			21.48				4.5		$	131
Exercisable as of December 31, 2014	4,315,414			19.99				4.2		127

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

	Year Ended December 31,
	2014				2013				2012
Weighted average grant-date fair value price per share	$	17.31			$	15.83			$	10.98
Intrinsic value of stock options exercised	85				101				78
Cash received from stock option exercises	47				59				59

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2014, 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.

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 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, 2014	2,205,314			$	32.23
Granted	969,671			49.40
Vested	(1,402,753	)		31.90
Forfeited	(14,082	)		32.56
Nonvested shares as of December 31, 2014	1,758,150			41.96

As of December 31, 2014, there was $45 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, 2014, 2013, and 2012 was $60 million, $74 million, and $47 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. The fair value per share for awards granted during 2014 is equal to the market price of our common stock on the grant date as these grants include DERs. The fair value per share for awards granted prior to 2014 was equal to the market price of our common stock on the grant date reduced by expected dividends over that tranche’s vesting period as these grants did not include DERs.

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, 2014	947,165			—
Granted	225,829			—
Vested	(534,028	)		534,028
Converted	—			(534,028	)
Forfeited	(24,576	)		—
Awards outstanding as of December 31, 2014	614,390			—

There were three tranches of performance awards granted during the year ended December 31, 2014 as follows:

	Awards Granted			Expected Conversion Rate		Fair Value Per Share
Third tranche of 2012 awards	99,023			100%		$	47.47
Second tranche of 2013 awards	76,232			100%		47.47
First tranche of 2014 awards	50,574			100%		48.57
Total	225,829

As of December 31, 2014, there was $11 million of unrecognized compensation cost related to outstanding unvested performance awards, which will be recognized during 2015. The total fair value of performance awards that vested during the years ended December 31, 2014, 2013, and 2012 was $15 million, $12 million, and $3 million, respectively.

Performance awards converted during the year ended December 31, 2014 were as follows:

	Vested Awards Converted			Actual Conversion Rate		Number of Shares Issued
2010 awards	201,422			100%		201,422
2011 awards	227,571			200%		455,142
2012 awards	102,855			200%		205,710
2013 awards	2,180			200%		4,360
Total	534,028					866,634

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.	INCOME TAXES

Income Tax Expense

Income from continuing operations before income tax expense was as follows (in millions):

	Year Ended December 31,
	2014				2013				2012
U.S. operations	$	4,677			$	3,531			$	4,015
International operations	875				445				725
Income from continuing operations before income tax expense	$	5,552			$	3,976			$	4,740

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,
	2014				2013				2012
Federal income tax expense at the U.S. federal statutory rate	$	1,943			$	1,392			$	1,659
U.S. state income tax expense, net of U.S. federal income tax effect	62				62				64
U.S. manufacturing deduction	(74		)		(36		)		(33		)
International operations	(88		)		(69		)		(96		)
Permanent differences	(16		)		(104		)		20
Change in tax law	—				(32		)		—
Other, net	(50		)		41				12
Income tax expense	$	1,777			$	1,254			$	1,626

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, 2014 was primarily due to an increase in income from continuing operations from our international operations that was taxed at statutory rates that are lower than in the U.S. and an increase in our U.S. manufacturing deduction. 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.

There was no income tax expense or benefit related to discontinued operations for the years ended December 31, 2014, 2013, and 2012.

