Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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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, 2015. 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, 2015, 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 57 of this report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Valero Energy Corporation:

We have audited the accompanying consolidated balance sheets of Valero Energy Corporation and subsidiaries (the Company) as of December 31, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, 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, 2015, 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 25, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

San Antonio, Texas

February 25, 2016

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Valero Energy Corporation:

We have audited Valero Energy Corporation (the Company’s) internal control over financial reporting as of December 31, 2015, 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, 2015, 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, 2015 and 2014, 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, 2015, and our report dated February 25, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Antonio, Texas

February 25, 2016

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Millions of Dollars, Except Par Value)

December 31,
20152014
ASSETS
Current assets:
Cash and temporary cash investments$4,114$3,689
Receivables, net4,4645,879
Inventories5,8986,623
Income taxes receivable21897
Deferred income taxes74162
Prepaid expenses and other204164
Total current assets14,97216,614
Property, plant, and equipment, at cost36,90735,933
Accumulated depreciation(10,204)(9,198)
Property, plant, and equipment, net26,70326,735
Deferred charges and other assets, net2,6682,201
Total assets$44,343$45,550
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and capital lease obligations$127$606
Accounts payable4,9076,760
Accrued expenses554596
Taxes other than income taxes1,0691,209
Income taxes payable337433
Deferred income taxes366376
Total current liabilities7,3609,980
Debt and capital lease obligations, less current portion7,2505,780
Deferred income taxes6,7686,607
Other long-term liabilities1,6111,939
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 issued77
Additional paid-in capital7,0647,116
Treasury stock, at cost; 200,462,208 and 159,202,872 common shares(10,799)(8,125)
Retained earnings25,18822,046
Accumulated other comprehensive loss(933)(367)
Total Valero Energy Corporation stockholders’ equity20,52720,677
Noncontrolling interests827567
Total equity21,35421,244
Total liabilities and equity$44,343$45,550

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Millions of Dollars, Except per Share Amounts)

Year Ended December 31,
201520142013
Operating revenues (a)$87,804$130,844$138,074
Costs and expenses:
Cost of sales (excluding the lower of cost or market inventory valuation adjustment)73,861118,141127,316
Lower of cost or market inventory valuation adjustment790——
Operating expenses4,2434,3874,323
General and administrative expenses710724758
Depreciation and amortization expense1,8421,6901,720
Total costs and expenses81,446124,942134,117
Operating income6,3585,9023,957
Gain on disposition of retained interest in CST Brands, Inc.——325
Other income, net464759
Interest and debt expense, net of capitalized interest(433)(397)(365)
Income from continuing operations before income tax expense5,9715,5523,976
Income tax expense1,8701,7771,254
Income from continuing operations4,1013,7752,722
Income (loss) from discontinued operations—(64)6
Net income4,1013,7112,728
Less: Net income attributable to noncontrolling interests111818
Net income attributable to Valero Energy Corporation stockholders$3,990$3,630$2,720
Net income attributable to Valero Energy Corporation stockholders:
Continuing operations$3,990$3,694$2,714
Discontinued operations—(64)6
Total$3,990$3,630$2,720
Earnings per common share:
Continuing operations$8.00$7.00$4.98
Discontinued operations—(0.12)0.01
Total$8.00$6.88$4.99
Weighted-average common shares outstanding (in millions)497526542
Earnings per common share – assuming dilution:
Continuing operations$7.99$6.97$4.96
Discontinued operations—(0.12)0.01
Total$7.99$6.85$4.97
Weighted-average common shares outstanding – assuming dilution (in millions)500530548
Dividends per common share$1.70$1.05$0.85
_______________________________________________
Supplemental information:
(a) Includes excise taxes on sales by certain of our international operations$5,980$5,901$5,459

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Millions of Dollars)

Year Ended December 31,
201520142013
Net income$4,101$3,711$2,728
Other comprehensive income (loss):
Foreign currency translation adjustment(606)(407)(98)
Net gain (loss) on pension and other postretirement benefits57(475)763
Net gain (loss) on derivative instruments designated and qualifying as cash flow hedges—1(2)
Other comprehensive income (loss) before income tax expense (benefit)(549)(881)663
Income tax expense (benefit) related to items of other comprehensive income (loss)17(164)262
Other comprehensive income (loss)(566)(717)401
Comprehensive income3,5352,9943,129
Less: Comprehensive income attributable to noncontrolling interests111818
Comprehensive income attributable to Valero Energy Corporation stockholders$3,424$2,913$3,121

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(Millions of Dollars)

Valero Energy Corporation Stockholders’ Equity
Common StockAdditional Paid-in CapitalTreasury StockRetained EarningsAccumulated Other Comprehensive Income (Loss)TotalNon- controlling InterestsTotal Equity
Balance as of December 31, 2012$7$7,322$(6,437)$17,032$108$18,032$63$18,095
Net income———2,720—2,72082,728
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 purchases——(236)——(236)—(236)
Stock purchases under purchase 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——————369369
Contributions from noncontrolling interests——————4646
Other—6———6—6
Other comprehensive income————401401—401
Balance as of December 31, 201377,187(7,054)18,97035019,46048619,946
Net income———3,630—3,630813,711
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 purchases——(128)——(128)—(128)
Stock purchases under purchase program——(1,168)——(1,168)—(1,168)
Contributions from noncontrolling interests——————1212
Distributions to noncontrolling interests——————(12)(12)
Other comprehensive loss————(717)(717)—(717)
Balance as of December 31, 201477,116(8,125)22,046(367)20,67756721,244
Net income———3,990—3,9901114,101
Dividends on common stock———(848)—(848)—(848)
Stock-based compensation expense—59———59—59
Tax deduction in excess of stock- based compensation expense—44———44—44
Transactions in connection with stock-based compensation plans:
Stock issuances—(155)189——34—34
Stock purchases——(196)——(196)—(196)
Stock purchases under purchase program——(2,667)——(2,667)—(2,667)
Net proceeds from issuance of Valero Energy Partners LP common units——————189189
Contributions from noncontrolling interests——————55
Distributions to noncontrolling interests——————(45)(45)
Other comprehensive loss————(566)(566)—(566)
Balance as of December 31, 2015$7$7,064$(10,799)$25,188$(933)$20,527$827$21,354

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of Dollars)

Year Ended December 31,
201520142013
Cash flows from operating activities:
Net income$4,101$3,711$2,728
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense1,8421,6901,720
Lower of cost or market inventory valuation adjustment790——
Aruba Refinery asset retirement expense and other—63—
Gain on disposition of retained interest in CST Brands, Inc.——(325)
Deferred income tax expense165445501
Changes in current assets and current liabilities(1,306)(1,810)922
Changes in deferred charges and credits and other operating activities, net1914218
Net cash provided by operating activities5,6114,2415,564
Cash flows from investing activities:
Capital expenditures(1,618)(2,153)(2,121)
Deferred turnaround and catalyst costs(673)(649)(634)
Investments in joint ventures(141)(14)(76)
Other investing activities, net(55)(28)19
Net cash used in investing activities(2,487)(2,844)(2,812)
Cash flows from financing activities:
Proceeds from debt issuances or borrowings1,44628—
Repayments of debt and capital lease obligations(513)(204)(486)
Proceeds from the exercise of stock options344759
Purchase of common stock for treasury(2,838)(1,296)(928)
Common stock dividends(848)(554)(462)
Net proceeds from issuance of Valero Energy Partners LP common units189—369
Contributions from noncontrolling interests51245
Distributions to noncontrolling interests (public unitholders) of Valero Energy Partners LP(20)(12)—
Distribution to other noncontrolling interest(25)——
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, net254938
Net cash used in financing activities(2,545)(1,930)(163)
Effect of foreign exchange rate changes on cash(154)(70)(20)
Net increase (decrease) in cash and temporary cash investments425(603)2,569
Cash and temporary cash investments at beginning of year3,6894,2921,723
Cash and temporary cash investments at end of year$4,114$3,689$4,292

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

General

As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole. We are an independent petroleum refining and marketing company and own 15 refineries with a combined throughput capacity of approximately 3.0 million barrels per day (BPD) as of December 31, 2015. 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 7,500 outlets that carry the Valero®, Diamond Shamrock®, 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 1.4 billion gallons per year as of December 31, 2015. 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, 2014 have been reclassified to conform to the 2015 presentation.

