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 Energy Corporation. Our management evaluated the effectiveness of Valero’s internal control over financial reporting as of December 31, 2016. 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, 2016, 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 68 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 as of December 31, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PCAOB, Valero Energy Corporation’s internal control over financial reporting as of December 31, 2016, 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 23, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

San Antonio, Texas

February 23, 2017

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Valero Energy Corporation:

We have audited Valero Energy Corporation’s internal control over financial reporting as of December 31, 2016, 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, 2016, 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, 2016 and 2015, 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, 2016, and our report dated February 23, 2017 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Antonio, Texas

February 23, 2017

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions of dollars, except par value)

December 31,
20162015
ASSETS
Current assets:
Cash and temporary cash investments$4,816$4,114
Receivables, net5,9014,464
Inventories5,7095,898
Income taxes receivable58218
Prepaid expenses and other316204
Total current assets16,80014,898
Property, plant, and equipment, at cost37,73336,907
Accumulated depreciation(11,261)(10,204)
Property, plant, and equipment, net26,47226,703
Deferred charges and other assets, net2,9012,626
Total assets$46,173$44,227
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and capital lease obligations$115$127
Accounts payable6,3574,907
Accrued expenses694554
Taxes other than income taxes1,0841,069
Income taxes payable78337
Total current liabilities8,3286,994
Debt and capital lease obligations, less current portion7,8867,208
Deferred income taxes7,3617,060
Other long-term liabilities1,7441,611
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 capital7,0887,064
Treasury stock, at cost; 222,000,024 and 200,462,208 common shares(12,027)(10,799)
Retained earnings26,36625,188
Accumulated other comprehensive loss(1,410)(933)
Total Valero Energy Corporation stockholders’ equity20,02420,527
Noncontrolling interests830827
Total equity20,85421,354
Total liabilities and equity$46,173$44,227

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(millions of dollars, except per share amounts)

Year Ended December 31,
201620152014
Operating revenues (a)$75,659$87,804$130,844
Costs and expenses:
Cost of sales (excluding the lower of cost or market inventory valuation adjustment)65,96273,861118,141
Lower of cost or market inventory valuation adjustment(747)790—
Operating expenses4,2074,2434,387
General and administrative expenses715710724
Depreciation and amortization expense1,8941,8421,690
Asset impairment loss56——
Total costs and expenses72,08781,446124,942
Operating income3,5726,3585,902
Other income, net564647
Interest and debt expense, net of capitalized interest(446)(433)(397)
Income from continuing operations before income tax expense3,1825,9715,552
Income tax expense7651,8701,777
Income from continuing operations2,4174,1013,775
Loss from discontinued operations——(64)
Net income2,4174,1013,711
Less: Net income attributable to noncontrolling interests12811181
Net income attributable to Valero Energy Corporation stockholders$2,289$3,990$3,630
Net income attributable to Valero Energy Corporation stockholders:
Continuing operations$2,289$3,990$3,694
Discontinued operations——(64)
Total$2,289$3,990$3,630
Earnings per common share:
Continuing operations$4.94$8.00$7.00
Discontinued operations——(0.12)
Total$4.94$8.00$6.88
Weighted-average common shares outstanding (in millions)461497526
Earnings per common share – assuming dilution:
Continuing operations$4.94$7.99$6.97
Discontinued operations——(0.12)
Total$4.94$7.99$6.85
Weighted-average common shares outstanding – assuming dilution (in millions)464500530
Dividends per common share$2.40$1.70$1.05
_______________________________________________
Supplemental information:
(a) Includes excise taxes on sales by certain of our international operations$5,493$5,980$5,901

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(millions of dollars)

Year Ended December 31,
201620152014
Net income$2,417$4,101$3,711
Other comprehensive loss:
Foreign currency translation adjustment(415)(606)(407)
Net gain (loss) on pension and other postretirement benefits(98)57(475)
Net gain on derivative instruments designated and qualifying as cash flow hedges——1
Other comprehensive loss before income tax expense (benefit)(513)(549)(881)
Income tax expense (benefit) related to items of other comprehensive loss(37)17(164)
Other comprehensive loss(476)(566)(717)
Comprehensive income1,9413,5352,994
Less: Comprehensive income attributable to noncontrolling interests12911181
Comprehensive income attributable to Valero Energy Corporation stockholders$1,812$3,424$2,913

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, 2013$7$7,187$(7,054)$18,970$350$19,460$486$19,946
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)
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, 201577,064(10,799)25,188(933)20,52782721,354
Net income———2,289—2,2891282,417
Dividends on common stock———(1,111)—(1,111)—(1,111)
Stock-based compensation expense—68———68—68
Transactions in connection with stock-based compensation plans:
Stock issuances—(89)95——6—6
Stock purchases——(61)——(61)—(61)
Stock purchases under purchase program——(1,262)——(1,262)—(1,262)
Distributions to noncontrolling interests——————(65)(65)
Other—45———45(61)(16)
Other comprehensive income (loss)————(477)(477)1(476)
Balance as of December 31, 2016$7$7,088$(12,027)$26,366$(1,410)$20,024$830$20,854

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of dollars)

Year Ended December 31,
201620152014
Cash flows from operating activities:
Net income$2,417$4,101$3,711
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense1,8941,8421,690
Lower of cost or market inventory valuation adjustment(747)790—
Asset impairment loss56——
Aruba Refinery asset retirement expense and other——63
Deferred income tax expense230165445
Changes in current assets and current liabilities976(1,306)(1,810)
Changes in deferred charges and credits and other operating activities, net(6)19142
Net cash provided by operating activities4,8205,6114,241
Cash flows from investing activities:
Capital expenditures(1,278)(1,618)(2,153)
Deferred turnaround and catalyst costs(718)(673)(649)
Investments in joint ventures(4)(141)(14)
Other investing activities, net(6)(55)(28)
Net cash used in investing activities(2,006)(2,487)(2,844)
Cash flows from financing activities:
Proceeds from debt issuances or borrowings2,1531,44628
Repayments of debt and capital lease obligations(1,475)(513)(204)
Proceeds from the exercise of stock options63447
Purchase of common stock for treasury(1,336)(2,838)(1,296)
Common stock dividends(1,111)(848)(554)
Proceeds from issuance of Valero Energy Partners LP common units—189—
Contributions from noncontrolling interests—512
Distributions to noncontrolling interests (public unitholders) of Valero Energy Partners LP(30)(20)(12)
Distributions to other noncontrolling interests(35)(25)—
Other financing activities, net(184)2549
Net cash used in financing activities(2,012)(2,545)(1,930)
Effect of foreign exchange rate changes on cash(100)(154)(70)
Net increase (decrease) in cash and temporary cash investments702425(603)
Cash and temporary cash investments at beginning of year4,1143,6894,292
Cash and temporary cash investments at end of year$4,816$4,114$3,689

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

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 refiner and ethanol producer. We own 15 petroleum refineries located in the United States (U.S.), Canada, and the United Kingdom (U.K.) with a combined throughput capacity of approximately 3.1 million barrels per day as of December 31, 2016. We sell our refined petroleum products in both the wholesale rack and bulk markets, and approximately 7,400 outlets carry the Valero®, Diamond Shamrock®, Shamrock®, Ultramar®, Beacon®, and Texaco® brand names in the U.S., Canada, the U.K., and Ireland. Most of our logistics assets support our refining operations, and some of these assets are owned by Valero Energy Partners LP (VLP). See Note 11 for further discussion about VLP. We also own 11 ethanol plants in the Mid-Continent region of the U.S. with a combined production capacity of approximately 1.4 billion gallons per year as of December 31, 2016. We sell our ethanol in the wholesale bulk market, and some of our logistics assets support our ethanol operations. We operated under two reportable segments, refining and ethanol. See Note 16 for additional information about our segments.

