Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following review of our results of operations and financial condition should be read in conjunction with Item 1A, “RISK FACTORS,” and Item 8, “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” included in this report.

This discussion and analysis includes the years ended December 31, 2020 and 2019 and comparisons between such years. The discussions for the year ended December 31, 2018 and comparisons between the years ended December 31, 2019 and 2018 have been omitted from this Annual Report on Form 10-K for the year ended December 31, 2020, as such information can be found in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed on February 26, 2020.

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report, including without limitation our disclosures below under the heading “OVERVIEW AND OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “scheduled,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “will,” “may,” “strive,” “seek,” “potential,” “opportunity,” “aimed,” “considering,” “continue,” and similar expressions.

These forward-looking statements include, among other things, statements regarding:

the effect, impact, potential duration, or other implications of the COVID-19 pandemic and global crude oil production levels, and any expectations we may have with respect thereto, including with respect to our operations and the production levels of our assets;
future refining segment margins, including gasoline and distillate margins;
future renewable diesel segment margins;
future ethanol segment margins;
expectations regarding feedstock costs, including crude oil differentials, and operating expenses;
anticipated levels of crude oil and refined petroleum product inventories and storage capacity;
our anticipated level of capital investments, including deferred turnaround and catalyst cost expenditures, capital expenditures for environmental and other purposes, and joint venture investments, the expected timing applicable to such capital investments and any related projects, and the effect of those capital investments on our results of operations;
our anticipated level of cash distributions or contributions, such as our dividend payment rate and contributions to our qualified pension plans and other postretirement benefit plans;
anticipated trends in the supply of and demand for crude oil and other feedstocks and refined petroleum products, renewable diesel, and ethanol and corn related co-products in the regions where we operate, as well as globally;
expectations regarding environmental, tax, and other regulatory initiatives; and
the effect of general economic and other conditions on refining, renewable diesel, and ethanol industry fundamentals.

We based our forward-looking statements on our current expectations, estimates, and projections about ourselves, our industry, and the global economy and financial markets generally. We caution that these statements are not guarantees of future performance or results and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, actual results may differ materially from the future performance or results that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance or results suggested in these forward-looking statements could result from a variety of factors, including the following:

demand for, and supplies of, refined petroleum products (such as gasoline, diesel, jet fuel, and petrochemicals), renewable diesel, and ethanol and corn related co-products;
demand for, and supplies of, crude oil and other feedstocks;
the effects of public health threats, pandemics, and epidemics, such as the COVID-19 pandemic, and the adverse impacts thereof on our business, financial condition, results of operations, and liquidity, including, but not limited to, our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand for our products, and industry demand generally, margins, production and throughput capacity, utilization, inventory value, cash position, taxes, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally;
acts of terrorism aimed at either our refineries and plants or third-party facilities that could impair our ability to produce or transport refined petroleum products, renewable diesel, ethanol, or corn related co-products, or to receive feedstocks;
political and economic conditions in nations that produce crude oil or other feedstocks or consume refined petroleum products, renewable diesel, ethanol or corn related co-products;
the ability of the members of OPEC to agree on and to maintain crude oil price and production controls;
the level of consumer demand, including seasonal fluctuations;
refinery, renewable diesel plant or ethanol plant overcapacity or undercapacity;
our ability to successfully integrate any acquired businesses into our operations;
the actions taken by competitors, including both pricing and adjustments to refining capacity or renewable fuels production in response to market conditions;
the level of competitors’ imports into markets that we supply;
accidents, unscheduled shutdowns, weather events, civil unrest, political events, terrorism, cyberattacks, or other catastrophes or disruptions affecting our operations, production facilities, machinery, pipelines and other logistics assets, equipment, or information systems, or any of the foregoing of our suppliers, customers, or third-party service providers;
changes in the cost or availability of transportation or storage capacity for feedstocks and our products;
the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles, as well as sentiment and perceptions with respect to GHG emissions more generally;
the levels of government subsidies for, and mandates or other policies with respect to, alternative fuels, alternative-fuel vehicles, and other low-carbon technologies;
the volatility in the market price of biofuel credits (primarily RINs needed to comply with the RFS) and GHG emission credits needed to comply with the requirements of various GHG emission programs;
delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;
earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil, rendered and recycled materials, corn, and other feedstocks, refined petroleum products, renewable diesel, and ethanol;
rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by governmental authorities, including tariffs and tax and environmental regulations, such as those implemented under the California cap-and-trade system and similar programs, and the U.S. EPA’s or other governmental regulation of GHGs, which may adversely affect our business or operations;
changes in the credit ratings assigned to our debt securities and trade credit;
changes in currency exchange rates, including the value of the Canadian dollar, the pound sterling, the euro, the Mexican peso, and the Peruvian sol relative to the U.S. dollar;
the adequacy of capital resources and liquidity, including availability, timing, and amounts of cash flow or our ability to borrow;
overall economic conditions, including the stability and liquidity of financial markets; and
other factors generally described in the “RISK FACTORS” section included in Item 1A, “RISK FACTORS” in this report.

Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

NON-GAAP FINANCIAL MEASURES

The discussions in “OVERVIEW AND OUTLOOK,” “RESULTS OF OPERATIONS,” and “LIQUIDITY AND CAPITAL RESOURCES” below include references to financial measures that are not defined under U.S. generally accepted accounting principles (GAAP). These non-GAAP financial measures include adjusted operating income (loss) (including adjusted operating income (loss) for each of our reportable segments, as applicable); refining, renewable diesel, and ethanol segment margin; and capital investments attributable to Valero. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between years and to help assess our cash flows. See the tables in note (f) beginning on page 46 for reconciliations of adjusted operating income (loss) (including adjusted operating income (loss) for each of our reportable segments, as applicable) and refining, renewable diesel, and ethanol segment margin to their most directly comparable U.S. GAAP financial measures. Also in note (f), we disclose the reasons why we believe our use of such non-GAAP financial measures provides useful information. See the table on page 53 for a reconciliation of capital investments attributable to Valero to its most directly comparable U.S. GAAP financial measure. Beginning on page 52, we disclose the reasons why we believe our use of this non-GAAP financial measure provides useful information.

OVERVIEW AND OUTLOOK

Overview

Business Operations Update

The outbreak of COVID-19 and its development into a pandemic in March 2020 has resulted in significant economic disruption globally, including in North America, Europe, and Latin America, the primary geographic areas where we operate. In March, governmental authorities around the world took actions, such as stay-at-home orders and other social distancing measures, to slow the spread of COVID-19 that restricted travel, public gatherings, and the overall level of individual movement and in-person interaction across the globe. These actions significantly reduced global economic activity and negatively impacted many businesses, including our business. Airlines have dramatically reduced flights and motor vehicle usage has significantly declined, in each case relative to typical pre-pandemic levels. As a result, in the first half of 2020, there was a decline in the demand for, and thus also the market prices of, most of the transportation fuels that we produce and sell. There was also a decline in the global demand for crude oil, the primary feedstock for our refined products, resulting in a decline in crude oil prices and production levels. While the production levels of all types of crude oils have declined, sour crude oil production has declined significantly and by more than production levels for sweet crude oils. This has reduced the price advantage of sour crude oils relative to sweet crude oils, which has exacerbated the negative impact of lower product prices on our refining margin.6,7

Beginning in the latter part of the second quarter, certain governmental authorities in the U.S. and other countries across the world, particularly those in our U.S. Gulf Coast and U.S. Mid-Continent regions, began lifting many of the restrictions put in place to slow the spread of COVID-19, while governmental authorities in our U.S. West Coast and North Atlantic regions began lifting restrictions on a more moderate basis during the third quarter. This resulted in an increase in the level of individual movement and travel and, in turn, an increase in the demand and market prices for most of our products relative to what we experienced during the early months of the pandemic. However, in the second half of 2020, many locations where restrictions were lifted, and others where the restrictions were only more moderately lifted (such as California in our U.S. West Coast region, and New York, Canada, and the U.K. in our North Atlantic region), experienced a resurgence in the spread of COVID-19, which prompted many governmental authorities to reimpose certain restrictions. In December 2020, the U.S. FDA and Canadian and U.K. regulators each granted emergency-use authorization for multiple COVID-19 vaccines to be used as immunization against the COVID-19 virus. Although these vaccines may be seen as a key factor in helping to restore public confidence, and thus stimulate and increase economic activity, potentially to pre-pandemic levels, they may not be distributed widely on a timely basis and they may not be effective against new variants of the virus. Based on these and other circumstances that cannot be predicted, the broader implications of the pandemic on our results of operations and financial position remain uncertain.