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,
	2014				2013				2012
Current:
U.S. federal	$	1,196			$	635			$	515
U.S. state	59				36				22
International	77				82				126
Total current	1,332				753				663
Deferred:
U.S. federal	268				459				854
U.S. state	36				59				77
International	141				(17		)		32
Total deferred	445				501				963
Income tax expense	$	1,777			$	1,254			$	1,626

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,
	2014				2013
Deferred income tax assets:
Tax credit carryforwards	$	37			$	48
Net operating losses (NOLs)	436				338
Inventories	160				264
Property, plant, and equipment	—				8
Compensation and employee benefit liabilities	358				178
Environmental liabilities	92				92
Other	178				187
Total deferred income tax assets	1,261				1,115
Less: Valuation allowance	(393		)		(347		)
Net deferred income tax assets	868				768
Deferred income tax liabilities:
Property, plant, and equipment	6,682				6,536
Deferred turnaround costs	356				331
Inventories	426				310
Investments	152				94
Other	73				81
Total deferred income tax liabilities	7,689				7,352
Net deferred income tax liabilities	$	6,821			$	6,584

We had the following income tax credit and loss carryforwards as of December 31, 2014 (in millions):

	Amount				Expiration
U.S. state income tax credits	$	53			2015 through 2027
U.S. state NOLs (gross amount)	6,574				2015 through 2034
International NOLs	1,630				Unlimited

We have recorded a valuation allowance as of December 31, 2014 and 2013 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 2014, the valuation allowance increased by $46 million, primarily due to increases in U.S. state NOLs. The realization of net deferred income tax assets recorded as of December 31, 2014 is primarily dependent upon our ability to generate future taxable income in certain U.S. states and international jurisdictions.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Should we ultimately recognize tax benefits related to the valuation allowance for deferred income tax assets as of December 31, 2014, such amounts will be allocated as follows (in millions):

Income tax benefit	$	386
Additional paid-in capital	7
Total	$	393

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, 2014, the cumulative undistributed earnings of these subsidiaries were approximately $2.9 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,
	2014				2013				2012
Balance as of beginning of year	$	950			$	341			$	326
Additions based on tax positions related to the current year	35				64				11
Additions for tax positions related to prior years	118				576				40
Reductions for tax positions related to prior years	(67		)		(26		)		(36		)
Reductions for tax positions related to the lapse of applicable statute of limitations	(1		)		(4		)		—
Settlements	(46		)		(1		)		—
Balance as of end of year	$	989			$	950			$	341

The reconciliation of the change in unrecognized tax benefits for the year ended December 31, 2013 includes $556 million of additions for tax positions primarily related to prior years for tax refunds that we intend to claim by amending our income tax returns for 2005 through 2012. 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 refund claims included in the reconciliation below cannot be recognized in our financial statements. As a result, these amounts are not included in our uncertain tax position liabilities as of December 31, 2014 and 2013, even though they are reflected in the table above.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a reconciliation of unrecognized tax benefits reflected in the table above to our uncertain tax position liabilities as of December 31, 2014 and 2013 that are reflected in Note 10 (in millions):

	December 31,
	2014				2013
Unrecognized tax benefits	$	989			$	950
Tax refund claim not recognized in our financial statements	(554		)		(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				49
Uncertain tax position liabilities	$	484			$	443

As of December 31, 2014 and 2013, there were $768 million and $763 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, excluding interest, by $133 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.

Penalties and interest, which are reflected within income tax expense, were immaterial for the year ended December 31, 2014. During the years ended December 31, 2013 and 2012, we recognized $12 million and $23 million, respectively, in penalties and interest. Accrued penalties and interest totaled $141 million and $145 million as of December 31, 2014 and 2013, respectively, excluding the U.S. federal and state income tax effects related to interest.