Basis of Presentation

General

These consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the rules and regulations of the Securities and Exchange Commission.

Reclassifications

Certain amounts reported as of December 31, 2015 have been reclassified to conform to the 2016 presentation, including the retrospective adoption of certain amendments to the Accounting Standards Codification (ASC) effective January 1, 2016. The adoption of Accounting Standards Update (ASU) No. 2015-15, “Interest–Imputation of Interest (Subtopic 835-30),” resulted in the reclassification of certain debt issuance costs from “deferred charges and other assets, net” to “debt and capital lease obligations, less current portion.” The adoption of ASU 2015-17, “Income Taxes (Topic 740)” resulted in the reclassification of current deferred income tax assets and current deferred income tax liabilities to noncurrent deferred income tax liabilities. The following table presents our previously reported balance sheet line items retrospectively adjusted for the adoption of these pronouncements (in millions):

December 31, 2015
Previously ReportedReclassificationsCurrently Reported
Assets
Current deferred income taxes$74$(74)$—
Deferred charges and other assets, net2,668(42)2,626
Liabilities
Current deferred income taxes366(366)—
Debt and capital lease obligations, less current portion7,250(42)7,208
Deferred income taxes6,7682927,060

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Significant Accounting Policies

Principles of Consolidation

These financial statements include the accounts of Valero, our subsidiaries, and the accounts of partnerships and joint ventures that we control through an ownership interest greater than 50 percent or through a controlling financial interest with respect to our variable interest entities (VIEs). Our VIEs are described in Note 11. The ownership interests held by others is recorded as noncontrolling interests. Intercompany balances and transactions have been eliminated in consolidation. Investments in less than wholly owned entities where we have significant influence are accounted for using the equity method.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Cash and Temporary Cash Investments

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

Receivables

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

Inventories

Inventories are carried at the lower of cost or market. The cost of refinery feedstocks purchased for processing, refined petroleum 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 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;

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•income taxes receivable;
•investments in joint ventures accounted for under the equity method; and
•intangible assets.

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 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Foreign Currency Translation

The functional currency of each of our international operations is generally the respective local currency, which includes the Canadian dollar, 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 our refining and ethanol segments are recorded upon delivery and transfer of title to the products to our customers 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 in revenues. The amount of such taxes is provided in supplemental information 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 petroleum product exchange transactions to fulfill sales contracts with our customers by accessing refined petroleum products in markets where we do not operate our own refineries. These refined petroleum product exchanges are accounted for as exchanges of non-monetary assets, and no revenues are recorded on these transactions.

Product Shipping and Handling Costs

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

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. 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. These programs are further described in Note 19 under “Environmental Compliance Program Price Risk.”

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 18 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 vesting period established in the award.

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.

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 18.

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 with changes in fair value recognized currently in income. To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fair value and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for trading purposes. The cash flow effects of all of our derivative instruments are reflected in operating activities in the statements of cash flows.

Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We recently completed our evaluation of the provisions of this ASU and concluded that our adoption of the ASU will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. The majority of our revenues are generated from the sale

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of refined petroleum products and ethanol. These revenues are largely based on the current spot (market) prices of the products sold, which represents consideration specifically allocable to the products being sold on a given day, and we recognize those revenues upon delivery and transfer of title to the products to our customers. The time at which delivery and transfer of title occurs is the point when our control of the products is transferred to our customers and when our performance obligation to our customers is fulfilled. We will adopt this ASU effective January 1, 2018, and we expect to use the modified retrospective method of adoption as permitted by the ASU. Under that method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed. During 2017, we will develop our revenue disclosures and enhance our accounting systems.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330),” to simplify the measurement of inventory measured using the first-in, first-out or average cost methods. The provisions of this ASU require the inventory to be measured at the lower of cost and net realizable value rather than the lower of cost or market. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal, and transportation. The provisions of this ASU are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. The adoption of this ASU effective January 1, 2017 will not affect our financial position or results of operations since the majority of our inventory is stated at LIFO.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments–Overall (Subtopic 825-10),” to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this ASU effective January 1, 2018 will not affect our financial position or results of operations, but will result in revised disclosures.

In February 2016, the FASB issued a new accounting standard under ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We anticipate adopting the new standard on January 1, 2019. We recently completed our evaluation of the provisions of this standard, and a multi-disciplined implementation team has gained an understanding of the standard’s accounting and disclosure provisions. This team is developing enhanced contracting and lease evaluation processes and information systems to support such processes, as well as new and enhanced accounting systems to account for our leases and support the required disclosures. We continue to evaluate the effect that adopting this standard will have on our financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740),” to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The provisions of this ASU require an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory immediately when the transfer occurs. These provisions are effective for annual reporting

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

periods beginning after December 15, 2017, and interim reporting periods within those annual periods, with early adoption permitted. The provisions should be applied on a modified retrospective basis with a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption to recognize the income tax consequences of intra-entity transfers of assets that occurred before the adoption date. We adopted this ASU effective January 1, 2017 and it did not materially affect our financial position or results of operations; however, certain deferred charges associated with intra-entity transfers of assets other than inventory will be reported in our balance sheet primarily as a reduction to our deferred income tax liabilities.

In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810),” to provide guidance on how a reporting entity that is a single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual periods, with early adoption permitted. The provisions should be applied on a retrospective basis to all relevant prior periods beginning with the fiscal year in which the VIE guidance was adopted with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this ASU effective January 1, 2017 will not affect our financial position or results of operations.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The provisions of this ASU provide a more robust framework to use in determining when a set of assets and activities is a business by clarifying the requirements related to inputs, processes, and outputs. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. Due to its application to future acquisitions and disposals, the adoption of this ASU effective January 1, 2018 will not have any immediate effect on our financial position or results of operations.

2.ARUBA DISPOSITION

Effective October 1, 2016, we (i) transferred ownership of all of our assets in Aruba, other than certain hydrocarbon inventories and working capital, to Refineria di Aruba N.V., an entity wholly-owned by the Government of Aruba (GOA), (ii) settled our obligations under various agreements with the GOA, including agreements that required us to dismantle our leasehold improvements under certain conditions, and (iii) sold the working capital of our Aruba operations, including hydrocarbon inventories, to the GOA, CITGO Aruba Refining N.V. (CAR), and CITGO Petroleum Corporation (together with CAR and certain other affiliates, collectively, CITGO). We refer to this transaction as the “Aruba Disposition.” The agreements associated with the Aruba Disposition were finalized in September 2016, including approval of such agreements by the Aruba Parliament. We no longer own any assets or have any operations in Aruba.

The following narrative describes the events that occurred prior to or in connection with the Aruba Disposition.

•In May 2014, we abandoned our Aruba Refinery, except for the associated crude oil and refined petroleum products terminal assets that we continued to operate. As a result, the refinery’s results

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of operations have been presented in this report as discontinued operations for the year ended December 31, 2014.

The Aruba Refinery resided on land leased from the GOA and our agreements with the GOA required us to dismantle our leasehold improvements under certain conditions. Because of our May 2014 decision to abandon the refining assets, we believed the GOA would require us to dismantle those assets. As a result, we recognized an asset retirement obligation of $59 million, which was charged to expense during the second quarter of 2014 and was 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 did not expect to realize this tax benefit.