As previously noted, the decrease in the demand for transportation fuels has resulted in a significant decrease in the price of refined petroleum products manufactured by our refining segment. For example, the price of gasoline8 in the U.S. Gulf Coast region where eight of our 15 refineries are located was $68.82 per barrel at the beginning of 2020, fell to $17.65 per barrel at the end of March (a 74 percent decline), and partially recovered to $57.63 per barrel by the end of December (a 16 percent decline over

6 See page 46 for our definition of refining margin and why we believe it is an important financial and operating measure.

7 Sour crude oils typically sell at a discount to the price of benchmark sweet crude oils, which set the price of most refined products. Therefore, lower prices for sour crude oils that we process have a favorable impact on our refining margin.

8 Gasoline prices quoted represent the price of U.S. Gulf Coast conventional blendstock of oxygenate blending gasoline.

the twelve-month period). Another example is the price of diesel9 in the U.S. Gulf Coast region, which was $81.71 per barrel at the beginning of 2020, fell to $39.18 per barrel at the end of March (a 52 percent decline), and partially recovered to $60.20 per barrel by the end of December (a 26 percent decline over the twelve-month period). On February 22, 2021, the prices of gasoline and diesel were $76.62 per barrel and $76.84 per barrel, respectively.

Demand for renewable diesel has not declined due to continued demand for this low-carbon transportation fuel despite the current economic environment; therefore, our renewable diesel segment has not been impacted as were our refining and ethanol segments.

The price of ethanol manufactured by our ethanol segment has also decreased due to a decline in demand. Because ethanol is primarily blended into gasoline, ethanol demand declined along with the decline in the demand for gasoline.

Prices for the products we sell and the feedstocks we purchase impact our revenues, cost of sales, operating income, and liquidity. In addition, a decline in the market prices of products and feedstocks below their carrying values in our inventory results in a writedown in the value of our inventories, and a subsequent recovery in market prices results in a write-up in the value of our inventories, not to exceed their previous carrying values. These inventory valuation adjustments are referred to as LCM inventory valuation adjustments and are described in Note 5 of Notes to Consolidated Financial Statements. We wrote down the value of our inventories by $2.5 billion in the first quarter of 2020 due to the significant decline in market prices at that time, but as market prices improved, the writedown was fully reversed by the end of the third quarter.

For the year ended December 31, 2020, we generated an operating loss of $1.6 billion. Our operating results for the year ended December 31, 2020, including operating results by segment, are described in the summary below, and detailed descriptions can be found under “RESULTS OF OPERATIONS” on pages 37 through 49.

Our cash and cash equivalents increased by $730 million during 2020, from $2.6 billion as of December 31, 2019 to $3.3 billion as of December 31, 2020. We invested $2.4 billion in our business and returned $1.8 billion to our stockholders primarily through dividend payments. These uses of cash were offset by proceeds from two public debt offerings totaling $4.0 billion before deducting the underwriting discounts and debt issuance costs as described in Note 10 of Notes to Consolidated Financial Statements. In addition, our operations generated net cash of $948 million, which was driven by a decrease in inventory on hand. We had $9.0 billion of liquidity10 as of December 31, 2020. A summary of our cash flows is presented on page 50, and a description of our cash flows and other matters impacting our liquidity and capital resources, including measures we have taken to address the impacts of the COVID-19 pandemic on our liquidity, can be found under “LIQUIDITY AND CAPITAL RESOURCES” on pages 49 through 55.

We have responded in multiple ways to the impacts from the COVID-19 pandemic on our business, and we will strive to continue to respond to these impacts. During the early months of the pandemic, we reduced the amount of crude oil processed at most of our refineries in response to the decreased demand for our products, we temporarily idled various gasoline-making units at certain of our refineries to further limit gasoline production, and we took measures to reduce jet fuel production. We also temporarily idled

9 Diesel prices quoted represent the price of U.S. Gulf Coast ultra-low sulfur diesel.

10 See the components of our liquidity as of December 31, 2020 in the table on page 50 under “LIQUIDITY AND CAPITAL RESOURCES—Our Liquidity.”

