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, 2017. 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, 2017, 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 67 of this report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The board of directors and stockholders

Valero Energy Corporation and subsidiaries:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Valero Energy Corporation and subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, 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 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2004.

San Antonio, Texas

February 28, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The board of directors and stockholders

Valero Energy Corporation and subsidiaries:

Opinion on Internal Control Over Financial Reporting

We have audited Valero Energy Corporation’s (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of 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 of internal control over financial reporting 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

/s/ KPMG LLP

San Antonio, Texas

February 28, 2018

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions of dollars, except par value)

	December 31,
	2017				2016
ASSETS
Current assets:
Cash and temporary cash investments	$	5,850			$	4,816
Receivables, net	6,922				5,901
Inventories	6,384				5,709
Prepaid expenses and other	156				374
Total current assets	19,312				16,800
Property, plant, and equipment, at cost	40,010				37,733
Accumulated depreciation	(12,530		)		(11,261		)
Property, plant, and equipment, net	27,480				26,472
Deferred charges and other assets, net	3,366				2,901
Total assets	$	50,158			$	46,173
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	122			$	115
Accounts payable	8,348				6,357
Accrued expenses	712				694
Taxes other than income taxes payable	1,321				1,084
Income taxes payable	568				78
Total current liabilities	11,071				8,328
Debt and capital lease obligations, less current portion	8,750				7,886
Deferred income tax liabilities	4,708				7,361
Other long-term liabilities	2,729				1,744
Commitments and contingencies
Equity:
Valero Energy Corporation stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 673,501,593 and 673,501,593 shares issued	7				7
Additional paid-in capital	7,039				7,088
Treasury stock, at cost; 239,603,534 and 222,000,024 common shares	(13,315		)		(12,027		)
Retained earnings	29,200				26,366
Accumulated other comprehensive loss	(940		)		(1,410		)
Total Valero Energy Corporation stockholders’ equity	21,991				20,024
Noncontrolling interests	909				830
Total equity	22,900				20,854
Total liabilities and equity	$	50,158			$	46,173

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(millions of dollars, except per share amounts)

	Year Ended December 31,
	2017				2016				2015
Operating revenues (a)	$	93,980			$	75,659			$	87,804
Cost of sales:
Cost of materials and other	83,037				65,962				73,861
Operating expenses (excluding depreciation and amortization expense reflected below)	4,462				4,207				4,243
Depreciation and amortization expense	1,934				1,846				1,795
Lower of cost or market inventory valuation adjustment	—				(747		)		790
Total cost of sales	89,433				71,268				80,689
Other operating expenses	61				—				—
General and administrative expenses (excluding depreciation and amortization expense reflected below)	835				715				710
Depreciation and amortization expense	52				48				47
Asset impairment loss	—				56				—
Operating income	3,599				3,572				6,358
Other income, net	76				56				46
Interest and debt expense, net of capitalized interest	(468		)		(446		)		(433		)
Income before income tax expense (benefit)	3,207				3,182				5,971
Income tax expense (benefit)	(949		)		765				1,870
Net income	4,156				2,417				4,101
Less: Net income attributable to noncontrolling interests	91				128				111
Net income attributable to Valero Energy Corporation stockholders	$	4,065			$	2,289			$	3,990
Earnings per common share	$	9.17			$	4.94			$	8.00
Weighted-average common shares outstanding (in millions)	442				461				497
Earnings per common share – assuming dilution	$	9.16			$	4.94			$	7.99
Weighted-average common shares outstanding – assuming dilution (in millions)	444				464				500
Dividends per common share	$	2.80			$	2.40			$	1.70
_______________________________________________
Supplemental information:
(a) Includes excise taxes on sales by certain of our international operations	$	5,573			$	5,493			$	5,980

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(millions of dollars)

	Year Ended December 31,
	2017				2016				2015
Net income	$	4,156			$	2,417			$	4,101
Other comprehensive income (loss):
Foreign currency translation adjustment	514				(415		)		(606		)
Net gain (loss) on pension and other postretirement benefits	(65		)		(98		)		57
Other comprehensive income (loss) before income tax expense (benefit)	449				(513		)		(549		)
Income tax expense (benefit) related to items of other comprehensive income (loss)	(21		)		(37		)		17
Other comprehensive income (loss)	470				(476		)		(566		)
Comprehensive income	4,626				1,941				3,535
Less: Comprehensive income attributable to noncontrolling interests	91				129				111
Comprehensive income attributable to Valero Energy Corporation stockholders	$	4,535			$	1,812			$	3,424

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(millions of dollars)

	Valero Energy Corporation Stockholders’ Equity
	Common Stock				Additional Paid-in Capital				Treasury Stock				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total				Non- controlling Interests				Total Equity
Balance as of December 31, 2014	$	7			$	7,116			$	(8,125	)		$	22,046			$	(367	)		$	20,677			$	567			$	21,244
Net income	—				—				—				3,990				—				3,990				111				4,101
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	—				(155		)		(7		)		—				—				(162		)		—				(162		)
Stock purchases under purchase program	—				—				(2,667		)		—				—				(2,667		)		—				(2,667		)
Issuance of Valero Energy Partners LP common units	—				—				—				—				—				—				189				189
Contributions from noncontrolling interests	—				—				—				—				—				—				5				5
Distributions to noncontrolling interests	—				—				—				—				—				—				(45		)		(45		)
Other comprehensive loss	—				—				—				—				(566		)		(566		)		—				(566		)
Balance as of December 31, 2015	7				7,064				(10,799		)		25,188				(933		)		20,527				827				21,354
Net income	—				—				—				2,289				—				2,289				128				2,417
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	—				(89		)		34				—				—				(55		)		—				(55		)
Stock purchases under purchase program	—				—				(1,262		)		—				—				(1,262		)		—				(1,262		)
Issuance of Valero Energy Partners LP common units	—				—				—				—				—				—				11				11
Distributions to noncontrolling interests	—				—				—				—				—				—				(65		)		(65		)
Other	—				45				—				—				—				45				(72		)		(27		)
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
Net income	—				—				—				4,065				—				4,065				91				4,156
Dividends on common stock	—				—				—				(1,242		)		—				(1,242		)		—				(1,242		)
Stock-based compensation expense	—				68				—				—				—				68				—				68
Transactions in connection with stock-based compensation plans	—				(82		)		19				—				—				(63		)		—				(63		)
Stock purchases under purchase program	—				—				(1,307		)		—				—				(1,307		)		—				(1,307		)
Issuance of Valero Energy Partners LP common units	—				—				—				—				—				—				33				33
Contributions from noncontrolling interests	—				—				—				—				—				—				30				30
Distributions to noncontrolling interests	—				—				—				—				—				—				(67		)		(67		)
Other	—				(35		)		—				11				—				(24		)		(8		)		(32		)
Other comprehensive income	—				—				—				—				470				470				—				470
Balance as of December 31, 2017	$	7			$	7,039			$	(13,315	)		$	29,200			$	(940	)		$	21,991			$	909			$	22,900

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of dollars)

	Year Ended December 31,
	2017				2016				2015
Cash flows from operating activities:
Net income	$	4,156			$	2,417			$	4,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	1,986				1,894				1,842
Lower of cost or market inventory valuation adjustment	—				(747		)		790
Asset impairment loss	—				56				—
Deferred income tax expense (benefit)	(2,543		)		230				165
Changes in current assets and current liabilities	1,289				976				(1,306		)
Changes in deferred charges and credits and other operating activities, net	594				(6		)		19
Net cash provided by operating activities	5,482				4,820				5,611
Cash flows from investing activities:
Capital expenditures	(1,353		)		(1,278		)		(1,618		)
Deferred turnaround and catalyst costs	(523		)		(718		)		(673		)
Investments in joint ventures	(406		)		(4		)		(141		)
Acquisition of undivided interest	(72		)		—				—
Capital expenditures of certain variable interest entities	(26		)		—				—
Other investing activities, net	(2		)		(6		)		(55		)
Net cash used in investing activities	(2,382		)		(2,006		)		(2,487		)
Cash flows from financing activities:
Proceeds from debt issuances or borrowings	380				2,153				1,446
Repayments of debt and capital lease obligations	(21		)		(1,475		)		(513		)
Proceeds from the exercise of stock options	10				6				34
Purchase of common stock for treasury	(1,372		)		(1,336		)		(2,838		)
Common stock dividends	(1,242		)		(1,111		)		(848		)
Proceeds from issuance of Valero Energy Partners LP common units	36				10				189
Contributions from noncontrolling interests	30				—				5
Distributions to noncontrolling interests	(67		)		(65		)		(45		)
Other financing activities, net	(26		)		(194		)		25
Net cash used in financing activities	(2,272		)		(2,012		)		(2,545		)
Effect of foreign exchange rate changes on cash	206				(100		)		(154		)
Net increase in cash and temporary cash investments	1,034				702				425
Cash and temporary cash investments at beginning of year	4,816				4,114				3,689
Cash and temporary cash investments at end of year	$	5,850			$	4,816			$	4,114

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” 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, 2017. We sell our refined petroleum products in both the wholesale rack and bulk markets, and approximately 7,400 outlets carry our 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 1.45 billion gallons per year as of December 31, 2017. We sell our ethanol in the wholesale bulk market, and some of our logistics assets support our ethanol operations.

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 U.S. Securities and Exchange Commission (SEC).

Reclassifications

Effective January 1, 2017, we revised our reportable segments to reflect a new reportable segment — VLP. The results of the VLP segment include the results of VLP, our majority-owned master limited partnership. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation. See Note 16 for additional information.