Significant Accounting Policies

Principles of Consolidation

These financial statements include the accounts of Valero, its 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.

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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 approach, 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. Market value is determined based on the net realizable value of the inventories. We compare the market value of inventories to their cost on an aggregate basis, excluding materials and supplies. If the aggregate market value is less than cost, we record a lower of cost or market inventory valuation adjustment to reflect our inventories at market value.

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.

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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” primarily 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;
•income taxes receivable;
•investments in joint ventures accounted for under the equity method;
•intangible assets; and
•re-imaging costs associated with branded outlets.

Impairment of Assets

Long-lived assets 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.

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

Environmental Matters

Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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

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.

We present excise taxes on sales by certain of our international operations on a gross basis with supplemental information regarding the amount of such taxes included in revenues provided in a footnote on the statements of income. 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Product Shipping and Handling Costs

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

Environmental Compliance Program Costs

We purchase credits in the open market to meet our obligations under various environmental compliance programs. 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 20 under “Environmental Compliance Program Price Risk.” To the degree that we are unable to blend biofuels at the required percentage, we must purchase biofuel credits to meet our obligation. We purchase greenhouse gas (GHG) emission credits to comply with government regulations concerning various GHG emission programs, including cap-and-trade systems, as described in Note 20.

The costs of purchased biofuel credits and GHG emission credits are charged to cost of sales as such credits are needed to satisfy our obligation. To the extent we have not purchased enough 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 credits as of the balance sheet date, and we record a liability for our obligation to purchase those credits. See Note 19 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 attributable to Valero stockholders 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 19.

Derivatives and Hedging

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

New Accounting Pronouncements

In May 2014, the Accounting Standards Codification (ASC) was amended and a new accounting standard, ASC Topic 606, “Revenue from Contracts with Customers,” was issued 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. In July 2015, the effective date of the new standard was deferred by one year. As a result, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those reporting periods, and can be adopted either retrospectively to each prior reporting period presented using a practical expedient, as allowed by the standard, or retrospectively with a cumulative-effect adjustment to retained earnings as of the date of initial application. Early adoption is permitted, but not before the original effective date, which was for annual reporting periods beginning after December 15, 2016, including interim reporting periods within those reporting periods. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

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

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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. The adoption of this guidance effective January 1, 2016 will not affect our financial position or results of operations, but will result in additional disclosures.

In April 2015, the provisions of ASC Subtopic 835-30, “Interest–Imputation of Interest,” were amended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a note be reported in the balance sheet as a direct deduction from the face amount of that note, consistent with debt discounts, and that amortization of debt issuance costs be reported as interest expense. In August 2015, these provisions were further amended with guidance from the Securities and Exchange Commission staff that they would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These provisions are to be applied 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 materially affect our financial position or results of operations; however, our debt issuance costs associated with issued debt (other than borrowings on our line-of-credit arrangements) will be reported in the balance sheet as a direct deduction from “debt and capital lease obligations, less current portion” and excluded from “deferred charges and other assets, net.” As of December 31, 2015, debt issuance costs associated with issued debt totaled $42 million. Debt issuance costs associated with borrowings on our line-of-credit arrangements will continue to be reported in the balance sheet as “deferred charges and other assets, net,” and the related amortization will continue to be reported as interest expense.

Also in April 2015, the provisions of ASC Topic 715, “Compensation–Retirement Benefits” were amended to provide a practical expedient for the measurement date of an entity’s defined benefit pension or other postretirement plans. For an entity with a fiscal year-end that does not coincide with a month-end, the guidance provides a practical expedient that allows the entity to measure the defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end. For an entity that has a significant event in an interim period that calls for a remeasurement, the guidance allows an entity to remeasure the defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event. These provisions are effective retrospectively 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.

In May 2015, the provisions of ASC Topic 820, “Fair Value Measurements,” were amended to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured using the net asset value per share practical expedient and limits those disclosures to investments for which the entity has elected to measure the fair value using that practical expedient. These provisions are to be applied 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, but will result in revised disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In July 2015, the provisions of ASC Topic 330, “Inventory” were amended to simplify the measurement of inventory. The guidance does not apply to inventory where the cost of such inventory is measured using the LIFO or the retail inventory methods. The guidance applies to inventory where the cost of such inventory is measured using the first-in, first-out or average cost methods, and it requires the inventory to be measured at the lower of cost and net realizable value rather than the lower of cost or market. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal, and transportation. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2017 will not affect our financial position or results of operations.

In September 2015, the provisions of ASC Topic 805, “Business Combinations,” were amended to simplify the accounting and reporting of adjustments made to provisional amounts recognized in a business combination. The amendment requires that an acquirer (i) record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and (ii) present separately on the statement of income or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, and should be applied prospectively to adjustments made to provisional amounts that occur after the effective date. Earlier application is permitted for financial statements that have not yet been issued. The adoption of this guidance effective January 1, 2016 will not affect our financial position or results of operations; however, it may result in changes to the manner in which adjustments to provisional amounts recognized in a future business combination, if any, are presented in our financial statements.

In November 2015, the provisions of ASC Topic 740, “Income Taxes,” were amended to simplify the presentation of deferred income taxes. The amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The amendments are effective for financial statements for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of any interim or annual period. The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Entities applying the guidance retrospectively should disclose in the first interim and first annual period of adoption the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods. Effective January 1, 2016, the adoption of this guidance on a retrospective basis will not materially affect our financial position and will not impact our results of operations. Upon adoption, our current deferred income tax assets of $74 million and current deferred income tax liabilities of $366 million as of December 31, 2015 will be reclassified to noncurrent deferred income tax liabilities. Adoption of this guidance simplifies the future presentation of our deferred income tax assets and liabilities.

In January 2016, the provisions of ASC Subtopic 825-10, “Financial Instruments–Overall,” were amended to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The amendment (i) requires equity investments (except those accounted for under the equity method or that are consolidated) to be measured at fair value with changes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost; (iv) requires an entity to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The standard is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In February 2016, the ASC was amended and a new accounting standard, ASC Topic 842, “Leases,” was issued to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. Accordingly, a lessee will recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the ROU asset and lease liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the ROU asset. Lessees can make an accounting policy election by class of underlying asset not to recognize a ROU asset and corresponding lease liability for leases with a term of 12 months or less. Accounting by lessors will remain largely unchanged from current U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized in accordance with the business combinations guidance for leases. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are currently evaluating the effect that adopting this standard will have on our 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 the years ended December 31, 2014 and 2013.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. The Aruba Refinery had no operating revenues and a $64 million loss before income taxes for the year ended December 31, 2014. There was no tax benefit recognized for the loss from discontinued operations for the year ended December 31, 2014 as we do not expect to realize this tax benefit. For the year ended December 31, 2013, the refinery had no operating revenues and $6 million of income before income tax expense.