eight of our ethanol plants and reduced production at our other ethanol plants, in each case in order to address the decreased demand for ethanol. We have since increased the production of most of our products to align with increasing demand, and we restarted the gasoline-making units and most of the ethanol plants that had been temporarily idled. Demand for our products taken as a whole, however, has not returned to pre-pandemic levels, and as of December 31, 2020, our refineries and plants are operating to meet current product demand. In addition to these measures and the issuances of an aggregate of $4.0 billion of debt previously noted, we have addressed our liquidity as outlined below:

We deferred projects representing approximately $500 million of capital investments that we had expected to make in 2020 related to our refining and ethanol segments.
We deferred income and indirect (e.g., VAT and motor fuel taxes) tax payments of approximately $440 million due in the first and second quarters of 2020. These deferrals were provided to taxpayers under new legislation, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the U.S., and by various taxing authorities under existing legislation. As of December 31, 2020, we had approximately $250 million of deferred tax payments. Of the $250 million, approximately 70 percent will be paid in 2021 and 30 percent in 2022.
We have not purchased any shares of our common stock under our stock purchase program since mid-March 2020, and we will evaluate the timing of repurchases when appropriate. We have no obligation to make purchases under our stock purchase program.
We entered into a 364-day Revolving Credit Facility on April 13, 2020 with an aggregate principal amount of up to $875 million as described in Note 10 of Notes to Consolidated Financial Statements. As of December 31, 2020 and February 22, 2021, we had no outstanding borrowings under this facility.
We extended the maturity date of our accounts receivable sales facility to July 2021 and decreased the facility amount from $1.3 billion to $1.0 billion as described in Note 10 of Notes to Consolidated Financial Statements. As of December 31, 2020 and February 22, 2021, we had no outstanding borrowings under this facility.

Many uncertainties remain with respect to the COVID-19 pandemic, including its resulting economic effects, and we are unable to predict the ultimate economic impacts from the pandemic on our business and how quickly national economies can recover once the pandemic subsides, the timing or effectiveness of vaccine distributions, or whether any recovery will ultimately experience a reversal or other setbacks. However, the adverse impacts of the economic effects on our company have been and will likely continue to be significant. We believe we have proactively addressed many of the known impacts of the pandemic to the extent possible and we will strive to continue to do so, but there can be no assurance that these or other measures will be fully effective.

Results for the Year Ended December 31, 2020

For 2020, we reported a net loss attributable to Valero stockholders of $1.4 billion compared to net income attributable to Valero stockholders of $2.4 billion for 2019, which represents a decrease of $3.8 billion. The decrease was primarily due to lower operating income of $5.4 billion, partially offset by a $1.6 billion decrease in income taxes. The decrease in operating income included a $224 million charge for the impact of a liquidation of LIFO inventory layers, which is described in Note 5 of Notes to Consolidated Financial Statements and in note (a) on page 44.

While our operating income decreased by $5.4 billion in 2020 compared to 2019, adjusted operating income decreased by $5.0 billion. Adjusted operating income excludes the LIFO liquidation adjustment and other adjustments to operating income reflected in the table in note (f) on page 49.

The $5.0 billion decrease in adjusted operating income was primarily due to the following:

Refining segment. Refining segment adjusted operating income decreased by $5.1 billion primarily due to decreases in gasoline and distillate margins, lower throughput volumes, and the higher cost of biofuel credits, partially offset by higher margins on other products and lower operating expenses (excluding depreciation and amortization expense). This is more fully described on pages 41 and 42.
Renewable diesel segment. Renewable diesel segment adjusted operating income increased by $62 million primarily due to a favorable impact from commodity derivative instruments associated with our price risk management activities. This is more fully described on page 43.
Ethanol segment. Ethanol segment adjusted operating income decreased by $40 million primarily due to lower ethanol prices and production volumes, partially offset by higher prices on corn related co-products, lower corn prices, and lower operating expenses (excluding depreciation and amortization expense). This is more fully described on pages 43 and 44.

Outlook

As previously discussed, many uncertainties remain with respect to the COVID-19 pandemic, and while it is difficult to predict the ultimate economic impacts that the pandemic will have on us and how quickly we can recover once the pandemic subsides, we have noted several factors below that have impacted or may impact our results of operations during the first quarter of 2021.