Certain prior year amounts have been reclassified to conform to the 2017 presentation. The changes were primarily due to the separate presentation of depreciation and amortization expense related to operating expenses and general and administrative expenses.

Significant Accounting Policies

Principles of Consolidation

These financial statements include those of Valero, our wholly owned subsidiaries, and variable interest entities (VIEs) in which we have a controlling interest. Our VIEs are described in Note 11. The ownership interests held by others in the VIEs are recorded as noncontrolling interests. Intercompany items 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The cost of refinery feedstocks, refined petroleum products, and grain and ethanol inventories is 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. Our LIFO inventories are carried at the lower of cost or market. The cost of products purchased for resale and the cost of materials and supplies are determined principally under the weighted-average cost method. Our non-LIFO inventories are carried at the lower of cost or net realizable value. If the aggregate market value of our LIFO inventories or the aggregate net realizable value of our non-LIFO inventories is less than the related aggregate cost, we recognize a loss for the difference in our statements of income.

Property, Plant, and Equipment

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

Our operations, especially those of our refining segment, are highly capital intensive. Each of our refineries comprises a large base of property assets, consisting of a series of interconnected, highly integrated and interdependent crude oil processing facilities and supporting logistical infrastructure (Units), and these Units are continuously improved. Improvements consist of the addition of new Units and betterments of existing Units. We plan for these improvements by developing a multi-year capital program that is updated and revised based on changing internal and external factors.

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

Under the composite method of depreciation, the cost of an improvement is added to the composite group to which it relates and is depreciated over that group’s estimated useful life. We design improvements to our

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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, sold, or 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;

•	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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. In addition, we have asset retirement obligations with respect to our ethanol plants and certain of our logistics assets that require us to perform under law or contract once the asset is retired from service. It is our practice and current intent to maintain all our assets and continue making improvements to those assets based on technological advances. As a result, we believe that our refineries, ethanol plants, and logistics assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire such assets cannot reasonably be estimated at this time. We will recognize a liability at such time when sufficient information exists to estimate a date or range of potential settlement dates that is needed to employ a present value technique to estimate fair value.

Foreign Currency Translation

The functional currency of each of our international operations is the respective local currency, which includes the Canadian dollar, the pound sterling, the euro, and the Mexican peso. 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 loss.

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. Our VLP segment generates revenues by providing fee-based transportation and terminaling services

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to transport and store crude oil and refined petroleum products using its pipelines and terminals under long-term commercial agreements. VLP segment revenues are recognized upon completion of the transportation or terminaling service. However, because VLP segment revenues are intersegment revenues with our refining segment, all VLP segment revenues are eliminated in consolidation.

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 present the net effect in cost of materials and other. 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.

Cost Classifications

“Cost of materials and other” primarily includes the cost of materials that are a component of our products sold. These costs include (i) the direct cost of materials (such as crude oil and other refinery feedstocks, refined petroleum products and blendstocks, and ethanol feedstocks and products) that are a component of our products sold; (ii) costs related to the delivery (such as shipping and handling costs) of products sold; (iii) costs related to our environmental credit obligations to comply with various governmental and regulatory programs (such as the cost of Renewable Identification Numbers (RINs) as required by the U.S. Environmental Protection Agency’s (EPA) Renewable Fuel Standard and emission credits under various cap-and-trade systems, as defined in Note 18); (iv) gains and losses on our commodity derivative instruments; and (v) certain excise taxes.

“Operating expenses (excluding depreciation and amortization expense)” include costs to operate our refineries, ethanol plants, and logistics assets, except for depreciation and amortization expense. These costs primarily include employee-related expenses, energy and utility costs, catalysts and chemical costs, and repair and maintenance expenses.

“Depreciation and amortization expense” associated with our operations is separately presented in our statement of income as a component of cost of sales and general and administrative expenses and is disclosed by reportable segment in Note 16.

“Other operating expenses” include costs, if any, incurred by our reportable segments that are not associated with our 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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 materials and other 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 materials and other 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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Business Combinations

Effective January 1, 2017, we adopted the provisions of Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805),” that was issued by the Financial Accounting Standards Board (FASB) in January 2017. This ASU provides a more robust framework to evaluate whether transactions should be accounted for as acquisitions (dispositions) of assets or businesses. Our adoption of this ASU did not affect our financial position or results of operations. However, more of our future acquisitions may be accounted for as acquisitions of assets in accordance with this ASU.

Accounting Pronouncements Adopted on January 1, 2018

ASU No. 2014-09

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. This new standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We adopted this standard on January 1, 2018 and it 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 of refined petroleum products and ethanol. These revenues are largely based on the current spot (market) prices of the products sold, which represent 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 adopted this new standard on January 1, 2018 using the modified retrospective method as permitted by the standard. Under this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed. Because the adoption of this standard did not materially impact the manner in which we recognize revenues, we will not make such an adjustment to retained earnings. We continue to develop our revenue disclosures and have enhanced our accounting systems to enable the preparation of such disclosures.

ASU No. 2016-01

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. The provisions of this ASU 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 year of adoption. The adoption of this ASU effective January 1, 2018 did not affect our financial position nor will it affect our results of operations, but it will result in revised disclosures.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ASU No. 2017-07

In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715),” which requires employers to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost (non-service cost components) to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU is to be applied retrospectively for income statement items and prospectively for any capitalized benefit costs. The adoption of this ASU effective January 1, 2018 did not affect our financial position or results of operations, but will result in the reclassification of the non-service cost components from operating expenses (excluding depreciation and amortization) and general and administrative expenses (excluding depreciation and amortization) to “other income, net.”

ASU No. 2017-09

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718),” to reduce diversity in practice, as well as reduce cost and complexity regarding a change to the terms or conditions of a share-based payment award. The adoption of this ASU effective January 1, 2018 did not have an immediate effect on our financial position or results of operations as it will be applied prospectively to an award modified on or after adoption.

Accounting Pronouncements Not Yet Adopted

ASU No. 2016-02

In February 2016, the FASB issued 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. This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We will adopt this new standard on January 1, 2019, and we expect to use the modified retrospective method of adoption. We are enhancing our contracting and lease evaluation systems and related processes, and we are developing a new lease accounting system to capture our leases and support the required disclosures. During 2018, we will continue to monitor the adoption process to ensure compliance with accounting and disclosure requirements. We also continue the integration of our lease accounting system with our general ledger, and we will make modifications to the related procurement and payment processes. We anticipate this standard will have a material impact on our financial position by increasing our assets and liabilities by equal amounts through the recognition of right-of-use assets and lease liabilities for our operating leases. However, we do not expect adoption to have a material impact on our results of operations or liquidity. We expect our accounting for capital leases to remain substantially unchanged.

ASU No. 2017-12

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815),” to improve and simplify accounting guidance for hedge accounting. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We use economic hedges to manage commodity price risk; however, we have not designated these hedges as fair value or cash flow hedges. As a result, the adoption of this ASU effective January 1, 2019 is not expected to affect our financial position or results of operations.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ASU No. 2018-02

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220),” which allows for the reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform), as discussed in Note 14. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. This ASU shall be applied at the beginning of the annual or interim period of adoption or retrospectively to each period in which the income tax effects of Tax Reform affects the items remaining in accumulated other comprehensive income. The adoption of this ASU is not expected to affect our financial position or results of operations, but will result in the reclassification of the income tax effects of Tax Reform and additional disclosures.

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 and CITGO (defined below). 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.

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.

Prior to the Aruba Disposition, we recognized an asset impairment loss of $56 million in June 2016 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, CITGO Aruba Refining N.V. (CAR), and CITGO Petroleum Corporation (together with CAR and certain other affiliates, collectively, 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.)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.	RECEIVABLES

Receivables consisted of the following (in millions):

	December 31,
	2017				2016
Accounts receivable	$	6,786			$	5,687
Commodity derivative and foreign currency contract receivables	102				129
Other receivables	67				117
	6,955				5,933
Allowance for doubtful accounts	(33		)		(32		)
Receivables, net	$	6,922			$	5,901

There were no significant changes in our allowance for doubtful accounts during the years ended December 31, 2017, 2016, and 2015.

4.	INVENTORIES

Inventories consisted of the following (in millions):

	December 31,
	2017				2016
Refinery feedstocks	$	2,427			$	2,068
Refined petroleum products and blendstocks	3,459				3,153
Ethanol feedstocks and products	242				238
Materials and supplies	256				250
Inventories	$	6,384			$	5,709

As of December 31, 2017 and 2016, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $3.0 billion and $1.9 billion, respectively. As of December 31, 2017 and 2016, our non-LIFO inventories accounted for $1.0 billion and $641 million, respectively, of our total inventories.

During the year ended December 31, 2016, 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, and we had a liquidation of LIFO inventory layers that increased cost of sales by $120 million.

During the year ended December 31, 2015, we recorded a lower of cost or market inventory valuation adjustment that resulted in a net charge to our results of operations of $790 million in order to state our inventories at market as of December 31, 2015.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.	PROPERTY, PLANT, AND EQUIPMENT

Major classes of property, plant, and equipment, including assets held under capital leases, consisted of the following (in millions):

		December 31,
		2017				2016
Land		$	411			$	400
Crude oil processing facilities		30,109				29,754
Transportation and terminaling facilities		4,335				3,692
Grain processing equipment		903				855
Administrative buildings		910				838
Other		2,068				1,464
Construction in progress		1,274				730
Property, plant, and equipment, at cost		40,010				37,733
Accumulated depreciation		(12,530		)		(11,261		)
Property, plant, and equipment, net		$	27,480			$	26,472

We have various assets under capital leases that primarily support our refining operations totaling $635 million and $118 million as of December 31, 2017 and 2016, respectively. Accumulated amortization on assets under capital leases was $72 million and $45 million as of December 31, 2017 and 2016, respectively.