•In June 2016, we recognized an asset impairment loss of $56 million representing all of the remaining carrying value of our long-lived assets in Aruba. These assets were primarily related to our crude oil and refined petroleum products terminal and transshipment facility in Aruba (collectively, the Aruba Terminal), which were included in our refining segment. We recognized the impairment loss at that time because we concluded that it was more likely than not that we would ultimately transfer ownership of these assets to the GOA as a result of agreements entered into in June 2016 between the GOA and CITGO providing for, among other things, the GOA’s lease of those assets to CITGO. (See Note 18 for disclosure related to the method to determine fair value.) We had previously written off all of the carrying value of the long-lived assets of the refining operations (the Aruba Refinery) and recognized an asset retirement obligation upon the suspension of operations of those assets in 2012. Therefore, there was no other significant effect to our results of operations from the Aruba Disposition during the year ended December 31, 2016, except with respect to income taxes, which are discussed below. In addition, the net cash impact to us upon effectiveness of the Aruba Disposition on October 1, 2016, was not significant.
•In September 2016 and in connection with the Aruba Disposition, our U.S. subsidiaries were unable to collect outstanding debt obligations owed to them by our Aruba subsidiaries, which resulted in the recognition by us of an income tax benefit in the U.S. of $42 million during the year ended December 31, 2016. We had no income tax effect in Aruba from the cancellation of debt or other effects of the Aruba Disposition because of net operating loss carryforwards associated with our operations in Aruba against which we had previously recorded a full valuation allowance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.RECEIVABLES

Receivables consisted of the following (in millions):

December 31,
20162015
Accounts receivable$5,687$4,105
Commodity derivative and foreign currency contract receivables129147
Other receivables117247
5,9334,499
Allowance for doubtful accounts(32)(35)
Receivables, net$5,901$4,464

There were no significant changes in our allowance for doubtful accounts during the years ended December 31, 2016, 2015, and 2014.

4.INVENTORIES

Inventories consisted of the following (in millions):

December 31,
20162015
Refinery feedstocks$2,068$2,404
Refined petroleum products and blendstocks3,1533,774
Ethanol feedstocks and products238242
Materials and supplies250244
Inventories, before lower of cost or market inventory valuation reserve5,7096,664
Lower of cost or market inventory valuation reserve—(766)
Inventories$5,709$5,898

Inventories are valued at the lower of cost or market. As of December 31, 2015, we had a valuation reserve of $766 million in order to state our inventories at market. As of December 31, 2016, we reevaluated our inventories and determined that our cost was lower than market. As a result, we recorded a change in our lower of cost or market inventory valuation reserve that resulted in a net benefit to our results of operations of $747 million for the year ended December 31, 2016. The income statement change for the years ended December 31, 2016 and 2015 differs from the change in the balance sheet reserve due to the foreign currency effect of inventories held by our international operations.

During the year ended December 31, 2016, we had a liquidation of LIFO inventory layers that increased cost of sales by $120 million. As of December 31, 2016, the replacement cost (market value) of LIFO

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

inventories exceeded their LIFO carrying amounts by $1.9 billion. As of December 31, 2016 and 2015, our non-LIFO inventories accounted for $641 million and $668 million, respectively, of our total inventories.

5.PROPERTY, PLANT, AND EQUIPMENT

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

December 31,
20162015
Land$400$400
Crude oil processing facilities29,75428,688
Transportation and terminaling facilities3,6923,642
Grain processing equipment855792
Administrative buildings838789
Other1,4641,423
Construction in progress7301,173
Property, plant, and equipment, at cost37,73336,907
Accumulated depreciation(11,261)(10,204)
Property, plant, and equipment, net$26,472$26,703

We have various assets under capital leases that primarily support our refining operations totaling $118 million and $134 million as of December 31, 2016 and 2015, respectively. Accumulated amortization on assets under capital leases was $45 million and $50 million as of December 31, 2016 and 2015, respectively.

Depreciation expense for the years ended December 31, 2016, 2015, and 2014 was $1.3 billion, $1.3 billion, and $1.2 billion, respectively.

6.DEFERRED CHARGES AND OTHER ASSETS

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

December 31,
20162015
Deferred turnaround and catalyst costs, net$1,614$1,484
Income taxes receivable447266
Investments in joint ventures201201
Intangible assets, net148156
Other491519
Deferred charges and other assets, net$2,901$2,626

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amortization expense for the deferred charges and other assets shown above was $575 million, $542 million, and $489 million for the years ended December 31, 2016, 2015, and 2014, respectively.

7.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,
2016201520162015
Defined benefit plan liabilities (see Note 12)$32$40$742$719
Wage and other employee-related liabilities225292103100
Uncertain income tax position liabilities (see Note 14)——465148
Environmental liabilities2927223231
Environmental credit obligations (see Note 18)2148——
Accrued interest expense10496——
Other accrued liabilities9091211413
Accrued expenses and other long-term liabilities$694$554$1,744$1,611

During the years ended December 31, 2016, 2015, and 2014, there were no significant changes in our environmental liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.DEBT AND CAPITAL LEASE OBLIGATIONS

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

Final MaturityDecember 31,
20162015
Bank credit facilities:
Valero Revolver2020$—$—
VLP Revolver202030175
Canadian Revolver2017——
Accounts receivable sales facility2017100100
Non-bank debt:
Valero Senior Notes
6.625%20371,5001,500
3.4%20261,250—
6.125%2020850850
9.375%2019750750
7.5%2032750750
4.9%2045650650
3.65%2025600600
10.5%2039250250
8.75%2030200200
7.45%2097100100
6.75%20372424
7.2%2017—200
6.125%2017—750
VLP Senior Notes, 4.375%2026500—
Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.0%2040300300
Debenture, 7.65%2026100100
Other debt20235117
Net unamortized debt issuance costs and other(79)(66)
Total debt7,9267,250
Capital lease obligations7585
Total debt and capital lease obligations8,0017,335
Less current portion(115)(127)
Debt and capital lease obligations, less current portion$7,886$7,208

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Bank Credit Facilities

Valero Revolver

We have a $3 billion revolving credit facility (the Valero Revolver) with a group of financial institution lenders that matures in November 2020. We have the option to increase the aggregate commitments under the Valero Revolver to $4.5 billion and we may request two additional one-year extensions, subject to certain conditions. The Valero Revolver also provides for the issuance of letters of credit of up to $2.0 billion.

Outstanding borrowings under the Valero Revolver bear interest, at our option, at either (a) the adjusted LIBO rate (as defined in the Valero 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 Valero Revolver) plus the applicable margin. The Valero 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 Valero Revolver are subject to adjustment based upon the credit ratings assigned to our senior unsecured debt.

We had no borrowings or repayments under the Valero Revolver during the years ended December 31, 2016, 2015, and 2014.

VLP Revolver

VLP has a $750 million senior unsecured revolving credit facility agreement (the VLP Revolver) with a group of lenders that matures in November 2020. 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 also provides for the issuance of letters of credit of up to $100 million. As a result of VLP obtaining an investment grade rating with respect to its issuance of senior notes in December 2016, VLP’s directly owned subsidiary, Valero Partners Operating Co. LLC, was released of its guarantee under the VLP Revolver.

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, 2016, the variable rate was 2.3125 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, 2016, VLP borrowed $139 million and $210 million under the VLP Revolver in connection with VLP’s acquisition from us of the McKee Terminal Services Business in April 2016 and the Meraux and Three Rivers Terminal Services Business in September 2016, respectively, and repaid $494 million on the VLP Revolver in December 2016. During the year ended December 31, 2015, VLP borrowed $200 million under the VLP Revolver in connection with VLP’s acquisition from us of the Houston and St. Charles Terminal Services Business and repaid $25 million on the VLP Revolver. During the year ended December 31, 2014, VLP had no borrowings or repayments under the VLP Revolver.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Canadian Revolver

In November 2016, one of our Canadian subsidiaries amended its committed revolving credit facility (the Canadian Revolver) to reduce the borrowing capacity from C$50 million to C$25 million under which it may borrow and obtain letters of credit and to extend the maturity date from November 2016 to November 2017.