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 10 under “Bank Debt” 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 10 under “Bank Debt”.

Selected historical results of operations of our retail business prior to the separation are disclosed in Note 17. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

4.VALERO ENERGY PARTNERS LP

Description of Operations

In July 2013, we formed Valero Energy Partners LP (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. VLP’s assets include crude oil and refined petroleum products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of nine of our refineries.

Public Equity Offerings and Ownership

On December 16, 2013, VLP completed its initial public 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.

Effective November 24, 2015, VLP completed a public offering of 4,250,000 common units at a price of $46.25 per unit and received net proceeds from the offering of $189 million after deducting the underwriting discount and other offering costs. Concurrent with the offering, we contributed $4 million in exchange for 86,735 general partner units to maintain our 2.0 percent general partner interest in VLP.

The ownership of VLP consisted of the following:

December 31,
20152014
Valero:
Limited partner interest65.7%68.6%
General partner interest2.0%2.0%
Public:
Limited partner interest32.3%29.4%

Relationship and Agreements with Valero

We consolidate the financial statements of VLP into our financial statements and as such, VLP’s cash and temporary cash investments are included in our consolidated cash and temporary cash investments. However, VLP’s cash and temporary cash investments can be used only to settle its own obligations. VLP’s cash and temporary cash investments were $81 million and $237 million as of December 31, 2015 and 2014, respectively. In addition, VLP’s partnership capital attributable to the public’s ownership interest in VLP of $581 million and $375 million as of December 31, 2015 and 2014, 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 pipeline transportation and terminaling services to us. These transactions, along with our contributions to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

VLP and transactions under subordinated credit agreements between VLP and us, are eliminated in consolidation.

5.RECEIVABLES

Receivables consisted of the following (in millions):

December 31,
20152014
Accounts receivable$4,105$5,509
Commodity derivative and foreign currency contract receivables147151
Other receivables247256
4,4995,916
Allowance for doubtful accounts(35)(37)
Receivables, net$4,464$5,879

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

Year Ended December 31,
201520142013
Balance as of beginning of year$37$46$56
Increase in allowance charged to expense7713
Accounts charged against the allowance, net of recoveries(9)(15)(23)
Foreign currency translation—(1)—
Balance as of end of year$35$37$46

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.INVENTORIES

Inventories consisted of the following (in millions):

December 31,
20152014
Refinery feedstocks$2,404$2,269
Refined products and blendstocks3,7743,926
Ethanol feedstocks and products242195
Materials and supplies244233
Inventories, before lower of cost or market inventory valuation reserve6,6646,623
Lower of cost or market inventory valuation reserve(766)—
Inventories$5,898$6,623

The market value of our LIFO inventory held as of December 31, 2015 fell below our historical LIFO inventory costs. As a result, we recorded a lower of cost or market inventory valuation adjustment of $790 million for the year ended December 31, 2015. The income statement effect differs from the balance sheet reserve due to the foreign currency effect of inventories held for our international operations. As of December 31, 2014, the market value of LIFO inventories exceeded their LIFO carrying amounts by approximately $857 million.

During the year ended December 31, 2013, we had net liquidations of LIFO inventory layers that decreased cost of sales by $17 million. As of December 31, 2015 and 2014, our non-LIFO inventories accounted for $668 million and $906 million, respectively, of our total inventories.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.PROPERTY, PLANT, AND EQUIPMENT

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

December 31,
20152014
Land$400$396
Crude oil processing facilities28,27827,629
Pipeline and terminal facilities2,4562,380
Grain processing equipment792779
Administrative buildings789789
Other3,0192,607
Construction in progress1,1731,353
Property, plant, and equipment, at cost36,90735,933
Accumulated depreciation(10,204)(9,198)
Property, plant, and equipment, net$26,703$26,735

We have various assets under capital leases that primarily support our refining operations totaling $134 million and $72 million as of December 31, 2015 and 2014, respectively. Accumulated amortization on assets under capital leases was $50 million and $40 million as of December 31, 2015 and 2014, respectively.

Depreciation expense for the years ended December 31, 2015, 2014, and 2013 was $1.3 billion, $1.2 billion, and $1.2 billion, respectively.

8.DEFERRED CHARGES AND OTHER ASSETS

“Deferred charges and other assets, net” consisted of the following (in millions):

December 31,
20152014
Deferred turnaround and catalyst costs, net$1,484$1,359
Income taxes receivable266182
Investments in joint ventures20178
Intangible assets, net156154
Re-imaging costs, net154141
Other407287
Deferred charges and other assets, net$2,668$2,201

Amortization expense for the deferred charges and other assets shown above was $542 million, $489 million, and $498 million for the years ended December 31, 2015, 2014, and 2013, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES

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

Accrued ExpensesOther Long- Term Liabilities
December 31,
2015201420152014
Defined benefit plan liabilities (see Note 13)$40$48$719$792
Wage and other employee-related liabilities292294100104
Uncertain income tax position liabilities (see Note 15) (a)——148316
Environmental liabilities2726231269
Accrued interest expense9688——
Asset retirement obligations19206471
Other accrued liabilities80120349387
Accrued expenses and other long-term liabilities$554$596$1,611$1,939

(a) As of December 31, 2015, our net liability for uncertain tax positions, including related penalties and interest, was $391 million. Of this amount, $438 million was classified as a current liability and reflected in income taxes payable, and $148 million was classified as a long-term liability and reflected in other long-term liabilities as detailed in this table. These liabilities were reduced by a $195 million receivable classified as a long-term asset and reflected in “deferred charges and other assets, net.” 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.

During the years ended December 31, 2015, 2014, and 2013, there were no significant changes in our environmental liabilities or asset retirement obligations. See Note 2 for further information regarding the 2014 addition to our asset retirement obligations related to our Aruba Refinery. There are no assets that are legally restricted for purposes of settling our asset retirement obligations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.DEBT AND CAPITAL LEASE OBLIGATIONS

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

Final MaturityDecember 31,
20152014
Bank credit facilitiesVarious$175$—
Senior Notes:
3.65%2025600—
4.5%2015—400
4.9%2045650—
6.125%2017750750
6.125%2020850850
6.625%20371,5001,500
6.75%20372424
7.2%2017200200
7.45%2097100100
7.5%2032750750
8.75%2030200200
9.375%2019750750
10.5%2039250250
Debentures:
7.65%2026100100
8.75%2015—75
Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.0%2040300300
Accounts receivable sales facility2016100100
Other debt20161726
Net unamortized discount, including fair value adjustments(24)(21)
Total debt7,2926,354
Capital lease obligations, including unamortized fair value adjustments8532
Total debt and capital lease obligations7,3776,386
Less current portion(127)(606)
Debt and capital lease obligations, less current portion$7,250$5,780

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit Facilities

Revolver

In November 2015, we amended and restated our $3 billion revolving credit facility (the Revolver) with a group of financial institution lenders to, among other things, extend the maturity date from November 2018 to November 2020. We have the option to increase the aggregate commitments under the Revolver to $4.5 billion and we may request two additional one-year extensions, subject to certain conditions. The Revolver also provides for the issuance of letters of credit of up to $2.0 billion.

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 Revolver also requires payments for customary fees, including facility fees, letter of credit participation fees, and administrative agent fees. The interest rate and facility fees under the Revolver are subject to adjustment based upon the credit ratings assigned to our senior unsecured debt.

During the years ended December 31, 2015, 2014, and 2013, we had no borrowings or repayments under the Revolver.