Depreciation expense was $1.3 billion for each of the years in the three-year period ended December 31, 2017.

6.	DEFERRED CHARGES AND OTHER ASSETS

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

	December 31,
	2017				2016
Deferred turnaround and catalyst costs, net	$	1,520			$	1,614
Income taxes receivable	673				447
Investments in joint ventures	530				201
Intangible assets, net	142				148
Other	501				491
Deferred charges and other assets, net	$	3,366			$	2,901

Amortization expense for the deferred charges and other assets shown above was $650 million, $575 million, and $542 million for the years ended December 31, 2017, 2016, and 2015, respectively.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.	ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES

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

	Accrued Expenses								Other Long- Term Liabilities
	December 31,								December 31,
	2017				2016				2017				2016
Defined benefit plan liabilities (see Note 12)	$	33			$	32			$	776			$	742
Wage and other employee-related liabilities	278				225				111				103
Uncertain income tax position liabilities (see Note 14)	—				—				723				465
Repatriation tax liability (see Note 14)	—				—				597				—
Environmental liabilities	30				29				232				223
Environmental credit obligations (see Note 18)	152				214				—				—
Accrued interest expense	105				104				—				—
Other accrued liabilities	114				90				290				211
Accrued expenses and other long-term liabilities	$	712			$	694			$	2,729			$	1,744

There were no significant changes in our environmental liabilities during each of the years in the three-year period ended December 31, 2017.

VALERO ENERGY CORPORATION

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 Maturity		December 31,
		2017				2016
Bank credit facilities:
Valero Revolver	2020		$	—			$	—
VLP Revolver	2020		410				30
Canadian Revolver	2018		—				—
Accounts receivable sales facility	2018		100				100
Non-bank debt:
Valero Senior Notes
6.625%	2037		1,500				1,500
3.4%	2026		1,250				1,250
6.125%	2020		850				850
9.375%	2019		750				750
7.5%	2032		750				750
4.9%	2045		650				650
3.65%	2025		600				600
10.5%	2039		250				250
8.75%	2030		200				200
7.45%	2097		100				100
6.75%	2037		24				24
VLP Senior Notes, 4.375%	2026		500				500
Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.0%	2040		300				300
Debenture, 7.65%	2026		100				100
Other debt	2023		49				51
Net unamortized debt issuance costs and other			(73		)		(79		)
Total debt			8,310				7,926
Capital lease obligations			562				75
Total debt and capital lease obligations			8,872				8,001
Less current portion			122				115
Debt and capital lease obligations, less current portion			$	8,750			$	7,886

VALERO ENERGY CORPORATION

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, 2017, 2016, and 2015.

VLP Revolver

VLP has a $750 million senior unsecured revolving credit facility (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 VLP may request two additional one-year extensions, subject to certain conditions. VLP may terminate the VLP Revolver with notice to the lenders of at least three business days prior to termination. The VLP Revolver 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, 2017 and 2016, the variable rate was 2.875 percent and 2.3125 percent, respectively. 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 covenant that requires VLP to maintain 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, 2017, VLP borrowed $118 million and $262 million under the VLP Revolver in connection with VLP’s acquisitions from us of Parkway Pipeline LLC and Valero Partners Port Arthur, LLC, respectively, and had no repayments under the VLP Revolver. During the year ended December 31, 2016, VLP borrowed $139 million and $210 million under the VLP Revolver in connection with VLP’s acquisitions from us of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business, respectively, and repaid $494 million on the VLP Revolver. During the year

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Canadian Revolver

In October 2017, one of our Canadian subsidiaries amended its committed revolving credit facility (the Canadian Revolver) to increase the borrowing capacity from C$25 million to C$75 million under which it may borrow and obtain letters of credit and to extend the maturity date from November 2017 to November 2018.

We had no borrowings or repayments under the Canadian Revolver during the years ended December 31, 2017, 2016, and 2015.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell up to $1.3 billion of eligible trade receivables on a revolving basis. In July 2017, we amended our agreement to extend the maturity date to July 2018. 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, 2017 and 2016, $2.3 billion and $2.0 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. As of December 31, 2017 and 2016, the variable interest rate on the accounts receivable sales facility was 2.0387 percent and 1.3422 percent, respectively. During the years ended December 31, 2017, 2016, and 2015, we had no proceeds from or repayments under the accounts receivable sales facility.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summary of Credit Facilities

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

								December 31, 2017
		Facility Amount				Maturity Date		Outstanding Borrowings				Letters of Credit Issued				Availability
Committed facilities:
Valero Revolver		$	3,000			November 2020		$	—			$	54			$	2,946
VLP Revolver		$	750			November 2020		$	410			$	—			$	340
Canadian Revolver		C$	75			November 2018		C$	—			C$	10			C$	65
Accounts receivable sales facility		$	1,300			July 2018		$	100			n/a				$	1,200
Letter of credit facility		$	100			November 2018		n/a				$	—			$	100
Uncommitted facilities:
Letter of credit facilities		n/a				n/a		n/a				$	249			n/a

Letters of credit issued as of December 31, 2017 expire at various times in 2018 through 2020.

In June 2017, one of our committed letter of credit facilities with a borrowing capacity of $125 million expired and was not renewed. In November 2017, the remaining committed letter of credit facility with a borrowing capacity of $100 million was amended to extend the maturity date from November 2017 to November 2018.

We are charged letter of credit issuance fees under our various uncommitted short-term bank credit facilities. These uncommitted credit facilities have no commitment fees or compensating balance requirements.

Non-Bank Debt

There was no issuance or redemption activity related to our non-bank debt during the year ended December 31, 2017.

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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Capital Lease Obligations

We have capital lease obligations that mature at various dates through 2046 for storage tanks, terminal facilities, and other assets that are used in our refining operations. In January 2017, we recognized capital lease assets and related obligations totaling approximately $490 million for the lease of storage tanks located at three of our refineries. These lease agreements have initial terms of 10 years each with successive 10-year automatic renewals.

Other Disclosures

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

	Year Ended December 31,
	2017				2016				2015
Interest and debt expense	$	539			$	511			$	504
Less capitalized interest	71				65				71
Interest and debt expense, net of capitalized interest	$	468			$	446			$	433

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Principal maturities for our debt obligations and future minimum rentals on capital lease obligations as of December 31, 2017 were as follows (in millions):

	Debt				Capital Lease Obligations
2018	$	106			$	55
2019	756				55
2020	1,266				53
2021	6				52
2022	6				54
Thereafter	6,243				969
Net unamortized debt issuance costs and other	(73		)		n/a
Total minimum lease payments	n/a				1,238
Less amount representing interest	n/a				676
Total	$	8,310			$	562

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2017, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess of one year were as follows (in millions):

2018	$	359
2019	236
2020	148
2021	104
2022	74
Thereafter	366
Total minimum rental payments	$	1,287
Minimum rentals to be received under subleases	$	15

“Rental expense, net of sublease rental income” was as follows (in millions):

	Year Ended December 31,
	2017				2016				2015
Minimum rental expense	$	691			$	739			$	732
Contingent rental expense	21				70				105
Total rental expense	712				809				837
Less sublease rental income	54				31				46
Rental expense, net of sublease rental income	$	658			$	778			$	791

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 terminaling agreements. We enter into these contracts to ensure an adequate supply of utilities and feedstock and adequate storage capacity to operate our refineries and ethanol plants. 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.

Other Commitments

MVP Terminal

We have a 50 percent membership interest in MVP Terminalling, LLC (MVP), a Delaware limited liability company formed in September 2017 with a subsidiary of Magellan Midstream Partners LP (Magellan), to construct, own, and operate the Magellan Valero Pasadena marine terminal (MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. The MVP Terminal will contain (i) approximately 5 million barrels of storage capacity, (ii) a dock with two ship berths, and (iii) a three-bay truck rack facility. In connection with our terminaling agreement with MVP, described below, we will have dedicated use of (i) approximately 4 million barrels of storage, (ii) one ship berth, and (iii) the three-bay truck rack facility.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Construction of phases one and two of the project began in 2017 with a total estimated cost of $840 million, of which we have committed to contribute 50 percent (approximately $420 million). The project could expand up to four phases with a total project cost of approximately $1.4 billion if warranted by additional demand and agreed to by Magellan and us. We have contributed $81 million to MVP through December 2017.

Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal upon completion of phase two, which is expected to occur in early 2020. The terminaling agreement has an initial term of 12 years with two five-year automatic renewals, and year-to-year renewals thereafter.

Due to our membership interest in MVP and because the terminaling agreement was determined to be a capital lease, we are the accounting owner of the MVP Terminal during the construction period. Accordingly, as of December 31, 2017, we recorded an asset of $174 million in property, plant, and equipment representing 100 percent of the construction costs incurred by MVP, as well as capitalized interest incurred by us, and a long-term liability of $94 million payable to Magellan. The amounts recorded for the portion of the construction costs associated with the payable to Magellan are noncash investing and financing items, respectively.