Tax Returns Under Audit

As of December 31, 2014, our tax years for 2004 through 2011 were under audit by the IRS. 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 December 2014, we paid the final IRS assessment for our tax years 2002 and 2003 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,
	2014								2013								2012
	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					$	3,694							$	2,714							$	3,117
Less dividends paid:
Common stock					552								460								358
Nonvested restricted stock					2								2								2
Undistributed earnings					$	3,140							$	2,252							$	2,757
Weighted-average common shares outstanding	2				526				3				542				3				550
Earnings per common share from continuing operations:
Distributed earnings	$	1.05			$	1.05			$	0.85			$	0.85			$	0.65			$	0.65
Undistributed earnings	5.95				5.95				4.13				4.13				4.99				4.99
Total earnings per common share from continuing operations	$	7.00			$	7.00			$	4.98			$	4.98			$	5.64			$	5.64
Earnings per common share from continuing operations – assuming dilution:
Net income attributable to Valero stockholders from continuing operations					$	3,694							$	2,714							$	3,117
Weighted-average common shares outstanding					526								542								550
Common equivalent shares:
Stock options					2								4								4
Performance awards and nonvested restricted stock					2								2								2
Weighted-average common shares outstanding – assuming dilution					530								548								556
Earnings per common share from continuing operations – assuming dilution					$	6.97							$	4.96							$	5.61

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18.	SEGMENT INFORMATION

We have two reportable segments, refining and ethanol, as of December 31, 2014. Prior to May 1, 2013, we also had a retail segment. As discussed in Note 3, we completed the separation of our retail business, CST, on May 1, 2013. Segment activity related to our retail business prior to the separation is reflected in the retail segment results below. Motor fuel sales to CST, 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				Ethanol				Retail				Corporate				Total
Year ended December 31, 2014:
Operating revenues from external customers	$	126,004			$	4,840			$	—			$	—			$	130,844
Intersegment revenues	—				100				—				—				100
Depreciation and amortization expense	1,597				49				—				44				1,690
Operating income (loss)	5,884				786				—				(768		)		5,902
Total expenditures for long-lived assets	2,750				42				—				30				2,822
Year ended December 31, 2013:
Operating revenues from external customers	129,064				5,114				3,896				—				138,074
Intersegment revenues	2,876				128				—				—				3,004
Depreciation and amortization expense	1,566				45				41				68				1,720
Operating income (loss)	4,211				491				81				(826		)		3,957
Total expenditures for long-lived assets	2,597				33				62				65				2,757
Year ended December 31, 2012:
Operating revenues from external customers	122,068				4,317				12,008				—				138,393
Intersegment revenues	8,946				115				—				—				9,061
Depreciation and amortization expense	1,345				42				119				43				1,549
Operating income (loss)	5,484				(47		)		348				(741		)		5,044
Total expenditures for long-lived assets	3,147				36				164				66				3,413

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,
	2014				2013				2012
Refining:
Gasolines and blendstocks	$	56,846			$	57,806			$	55,647
Distillates	57,521				56,921				51,095
Petrochemicals	3,759				4,281				3,908
Lubes and asphalts	1,397				1,643				2,033
Other product revenues	6,481				8,413				9,385
Total refining operating revenues	126,004				129,064				122,068
Ethanol:
Ethanol	4,192				4,245				3,545
Distillers grains	648				869				772
Total ethanol operating revenues	4,840				5,114				4,317
Retail:
Fuel sales (gasoline and diesel)	—				3,226				10,045
Merchandise sales and other	—				524				1,649
Home heating oil	—				146				314
Total retail operating revenues	—				3,896				12,008
Total operating revenues	$	130,844			$	138,074			$	138,393

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 10 percent or more of our operating revenues.

	Year Ended December 31,
	2014				2013				2012
U.S.	$	91,499			$	100,418			$	99,879
Canada	10,410				9,974				10,376
U.K. and Ireland	14,182				13,675				12,818
Other countries	14,753				14,007				15,320
Total operating revenues	$	130,844			$	138,074			$	138,393

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long-lived assets include property, plant, and equipment 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,
	2014				2013
U.S.	$	24,710			$	23,572
Canada	2,250				2,260
U.K.	1,206				1,148
Aruba	59				53
Ireland	22				26
Total long-lived assets	$	28,247			$	27,059

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

	December 31,
	2014				2013
Refining	$	40,103			$	41,227
Ethanol	954				889
Corporate	4,493				5,144
Total assets	$	45,550			$	47,260

In March 2014, we purchased an idled corn ethanol plant in Mount Vernon, Indiana for $34 million from a wholly owned subsidiary of Aventine Renewable Energy Holdings, Inc. We resumed production at that plant during the third quarter of 2014. In the fourth quarter of 2014, an independent appraisal of the assets acquired and liabilities assumed and certain other evaluations of the fair values related to the Mount Vernon plant were completed and finalized. The purchase price of the Mount Vernon plant 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. There were no significant adjustments made to the preliminary purchase price allocation.