VLP Revolver

In November 2015, VLP’s senior unsecured revolving credit facility agreement (the VLP Revolver) with a group of lenders was amended and restated to, among other things, extend the maturity date from December 2018 to November 2020 and increase the total commitment from $300 million to $750 million. 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 $1.0 billion and we 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 a letter of credit sub-facility of up to $100 million. VLP’s obligations under the VLP Revolver are jointly and severally guaranteed by all of VLP’s directly owned material subsidiaries. As of December 31, 2015, 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. As of December 31, 2015, the variable rate was 1.5 percent. The VLP Revolver requires payments for customary fees, including commitment fees, letter of credit participation fees, and administrative agent 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.

During the year ended December 31, 2015, VLP borrowed $200 million under the VLP Revolver in connection with VLP’s acquisition of the Houston and St. Charles Terminal Services Business and repaid $25 million on the VLP Revolver. During the years ended December 31, 2014 and 2013, VLP had no borrowings or repayments under the VLP Revolver. As of December 31, 2015, $175 million was outstanding under the VLP Revolver.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 2016.

During the years ended December 31, 2015, 2014, and 2013, we had no borrowings or repayments under the Canadian Revolver.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell eligible trade receivables on a revolving basis. In July 2015, we amended our agreement to decrease the facility from $1.5 billion to $1.4 billion and extended the maturity date to July 2016. 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, 2015 and 2014, $1.3 billion and $1.7 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. During the years ended December 31, 2015, 2014, and 2013, we had no proceeds from or repayments under the accounts receivable sales facility.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summary of Credit Facilities

We had outstanding borrowings and letters of credit issued under our credit facilities as follows (in millions):

December 31, 2015
Facility AmountMaturity DateBorrowingsLetters of CreditAvailable
Committed facilities:
Revolver$3,000November 2020$—$57$2,943
VLP Revolver$750November 2020$175$—$575
Canadian RevolverC$50November 2016C$—C$10C$40
Accounts receivable sales facility$1,400July 2016$100$—$992
Letter of credit facilities$275June 2016 and November 2016$—$9$266
Uncommitted facilities:
Letter of credit facilities$775N/A$—$87$688

In June 2015, one of our committed letter of credit facilities with a borrowing capacity of $300 million expired and was not renewed. The remaining committed letter of credit facility was amended in July 2015 to extend the maturity date to June 2016 and reduce the borrowing capacity from $250 million to $125 million.

In November 2015, we entered into a new committed letter of credit facility with a borrowing capacity of $150 million that matures in November 2016. Also in November 2015, our Canadian Revolver was amended to extend the maturity date to November 2016.

We also have various other uncommitted short-term bank credit facilities for which we are charged letter of credit issuance fees. These 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

$58 million of short-term debt in cash. After paying $19 million of fees, we recognized a $325 million nontaxable gain.

Non-Bank Debt

During the year ended December 31, 2015, we issued $600 million of 3.65 percent senior notes due March 15, 2025 and $650 million of 4.9 percent senior notes due March 15, 2045. Proceeds from these debt issuances totaled $1.246 billion. We also incurred $12 million of debt issuance costs. In addition, we made scheduled debt repayments of $400 million related to our 4.5 percent senior notes and $75 million related to our 8.75 percent debentures.

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

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

Capitalized Interest

For the years ended December 31, 2015, 2014, and 2013, capitalized interest was $71 million, $70 million, and $118 million, respectively.

Other Disclosures

Our 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, 2015 were as follows (in millions):

DebtCapital Lease Obligations
2016$117$17
201795016
2018—16
201975016
20201,02514
Thereafter4,47443
Net unamortized discount and fair value adjustments(24)—
Less interest expense—(37)
Total$7,292$85

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.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.

As of December 31, 2015, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess of one year were as follows (in millions):

2016$430
2017283
2018200
2019143
2020100
Thereafter311
Total minimum rental payments$1,467

Rental expense was as follows (in millions):

Year Ended December 31,
201520142013
Minimum rental expense$732$618$588
Contingent rental expense1054347
Total rental expense$837$661$635

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 recently, one of these companies assumed the ongoing remediation in the Village pursuant to a federal court order. We had previously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The parties involved in the initial response may have further claims between themselves for costs already incurred. We also continue to be engaged in site assessment and interim measures at the adjacent shutdown refinery site, which we acquired as part of an acquisition in 2005, and we are in litigation with the Illinois EPA and other potentially responsible parties relating to the remediation of the site. In each of these matters, we have various defenses and rights for contribution from the other responsible parties. We have recorded a liability for our own expected contribution obligations. However, because of the unpredictable nature of these cleanups, the methodology for allocation of liabilities and the state of Illinois’ failure to directly sue third parties responsible for historic contamination at the site, it is reasonably possible that we could incur a loss in a range of $0 to $200 million in excess of the amount of our accrual to ultimately resolve these matters. Factors underlying this estimated range are expected to change from time to time, and actual results may vary significantly from this estimate.

Litigation Matters

We are party to claims and legal proceedings arising in the ordinary course of business. We have not recorded a loss contingency liability with respect to some of these matters because we have determined that it is remote that a loss has been incurred. For other matters, we have recorded a loss contingency liability where we have determined that it is probable that a loss has been incurred and that the loss is reasonably estimable. These loss contingency liabilities are not material to our financial position. We re-evaluate and update our loss contingency liabilities as matters progress over time, and we believe that any changes to the recorded liabilities will not be material to our financial position, results of operations, or liquidity.

Tax Matters

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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.EQUITY

Share Activity

Activity in the number of shares of common stock and treasury stock was as follows (in millions):

Common StockTreasury Stock
Balance as of December 31, 2012673(121)
Transactions in connection with stock-based compensation plans:
Stock issuances—6
Stock purchases—(6)
Stock purchases under purchase program—(17)
Balance as of December 31, 2013673(138)
Transactions in connection with stock-based compensation plans:
Stock issuances—4
Stock purchases—(2)
Stock purchases under purchase program—(23)
Balance as of December 31, 2014673(159)
Transactions in connection with stock-based compensation plans:
Stock issuances—4
Stock purchases—(3)
Stock purchases under purchase program—(42)
Balance as of December 31, 2015673(200)

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, 2015 or 2014.

Treasury Stock

We purchase shares of our common stock as authorized under our common stock purchase program (described below) and to meet our obligations under employee stock-based compensation plans.

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 had no expiration date. We completed the $6 billion program during 2013 and the $3 billion program during 2015. On July 13, 2015, our board of directors authorized us to purchase an additional $2.5 billion of our outstanding common stock with no expiration date. During the years ended December 31, 2015, 2014, and 2013, we purchased $2.7 billion, $1.2 billion, and $692 million, respectively, of our common stock under our programs. As of December 31, 2015, we have approvals under the $2.5 billion program to purchase approximately $1.3 billion of our common stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Common Stock Dividends

On January 21, 2016, our board of directors declared a quarterly cash dividend of $0.60 per common share payable March 3, 2016 to holders of record at the close of business on February 9, 2016.