Central Texas Pipeline and Terminal Projects

We have committed to a 40 percent undivided interest in a project with a subsidiary of Magellan to jointly build an estimated 135-mile, 20-inch refined petroleum products pipeline with a capacity of up to 150,000 barrels per day from Houston to Hearne, Texas. The pipeline is expected to be completed in mid-2019. Our estimated cost to acquire our 40 percent undivided interest in this pipeline is $170 million. We have incurred capital expenditures of $7 million through December 2017.

Sunrise Pipeline System

Effective January 31, 2018, we entered into a joint ownership agreement with Sunrise Pipeline LLC, a subsidiary of Plains All American Pipeline, L.P. (Plains) to acquire a 20 percent undivided interest in the expanded Sunrise Pipeline System to be constructed by Plains. The Sunrise Pipeline System will contain (i) a 262-mile, 24-inch crude oil pipeline (the Sunrise Pipeline) that will originate at Plains’ terminal in Midland, Texas and will end at Plains’ station in Wichita Falls, Texas with throughput capacity of 500,000 barrels per day, and (ii) two 270,000 shell barrel capacity tanks located at the Colorado City, Texas station (the Colorado City Storage Tanks). The Sunrise Pipeline System expansion is expected to begin construction in early 2018 and continue through the first half of 2019. The cost to acquire our 20 percent undivided interest in the Sunrise Pipeline System is $135 million, of which $34 million was paid on February 1, 2018. Including the February 2018 payment, we expect to incur approximately $101 million during 2018.

Environmental Matters

We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and during 2015, one of these companies assumed the ongoing 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. 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 Stock			Treasury Stock
Balance as of December 31, 2014	673			(159	)
Transactions in connection with stock-based compensation plans	—			1
Stock purchases under purchase program	—			(42	)
Balance as of December 31, 2015	673			(200	)
Transactions in connection with stock-based compensation plans	—			1
Stock purchases under purchase program	—			(23	)
Balance as of December 31, 2016	673			(222	)
Transactions in connection with stock-based compensation plans	—			1
Stock purchases under purchase program	—			(19	)
Balance as of December 31, 2017	673			(240	)

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, 2017 or 2016.

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, and we completed that program during 2017. 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, 2017, 2016, and 2015, we purchased $1.3 billion, $1.3 billion, and $2.7 billion, respectively, of our common stock under our programs. As of December 31, 2017, we have approvals under the 2016 program to purchase approximately $1.2 billion of our common stock.

On January 23, 2018, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding common stock with no expiration date.

Common Stock Dividends

On January 23, 2018, our board of directors declared a quarterly cash dividend of $0.80 per common share payable on March 6, 2018 to holders of record at the close of business on February 13, 2018.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Valero Energy Partners LP Units

On September 16, 2016, VLP entered into an equity distribution agreement pursuant to which VLP may offer and sell from time to time their common units having an aggregate offering price of up to $350 million based on amounts, at prices, and on terms to be determined by market conditions and other factors at the time of the offerings (such continuous offering program, or at-the-market program, referred to as the “ATM Program”). VLP issued 742,897 and 223,083 common units under the ATM Program and received net proceeds of $35 million and $9 million after deducting offering costs during the years ended December 31, 2017 and 2016, respectively.

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 Income (Loss)

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

	Before-Tax Amount				Tax Expense (Benefit)				Net Amount
Year Ended December 31, 2017:
Foreign currency translation adjustment	$	514			$	—			$	514
Pension and other postretirement benefits:
Loss arising during the year related to:
Net actuarial loss	(79		)		(29		)		(50		)
Prior service cost	(4		)		(1		)		(3		)
Miscellaneous loss	—				3				(3		)
Amounts reclassified into income related to:
Net actuarial loss	50				18				32
Prior service credit	(36		)		(13		)		(23		)
Curtailment and settlement loss	4				1				3
Net loss on pension and other postretirement benefits	(65		)		(21		)		(44		)
Other comprehensive income	$	449			$	(21	)		$	470

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Before-Tax Amount				Tax 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 loss	48				18				30
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 gain	50				15				35
Prior service cost	(22		)		(8		)		(14		)
Amounts reclassified into income related to:
Net actuarial loss	62				22				40
Prior service credit	(40		)		(14		)		(26		)
Curtailment and settlement loss	7				2				5
Net gain on pension and other postretirement benefits	57				17				40
Other comprehensive loss	$	(549	)		$	17			$	(566	)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Income (Loss)

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

	Foreign Currency Translation Adjustment				Defined Benefit Plan Items				Total
Balance as of December 31, 2014	$	1			$	(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		)
Other comprehensive income (loss) before reclassifications	514				(56		)		458
Amounts reclassified from accumulated other comprehensive loss	—				12				12
Net other comprehensive income (loss)	514				(44		)		470
Balance as of December 31, 2017	$	(507	)		$	(433	)		$	(940	)

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 Components														Affected Line Item in the Statement of Income
	Year Ended December 31,
	2017				2016				2015
Amortization of items related to defined benefit pension plans:
Net actuarial loss		$	(50	)		$	(48	)		$	(62	)		(a)
Prior service credit		36				36				40				(a)
Curtailment and settlement		(4		)		—				(7		)		(a)
		(18		)		(12		)		(29		)		Total before tax
		6				5				10				Tax benefit
Total reclassifications for the year		$	(12	)		$	(7	)		$	(19	)		Net of tax

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(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 (excluding depreciation and amortization expense) and general and administrative expenses (excluding depreciation and amortization expense).

11.	VARIABLE INTEREST ENTITIES

Consolidated VIEs

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, 2017, we owned a 66.2 percent limited partner interest and a 2.0 percent general partner interest in VLP, and public unitholders owned a 31.8 percent limited partner interest.

We determined VLP is 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 66.2 percent limited partner interest and 2.0 percent general partner interest provide us with significant economic rights and obligations. Substantially 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 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 have terminaling agreements with three subsidiaries of Infraestructura Energetica Nova, S.A.B. de C.V. (IEnova), a Mexican subsidiary of Sempra Energy, a U.S. public company (the three subsidiaries are collectively referred to as VPM Terminals). The terminaling agreements represent variable interests because we have determined them to be capital leases due to our exclusive use of the terminals. Although we do not have an ownership interest in the entities that own each of the three terminals, the capital leases convey to us (i) the power to direct the activities that most significantly impact the economic performance of all three terminals and (ii) the ability to influence the benefits received or the losses incurred by the terminals because of our use of the terminals. As a result, we determined each of the entities was a VIE and that we are the primary beneficiary of each. Substantially all of VPM Terminals’ revenues will be derived from us; therefore, there is limited risk to us associated with VPM Terminals’ operations.

•

We also have financial interests in other entities that have been 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/or (b) our 50 percent

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 some of our 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, 2017
	VLP				DGD				VPM Terminals				Other				Total
Assets
Cash and temporary cash investments	$	42			$	123			$	1			$	13			$	179
Other current assets	2				66				4				—				72
Property, plant, and equipment, net	1,416				435				51				127				2,029
Liabilities
Current liabilities	$	27			$	33			$	26			$	9			$	95
Debt and capital lease obligations, less current portion	905				—				—				43				948

	December 31, 2016
	VLP				DGD				Other				Total
Assets
Cash and temporary cash investments	$	71			$	167			$	15			$	253
Other current assets	3				87				—				90
Property, plant, and equipment, net	865				355				133				1,353
Liabilities
Current liabilities	$	15			$	17			$	7			$	39
Debt and capital lease obligations, less current portion	525				—				46				571

Non-Consolidated VIEs

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. These non-consolidated VIEs are not material to our financial position or results of operations and are primarily accounted for as equity investments. However, one of our non-consolidated VIEs is accounted for under owner accounting and is further described below and in Note 9.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As described in Note 9, we have a 50 percent membership interest in MVP, which was formed to construct, own, and operate the MVP Terminal. We determined MVP is a VIE because the power to direct the activities that most significantly impact its economic performance is not required to be held by its two members, but is held by Magellan, as operator under a construction, operating, and management agreement with MVP. For this reason and because Magellan holds a 50 percent interest in MVP that provides it with significant economic rights and obligations, we determined that we are not the primary beneficiary. As of December 31, 2017, our maximum exposure to loss was $80 million, which represents our equity investment in MVP.

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.