We had no borrowings or repayments under the Canadian Revolver during the years ended December 31, 2016, 2015, and 2014.

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 2016, we amended our agreement to decrease the facility from $1.4 billion to $1.3 billion and extended the maturity date to July 2017. 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, 2016 and 2015, $2.0 billion and $1.3 billion, respectively, of our accounts receivable composed the designated pool of accounts receivable included in the program. All amounts outstanding under the accounts receivable sales facility are reflected as debt on our balance sheets and proceeds and repayments are reflected as cash flows from financing activities on the statements of cash flows. During the years ended December 31, 2016, 2015, and 2014, 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, letters of credit issued, and availability under our revolving credit facilities as follows (in millions):

December 31, 2016
Facility AmountMaturity DateOutstanding BorrowingsLetters of Credit IssuedAvailability
Committed facilities:
Valero Revolver$3,000November 2020$—$53$2,947
VLP Revolver$750November 2020$30$—$720
Canadian RevolverC$25November 2017C$—C$10C$15
Accounts receivable sales facility$1,300July 2017$100$—$1,200
Letter of credit facilities$225June 2017 and November 2017$—$—$225
Uncommitted facilities:
Letter of credit facilities$670N/A$—$202$468

In July 2016, we amended one of our committed letter of credit facilities to extend the maturity date from June 2016 to June 2017. In November 2016, the remaining committed letter of credit facility was amended to reduce the borrowing capacity from $150 million to $100 million and to extend the maturity date from November 2016 to November 2017.

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.

Non-Bank Debt

During the year ended December 31, 2016, the following activity occurred:

•We issued $1.25 billion of 3.4 percent Senior Notes due September 15, 2026. Proceeds from this debt issuance totaled $1.246 billion. We also incurred $10 million of debt issuance costs.
•We redeemed our 6.125 percent Senior Notes with a maturity date of June 15, 2017 for $778 million, or 103.70 percent of stated value.
•We redeemed our 7.2 percent Senior Notes with a maturity date of October 15, 2017 for $213 million, or 106.27 percent of stated value.
•VLP issued $500 million of 4.375 percent Senior Notes due December 15, 2026. Proceeds from this debt issuance totaled $500 million. Debt issuance costs totaled $4 million.

During the year ended December 31, 2015, the following activity occurred:

•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.
•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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Other Debt

In June 2016, one of our consolidated joint ventures entered into a C$72 million senior secured credit facility. This non-revolving credit facility bears interest at a fixed rate (as defined by the lender) plus the applicable margin and matures in June 2023. During the year ended December 31, 2016, borrowings under this facility totaled C$72 million and debt repayments totaled C$4 million. As of December 31, 2016, the effective interest rate of this facility was 3.85 percent.

Other Disclosures

Interest and debt expense, net of capitalized interest is comprised as follows (in millions):

Year Ended December 31,
201620152014
Interest and debt expense incurred$511$504$467
Less capitalized interest657170
Interest and debt expense, net of capitalized interest$446$433$397

Our credit facilities and other debt arrangements contain various customary restrictive covenants, including cross-default and cross-acceleration clauses.

Principal maturities for our debt obligations and future minimum rentals on capital lease obligations as of December 31, 2016 were as follows (in millions):

DebtCapital Lease Obligations
2017$105$17
2018516
201975516
202088513
2021512
Thereafter6,25031
Net unamortized debt issuance costs and other(79)—
Less interest expense—(30)
Total$7,926$75

In October 2016, we entered into agreements to lease storage tanks located at three of our refineries. The leases commenced in January 2017. The lease agreements will be accounted for as capital leases and we expect to recognize capital lease assets and related obligations of approximately $490 million. These capital

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

lease agreements have initial terms of 10 years each and each agreement has successive 10-year automatic renewal terms.

9.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 petroleum product and corn inventories.

Certain leases for processing equipment and feedstock and refined petroleum 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, 2016, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess of one year were as follows (in millions):

2017$479
2018321
2019221
2020162
2021106
Thereafter362
Total minimum rental payments$1,651
Minimum rentals to be received under subleases$26

Rental expense was as follows (in millions):

Year Ended December 31,
201620152014
Minimum rental expense$739$732$618
Contingent rental expense7010543
Total rental expense809837661
Less sublease rental income(31)(46)(28)
Net rental expense$778$791$633

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Purchase Obligations

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

Environmental Matters

We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and during 2015, one of these companies assumed the ongoing remediation in the Village pursuant to a federal court order. We had previously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The parties involved in the initial response may have further claims among themselves for costs already incurred. We also continue to be engaged in site assessment and interim measures at the adjacent shutdown refinery site, which we acquired as part of an acquisition in 2005, and we are in litigation with other potentially responsible parties and the Illinois EPA relating to the remediation of the site. In each of these matters, we have various defenses, limitations, and potential rights for contribution from the other responsible parties. We have recorded a liability for our expected contribution obligations. However, because 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.

Self-Insurance

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.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, 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)
Transactions in connection with stock-based compensation plans:
Stock issuances—2
Stock purchases—(1)
Stock purchases under purchase program—(23)
Balance as of December 31, 2016673(222)

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, 2016 or 2015.

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 with no expiration date, and we completed that 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 (the 2015 program) with no expiration date. On September 21, 2016, our board of directors authorized our purchase of up to an additional $2.5 billion (the 2016 program) with no expiration date. During the years ended December 31, 2016, 2015, and 2014, we purchased $1.3 billion, $2.7 billion, and $1.2 billion, respectively, of our common stock under our programs. As of December 31, 2016, we have approvals under the 2015 program and the 2016 program to purchase approximately $2.5 billion of our common stock.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Common Stock Dividends

On January 26, 2017, our board of directors declared a quarterly cash dividend of $0.70 per common share payable March 7, 2017 to holders of record at the close of business on February 15, 2017.

Valero Energy Partners LP Units

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.

Income Tax Effects Related to Components of Other Comprehensive Loss

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

Before-Tax AmountTax Expense (Benefit)Net Amount
Year Ended December 31, 2016:
Foreign currency translation adjustment$(415)$—$(415)
Pension and other postretirement benefits:
Gain (loss) arising during the year related to:
Net actuarial loss(110)(34)(76)
Miscellaneous gain—(8)8
Amounts reclassified into income related to:
Net actuarial loss481830
Prior service credit(36)(13)(23)
Net loss on pension and other postretirement benefits(98)(37)(61)
Other comprehensive loss$(513)$(37)$(476)
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)

VALERO ENERGY CORPORATION

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)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Income (Loss)

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

Foreign Currency Translation AdjustmentDefined Benefit Plan ItemsGains and (Losses) on Cash Flow HedgesTotal
Balance as of December 31, 2013$408$(58)$—$350
Other comprehensive loss before reclassifications(407)(309)(1)(717)
Amounts reclassified from accumulated other comprehensive income (loss)—(1)1—
Net other comprehensive loss(407)(310)—(717)
Balance as of December 31, 20141(368)—(367)
Other comprehensive income (loss) before reclassifications(606)21—(585)
Amounts reclassified from accumulated other comprehensive income (loss)—19—19
Net other comprehensive income (loss)(606)40—(566)
Balance as of December 31, 2015(605)(328)—(933)
Other comprehensive loss before reclassifications(416)(68)—(484)
Amounts reclassified from accumulated other comprehensive loss—7—7
Net other comprehensive loss(416)(61)—(477)
Balance as of December 31, 2016$(1,021)$(389)$—$(1,410)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Details about Accumulated Other Comprehensive Loss ComponentsAffected Line Item in the Statement of Income
Year Ended December 31,
201620152014
Amortization of items related to defined benefit pension plans:
Net actuarial loss$(48)$(62)$(34)(a)
Prior service credit364040(a)
Curtailment and settlement—(7)(3)(a)
(12)(29)3Total before tax
510(2)Tax (expense) benefit
$(7)$(19)$1Net of tax
Losses on cash flow hedges:
Commodity contracts$—$—$(2)Cost of sales
——(2)Total before tax
——1Tax benefit
$—$—$(1)Net of tax
Total reclassifications for the year$(7)$(19)$—Net of tax
(a)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost, as further discussed in Note 12. Net periodic benefit cost is reflected in operating expenses and general and administrative expenses.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.VARIABLE INTEREST ENTITIES

Overview

In the normal course of business, we have financial interests in certain entities that have been determined to be VIEs. We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary such that we have (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to make this determination, we evaluated our contractual arrangements with the VIEs, including arrangements for the use of assets, purchases of products and services, debt, equity, or management of operating activities.