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

The tax effects allocated to each component of other comprehensive income (loss) were as follows (in millions):

Before-Tax AmountTax Expense (Benefit)Net Amount
Year Ended December 31, 2015:
Foreign currency translation adjustment$(606)$—$(606)
Pension and other postretirement benefits:
Gain (loss) arising during the year related to:
Net actuarial gain501535
Prior service cost(22)(8)(14)
Amounts reclassified into income related to:
Net actuarial loss622240
Prior service credit(40)(14)(26)
Curtailment and settlement725
Net gain on pension and other postretirement benefits571740
Other comprehensive loss$(549)$17$(566)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Before-Tax AmountTax Expense (Benefit)Net Amount
Year Ended December 31, 2014:
Foreign currency translation adjustment$(407)$—$(407)
Pension and other postretirement benefits:
Loss arising during the year related to:
Net actuarial loss(471)(162)(309)
Prior service cost(1)(1)—
Amounts reclassified into income related to:
Net actuarial loss341222
Prior service credit(40)(14)(26)
Curtailment and settlement3—3
Net loss on pension and other postretirement benefits(475)(165)(310)
Derivative instruments designated and qualifying as cash flow hedges:
Net loss arising during the year(1)—(1)
Net loss reclassified into income211
Net gain on cash flow hedges11—
Other comprehensive loss$(881)$(164)$(717)
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 gain367125242
Plan amendments371130241
Amounts reclassified into income related to:
Net actuarial loss572037
Prior service credit(33)(12)(21)
Settlement1—1
Net gain on pension and other postretirement benefits763263500
Derivative instruments designated and qualifying as cash flow hedges:
Net loss arising during the year(4)(2)(2)
Net loss reclassified into income211
Net loss on cash flow hedges(2)(1)(1)
Other comprehensive income$663$262$401

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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 AdjustmentDefined Benefit Plan ItemsGains and (Losses) on Cash Flow HedgesTotal
Balance as of December 31, 2012$665$(558)$1$108
Other comprehensive income (loss) before reclassifications(98)483(2)383
Amounts reclassified from accumulated other comprehensive income (loss)—17118
Net other comprehensive income (loss)(98)500(1)401
Separation of retail business(159)——(159)
Balance as of December 31, 2013408(58)—350
Other comprehensive loss before reclassifications(407)(309)(1)(717)
Amounts reclassified from accumulated other comprehensive income (loss)—(1)1—
Net other comprehensive loss(407)(310)—(717)
Balance as of December 31, 20141(368)—(367)
Other comprehensive income (loss) before reclassifications(606)21—(585)
Amounts reclassified from accumulated other comprehensive income (loss)—19—19
Net other comprehensive income (loss)(606)40—(566)
Balance as of December 31, 2015$(605)$(328)$—$(933)

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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) ComponentsAffected Line Item in the Statement of Income
Year Ended December 31,
201520142013
Amortization of items related to defined benefit pension plans:
Net actuarial loss$(62)$(34)$(57)(a)
Prior service credit404033(a)
Curtailment and settlement(7)(3)(1)(a)
(29)3(25)Total before tax
10(2)8Tax (expense) benefit
$(19)$1$(17)Net of tax
Losses on cash flow hedges:
Commodity contracts$—$(2)$(2)Cost of sales
—(2)(2)Total before tax
—11Tax benefit
$—$(1)$(1)Net of tax
Total reclassifications for the year$(19)$—$(18)Net of tax
(a)These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost, as further discussed in Note 13. Net periodic benefit cost is reflected in operating expenses and general and administrative expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.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.

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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 PlansOther Postretirement Benefit Plans
December 31,December 31,
2015201420152014
Changes in benefit obligation:
Benefit obligation as of beginning of year$2,450$1,914$361$324
Service cost10912087
Interest cost98911415
Participant contributions——87
Plan amendments222——
Benefits paid(169)(109)(27)(30)
Actuarial (gain) loss(138)440(26)37
Other(7)(8)(2)1
Benefit obligation as of end of year$2,365$2,450$336$361
Changes in plan assets(a):
Fair value of plan assets as of beginning of year$1,978$1,909$—$—
Actual return on plan assets19139——
Valero contributions126461820
Participant contributions——87
Benefits paid(169)(109)(27)(30)
Other(7)(7)13
Fair value of plan assets as of end of year$1,947$1,978$—$—
Reconciliation of funded status(a):
Fair value of plan assets as of end of year$1,947$1,978$—$—
Less benefit obligation as of end of year2,3652,450336361
Funded status as of end of year$(418)$(472)$(336)$(361)
Accumulated benefit obligation$2,240$2,354n/an/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 19 for the assets associated with certain U.S. nonqualified pension plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts recognized in our balance sheet for our pension and other postretirement benefits plans as of December 31, 2015 and 2014 include (in millions):

Pension PlansOther Postretirement Benefit Plans
2015201420152014
Deferred charges and other assets, net$5$7$—$—
Accrued expenses(20)(28)(20)(20)
Other long-term liabilities(403)(451)(316)(341)
$(418)$(472)$(336)$(361)

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,
20152014
Projected benefit obligation$2,169$2,288
Accumulated benefit obligation2,0702,217
Fair value of plan assets1,7471,812

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

Pension BenefitsOther Postretirement Benefits
2016$131$20
201713221
201814122
201919022
202016622
2021-2025913112

We plan to contribute approximately $36 million to our pension plans and $20 million to our other postretirement benefit plans during 2016.

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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 PlansOther Postretirement Benefit Plans
Year Ended December 31,Year Ended December 31,
201520142013201520142013
Components of net periodic benefit cost:
Service cost$109$120$137$8$7$12
Interest cost989186141518
Expected return on plan assets(133)(133)(131)———
Amortization of:
Prior service credit(22)(22)(19)(18)(18)(14)
Net actuarial (gain) loss623557—(1)—
Special charges (credits)73(5)———
Net periodic benefit cost$121$94$125$4$3$16

Amortization of prior service 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 (gain) 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 PlansOther Postretirement Benefit Plans
Year Ended December 31,Year Ended December 31,
201520142013201520142013
Net gain (loss) arising during the year:
Net actuarial gain (loss)$24$(434)$290$26$(37)$77
Prior service cost(22)(1)————
Remeasurement due to plan amendments——328——43
Net (gain) loss reclassified into income:
Net actuarial (gain) loss623557—(1)—
Prior service credit(22)(22)(19)(18)(18)(14)
Curtailment and settlement loss731———
Total changes in other comprehensive income (loss)$49$(419)$657$8$(56)$106

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The pre-tax amounts in accumulated other comprehensive income as of December 31, 2015 and 2014 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):

Pension PlansOther Postretirement Benefit Plans
2015201420152014
Prior service credit$(166)$(210)$(75)$(92)
Net actuarial (gain) loss783876(31)(6)
Total$617$666$(106)$(98)

The following pre-tax amounts included in accumulated other comprehensive income as of December 31, 2015 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2016 (in millions):

Pension PlansOther Postretirement Benefit Plans
Amortization of prior service credit$(20)$(16)
Amortization of net actuarial (gain) loss49(1)
Total$29$(17)

The weighted-average assumptions used to determine the benefit obligations as of December 31, 2015 and 2014 were as follows:

Pension PlansOther Postretirement Benefit Plans
2015201420152014
Discount rate4.45%4.10%4.53%4.13%
Rate of compensation increase3.79%3.78%—%—%

The discount rate assumption used to determine the benefit obligations as of December 31, 2015 and 2014 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, 2015, 2014, and 2013 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

settle our pension and other postretirement benefit plan liabilities as of those dates. We believe that the yields associated with the bonds used to develop this yield curve reflect the current level of interest rates.