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 Plans								Other Postretirement Benefit Plans
	December 31,								December 31,
	2017				2016				2017				2016
Changes in benefit obligation:
Benefit obligation as of beginning of year	$	2,567			$	2,365			$	302			$	336
Service cost	123				111				6				7
Interest cost	86				84				10				12
Participant contributions	—				—				9				8
Benefits paid	(158		)		(130		)		(28		)		(27		)
Actuarial (gain) loss	286				171				6				(35		)
Other	22				(34		)		1				1
Benefit obligation as of end of year	$	2,926			$	2,567			$	306			$	302
Changes in plan assets (a):
Fair value of plan assets as of beginning of year	$	2,097			$	1,947			$	—			$	—
Actual return on plan assets	363				165				—				—
Valero contributions	110				141				19				18
Participant contributions	—				—				9				8
Benefits paid	(158		)		(130		)		(28		)		(27		)
Other	16				(26		)		—				1
Fair value of plan assets as of end of year	$	2,428			$	2,097			$	—			$	—
Reconciliation of funded status (a):
Fair value of plan assets as of end of year	$	2,428			$	2,097			$	—			$	—
Less benefit obligation as of end of year	2,926				2,567				306				302
Funded status as of end of year	$	(498	)		$	(470	)		$	(306	)		$	(302	)
Accumulated benefit obligation	$	2,746			$	2,419			n/a				n/a

---

(a)

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

	Pension Plans								Other Postretirement Benefit Plans
	December 31,								December 31,
	2017				2016				2017				2016
Deferred charges and other assets, net	$	5			$	2			$	—			$	—
Accrued expenses	(14		)		(13		)		(19		)		(19		)
Other long-term liabilities	(489		)		(459		)		(287		)		(283		)
	$	(498	)		$	(470	)		$	(306	)		$	(302	)

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

	December 31,
	2017				2016
Projected benefit obligation	$	2,661			$	2,322
Accumulated benefit obligation	2,526				2,210
Fair value of plan assets	2,180				1,870

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 Benefits				Other Postretirement Benefits
2018	$	162			$	19
2019	219				19
2020	184				19
2021	180				19
2022	185				19
2023-2027	1,074				93

We plan to contribute approximately $131 million to our pension plans, including discretionary contributions of $100 million, and $19 million to our other postretirement benefit plans during 2018.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	Pension Plans												Other Postretirement Benefit Plans
	Year Ended December 31,												Year Ended December 31,
	2017				2016				2015				2017				2016				2015
Service cost	$	123			$	111			$	109			$	6			$	7			$	8
Interest cost	86				84				98				10				12				14
Expected return on plan assets	(150		)		(139		)		(133		)		—				—				—
Amortization of:
Net actuarial (gain) loss	53				49				62				(3		)		(1		)		—
Prior service credit	(20		)		(20		)		(22		)		(16		)		(16		)		(18		)
Special charges (credits)	4				(7		)		7				—				—				—
Net periodic benefit cost (credit)	$	96			$	78			$	121			$	(3	)		$	2			$	4

Amortization of prior service credit shown in the preceding 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 preceding 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 (loss) were as follows (in millions):

	Pension Plans												Other Postretirement Benefit Plans
	Year Ended December 31,												Year Ended December 31,
	2017				2016				2015				2017				2016				2015
Net gain (loss) arising during the year:
Net actuarial gain (loss)	$	(73	)		$	(145	)		$	24			$	(6	)		$	35			$	26
Prior service cost	(4		)		—				(22		)		—				—				—
Net (gain) loss reclassified into income:
Net actuarial (gain) loss	53				49				62				(3		)		(1		)		—
Prior service credit	(20		)		(20		)		(22		)		(16		)		(16		)		(18		)
Curtailment and settlement loss	4				—				7				—				—				—
Total changes in other comprehensive income (loss)	$	(40	)		$	(116	)		$	49			$	(25	)		$	18			$	8

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The pre-tax amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost (credit) were as follows (in millions):

	Pension Plans								Other Postretirement Benefit Plans
	December 31,								December 31,
	2017				2016				2017				2016
Net actuarial (gain) loss	$	894			$	878			$	(57	)		$	(66	)
Prior service credit	(121		)		(145		)		(42		)		(58		)
Total	$	773			$	733			$	(99	)		$	(124	)

The following pre-tax amounts included in accumulated other comprehensive loss as of December 31, 2017 are expected to be recognized as components of net periodic benefit cost (credit) during the year ending December 31, 2018 (in millions):

	Pension Plans				Other Postretirement Benefit Plans
Amortization of net actuarial (gain) loss	$	66			$	(2	)
Amortization of prior service credit	(19		)		(11		)
Total	$	47			$	(13	)

The weighted-average assumptions used to determine the benefit obligations were as follows:

	Pension Plans						Other Postretirement Benefit Plans
	December 31,						December 31,
	2017			2016			2017			2016
Discount rate	3.58	%		4.08	%		3.72	%		4.26	%
Rate of compensation increase	3.86	%		3.81	%		n/a			n/a

The discount rate assumption used to determine the benefit obligations as of December 31, 2017 and 2016 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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The weighted-average assumptions used to determine the net periodic benefit cost were as follows:

	Pension Plans									Other Postretirement Benefit Plans
	Year Ended December 31,									Year Ended December 31,
	2017			2016			2015			2017			2016			2015
Discount rate	4.08	%		4.45	%		4.10	%		4.26	%		4.53	%		4.13	%
Expected long-term rate of return on plan assets	7.29	%		7.28	%		7.29	%		n/a			n/a			n/a
Rate of compensation increase	3.81	%		3.79	%		3.78	%		n/a			n/a			n/a

The assumed health care cost trend rates were as follows:

	December 31,
	2017			2016
Health care cost trend rate assumed for the next year	7.30	%		7.28	%
Rate to which the cost trend rate was assumed to decline (the ultimate trend rate)	5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate	2026			2026

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 following tables present the fair values of the assets of our pension plans (in millions) as of December 31, 2017 and 2016 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 Using												Total as of December 31, 2017
	Level 1				Level 2				Level 3
Equity securities:
U.S. companies (a)	$	571			$	—			$	—			$	571
International companies	187				1				—				188
Preferred stock	4				—				—				4
Mutual funds:
International growth	118				—				—				118
Index funds (b)	85				—				—				85
Corporate debt instruments	—				272				—				272
Government securities:
U.S. Treasury securities	45				—				—				45
Other government securities	—				144				—				144
Common collective trusts (c)	—				621				—				621
Pooled separate accounts	—				192				—				192
Private funds	—				101				—				101
Insurance contract	—				18				—				18
Interest and dividends receivable	5				—				—				5
Cash and cash equivalents	85				1				—				86
Securities transactions payable, net	(22		)		—				—				(22		)
Total pension assets	$	1,078			$	1,350			$	—			$	2,428

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See notes on page 109.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fair Value Measurements Using												Total as of December 31, 2016
	Level 1				Level 2				Level 3
Equity securities:
U.S. companies (a)	$	562			$	—			$	—			$	562
International companies	164				—				—				164
Preferred stock	3				—				—				3
Mutual funds:
International growth	90				—				—				90
Index funds (b)	230				—				—				230
Corporate debt instruments	—				280				—				280
Government securities:
U.S. Treasury securities	52				—				—				52
Other government securities	—				158				—				158
Common collective trusts (c)	—				434				—				434
Private funds	—				76				—				76
Insurance contract	—				18				—				18
Interest and dividends receivable	5				—				—				5
Cash and cash equivalents	56				16				—				72
Securities transactions payable, net	(47		)		—				—				(47		)
Total pension assets	$	1,115			$	982			$	—			$	2,097

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(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 70 percent equities and 30 percent bonds as of December 31, 2017. As of December 31, 2016, the class included primarily investments in approximately 50 percent equities and 50 percent bonds.

(c)	This class includes primarily investments in approximately 80 percent equities and 20 percent bonds as of December 31, 2017. As of December 31, 2016, the class included primarily investments in approximately 90 percent equities and 10 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, 2017, the target allocations for plan assets under our primary pension plan are 70 percent equity securities and 30 percent fixed income investments.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The expected long-term rate of return on plan assets is based on a forward-looking expected asset return model. This model derives an expected rate of return based on the target asset allocation of a plan’s assets. The underlying assumptions regarding expected rates of return for each asset class reflect Aon Hewitt’s best expectations for these asset classes. The model reflects the positive effect of periodic rebalancing among diversified asset classes. We select an expected asset return that is supported by this model.

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 $70 million, $67 million, and $65 million for the years ended December 31, 2017, 2016, and 2015, 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, 2017, 9,409,188 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,
	2017				2016				2015
Stock-based compensation expense:
Restricted stock	$	58			$	52			$	47
Performance awards	19				15				11
Stock options	—				1				1
Total stock-based compensation expense	$	77			$	68			$	59
Tax benefit recognized on stock-based compensation expense	$	27			$	24			$	21
Tax benefit realized for tax deductions resulting from exercises and vestings	44				33				66
Effect of tax deductions in excess of recognized stock-based compensation expense (a)	24				22				44

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(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.

Our significant stock-based compensation arrangement 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 following table.

	Number of Shares			Weighted- Average Grant-Date Fair Value Per Share
Nonvested shares as of January 1, 2017	1,566,950			$	60.68
Granted	739,393			79.32
Vested	(897,246	)		61.76
Forfeited	(8,057	)		61.22
Nonvested shares as of December 31, 2017	1,401,040			69.82

As of December 31, 2017, 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,
	2017				2016				2015
Weighted-average grant-date fair value per share of restricted stock granted	$	79.32			$	59.00			$	70.07
Fair value of restricted stock vested	71				46				69

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.	INCOME TAXES

Tax Reform

On December 22, 2017, Tax Reform was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the Code) and was effective beginning on January 1, 2018. The most significant changes affecting us are as follows:

•	reduction in the statutory income tax rate from 35 percent to 21 percent;

•	repeal of the manufacturing deduction;

•	deduction for all of the costs to acquire or construct certain business assets in the year they are placed in service through 2022;

•	shift from a worldwide system of taxation to a territorial system of taxation, resulting in a minimum tax on the income of international subsidiaries (the global intangible low-taxes income (GILTI) tax) rather than a tax deferral on such earnings in certain circumstances; and

•	assessment of a one-time transition tax on deemed repatriated earnings and profits from our international subsidiaries.

We reflected an overall income tax benefit of $1.9 billion for the year ended December 31, 2017 with respect to Tax Reform as a result of the following:

•	We remeasured our U.S. deferred tax assets and liabilities using the 21 percent rate, which resulted in a tax benefit and a reduction to our net deferred tax liabilities of $2.6 billion.

•

We recognized a one-time transition tax of $734 million on the deemed repatriation of previously undistributed accumulated earnings and profits of our international subsidiaries based on approximately $4.7 billion of the combined earnings and profits of our international subsidiaries that have not been distributed to us. This transition tax will be remitted to the Internal Revenue Service (IRS) over the eight-year period provided in the Code beginning in 2018.