The following discussion summarizes our involvement with our VIEs:

•VLP is a publicly traded master limited partnership whose common limited partner units are traded on the New York Stock Exchange under “VLP.” We formed VLP in July 2013 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 ten of our refineries. As of December 31, 2016, we owned a 66.4 percent limited partner interest and a 2.0 percent general partner interest in VLP, and public unitholders owned a 31.6 percent limited partner interest. See “Valero Energy Partners LP” below for additional information regarding VLP’s equity offering.

VLP was determined to be a VIE because the public limited partners of VLP (i.e., parties other than entities under common control with the general partner) lack the power to direct the activities of VLP that most significantly impact its economic performance because they do not have substantive kick-out rights over the general partner or substantive participating rights in VLP. Furthermore, we determined that we are the primary beneficiary of VLP because (a) we are the single decision maker and because our general partner interest provides us with the sole power to direct the activities that most significantly impact VLP’s economic performance and (b) our 66.4 percent limited partner interest and 2.0 percent general partner interest provide us with significant economic rights and obligations. All of VLP’s revenues are derived from us; therefore, there is limited risk to us associated with VLP’s operations.

•Diamond Green Diesel Holdings LLC (DGD) is a joint venture with Darling Green Energy LLC, a subsidiary of Darling Ingredients Inc., that was formed to construct and operate a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel. The plant is located next to our St. Charles Refinery and began operations in June 2013. Our significant agreements with DGD include an operations agreement that outlines our responsibilities as operator of the plant, a debt agreement whereby we financed approximately 60 percent of the construction costs of the plant, and a marketing agreement.

As operator, we operate the plant and perform certain day-to-day operating and management functions for DGD as an independent contractor. The operations agreement provides us (as operator) and, in the event of certain conditions, the debt agreement provides us (as lender) with certain power

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to direct the activities that most significantly impact DGD’s economic performance. Because the operations agreement and the debt agreement convey such power to us and are separate from our ownership rights, DGD was determined to be a VIE. For this reason and because we hold a 50 percent ownership interest that provides us with significant economic rights and obligations, we determined that we are the primary beneficiary of DGD. DGD has risk associated with its operations because it generates revenues from third-party customers.

•We also have financial interests in other entities in which we hold a 50 percent ownership interest, which is a significant variable interest. These entities were determined to be VIEs because the entities’ contractual arrangements transfer the power to direct the activities that most significantly impact their economic performance or reduce the exposure to operational variability and risk of loss created by the entity that otherwise would be held exclusively by the equity owners. Furthermore, we determined that we are the primary beneficiary of these VIEs because (a) certain contractual arrangements (exclusive of our ownership rights) provide us with the power to direct the activities that most significantly impact the economic performance of these entities and (b) our 50 percent ownership interests provide us with significant economic rights and obligations. The financial position, results of operations, and cash flows of these VIEs are not material to us.

The VIEs’ assets can only be used to settle their own obligations and the VIEs’ creditors have no recourse to our assets. We do not provide financial guarantees to our VIEs. Although we have provided credit facilities to the VIEs in support of their construction or acquisition activities, these transactions are eliminated in consolidation. Our financial position, results of operations, and cash flows are impacted by our consolidated VIEs’ performance, net of intercompany eliminations, to the extent of our ownership interest in each VIE.

The following tables present summarized balance sheet information for the significant assets and liabilities of our VIEs, which are included in our balance sheets (in millions).

December 31, 2016
VLPDGDOtherTotal
Assets
Cash and temporary cash investments$71$167$15$253
Other current assets387—90
Property, plant, and equipment, net8653551331,353
Liabilities
Current liabilities$15$17$7$39
Debt and capital lease obligations, less current portion525—46571

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015
VLPDGDOtherTotal
Assets
Cash and temporary cash investments$81$44$7$132
Other current assets—211—211
Property, plant, and equipment, net7473561401,243
Liabilities
Current liabilities$13$12$18$43
Debt and capital lease obligations, less current portion175——175
12.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 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, 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.

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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Pension PlansOther Postretirement Benefit Plans
December 31,December 31,
2016201520162015
Changes in benefit obligation:
Benefit obligation as of beginning of year$2,365$2,450$336$361
Service cost11110978
Interest cost84981214
Participant contributions——88
Plan amendments—22——
Benefits paid(130)(169)(27)(27)
Actuarial (gain) loss171(138)(35)(26)
Other(34)(7)1(2)
Benefit obligation as of end of year$2,567$2,365$302$336
Changes in plan assets(a):
Fair value of plan assets as of beginning of year$1,947$1,978$—$—
Actual return on plan assets16519——
Valero contributions1411261818
Participant contributions——88
Benefits paid(130)(169)(27)(27)
Other(26)(7)11
Fair value of plan assets as of end of year$2,097$1,947$—$—
Reconciliation of funded status(a):
Fair value of plan assets as of end of year$2,097$1,947$—$—
Less benefit obligation as of end of year2,5672,365302336
Funded status as of end of year$(470)$(418)$(302)$(336)
Accumulated benefit obligation$2,419$2,240n/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 18 for the assets associated with certain U.S. nonqualified pension plans.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts recognized in our balance sheet for our pension and other postretirement benefits plans as of December 31, 2016 and 2015 include (in millions):

Pension PlansOther Postretirement Benefit Plans
2016201520162015
Deferred charges and other assets, net$2$5$—$—
Accrued expenses(13)(20)(19)(20)
Other long-term liabilities(459)(403)(283)(316)
$(470)$(418)$(302)$(336)

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,
20162015
Projected benefit obligation$2,322$2,169
Accumulated benefit obligation2,2102,070
Fair value of plan assets1,8701,747

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
2017$144$19
201815120
201920520
202017520
202117220
2022-202698599

We plan to contribute approximately $28 million to our pension plans and $19 million to our other postretirement benefit plans during 2017.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Pension PlansOther Postretirement Benefit Plans
Year Ended December 31,Year Ended December 31,
201620152014201620152014
Components of net periodic benefit cost:
Service cost$111$109$120$7$8$7
Interest cost849891121415
Expected return on plan assets(139)(133)(133)———
Amortization of:
Net actuarial (gain) loss496235(1)—(1)
Prior service credit(20)(22)(22)(16)(18)(18)
Special charges (credits)(7)73———
Net periodic benefit cost$78$121$94$2$4$3

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 (gain) 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,
201620152014201620152014
Net gain (loss) arising during the year:
Net actuarial gain (loss)$(145)$24$(434)$35$26$(37)
Prior service cost—(22)(1)———
Net (gain) loss reclassified into income:
Net actuarial (gain) loss496235(1)—(1)
Prior service credit(20)(22)(22)(16)(18)(18)
Curtailment and settlement loss—73———
Total changes in other comprehensive income (loss)$(116)$49$(419)$18$8$(56)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The pre-tax amounts in accumulated other comprehensive (income) loss as of December 31, 2016 and 2015 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):