The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2015, 2014, and 2013 were as follows:

Pension PlansOther Postretirement Benefit Plans
201520142013201520142013
Discount rate4.10%4.92%4.33%4.13%4.88%4.19%
Expected long-term rate of return on plan assets7.29%7.61%7.62%—%—%—%
Rate of compensation increase3.78%3.81%3.73%—%—%—%

The assumed health care cost trend rates as of December 31, 2015 and 2014 were as follows:

20152014
Health care cost trend rate assumed for the next year7.29%7.36%
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 rate20262020

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% Increase1% Decrease
Effect on total of service and interest cost components$—$—
Effect on accumulated postretirement benefit obligation3(2)

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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, 2015 and 2014 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 UsingTotal as of December 31, 2015
Level 1Level 2Level 3
Equity securities:
U.S. companies(a)$503$—$—$503
International companies158——158
Preferred stock2——2
Mutual funds:
International growth89——89
Index funds(b)202——202
Corporate debt instruments—279—279
Government securities:
U.S. Treasury securities57——57
Other government securities—101—101
Common collective trusts—403—403
Private fund—37—37
Insurance contracts—19—19
Interest and dividends receivable5——5
Cash and cash equivalents4943—92
Total$1,065$882$—$1,947

See notes on page 98.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements UsingTotal as of December 31, 2014
Level 1Level 2Level 3
Equity securities:
U.S. companies(a)$541$—$—$541
International companies144——144
Preferred stock11—2
Mutual funds:
International growth119——119
Index funds(b)199——199
Corporate debt instruments—263—263
Government securities:
U.S. Treasury securities71——71
Other government securities—100—100
Common collective trusts—379—379
Private fund—40—40
Insurance contracts—18—18
Interest and dividends receivable5——5
Cash and cash equivalents7522—97
Total$1,155$823$—$1,978
(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. 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. As of December 31, 2015, the target allocations for plan assets are 70 percent equity securities and 30 percent fixed income investments.

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 $65 million, $61 million, and $62 million for the years ended December 31, 2015, 2014, and 2013, respectively.

14.STOCK-BASED COMPENSATION

Overview

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, 2015, 12,109,301 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,
201520142013
Stock-based compensation expense:
Restricted stock$47$43$49
Performance awards111511
Stock options124
Total stock-based compensation expense$59$60$64
Tax benefit recognized on stock-based compensation expense$21$21$22
Tax benefit realized for tax deductions resulting from exercises and vestings666466
Effect of tax deductions in excess of recognized stock-based compensation expense reported as a financing cash flow444747

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

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 vests in equal annual installments over a period of three years beginning one year after the date of grant. The fair value of each restricted stock per share is equal to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

market price of our common stock. A summary of the status of our restricted stock awards is presented in the table below.

Number of SharesWeighted- Average Grant-Date Fair Value Per Share
Nonvested shares as of January 1, 20151,758,150$41.96
Granted829,21370.07
Vested(1,016,862)41.72
Forfeited(19,061)41.42
Nonvested shares as of December 31, 20151,551,44057.15

As of December 31, 2015, there was $55 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 following table reflects activity related to our restricted stock (in millions, except per share data):

Year Ended December 31,
201520142013
Weighted-average grant-date fair value per share of restricted stock granted$70.07$49.40$39.55
Fair value of restricted stock vested696074

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 grant date principally using a Monte Carlo simulation model.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Nonvested AwardsWeighted- Average Grant-Date Fair Value Per Share
Awards outstanding as of January 1, 2015614,390$42.06
Granted183,29988.97
Vested(388,561)38.77
Forfeited(703)48.57
Awards outstanding as of December 31, 2015408,42566.23

As of December 31, 2015, there was $16 million of unrecognized compensation cost related to outstanding unvested performance awards, which will be recognized during 2016.

Performance awards converted during the year ended December 31, 2015 were as follows:

Vested Awards ConvertedActual Conversion RateNumber of Shares Issued
2011 awards213,299166.7%355,576
2012 awards96,845200.0%193,690
2013 awards78,417200.0%156,834
Total388,561706,100
15.INCOME TAXES

Income Tax Expense

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

Year Ended December 31,
201520142013
U.S. operations$5,327$4,677$3,531
International operations644875445
Income from continuing operations before income tax expense$5,971$5,552$3,976

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a reconciliation of income tax expense computed by applying statutory income tax rates as reflected in the table below to actual income tax expense related to continuing operations (in millions):

Year Ended December 31, 2015
U.S.InternationalTotal
Income tax expense at statutory rates$1,864$92$1,956
U.S. state and Canadian provincial tax expense, net of federal income tax effect4573118
Permanent differences:
Manufacturing deduction(102)—(102)
Other(18)(5)(23)
Change in tax law—(17)(17)
Tax effects of income associated with noncontrolling interests(39)—(39)
Other, net(25)2(23)
Income tax expense$1,725$145$1,870
Year Ended December 31, 2014
U.S.InternationalTotal
Income tax expense at statutory rates$1,637$145$1,782
U.S. state and Canadian provincial tax expense, net of federal income tax effect6271133
Permanent differences:
Manufacturing deduction(74)—(74)
Other(16)1(15)
Tax effects of income associated with noncontrolling interests(28)—(28)
Other, net(22)1(21)
Income tax expense$1,559$218$1,777

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Year Ended December 31, 2013
U.S.InternationalTotal
Income tax expense at statutory rates$1,236$84$1,320
U.S. state and Canadian provincial tax expense, net of federal income tax effect622486
Permanent differences:
Manufacturing deduction(36)—(36)
Nontaxable gain on disposition (See Notes 3 and 10)(114)—(114)
Other10(1)9
Change in tax law(10)(22)(32)
Tax effects of income associated with noncontrolling interests(3)—(3)
Other, net44(20)24
Income tax expense$1,189$65$1,254

Statutory income tax rates applicable to the countries in which we operate were as follows:

Year Ended December 31,
201520142013
U.S.35%35%35%
Canada15%15%15%
U.K.20%21%23%
Ireland13%13%13%
Aruba7%7%7%

There was no income tax expense or benefit related to discontinued operations for the years ended December 31, 2015, 2014, and 2013.

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, 2015
U. S.InternationalTotal
Current:
Country$1,513$64$1,577
U.S. state / Canadian provincial8543128
Total current1,5981071,705
Deferred:
Country1438151
U.S. state / Canadian provincial(16)3014
Total deferred12738165
Income tax expense$1,725$145$1,870
Year Ended December 31, 2014
U. S.InternationalTotal
Current:
Country$1,196$53$1,249
U.S. state / Canadian provincial592483
Total current1,255771,332
Deferred:
Country26894362
U.S. state / Canadian provincial364783
Total deferred304141445
Income tax expense$1,559$218$1,777
Year Ended December 31, 2013
U. S.InternationalTotal
Current:
Country$635$53$688
U.S. state / Canadian provincial362965
Total current67182753
Deferred:
Country459(12)447
U.S. state / Canadian provincial59(5)54
Total deferred518(17)501
Income tax expense$1,189$65$1,254

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,
20152014
Deferred income tax assets:
Tax credit carryforwards$33$37
Net operating losses (NOLs)423436
Inventories72160
Compensation and employee benefit liabilities331358
Environmental liabilities8092
Other139178
Total deferred income tax assets1,0781,261
Less: Valuation allowance(435)(393)
Net deferred income tax assets643868
Deferred income tax liabilities:
Property, plant, and equipment6,7256,682
Deferred turnaround costs394356
Inventories287426
Investments226152
Other7173
Total deferred income tax liabilities7,7037,689
Net deferred income tax liabilities$7,060$6,821

We had the following income tax credit and loss carryforwards as of December 31, 2015 (in millions):

AmountExpiration
U.S. state income tax credits$512016 through 2027
U.S. state NOLs (gross amount)7,3022016 through 2035
International NOLs1,465Unlimited

We have recorded a valuation allowance as of December 31, 2015 and 2014 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 2015, the valuation allowance increased by $42 million, primarily due to increases in U.S. state NOLs. The realization of net deferred income tax assets recorded as of December 31, 2015 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, 2015, such amounts will be allocated as follows (in millions):