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,
	2014				2013				2012
Decrease (increase) in current assets:
Receivables, net	$	2,753			$	(753	)		$	437
Inventories	(1,014		)		(13		)		(282		)
Income taxes receivable	(23		)		10				51
Prepaid expenses and other	(32		)		2				(28		)
Increase (decrease) in current liabilities:
Accounts payable	(3,149		)		977				(113		)
Accrued expenses	38				53				13
Taxes other than income taxes	(64		)		337				(260		)
Income taxes payable	(319		)		309				(120		)
Changes in current assets and current liabilities	$	(1,810	)		$	922			$	(302	)

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;

•	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, 2014, 2013 and 2012.

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, 2014 and 2012.

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,
	2014				2013				2012
Interest paid in excess of amount capitalized	$	392			$	361			$	302
Income taxes paid, net	1,624				387				705

Cash flows related to the discontinued operations of the Aruba Refinery were immaterial for the years ended December 31, 2014, 2013, and 2012.

20.	FAIR VALUE MEASUREMENTS

General

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

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

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

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

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

•

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

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, 2014 and 2013.

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, 2014
													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	$	3,096			$	36			$	—			$	3,132			$	(2,907	)		$	(99	)		$	126			$	—
Physical purchase contracts	—				1				—				1				n/a				n/a				1				n/a
Investments of certain benefit plans	97				—				11				108				n/a				n/a				108				n/a
Total	$	3,193			$	37			$	11			$	3,241			$	(2,907	)		$	(99	)		$	235
Liabilities:
Commodity derivative contracts	$	2,886			$	34			$	—			$	2,920			$	(2,907	)		$	(13	)		$	—			$	(25	)
Biofuels blending obligation	—				14				—				14				n/a				n/a				14				n/a
Physical purchase contracts	—				5				—				5				n/a				n/a				5				n/a
Total	$	2,886			$	53			$	—			$	2,939			$	(2,907	)		$	(13	)		$	19

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	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

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.

•	Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for our international operations to manage our exposure to exchange rate fluctuations on transactions

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 Price 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, 2014 and 2013 that were measured at fair value on a recurring basis.

There was no activity during the years ended December 31, 2014, 2013, and 2012 related to the fair value amounts categorized in Level 3 as of December 31, 2014, 2013, and 2012.

Nonrecurring Fair Value Measurements

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2014 and 2013.

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, 2014								December 31, 2013
	Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and temporary cash investments	$	3,689			$	3,689			$	4,292			$	4,292
Financial liabilities:
Debt (excluding capital leases)	6,354				7,562				6,525				7,659

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 into 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, 2014, we had no outstanding commodity derivative instruments that were entered into as fair value hedges.

•

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, 2014, we had no outstanding commodity derivative instruments that were entered into as cash flow hedges.

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) feedstock and refined product inventories, (ii) forecasted feedstock and product purchases, and product sales, and (iii) fixed-price 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, 2014, we had the following outstanding commodity derivative instruments that were used as economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units, 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		2015			2016
Crude oil and refined products:
Swaps – long		7,532			—
Swaps – short		5,676			—
Futures – long		46,886			—
Futures – short		67,600			—
Natural gas:
Options – long		1,250			—
Corn:
Futures – long		20,815			80
Futures – short		46,585			1,155
Physical contracts – long		25,327			1,081
Soybean oil:
Futures – long		94,920			—
Futures – short		178,920			—

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, 2014, 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).