Pension PlansOther Postretirement Benefit Plans
2016201520162015
Net actuarial (gain) loss$878$783$(66)$(31)
Prior service credit(145)(166)(58)(75)
Total$733$617$(124)$(106)

The following pre-tax amounts included in accumulated other comprehensive (income) loss as of December 31, 2016 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2017 (in millions):

Pension PlansOther Postretirement Benefit Plans
Amortization of net actuarial (gain) loss$53$(3)
Amortization of prior service credit(20)(16)
Total$33$(19)

The weighted-average assumptions used to determine the benefit obligations as of December 31, 2016 and 2015 were as follows:

Pension PlansOther Postretirement Benefit Plans
2016201520162015
Discount rate4.08%4.45%4.26%4.53%
Rate of compensation increase3.81%3.79%n/an/a

The discount rate assumption used to determine the benefit obligations as of December 31, 2016 and 2015 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, 2016, 2015, and 2014 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

VALERO ENERGY CORPORATION

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, 2016, 2015, and 2014 were as follows:

Pension PlansOther Postretirement Benefit Plans
201620152014201620152014
Discount rate4.45%4.10%4.92%4.53%4.13%4.88%
Expected long-term rate of return on plan assets7.28%7.29%7.61%n/an/an/a
Rate of compensation increase3.79%3.78%3.81%n/an/an/a

The assumed health care cost trend rates as of December 31, 2016 and 2015 were as follows:

20162015
Health care cost trend rate assumed for the next year7.28%7.29%
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 rate20262026

Assumed health care cost trend rates impact the amounts reported for retiree health care plans. A one percentage-point increase or decrease in assumed health care cost trend rates would have an immaterial effect on the total of service and interest cost components and on the accumulated postretirement benefit obligation on our postretirement benefits.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The tables below present the fair values of the assets of our pension plans (in millions) as of December 31, 2016 and 2015 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 in a market that is not active. 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, 2016
Level 1Level 2Level 3
Equity securities:
U.S. companies(a)$562$—$—$562
International companies164——164
Preferred stock3——3
Mutual funds:
International growth90——90
Index funds(b)230——230
Corporate debt instruments—280—280
Government securities:
U.S. Treasury securities52——52
Other government securities—158—158
Common collective trusts—434—434
Private funds—76—76
Insurance contract—18—18
Interest and dividends receivable5——5
Cash and cash equivalents5616—72
Securities transactions payable, net(47)——(47)
Total pension assets$1,115$982$—$2,097

See notes on page 108.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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—141—141
Common collective trusts—375—375
Private funds—65—65
Insurance contract—19—19
Interest and dividends receivable5——5
Cash and cash equivalents4943—92
Securities transactions payable, net(40)——(40)
Total pension assets$1,025$922$—$1,947
(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 50 percent equities and 50 percent bonds as of December 31, 2016. As of December 31, 2015, the class included 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, 2016, the target allocations for plan assets under our primary pension plan 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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 $67 million, $65 million, and $61 million for the years ended December 31, 2016, 2015, and 2014, respectively.

13.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 and re-approved by our stockholders on May 12, 2016. As of December 31, 2016, 10,581,274 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,
201620152014
Stock-based compensation expense:
Restricted stock$52$47$43
Performance awards151115
Stock options112
Total stock-based compensation expense$68$59$60
Tax benefit recognized on stock-based compensation expense$24$21$21
Tax benefit realized for tax deductions resulting from exercises and vestings336664
Effect of tax deductions in excess of recognized stock-based compensation expense (a)224447
(a)Effective January 1, 2016, the effect of tax deductions in excess of recognized stock-based compensation expense is reported as an operating cash flow. These amounts were previously reported as financing cash flows.

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Stock

Restricted stock is granted to employees and non-employee directors. Restricted stock granted to employees vests in accordance with individual written agreements between the participants and us, usually in equal annual installments over a period of three 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 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, 20161,551,440$57.15
Granted1,004,93559.00
Vested(978,845)53.40
Forfeited(10,580)57.37
Nonvested shares as of December 31, 20161,566,95060.68

As of December 31, 2016, there was $61 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,
201620152014
Weighted-average grant-date fair value per share of restricted stock granted$59.00$70.07$49.40
Fair value of restricted stock vested466960

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, 2016408,425$66.23
Granted170,32788.79
Vested(225,126)47.71
Forfeited(15,237)91.88
Awards outstanding as of December 31, 2016338,38988.75

As of December 31, 2016, there was $15 million of unrecognized compensation cost related to outstanding unvested performance awards, which will be recognized during 2017.

Performance awards converted during the year ended December 31, 2016 were as follows:

Vested Awards ConvertedActual Conversion RateNumber of Shares Issued
2012 awards96,844200%193,688
2013 awards78,411200%156,822
2014 awards49,871200%99,742
Total225,126450,252

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.INCOME TAXES

Income Statement Components

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

Year Ended December 31,
201620152014
U.S. operations$1,733$5,327$4,677
International operations1,449644875
Income from continuing operations before income tax expense$3,182$5,971$5,552

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

Year Ended December 31,
201620152014
U.S.35%35%35%
Canada15%15%15%
U.K.20%20%21%
Ireland13%13%13%
Aruba(a)7%7%7%
(a)Statutory income tax rate applicable through the date of the Aruba Disposition as described in Note 2.

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

Year Ended December 31, 2016
U.S.InternationalTotal
Income tax expense at statutory rates$606$256$862
U.S. state and Canadian provincial tax expense, net of federal income tax effect53136
Permanent differences:
Manufacturing deduction(22)—(22)
Other(3)(10)(13)
Change in tax law—(7)(7)
Tax effects of income associated with noncontrolling interests(44)—(44)
Other, net(37)(10)(47)
Income tax expense$505$260$765

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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, 2016
U.S.InternationalTotal
Current:
Country$294$194$488
U.S. state / Canadian provincial123547
Total current306229535
Deferred:
Country20335238
U.S. state / Canadian provincial(4)(4)(8)
Total deferred19931230
Income tax expense$505$260$765
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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Taxes Paid

Income taxes paid to U.S. and international taxing authorities were as follows (in millions):

Year Ended December 31,
201620152014
Income taxes paid, net:
U.S.$241$2,092$1,455
International2031169
Total$444$2,093$1,624

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,
20162015
Deferred income tax assets:
Tax credit carryforwards$65$33
Net operating losses (NOLs)374423
Inventories9372
Compensation and employee benefit liabilities344331
Environmental liabilities6980
Other100139
Total deferred income tax assets1,0451,078
Less: Valuation allowance(374)(435)
Net deferred income tax assets671643
Deferred income tax liabilities:
Property, plant, and equipment6,9006,725
Deferred turnaround costs450394
Inventories356287
Investments253226
Other7371
Total deferred income tax liabilities8,0327,703
Net deferred income tax liabilities$7,361$7,060

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We had the following income tax credit and loss carryforwards as of December 31, 2016 (in millions):

AmountExpiration
U.S. state income tax credits$712017 through 2026
U.S. state income tax credits2Unlimited
U.S. state NOLs (gross amount)9,0182017 through 2036
U.S. alternative minimum tax credit18Unlimited

We have recorded a valuation allowance as of December 31, 2016 and 2015 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, 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 2016, the valuation allowance decreased by $61 million, primarily due to the write off of NOLs in Aruba, offset by increases in State NOLs. The realization of net deferred income tax assets recorded as of December 31, 2016 is primarily dependent upon our ability to generate future taxable income in certain U.S. states.