Income tax benefit$429
Additional paid-in capital6
Total$435

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, 2015, the cumulative undistributed earnings of these subsidiaries were approximately $3.2 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,
201520142013
Balance as of beginning of year$989$950$341
Additions based on tax positions related to the current year363564
Additions for tax positions related to prior years83118576
Reductions for tax positions related to prior years(82)(67)(26)
Reductions for tax positions related to the lapse of applicable statute of limitations(3)(1)(4)
Settlements(59)(46)(1)
Balance as of end of year$964$989$950

As of December 31, 2015, the balance in unrecognized tax benefits includes $570 million of tax refunds that we intend to claim by amending various of our income tax returns for 2005 through 2015. 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, 2015, 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, 2015 and 2014 that are reflected in Note 9 (in millions):

December 31,
20152014
Unrecognized tax benefits$964$989
Tax refund claim not recognized in our financial statements(570)(554)
Reduction of deferred tax asset(28)—
Penalties, interest (net of U.S. federal and state income tax effect), and the U.S. federal income tax effect of state unrecognized tax benefits2549
Uncertain tax position liabilities$391$484

As of December 31, 2015 and 2014, there were $757 million and $768 million, respectively, of unrecognized tax benefits that if recognized would affect our annual effective tax rate.

During the years ended December 31, 2015, 2014, and 2013, we recognized $5 million, $2 million, and $12 million, respectively, in penalties and interest, which are reflected within income tax expense. Accrued penalties and interest totaled $117 million and $141 million as of December 31, 2015 and 2014, respectively, excluding the U.S. federal and state income tax effects related to interest.

During the next 12 months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits, excluding interest, by approximately $370 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.

Tax Returns Under Audit

As of December 31, 2015, our tax years for 2008 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.

During the year ended December 31, 2015, we settled the audits related to our 2004 through 2007 tax years consistent with the recorded amounts of uncertain tax position liabilities associated with those audits.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.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,
201520142013
Participating SecuritiesCommon StockParticipating SecuritiesCommon StockParticipating SecuritiesCommon Stock
Earnings per common share from continuing operations:
Net income attributable to Valero stockholders from continuing operations$3,990$3,694$2,714
Less dividends paid:
Common stock845552460
Participating securities322
Undistributed earnings$3,142$3,140$2,252
Weighted-average common shares outstanding249725263542
Earnings per common share from continuing operations:
Distributed earnings$1.70$1.70$1.05$1.05$0.85$0.85
Undistributed earnings6.306.305.955.954.134.13
Total earnings per common share from continuing operations$8.00$8.00$7.00$7.00$4.98$4.98
Earnings per common share from continuing operations – assuming dilution:
Net income attributable to Valero stockholders from continuing operations$3,990$3,694$2,714
Weighted-average common shares outstanding497526542
Common equivalent shares:
Stock options224
Performance awards and nonvested restricted stock122
Weighted-average common shares outstanding – assuming dilution500530548
Earnings per common share from continuing operations – assuming dilution$7.99$6.97$4.96

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.SEGMENT INFORMATION

We have two reportable segments, refining and ethanol, as of December 31, 2015. 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 and marketing operations in the U.S., Canada, the U.K., Aruba, and Ireland. Our ethanol segment includes ethanol and marketing operations in the U.S. 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):

RefiningEthanolRetailCorporateTotal
Year ended December 31, 2015:
Total segment revenues$84,521$3,434$—$—$87,955
Intersegment elimination—(151)——(151)
Operating revenues from external customers$84,521$3,283$—$—$87,804
Lower of cost or market inventory valuation adjustment$740$50$—$—$790
Depreciation and amortization expense1,74550—471,842
Operating income (loss)6,973142—(757)6,358
Total expenditures for long-lived assets2,25467—292,350
Year ended December 31, 2014:
Total segment revenues$126,004$4,940$—$—$130,944
Intersegment elimination—(100)——(100)
Operating revenues from external customers$126,004$4,840$—$—$130,844
Depreciation and amortization expense$1,597$49$—$44$1,690
Operating income (loss)5,884786—(768)5,902
Total expenditures for long-lived assets2,73042—302,802
Year ended December 31, 2013:
Total segment revenues$131,940$5,242$3,896$—$141,078
Intersegment elimination(2,876)(128)——(3,004)
Operating revenues from external customers$129,064$5,114$3,896$—$138,074
Depreciation and amortization expense$1,566$45$41$68$1,720
Operating income (loss)4,21149181(826)3,957
Total expenditures for long-lived assets2,5953362652,755

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,
201520142013
Refining:
Gasolines and blendstocks$38,983$56,846$57,806
Distillates38,09357,52156,921
Petrochemicals1,8243,7594,281
Lubes and asphalts8741,3971,643
Other product revenues4,7476,4818,413
Total refining operating revenues84,521126,004129,064
Ethanol:
Ethanol2,6284,1924,245
Distillers grains655648869
Total ethanol operating revenues3,2834,8405,114
Retail:
Fuel sales (gasoline and diesel)——3,226
Merchandise sales and other——524
Home heating oil——146
Total retail operating revenues——3,896
Total operating revenues$87,804$130,844$138,074

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,
201520142013
U.S.$60,319$91,499$100,418
Canada6,84110,4109,974
U.K. and Ireland11,23214,18213,675
Other countries9,41214,75314,007
Total operating revenues$87,804$130,844$138,074

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,
20152014
U.S.$25,210$24,653
Canada1,8242,161
U.K.1,1311,199
Aruba5759
Ireland2022
Total long-lived assets$28,242$28,094

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

December 31,
20152014
Refining$38,142$40,103
Ethanol1,016954
Corporate5,1854,493
Total assets$44,343$45,550

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)

18.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,
201520142013
Decrease (increase) in current assets:
Receivables, net$1,294$2,753$(753)
Inventories(222)(1,014)(13)
Income taxes receivable(104)(23)10
Prepaid expenses and other(45)(32)2
Increase (decrease) in current liabilities:
Accounts payable(1,787)(3,149)977
Accrued expenses(40)3853
Taxes other than income taxes(74)(64)337
Income taxes payable(328)(319)309
Changes in current assets and current liabilities$(1,306)$(1,810)$922

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.

Noncash investing and financing activities for the year ended December 31, 2015 included the recognition of a capital lease asset and related obligation associated with an agreement for storage tanks near one of our refineries. Noncash financing activities for the year ended December 31, 2015 also included an accrual of $25 million for the purchase of 347,438 shares of our common stock, which was settled in early January 2016.

There were no significant noncash investing activities for the years ended December 31, 2014 and 2013.

There were no significant noncash financing activities for the year ended December 31, 2014. Noncash financing activities for the year ended December 31, 2013 included the exchange of CST’s senior unsecured

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 10.

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

Year Ended December 31,
201520142013
Interest paid in excess of amount capitalized$416$392$361
Income taxes paid, net2,0931,624387

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

19.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, 2015 and 2014.