•	We accrued withholding tax of $47 million on a portion of the cash held by one of our international subsidiaries that we have deemed to not be permanently reinvested in our operations in that country.

Because of the significant and complex changes to the Code from Tax Reform, including the need for regulatory guidance from the IRS to properly account for many of the provisions, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” (SAB 118) to provide for a measurement period of up to one year for adjustments to be made to account for the effects of Tax Reform. Specifically, SAB 118 requires that the effects of Tax Reform be recorded for items where the accounting is complete, as well as for items where a reasonable estimate can be made (referred to as provisional amounts). For items where reasonable estimates cannot be made, provisional amounts should not be recorded and those items should continue to be accounted for under the Code prior to changes from Tax Reform until a reasonable estimate can be made.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

See “Details of the Tax Reform Adjustment” below, which more fully describes the components of our $1.9 billion adjustment, including the components for which we recorded a provisional amount and the components that are incomplete.

Income Statement Components

Income before income tax expense (benefit) was as follows (in millions):

	Year Ended December 31,
	2017				2016				2015
U.S. operations	$	2,283			$	1,733			$	5,327
International operations	924				1,449				644
Income before income tax expense (benefit)	$	3,207			$	3,182			$	5,971

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

	Year Ended December 31,
	2017			2016			2015
U.S. (a)	35	%		35	%		35	%
Canada	15	%		15	%		15	%
U.K.	19	%		20	%		20	%
Ireland	13	%		13	%		13	%
Aruba (b)	n/a			7	%		7	%

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(a)	Statutory income tax rate was reduced to 21 percent effective January 1, 2018 as described in “Tax Reform” above.

(b)	Statutory income tax rate applicable through the date of the Aruba Disposition as described in Note 2.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	Year Ended December 31, 2017
	U.S.							International							Total
	Amount				Percent			Amount				Percent			Amount				Percent
Income tax expense at statutory rates	$	799			35.0	%		$	158			17.1	%		$	957			29.8	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	37				1.6	%		46				5.0	%		83				2.6	%
Permanent differences:
Manufacturing deduction	(42		)		(1.8	)%		—				—			(42		)		(1.3	)%
Other	(9		)		(0.4	)%		—				—			(9		)		(0.3	)%
Change in tax law	(1,862		)		(81.6	)%		—				—			(1,862		)		(58.1	)%
Tax effects of income associated with noncontrolling interests	(31		)		(1.4	)%		—				—			(31		)		(1.0	)%
Other, net	(52		)		(2.3	)%		7				0.8	%		(45		)		(1.4	)%
Income tax expense (benefit)	$	(1,160	)		(50.9	)%		$	211			22.9	%		$	(949	)		(29.7	)%

	Year Ended December 31, 2016
	U.S.							International							Total
	Amount				Percent			Amount				Percent			Amount				Percent
Income tax expense at statutory rates	$	606			35.0	%		$	256			17.7	%		$	862			27.1	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	5				0.3	%		31				2.1	%		36				1.1	%
Permanent differences:
Manufacturing deduction	(22		)		(1.3	)%		—				—			(22		)		(0.7	)%
Other	(3		)		(0.2	)%		(10		)		(0.7	)%		(13		)		(0.4	)%
Change in tax law	—				—			(7		)		(0.5	)%		(7		)		(0.2	)%
Tax effects of income associated with noncontrolling interests	(44		)		(2.5	)%		—				—			(44		)		(1.4	)%
Other, net	(37		)		(2.1	)%		(10		)		(0.7	)%		(47		)		(1.5	)%
Income tax expense	$	505			29.2	%		$	260			17.9	%		$	765			24.0	%

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Year Ended December 31, 2015
	U.S.							International							Total
	Amount				Percent			Amount				Percent			Amount				Percent
Income tax expense at statutory rates	$	1,864			35.0	%		$	92			14.3	%		$	1,956			32.8	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	45				0.8	%		73				11.3	%		118				2.0	%
Permanent differences:
Manufacturing deduction	(102		)		(1.9	)%		—				—			(102		)		(1.7	)%
Other	(18		)		(0.3	)%		(5		)		(0.8	)%		(23		)		(0.4	)%
Change in tax law	—				—			(17		)		(2.6	)%		(17		)		(0.3	)%
Tax effects of income associated with noncontrolling interests	(39		)		(0.7	)%		—				—			(39		)		(0.7	)%
Other, net	(25		)		(0.5	)%		2				0.3	%		(23		)		(0.4	)%
Income tax expense	$	1,725			32.4	%		$	145			22.5	%		$	1,870			31.3	%

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

	Year Ended December 31, 2017
	U.S.				International				Total
Current:
Country	$	1,305			$	194			$	1,499
U.S. state / Canadian provincial	34				61				95
Total current	1,339			(a)	255				1,594
Deferred:
Country	(2,522		)		(29		)		(2,551		)
U.S. state / Canadian provincial	23				(15		)		8
Total deferred	(2,499		)	(b)	(44		)		(2,543		)
Income tax expense (benefit)	$	(1,160	)		$	211			$	(949	)

---

See notes on page 116.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Year Ended December 31, 2016
	U.S.				International				Total
Current:
Country	$	294			$	194			$	488
U.S. state / Canadian provincial	12				35				47
Total current	306				229				535
Deferred:
Country	203				35				238
U.S. state / Canadian provincial	(4		)		(4		)		(8		)
Total deferred	199				31				230
Income tax expense	$	505			$	260			$	765

	Year Ended December 31, 2015
	U.S.				International				Total
Current:
Country	$	1,513			$	64			$	1,577
U.S. state / Canadian provincial	85				43				128
Total current	1,598				107				1,705
Deferred:
Country	143				8				151
U.S. state / Canadian provincial	(16		)		30				14
Total deferred	127				38				165
Income tax expense	$	1,725			$	145			$	1,870

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(a)	Current income tax expense includes the effect of our $781 million Tax Reform adjustment as described in “Tax Reform” above.

(b)	Deferred income tax benefit includes the effect of our $2.6 billion Tax Reform adjustment as described in “Tax Reform” above.

Income Taxes Paid

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

	Year Ended December 31,
	2017				2016				2015
U.S.	$	239			$	241			$	2,092
International	171				203				1
Income taxes paid, net	$	410			$	444			$	2,093

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Income Tax Assets and Liabilities

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

	December 31,
	2017				2016
Deferred income tax assets:
Tax credit carryforwards	$	69			$	65
Net operating losses (NOLs)	492				374
Inventories	135				93
Compensation and employee benefit liabilities	179				344
Environmental liabilities	47				69
Other	112				100
Total deferred income tax assets	1,034				1,045
Valuation allowance	(498		)		(374		)
Net deferred income tax assets	536				671
Deferred income tax liabilities:
Property, plant, and equipment	4,545				6,900
Deferred turnaround costs	272				450
Inventories	243				356
Investments	77				253
Other	107				73
Total deferred income tax liabilities	5,244				8,032
Net deferred income tax liabilities	$	4,708			$	7,361

Our deferred income tax assets and liabilities as of December 31, 2017 were impacted by the remeasurement of our U.S. temporary differences using the 21 percent statutory income tax rate as more fully described in “Tax Reform” above and “Details of the Tax Reform Adjustment” below.

We had the following income tax credit and loss carryforwards as of December 31, 2017 (in millions):

	Amount				Expiration
U.S. state income tax credits	$	76			2018 through 2031
U.S. state income tax credits	11				Unlimited
U.S. state NOLs (gross amount)	9,441				2018 through 2037

We have recorded a valuation allowance as of December 31, 2017 and 2016 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

will be recoverable. During 2017, the valuation allowance increased by $124 million, primarily due to increases in State NOLs. The realization of net deferred income tax assets recorded as of December 31, 2017 is primarily dependent upon our ability to generate future taxable income in certain U.S. states.

As described in “Tax Reform” above, one of the most significant changes in Tax Reform is the shift from a worldwide system of taxation to a territorial system. The shift to a territorial system allows us to distribute cash via a dividend from our international subsidiaries with a full dividend received deduction. As a result, we will not recognize U.S. federal deferred taxes for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and the respective tax basis for our international subsidiaries. As of December 31, 2017, we recognized a one-time transition tax of $734 million on approximately $4.7 billion of combined earnings and profits of our international subsidiaries. Because of the deemed repatriation of these accumulated earnings and profits, there are no longer any U.S. federal income tax consequences associated with the repatriation of any of the $3.2 billion of cash and temporary cash investments held by our international subsidiaries as of December 31, 2017. However, certain countries in which our international subsidiaries are organized impose withholding taxes on cash distributed outside of those countries. We have accrued for withholding taxes on a portion of the cash held by one of our international subsidiaries that we have deemed to not be permanently reinvested in our operations in that country.

Details of the Tax Reform Adjustment

The following table details the components of our adjustment (in millions) to reflect the effects of Tax Reform for the year ended December 31, 2017, including (i) whether such amounts are complete, provisional, or incomplete, and (ii) the additional information that we need to obtain in order to complete the accounting as required by SAB 118. See “Tax Reform” above for a discussion of the provisions of SAB 118.