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, 2016, the cumulative undistributed earnings of these subsidiaries were approximately $3.9 billion. If those earnings were not considered indefinitely reinvested, deferred income taxes would have been recorded after consideration of U.S. foreign tax credits. It is not practicable to estimate the amount of additional tax that might be payable on those earnings, if distributed. As of December 31, 2016, $2.2 billion of our cash and temporary cash investments was held by our international subsidiaries.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,
201620152014
Balance as of beginning of year$964$989$950
Additions based on tax positions related to the current year363635
Additions for tax positions related to prior years1183118
Reductions for tax positions related to prior years(46)(82)(67)
Reductions for tax positions related to the lapse of applicable statute of limitations(3)(3)(1)
Settlements(237)(59)(46)
Reclassification of uncertain tax receivable to long-term receivable from IRS211——
Balance as of end of year$936$964$989

As of December 31, 2016, the balance in unrecognized tax benefits included $433 million of tax refunds that we intend to claim by amending various of our income tax returns for 2008 through 2016. We intend to propose that incentive payments received from the U.S. federal government for blending biofuels into refined petroleum 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 table 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, 2016, 2015, and 2014 even though they are reflected in the table above.

The following is a reconciliation of unrecognized tax benefits reflected in the table above to our uncertain tax position liabilities that are presented in our balance sheets (in million).

December 31,
20162015
Unrecognized tax benefits$936$964
Tax refund claim not presented in our balance sheets(433)(570)
Other(5)25
Uncertain tax position liabilities presented in our balance sheets$498$419

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amounts recognized in our balance sheets for uncertain tax positions include (in millions):

December 31,
20162015
Deferred charges and other assets, net$—$195
Income taxes payable(7)(438)
Other long-term liabilities(465)(148)
Deferred tax liabilities(26)(28)
Uncertain tax position liabilities presented in our balance sheets$(498)$(419)

As of December 31, 2016 and 2015, there were $756 million and $757 million, respectively, of unrecognized tax benefits that if recognized would affect our annual effective tax rate.

Penalties and interest during the years ended December 31, 2016, 2015, and 2014 were immaterial. Accrued penalties and interest totaled $70 million and $117 million as of December 31, 2016 and 2015, 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 $4 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 tax rate.

U.S. Tax Returns Under Audit

Federal

As of December 31, 2016, our tax years for 2010 through 2014 were under audit by the Internal Revenue Service (IRS). The IRS has proposed adjustments to our taxable income for certain open years. We are currently contesting the proposed adjustments with the Office of Appeals of the IRS for certain open years 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, 2016, we settled the audit with the IRS related to our 2008 and 2009 tax years.

State

As of December 31, 2016, our tax years for 2004 through 2007 and 2011 through 2013 were under audit by the state of California for certain tax issues. We do not expect the ultimate disposition of these issues will result in a material change to our financial position, results of operations, or liquidity. We believe these matters will be resolved for amounts consistent with our recorded amounts of unrecognized tax benefits associated with these matters.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.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,
201620152014
Participating SecuritiesCommon StockParticipating SecuritiesCommon StockParticipating SecuritiesCommon Stock
Earnings per common share from continuing operations:
Net income attributable to Valero stockholders from continuing operations$2,289$3,990$3,694
Less dividends paid:
Common stock1,108845552
Participating securities332
Undistributed earnings$1,178$3,142$3,140
Weighted-average common shares outstanding146124972526
Earnings per common share from continuing operations:
Distributed earnings$2.40$2.40$1.70$1.70$1.05$1.05
Undistributed earnings2.542.546.306.305.955.95
Total earnings per common share from continuing operations$4.94$4.94$8.00$8.00$7.00$7.00
Earnings per common share from continuing operations – assuming dilution:
Net income attributable to Valero stockholders from continuing operations$2,289$3,990$3,694
Weighted-average common shares outstanding461497526
Common equivalent shares:
Stock options222
Performance awards and nonvested restricted stock112
Weighted-average common shares outstanding – assuming dilution464500530
Earnings per common share from continuing operations – assuming dilution$4.94$7.99$6.97

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.SEGMENT INFORMATION

As of December 31, 2016, we had two reportable segments — refining and ethanol. The refining segment includes our refining operations, the associated marketing activities, and logistics assets that support our refining operations. The ethanol segment includes our ethanol operations, the associated marketing activities, and logistics assets that support our ethanol operations. Activities that are not included in any of the reportable segments are included in the corporate category.

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

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

RefiningEthanolCorporate and EliminationsTotal
Year ended December 31, 2016:
Operating revenues from external customers$71,968$3,691$—$75,659
Intersegment revenues—210(210)—
Total segment revenues$71,968$3,901$(210)$75,659
Lower of cost or market inventory valuation adjustment$(697)$(50)$—$(747)
Depreciation and amortization expense1,78066481,894
Asset impairment loss56——56
Operating income (loss)3,995340(763)3,572
Total expenditures for long-lived assets1,89068381,996
Year ended December 31, 2015:
Operating revenues from external customers$84,521$3,283$—$87,804
Intersegment revenues—151(151)—
Total segment revenues$84,521$3,434$(151)$87,804
Lower of cost or market inventory valuation adjustment$740$50$—$790
Depreciation and amortization expense1,74550471,842
Operating income (loss)6,973142(757)6,358
Total expenditures for long-lived assets2,25467292,350

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

RefiningEthanolCorporate and EliminationsTotal
Year ended December 31, 2014:
Operating revenues from external customers$126,004$4,840$—$130,844
Intersegment revenues—100(100)—
Total segment revenues$126,004$4,940$(100)$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 assets2,73042302,802

Our principal products include conventional and California Air Resources Board gasolines, RBOB (reformulated gasoline blendstock for oxygenate blending), gasoline blendstocks, ultra-low-sulfur diesel, middle distillates, and jet fuel. Other product revenues primarily include petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt. Operating revenues from external customers for our principal products were as follows (in millions):

Year Ended December 31,
201620152014
Refining:
Gasolines and blendstocks$33,450$38,983$56,846
Distillates32,57638,09357,521
Other product revenues5,9427,44511,637
Total refining revenues71,96884,521126,004
Ethanol:
Ethanol3,1052,6284,192
Distillers grains586655648
Total ethanol revenues3,6913,2834,840
Total revenues from external customers$75,659$87,804$130,844

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,
201620152014
U.S.$51,479$60,319$91,499
Canada6,1156,84110,410
U.K. and Ireland10,79711,23214,182
Other countries7,2689,41214,753
Total operating revenues$75,659$87,804$130,844

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,
20162015
U.S.$25,359$25,210
Canada1,8161,824
U.K.9471,131
Aruba—57
Ireland2020
Total long-lived assets$28,142$28,242

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

December 31,
20162015
Refining$39,034$38,068
Ethanol1,3161,016
Corporate5,8235,143
Total assets$46,173$44,227

Effective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business and created a new reportable segment — VLP. The results of VLP, which are those of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.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,
201620152014
Decrease (increase) in current assets:
Receivables, net$(1,531)$1,294$2,753
Inventories771(222)(1,014)
Income taxes receivable156(104)(23)
Prepaid expenses and other(109)(45)(32)
Increase (decrease) in current liabilities:
Accounts payable1,556(1,787)(3,149)
Accrued expenses117(40)38
Taxes other than income taxes82(74)(64)
Income taxes payable(66)(328)(319)
Changes in current assets and current liabilities$976$(1,306)$(1,810)

There were no significant noncash investing or financing activities for the year ended December 31, 2016.

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 and an accrual for the purchase of 347,438 shares of our common stock, which was settled in early January 2016.