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, 2015
Total Gross Fair ValueEffect of Counter- party NettingEffect of Cash Collateral NettingNet Carrying Value on Balance SheetCash Collateral Paid or Received Not Offset
Fair Value Hierarchy
Level 1Level 2Level 3
Assets:
Commodity derivative contracts$649$33$—$682$(557)$(12)$113$—
Foreign currency contracts3——3n/an/a3n/a
Investments of certain benefit plans64—1175n/an/a75n/a
Total$716$33$11$760$(557)$(12)$191
Liabilities:
Commodity derivative contracts$522$35$—$557$(557)$—$—$(31)
Environmental credit obligations—2—2n/an/a2n/a
Physical purchase contracts—6—6n/an/a6n/a
Total$522$43$—$565$(557)$—$8

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2014
Total Gross Fair ValueEffect of Counter- party NettingEffect of Cash Collateral NettingNet Carrying Value on Balance SheetCash Collateral Paid or Received Not Offset
Fair Value Hierarchy
Level 1Level 2Level 3
Assets:
Commodity derivative contracts$3,096$36$—$3,132$(2,907)$(99)$126$—
Physical purchase contracts—1—1n/an/a1n/a
Investments of certain benefit plans97—11108n/an/a108n/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)
Environmental credit obligations—14—14n/an/a14n/a
Physical purchase contracts—5—5n/an/a5n/a
Total$2,886$53$—$2,939$(2,907)$(13)$19

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 20, some of these contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but because they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.
•Physical purchase contracts represent the fair value of fixed-price corn purchase contracts. The fair values of these purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.
•Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.
•Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.

•Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily RINs in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California Global Warming Solutions Act (the California cap-and-trade system, also known as AB 32) and Quebec’s Regulation respecting the cap-and-trade system for greenhouse gas emission allowances (the Quebec cap-and-trade system), (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. These programs are further described in Note 20 under “Environmental Compliance Program Price Risk.” The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using the market approach based on quoted prices from an independent pricing service.

There were no transfers between Level 1 and Level 2 for assets and liabilities held as of December 31, 2015 and 2014 that were measured at fair value on a recurring basis.

There was no activity during the years ended December 31, 2015, 2014, and 2013 related to the fair value amounts categorized in Level 3 as of December 31, 2015, 2014, and 2013.

Nonrecurring Fair Value Measurements

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2015 and 2014.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Financial Instruments

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

December 31, 2015December 31, 2014
Carrying AmountFair ValueCarrying AmountFair Value
Financial assets:
Cash and temporary cash investments$4,114$4,114$3,689$3,689
Financial liabilities:
Debt (excluding capital leases)7,2927,7596,3547,562

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).
20.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 19), 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 our 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.

•Fair Value Hedges – Fair value hedges are used, from time to time, 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 exceed our previous year-end LIFO inventory levels. As of December 31, 2015, we had no outstanding commodity derivative instruments that were entered into as fair value hedges.
•Cash Flow Hedges – Cash flow hedges are used, from time to time, 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, 2015, 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 qualify as hedging instruments for accounting purposes.

As of December 31, 2015, 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 Instrument20162017
Crude oil and refined products:
Swaps – long11,727—
Swaps – short11,559—
Futures – long73,746—
Futures – short85,999—
Corn:
Futures – long19,34510
Futures – short39,99575
Physical contracts – long18,33665
Soybean oil:
Futures – long83,340—
Futures – short128,760—

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, 2015, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units).

Notional Contract Volumes by Year of Maturity
Derivative Instrument20162017
Crude oil and refined products:
Swaps – long7,739—
Swaps – short7,739—
Futures – long38,732500
Futures – short39,279—
Options – long10,800—
Options – short12,400—
Natural gas:
Futures – long1,400—

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, 2015 and 2014, or during the years ended December 31, 2015, 2014, or 2013.

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, 2015, we had commitments to purchase $292 million of U.S. dollars. These commitments matured on or before January 31, 2016 resulting in a gain of $10 million in the first quarter of 2016.

Environmental Compliance Program Price Risk

We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. Certain of these programs require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2015, 2014, and 2013, the cost of meeting our obligations under these compliance programs was $440 million, $372 million, and $517 million, respectively. These amounts are reflected in cost of sales.

Effective January 1, 2015, we became subject to additional requirements under GHG emission programs, including the cap-and-trade systems, as discussed in Note 19. Under these cap-and-trade systems, we purchase various GHG emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we have recovered the majority of these costs from our customers for the year ended December 31, 2015 and expect to continue to recover the majority of these costs in the future. For the years ended December 31, 2015, 2014, and 2013, the net cost of meeting our obligations under these compliance programs was immaterial.

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of December 31, 2015 and 2014 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 19 for additional information related to the fair values of our derivative instruments.

As indicated in Note 19, 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 LocationDecember 31, 2015
Asset DerivativesLiability Derivatives
Derivatives not designated as hedging instruments
Commodity contracts:
FuturesReceivables, net$648$522
SwapsReceivables, net3033
OptionsReceivables, net42
Physical purchase contractsInventories—6
Foreign currency contractsReceivables, net3—
Total$685$563

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Balance Sheet LocationDecember 31, 2014
Asset DerivativesLiability Derivatives
Derivatives not designated as hedging instruments
Commodity contracts:
FuturesReceivables, net$3,096$2,886
SwapsReceivables, net3431
OptionsReceivables, net23
Physical purchase contractsInventories15
Total$3,133$2,925

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 our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.

Effect of Derivative Instruments on Income 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 RelationshipsLocation of Gain (Loss) Recognized in Income on DerivativesYear Ended December 31,
201520142013
Commodity contracts:
Loss recognized in income on derivativesCost of sales$—$(42)$(12)
Gain recognized in income on hedged itemCost of sales—4218
Gain recognized in income on derivatives (ineffective portion)Cost of sales——6

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2015, 2014, and 2013. 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, 2015, 2014, and 2013.

Derivatives in Cash Flow Hedging RelationshipsLocation of Gain (Loss) Recognized in Income on DerivativesYear Ended December 31,
201520142013
Commodity contracts:
Loss recognized in OCI on derivatives (effective portion)$—$(1)$(4)
Loss reclassified from accumulated OCI into income (effective portion)Cost of sales—(2)(2)
Gain (loss) recognized in income on derivatives (ineffective portion)Cost of sales—(1)21

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, 2015, 2014, and 2013. There were no cumulative after-tax gains or losses on cash flow hedges remaining in accumulated other comprehensive income as of December 31, 2015. For the years ended December 31, 2015, 2014, and 2013, there were no amounts reclassified from accumulated other comprehensive income into income as a result of the discontinuance of cash flow hedge accounting.

Derivatives Designated as Economic Hedges and Other Derivative InstrumentsLocation of Gain Recognized in Income on DerivativesYear Ended December 31,
201520142013
Commodity contractsCost of sales$377$693$193
Foreign currency contractsCost of sales494014
Trading DerivativesLocation of Gain (Loss) Recognized in Income on DerivativesYear Ended December 31,
201520142013
Commodity contractsCost of sales$45$38$21
RINs fixed-price contractsCost of sales——(20)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21.QUARTERLY FINANCIAL DATA (Unaudited)

The following table summarizes quarterly financial data for the years ended December 31, 2015 and 2014 (in millions, except per share amounts).

2015 Quarter Ended
March 31June 30September 30December 31 (a)
Operating revenues$21,330$25,118$22,579$18,777
Operating income1,4952,0782,139646
Net income9681,3651,373395
Net income attributable to Valero Energy Corporation stockholders9641,3511,377298
Earnings per common share1.872.672.790.62
Earnings per common share – assuming dilution1.872.662.790.62
2014 Quarter Ended
March 31June 30September 30December 31
Operating revenues33,66334,91434,40827,859
Operating income1,3511,0851,6701,796
Net income8365931,0621,220
Net income attributable to Valero Energy Corporation stockholders8285881,0591,155
Earnings per common share1.551.112.012.22
Earnings per common share – assuming dilution1.541.102.002.22
(a)Operating income for the quarter ended December 31, 2015 reflects a noncash lower of cost or market inventory valuation adjustment of $790 million, as described in Note 6.

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