	Accounting Status		Amount
Income tax benefit from the remeasurement of U.S. deferred income tax assets and liabilities	Complete		$	(2,643	)
Tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries	Provisional		734
Recognition of foreign withholding tax, net of U.S. federal tax benefit	Complete		47
Deductibility of certain executive compensation expense	Incomplete		—
Income tax expense associated with the statutory income tax rate differential on accrual to return adjustments that may be identified upon completion of our U.S. federal income tax return in 2018	Incomplete		—
Foreign tax credit available to offset the tax on deemed repatriation of the accumulated earnings and profits of our international subsidiaries	Incomplete		—
Estimated Tax Reform benefit			$	(1,862	)

We recorded a provisional amount of $734 million for the tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries. We continue to gather additional information in order

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to more accurately compute this tax. Any associated U.S. state taxes will be recorded once the federal estimate is finalized. We anticipate this information will be available in the second half of 2018.

Our accounting for the following items of Tax Reform are incomplete, and we have not yet been able to make reasonable estimates of the effects of these items. Therefore, no provisional amounts were recorded.

•

Deductibility of certain executive compensation: It is unclear from Tax Reform if the future payments related to existing deferred compensation plans to the covered executives will be subject to the $1 million deduction limitation or if such plans are considered grandfathered. We currently have deferred tax assets related to certain benefit plans that may be determined to be subject to the excess compensation limitations; however, the impact is not expected to be material. Additional clarifying guidance from the IRS is necessary to determine the proper treatment, and we expect such guidance will be released by the IRS in the near future.

•

Tax rate differential amount related to accrual to return adjustments: We use estimates to compute certain adjustments related to current and deferred income taxes. Upon the filing of our U.S. federal income tax return in the third quarter of 2018, adjustments will be recorded in our financial statements to reflect our actual payment. The U.S. tax rate differential (35 percent for current vs. 21 percent for deferred items) cannot be practically estimated until such true-up adjustments are known.

•

Foreign tax credits on deemed repatriation amount: Additional information is required to determine the amount of available foreign tax credits, if any, that can be used to reduce our tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries. This includes information needed to compute any foreign tax credit limitations and information to accurately compute the income taxes paid from our various foreign subsidiaries. We anticipate this information will be available in the second half of 2018.

Other significant Tax Reform provisions that are not yet effective, but may impact our income tax expense in future years include:

•	an exemption from U.S. tax on dividends of future foreign earnings;

•	a limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income;

•	a limitation of net operating losses generated after fiscal 2018 to 80 percent of taxable income;

•	an incremental tax (base erosion anti-abuse tax, or BEAT) on excessive amounts paid to international related parties;

•	a minimum tax on certain foreign earnings in excess of 10 percent of the international subsidiaries’ tangible assets (the GILTI tax); and

•	a deduction equal to 37.5 percent of our foreign-derived intangible income.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on temporary differences that are expected to generate GILTI income when they reverse in future years.

Unrecognized Tax Benefits

The following is a reconciliation of the change in unrecognized tax benefits, excluding related penalties and interest, (in millions):

	Year Ended December 31,
	2017				2016				2015
Balance as of beginning of year	$	936			$	964			$	989
Additions based on tax positions related to the current year	33				36				36
Additions for tax positions related to prior years	15				11				83
Reductions for tax positions related to prior years	(42		)		(46		)		(82		)
Reductions for tax positions related to the lapse of applicable statute of limitations	(1		)		(3		)		(3		)
Settlements	—				(237		)		(59		)
Reclassification of uncertain tax receivable to long-term receivable from IRS	—				211				—
Balance as of end of year	$	941			$	936			$	964

As of December 31, 2017, the balance in unrecognized tax benefits included $274 million of tax refunds that we intend to claim by amending various of our income tax returns for 2010 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 Code, we concluded that the refund claims included in the following table 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, 2017, 2016, and 2015 even though they are reflected in the preceding table.

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

	December 31,
	2017				2016
Unrecognized tax benefits	$	941			$	936
Tax refund claim not presented in our balance sheets	(274		)		(433		)
Other	77				(5		)
Uncertain tax position liabilities presented in our balance sheets	$	744			$	498

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	December 31,
	2017				2016
Income taxes payable	$	—			$	(7	)
Other long-term liabilities	(723		)		(465		)
Deferred tax liabilities	(21		)		(26		)
Uncertain tax position liabilities presented in our balance sheets	$	(744	)		$	(498	)

As of December 31, 2017 and 2016, there were $793 million and $756 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, 2017, 2016, and 2015 were immaterial. Accrued penalties and interest totaled $77 million and $70 million as of December 31, 2017 and 2016, 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, 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, 2017, our tax years for 2010 through 2015 were under audit by the 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.

State

As of December 31, 2017, our tax years for 2004 through 2008 and 2011 through 2014 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 were computed as follows (dollars and shares in millions, except per share amounts):

	Year Ended December 31,
	2017								2016								2015
	Participating Securities				Common Stock				Participating Securities				Common Stock				Participating Securities				Common Stock
Earnings per common share:
Net income attributable to Valero stockholders					$	4,065							$	2,289							$	3,990
Less dividends paid:
Common stock					1,238								1,108								845
Participating securities					4								3								3
Undistributed earnings					$	2,823							$	1,178							$	3,142
Weighted-average common shares outstanding	2				442				1				461				2				497
Earnings per common share:
Distributed earnings	$	2.80			$	2.80			$	2.40			$	2.40			$	1.70			$	1.70
Undistributed earnings	6.37				6.37				2.54				2.54				6.30				6.30
Total earnings per common share	$	9.17			$	9.17			$	4.94			$	4.94			$	8.00			$	8.00
Earnings per common share – assuming dilution:
Net income attributable to Valero stockholders					$	4,065							$	2,289							$	3,990
Weighted-average common shares outstanding					442								461								497
Common equivalent shares					2								3								3
Weighted-average common shares outstanding – assuming dilution					444								464								500
Earnings per common share – assuming dilution					$	9.16							$	4.94							$	7.99

Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.	SEGMENT INFORMATION

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. Accordingly, we created a new reportable segment — VLP. The results of the VLP segment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.

As a result, we have three reportable segments as follows:

•	Refining segment includes our refining operations, the associated marketing activities, and certain logistics assets, which are not owned by VLP, that support our refining operations;

•	Ethanol segment includes our ethanol operations, the associated marketing activities, and logistics assets that support our ethanol operations; and

•	VLP segment includes the results of VLP, which provides transportation and terminaling services to our refining segment.

Operations 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 technologies and marketing strategies. Performance is evaluated based on segment operating income, which includes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reflects activity related to our reportable segments (in millions):

	Refining				Ethanol				VLP				Corporate and Eliminations				Total
Year ended December 31, 2017:
Operating revenues:
Operating revenues from external customers	$	90,651			$	3,324			$	—			$	5			$	93,980
Intersegment revenues	6				176				452				(634		)		—
Total operating revenues	90,657				3,500				452				(629		)		93,980
Cost of sales:
Cost of materials and other	80,865				2,804				—				(632		)		83,037
Operating expenses (excluding depreciation and amortization expense reflected below)	3,917				443				104				(2		)		4,462
Depreciation and amortization expense	1,800				81				53				—				1,934
Total cost of sales	86,582				3,328				157				(634		)		89,433
Other operating expenses	58				—				3				—				61
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—				—				—				835				835
Depreciation and amortization expense	—				—				—				52				52
Operating income by segment	$	4,017			$	172			$	292			$	(882	)		$	3,599
Total expenditures for long-lived assets	$	1,710			$	84			$	110			$	44			$	1,948

Year ended December 31, 2016:
Operating revenues:
Operating revenues from external customers	$	71,968			$	3,691			$	—			$	—			$	75,659
Intersegment revenues	—				210				363				(573		)		—
Total operating revenues	71,968				3,901				363				(573		)		75,659
Cost of sales:
Cost of materials and other	63,405				3,130				—				(573		)		65,962
Operating expenses (excluding depreciation and amortization expense reflected below)	3,696				415				96				—				4,207
Depreciation and amortization expense	1,734				66				46				—				1,846
Lower of cost or market inventory valuation adjustment	(697		)		(50		)		—				—				(747		)
Total cost of sales	68,138				3,561				142				(573		)		71,268
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—				—				—				715				715
Depreciation and amortization expense	—				—				—				48				48
Asset impairment loss	56				—				—				—				56
Operating income by segment	$	3,774			$	340			$	221			$	(763	)		$	3,572
Total expenditures for long-lived assets	$	1,867			$	68			$	23			$	38			$	1,996

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Refining				Ethanol				VLP				Corporate and Eliminations				Total
Year Ended December 31, 2015:
Operating revenues:
Operating revenues from external customers	$	84,521			$	3,283			$	—			$	—			$	87,804
Intersegment revenues	—				151				244				(395		)		—
Total operating revenues	84,521				3,434				244				(395		)		87,804
Cost of sales:
Cost of materials and other	71,512				2,744				—				(395		)		73,861
Operating expenses (excluding depreciation and amortization expense reflected below)	3,689				448				106				—				4,243
Depreciation and amortization expense	1,699				50				46				—				1,795
Lower of cost or market inventory valuation adjustment	740				50				—				—				790
Total cost of sales	77,640				3,292				152				(395		)		80,689
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—				—				—				710				710
Depreciation and amortization expense	—				—				—				47				47
Operating income by segment	$	6,881			$	142			$	92			$	(757	)		$	6,358
Total expenditures for long-lived assets	$	2,216			$	67			$	38			$	29			$	2,350

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 by reportable segment for our principal products were as follows (in millions):