There were no significant noncash investing or financing activities for the year ended December 31, 2014.

Cash flows reflected as “other financing activities, net” for the year ended December 31, 2016 included the payment of a long-term liability of $137 million owed to a joint venture partner associated with an owner-method joint venture investment.

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

Year Ended December 31,
201620152014
Interest paid in excess of amount capitalized$427$416$392
Income taxes paid, net4442,0931,624

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18.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, 2016 and 2015.

We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the tables below on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.

December 31, 2016
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$874$38$—$912$(875)$—$37$—
Foreign currency contracts3——3n/an/a3n/a
Investments of certain benefit plans58—1169n/an/a69n/a
Total$935$38$11$984$(875)$—$109
Liabilities:
Commodity derivative contracts$872$23$—$895$(875)$(20)$—$(88)
Environmental credit obligations—188—188n/an/a188n/a
Physical purchase contracts—5—5n/an/a5n/a
Total$872$216$—$1,088$(875)$(20)$193

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.
•Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily 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 19 under “Environmental Compliance Program Price Risk.” The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using the market approach based on quoted prices from an independent pricing service.

There were no transfers between levels for assets and liabilities held as of December 31, 2016 and 2015 that were measured at fair value on a recurring basis.

There was no activity during the years ended December 31, 2016, 2015, and 2014 related to the fair value amounts categorized in Level 3 as of December 31, 2016, 2015, and 2014.

Nonrecurring Fair Value Measurements

As discussed in Note 2, we concluded that the Aruba Terminal was impaired as of June 30, 2016, which resulted in an asset impairment loss of $56 million that was recorded in June 2016. The fair value of the Aruba Terminal was determined using an income approach and was classified in Level 3. We employed a probability-weighted approach to possible future cash flow scenarios, including transferring ownership of the business to the GOA or continuing to operate.

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2016 and 2015.

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, 2016December 31, 2015
Carrying AmountFair ValueCarrying AmountFair Value
Financial assets:
Cash and temporary cash investments$4,816$4,816$4,114$4,114
Financial liabilities:
Debt (excluding capital leases)7,9268,8827,2507,759

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).
19.PRICE RISK MANAGEMENT ACTIVITIES

We are exposed to market risks primarily related to the volatility in the price of commodities, and foreign currency exchange rates, and the price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note 18), as summarized below under “Fair Values of Derivative Instruments,” with changes in fair value recognized currently in income. The effect of these derivative instruments on our income is summarized below under “Effect of Derivative Instruments on Income and Other Comprehensive Income.”

Risk Management Activities by Type of Risk

Commodity Price Risk

We are exposed to market risks related to the volatility in the price of crude oil, refined petroleum products (primarily gasoline and distillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fair value and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for trading purposes. Our objectives for entering into hedges or trading derivatives are described below.

•Economic Hedges – Economic hedges represent commodity derivative instruments that are used to manage price volatility in certain (i) feedstock and refined petroleum product inventories, (ii) fixed-price purchase contracts, and (iii) forecasted feedstock, refined petroleum product or natural gas purchases and refined petroleum product sales. The objectives of our economic hedges are to hedge price volatility in certain feedstock and refined petroleum product inventories and to lock in the price of forecasted feedstock, refined petroleum product, or natural gas purchases or refined petroleum product sales at existing market prices that we deem favorable. Economic hedges are not designated as fair value or cash flow hedges for accounting purposes, usually due to the difficulty of establishing the required documentation at the date the derivative instrument is entered into for them to qualify as hedging instruments for accounting purposes.

As of December 31, 2016, 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 represent thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels and soybean oil contracts that are presented in thousands of pounds).

Notional Contract Volumes by Year of Maturity
Derivative Instrument20172018
Crude oil and refined petroleum products:
Swaps – long6,372—
Swaps – short6,144—
Futures – long109,372—
Futures – short99,125—
Corn:
Futures – long15,285—
Futures – short38,325540
Physical contracts – long18,994543
Soybean oil:
Futures – long88,859—
Futures – short147,598—

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 for crude oil and refined petroleum products.

As of December 31, 2016, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units and corn contracts that are presented in thousands of bushels).

Notional Contract Volumes by Year of Maturity
Derivative Instrument2017
Crude oil and refined petroleum products:
Swaps – long4,801
Swaps – short4,801
Futures – long22,577
Futures – short24,429
Options – long139,340
Options – short140,690
Natural gas:
Futures – long750
Futures – short250
Corn:
Futures – long1,000
Futures – short1,000

We had no commodity derivative contracts outstanding as of December 31, 2016 and 2015 that were designated as fair value or cash flow hedges.

Foreign Currency Risk

We are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated in currencies other than the local (functional) currencies of 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 are classified as economic hedges. As of December 31, 2016, we had forward contracts to purchase $374 million of U.S. dollars. These commitments matured on or before February 1, 2017.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Environmental Compliance Program Price Risk

We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. Certain of these programs require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. For the years ended December 31, 2016, 2015, and 2014, the cost of meeting our obligations under these compliance programs was $749 million, $440 million, and $372 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 18. Under these cap-and-trade systems, we purchase various GHG emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we recovered the majority of these costs from our customers for the years ended December 31, 2016 and 2015 and expect to continue to recover the majority of these costs in the future. For the years ended December 31, 2016, 2015, and 2014, the net cost of meeting our obligations under these compliance programs was immaterial.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of December 31, 2016 and 2015 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 18 for additional information related to the fair values of our derivative instruments.

As indicated in Note 18, 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, 2016
Asset DerivativesLiability Derivatives
Derivatives not designated as hedging instruments
Commodity contracts:
FuturesReceivables, net$874$872
SwapsReceivables, net3221
OptionsReceivables, net62
Physical purchase contractsInventories—5
Foreign currency contractsReceivables, net3—
Total$915$900
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

Market Risk

Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 on our derivative instruments and the line items in the financial statements in which such gains and losses are reflected (in millions). There were no gains or losses recognized in income or other comprehensive income related to fair value hedges and cash flow hedges for the years ended December 31, 2016 and 2015 and amounts recognized for the year ended December 31, 2014 were immaterial.

Derivatives Designated as Economic Hedges and Other Derivative InstrumentsLocation of Gain (Loss) Recognized in Income on DerivativesYear Ended December 31,
201620152014
Commodity contractsCost of sales$(132)$377$693
Foreign currency contractsCost of sales164940
Trading DerivativesLocation of Gain Recognized in Income on DerivativesYear Ended December 31,
201620152014
Commodity contractsCost of sales$46$45$38

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.QUARTERLY FINANCIAL DATA (Unaudited)

The following table summarizes quarterly financial data for the years ended December 31, 2016 and 2015 (in millions, except per share amounts).

2016 Quarter Ended
March 31 (a)June 30 (b)September 30December 31
Operating revenues$15,714$19,584$19,649$20,712
Operating income8291,231892620
Net income513843645416
Net income attributable to Valero Energy Corporation stockholders495814613367
Earnings per common share1.051.741.330.81
Earnings per common share – assuming dilution1.051.731.330.81
2015 Quarter Ended
March 31June 30September 30December 31 (c)
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
(a)Operating income for the quarter ended March 31, 2016 reflects a favorable noncash lower of cost or market inventory valuation adjustment of $293 million as described in Note 4.
(b)Operating income for the quarter ended June 30, 2016 reflects a favorable noncash lower of cost or market inventory valuation adjustment of $454 million as described in Note 4 and an asset impairment loss of $56 million related to the Aruba Disposition as described in Note 2.
(c)Operating income for the quarter ended December 31, 2015 reflects an unfavorable noncash lower of cost or market inventory valuation adjustment of $790 million as described in Note 4.

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