		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2015			2016
Crude oil and refined products:
Swaps – long		645			—
Swaps – short		645			—
Futures – long		95,709			5,116
Futures – short		96,897			4,341
Options – long		1,900			—
Options – short		1,200			—
Natural gas:
Futures – long		6,200			—
Futures – short		4,200			—

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, 2014 and 2013, or during the years ended December 31, 2014, 2013, or 2012.

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, 2014, we had commitments to purchase $377 million of U.S. dollars. These commitments matured on or before January 31, 2015 resulting in a gain of $12 million in the first quarter of 2015.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2014, 2013, and 2012, the cost of meeting our obligations under these compliance programs was $372 million, $517 million, and $250 million, respectively. These amounts are reflected in cost of sales.

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of December 31, 2014 and 2013 (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, 2014
		Asset Derivatives				Liability Derivatives
Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net		$	3,096			$	2,886
Swaps	Receivables, net		34				31
Options	Receivables, net		2				3
Physical purchase contracts	Inventories		1				5
Total			$	3,133			$	2,925

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	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

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. 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,
		2014				2013				2012
Commodity contracts:
Loss recognized in income on derivatives		Cost of sales		$	(42	)		$	(12	)		$	(250	)
Gain recognized in income on hedged item		Cost of sales		42				18				183
Gain (loss) recognized in income on derivatives (ineffective portion)		Cost of sales		—				6				(67		)

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, 2014, 2013, and 2012. 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, 2014 and 2013; 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,
		2014				2013				2012
Commodity contracts:
Gain (loss) recognized in OCI on derivatives (effective portion)				$	(1	)		$	(4	)		$	45
Gain (loss) reclassified from accumulated OCI into income (effective portion)		Cost of sales		(2		)		(2		)		73
Gain (loss) recognized in income on derivatives (ineffective portion)		Cost of sales		(1		)		21				48

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, 2014, 2013, and 2012. For the year ended December 31, 2014, cash flow hedges primarily related to forward purchases of crude oil, with no cumulative after-tax gains or losses on cash flow hedges remaining in accumulated other comprehensive income. For the years ended December 31, 2014, 2013, and 2012, there were no amounts reclassified from accumulated other comprehensive income into income as a result of the discontinuance of cash flow hedge accounting.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives Designated as Economic Hedges and Other Derivative Instruments		Location of Gain (Loss) Recognized in Income on Derivatives		Year Ended December 31,
		2014				2013				2012
Commodity contracts		Cost of sales		$	693			$	193			$	1
Foreign currency contracts		Cost of sales		40				14				(38		)

Trading Derivatives		Location of Gain (Loss) Recognized in Income on Derivatives		Year Ended December 31,
		2014				2013				2012
Commodity contracts		Cost of sales		$	38			$	21			$	(16	)
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, 2014 and 2013 (in millions, except per share amounts). The amounts shown below differ from those previously reported in our quarterly reports on Form 10-Q for the quarters ended March 31, 2013 and 2014 due to the abandonment of the Aruba Refinery in May 2014 as discussed in Note 2. The results of operations of the Aruba Refinery have been presented as discontinued operations for all periods presented.

	2014 Quarter Ended
	March 31				June 30				September 30				December 31
Operating revenues	$	33,663			$	34,914			$	34,408			$	27,859
Operating income	1,351				1,085				1,670				1,796
Net income	836				593				1,062				1,220
Net income attributable to Valero Energy Corporation stockholders	828				588				1,059				1,155
Earnings per common share	1.55				1.11				2.01				2.22
Earnings per common share – assuming dilution	1.54				1.10				2.00				2.22
	2013 Quarter Ended
	March 31				June 30 (a)				September 30				December 31
Operating revenues	33,474				34,034				36,137				34,429
Operating income	1,058				805				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	1.18				0.86				0.58				2.39
Earnings per common share – assuming dilution	1.18				0.85				0.57				2.38

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