	Year Ended December 31,
	2017				2016				2015
Refining:
Gasolines and blendstocks	$	40,362			$	33,450			$	38,983
Distillates	42,074				32,576				38,093
Other product revenues	8,215				5,942				7,445
Total refining revenues	90,651				71,968				84,521
Ethanol:
Ethanol	2,764				3,105				2,628
Distillers grains	560				586				655
Total ethanol revenues	3,324				3,691				3,283
Corporate – other revenues	5				—				—
Total revenues from external customers	$	93,980			$	75,659			$	87,804

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Operating revenues by geographic area are shown in the following table (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,
	2017				2016				2015
U.S.	$	66,614			$	51,479			$	60,319
Canada	7,039				6,115				6,841
U.K. and Ireland	11,556				10,797				11,232
Other countries	8,771				7,268				9,412
Total operating revenues	$	93,980			$	75,659			$	87,804

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

	December 31,
	2017				2016
U.S.	$	26,083			$	25,359
Canada	1,915				1,816
U.K. and Ireland	1,063				967
Total long-lived assets	$	29,061			$	28,142

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

	December 31,
	2017				2016
Refining	$	40,382			$	38,095
Ethanol	1,344				1,316
VLP	1,517				979
Corporate and eliminations	6,915				5,783
Total assets	$	50,158			$	46,173

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,
	2017				2016				2015
Decrease (increase) in current assets:
Receivables, net	$	(870	)		$	(1,531	)		$	1,294
Inventories	(516		)		771				(222		)
Prepaid expenses and other	151				47				(149		)
Increase (decrease) in current liabilities:
Accounts payable	1,842				1,556				(1,787		)
Accrued expenses	21				117				(40		)
Taxes other than income taxes payable	172				82				(74		)
Income taxes payable	489				(66		)		(328		)
Changes in current assets and current liabilities	$	1,289			$	976			$	(1,306	)

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

	Year Ended December 31,
	2017				2016				2015
Interest paid in excess of amount capitalized	$	457			$	427			$	416
Income taxes paid, net	410				444				2,093

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.

Noncash investing and financing activities for the year ended December 31, 2017 included the recognition of (i) a capital lease asset and related obligation associated with an agreement for storage tanks near three of our refineries as described in Note 8 and (ii) terminal assets and related obligation recorded under owner accounting as described in Note 9.

There were no significant noncash investing and 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.

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 following tables present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of December 31, 2017 and 2016.

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

	December 31, 2017
													Total Gross Fair Value				Effect of Counter- party Netting				Effect of Cash Collateral Netting				Net Carrying Value on Balance Sheet				Cash Collateral Paid or Received Not Offset
	Fair Value Hierarchy
	Level 1				Level 2				Level 3
Assets:
Commodity derivative contracts	$	875			$	19			$	—			$	894			$	(893	)		$	—			$	1			$	—
Investments of certain benefit plans	65				—				8				73				n/a				n/a				73				n/a
Total	$	940			$	19			$	8			$	967			$	(893	)		$	—			$	74
Liabilities:
Commodity derivative contracts	$	955			$	14			$	—			$	969			$	(893	)		$	(76	)		$	—			$	(102	)
Environmental credit obligations	—				104				—				104				n/a				n/a				104				n/a
Physical purchase contracts	—				6				—				6				n/a				n/a				6				n/a
Foreign currency contracts	7				—				—				7				n/a				n/a				7				n/a
Total	$	962			$	124			$	—			$	1,086			$	(893	)		$	(76	)		$	117

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	December 31, 2016
													Total Gross Fair Value				Effect of Counter- party Netting				Effect of Cash Collateral Netting				Net Carrying Value on Balance Sheet				Cash Collateral Paid or Received Not Offset
	Fair Value Hierarchy
	Level 1				Level 2				Level 3
Assets:
Commodity derivative contracts	$	874			$	38			$	—			$	912			$	(875	)		$	—			$	37			$	—
Foreign currency contracts	3				—				—				3				n/a				n/a				3				n/a
Investments of certain benefit plans	58				—				11				69				n/a				n/a				69				n/a
Total	$	935			$	38			$	11			$	984			$	(875	)		$	—			$	109
Liabilities:
Commodity derivative contracts	$	872			$	23			$	—			$	895			$	(875	)		$	(20	)		$	—			$	(88	)
Environmental credit obligations	—				188				—				188				n/a				n/a				188				n/a
Physical purchase contracts	—				5				—				5				n/a				n/a				5				n/a
Total	$	872			$	216			$	—			$	1,088			$	(875	)		$	(20	)		$	193

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), Quebec’s Environmental Quality Act (the Quebec cap-and-trade system), and Ontario’s Climate Change Mitigation and Low-Carbon Economy Act (the Ontario cap-and-trade system), (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. These programs are further described in Note 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, 2017 and 2016 that were measured at fair value on a recurring basis.

There was no significant activity during the years ended December 31, 2017, 2016, and 2015 related to the fair value amounts categorized in Level 3 as of December 31, 2017, 2016, and 2015.

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 the business.

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2017 and 2016.

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 following table along with their associated fair values (in millions):

	December 31, 2017								December 31, 2016
	Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and temporary cash investments	$	5,850			$	5,850			$	4,816			$	4,816
Financial liabilities:
Debt (excluding capital leases)	8,310				9,795				7,926				8,882

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.”

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, 2017, we had the following outstanding commodity derivative instruments that were used as economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels and soybean oil contracts that are presented in thousands of pounds).

		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2018			2019
Crude oil and refined petroleum products:
Swaps – long		2,655			—
Swaps – short		2,590			—
Futures – long		83,296			—
Futures – short		87,542			—
Corn:
Futures – long		21,315			35
Futures – short		50,695			665
Physical contracts – long		25,103			630
Soybean oil:
Futures – long		76,079			—
Futures – short		154,378			—

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, 2017, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels).

		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2018			2019
Crude oil and refined petroleum products:
Swaps – long		659			—
Swaps – short		659			—
Futures – long		37,532			—
Futures – short		36,919			150
Options – long		153,050			—
Options – short		153,050			—
Corn:
Futures – long		300			—

We had no commodity derivative contracts outstanding as of December 31, 2017 and 2016 or during the years ended December 31, 2017 and 2016 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, 2017, we had forward contracts to purchase $507 million of U.S. dollars. These commitments matured on or before January 31, 2018.

Environmental Compliance Program Price Risk

We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. Certain of these programs require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2017, 2016, and 2015, the cost of meeting our obligations under these compliance programs was $942 million, $749 million, and $440 million, respectively. These amounts are reflected in cost of materials and other.

We are 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, 2017, 2016, and 2015 and expect to continue to recover the majority of these costs in the future. For the years ended December 31, 2017, 2016, and 2015, the net cost of meeting our obligations under these compliance programs was immaterial.

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of December 31, 2017 and 2016 (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 following tables, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.

	Balance Sheet Location		December 31, 2017
		Asset Derivatives				Liability Derivatives
Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net		$	875			$	955
Swaps	Receivables, net		11				11
Options	Receivables, net		8				3
Physical purchase contracts	Inventories		—				6
Foreign currency contracts	Accrued expenses		—				7
Total			$	894			$	982

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Balance Sheet Location		December 31, 2016
		Asset Derivatives				Liability Derivatives
Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net		$	874			$	872
Swaps	Receivables, net		32				21
Options	Receivables, net		6				2
Physical purchase contracts	Inventories		—				5
Foreign currency contracts	Receivables, net		3				—
Total			$	915			$	900

Market Risk

Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.

Effect of Derivative Instruments on Income

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

Derivatives Designated as Economic Hedges		Location of Gain (Loss) Recognized in Income on Derivatives		Year Ended December 31,
		2017				2016				2015
Commodity contracts		Cost of materials and other		$	(344	)		$	(132	)		$	377
Foreign currency contracts		Cost of materials and other		(40		)		16				49

Trading Derivatives		Location of Gain Recognized in Income on Derivatives		Year Ended December 31,
		2017				2016				2015
Commodity contracts		Cost of materials and other		$	66			$	46			$	45

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, 2017 and 2016 (in millions, except per share amounts).

	2017 Quarter Ended
	March 31				June 30				September 30				December 31 (b)
Operating revenues	$	21,772			$	22,254			$	23,562			$	26,392
Gross profit (a)	739				1,063				1,624				1,121
Operating income	537				871				1,338				853
Net income	321				572				863				2,400
Net income attributable to Valero Energy Corporation stockholders	305				548				841				2,371
Earnings per common share	0.68				1.23				1.91				5.43
Earnings per common share – assuming dilution	0.68				1.23				1.91				5.42
	2016 Quarter Ended
	March 31 (c)				June 30 (d)				September 30 (e)				December 31
Operating revenues	$	15,714			$	19,584			$	19,649			$	20,712
Gross profit (a)	997				1,457				1,096				841
Operating income	829				1,231				892				620
Net income	513				843				645				416
Net income attributable to Valero Energy Corporation stockholders	495				814				613				367
Earnings per common share	1.05				1.74				1.33				0.81
Earnings per common share – assuming dilution	1.05				1.73				1.33				0.81

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(a)	Gross profit is calculated as operating revenues less total cost of sales.

(b)	During the quarter ended December 31, 2017, we recognized an income tax benefit of $1.9 billion related to Tax Reform as described in Note 14.

(c)	During the quarter ended March 31, 2016, we recognized a favorable noncash lower of cost or market inventory valuation adjustment of $293 million as described in Note 4.

(d)	During the quarter ended June 30, 2016, we recognized 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.

(e)	During the quarter ended September 30, 2016, we recognized a tax benefit of $42 million related to the Aruba Disposition as described in Note 2.