Gasoline, jet fuel, and diesel prices are expected to improve as industry-wide excess inventory levels continue to draw toward historical levels and product demand recovers.
Sour crude oil discounts are not expected to improve until OPEC production is increased in response to any growth in global oil demand.
Renewable diesel margins are expected to remain consistent with current levels.
Ethanol margins are expected to decline.

As a result of Brexit in June 2016, the U.K. withdrew from the EU on January 31, 2020 consistent with the terms of the EU-UK Withdrawal Agreement. In late December 2020, the European Commission reached a trade agreement with the U.K. on the terms of its future cooperation with the EU. The trade agreement offers U.K. and EU companies preferential access to each other’s markets, ensuring imported goods will be free of tariffs and quotas (subject to rules of origin requirements). Although the ultimate impact of this trade agreement is currently unknown, we do not anticipate any material adverse effect on our operations in the U.K.

In mid-February 2021, the U.S. Gulf Coast and U.S. Mid-Continent regions experienced a severe winter storm that disrupted the operation of industrial facilities like refineries, plants, and logistical assets, including ours located in those regions. Most facilities experienced curtailments or outages of various utilities and other services necessary for such facilities to remain operational. All of our facilities in those

regions were impacted to some extent by the severe cold and/or supply and utility disruptions. We are in the process of returning to normal operations and we are currently unable to estimate the impact this event will have on our results of operations.

RESULTS OF OPERATIONS

The following tables, including the reconciliations of non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures in note (f) beginning on page 46, highlight our results of operations, our operating performance, and market reference prices that directly impact our operations.

Financial Highlights by Segment and Total Company

(millions of dollars)


	Year Ended December 31, 2020
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
Revenues:
Revenues from external customers	$	60,840	$	1,055	$	3,017	$	—	$	64,912
Intersegment revenues	8		212		226		(446)		—
Total revenues	60,848		1,267		3,243		(446)		64,912
Cost of sales:
Cost of materials and other (a) (b)	56,093		500		2,784		(444)		58,933
LCM inventory valuation adjustment (c)	(19)		—		—		—		(19)
Operating expenses (excluding depreciation and amortization expense reflected below)	3,944		85		406		—		4,435
Depreciation and amortization expense (d)	2,138		44		121		—		2,303
Total cost of sales	62,156		629		3,311		(444)		65,652
Other operating expenses	34		—		1		—		35
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—		—		—		756		756
Depreciation and amortization expense	—		—		—		48		48

Operating income (loss) by segment	$	(1,342)	$	638	$	(69)	$	(806)	(1,579)
Other income, net									132
Interest and debt expense, net of capitalized interest									(563)
Loss before income tax benefit									(2,010)
Income tax benefit									(903)
Net loss									(1,107)
Less: Net income attributable to noncontrolling interests (b)									314
Net loss attributable to Valero Energy Corporation stockholders									$	(1,421)

See note references on pages 44 through 49.

Financial Highlights by Segment and Total Company (continued)

(millions of dollars)


	Year Ended December 31, 2019
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
Revenues:
Revenues from external customers	$	103,746	$	970	$	3,606	$	2	$	108,324
Intersegment revenues	18		247		231		(496)		—
Total revenues	103,764		1,217		3,837		(494)		108,324
Cost of sales:
Cost of materials and other (b)	93,371		360		3,239		(494)		96,476
Operating expenses (excluding depreciation and amortization expense reflected below)	4,289		75		504		—		4,868
Depreciation and amortization expense	2,062		50		90		—		2,202
Total cost of sales	99,722		485		3,833		(494)		103,546
Other operating expenses	20		—		1		—		21
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—		—		—		868		868
Depreciation and amortization expense	—		—		—		53		53
Operating income by segment	$	4,022	$	732	$	3	$	(921)	3,836
Other income, net (e)									104
Interest and debt expense, net of capitalized interest									(454)
Income before income tax expense									3,486
Income tax expense									702
Net income									2,784
Less: Net income attributable to noncontrolling interests (b)									362
Net income attributable to Valero Energy Corporation stockholders									$	2,422

See note references on pages 44 through 49.

Average Market Reference Prices and Differentials


	Year Ended December 31,
	2020		2019
Refining
Feedstocks (dollars per barrel)
Brent crude oil	$	43.15	$	64.18
Brent less West Texas Intermediate (WTI) crude oil	3.84		7.15
Brent less Alaska North Slope (ANS) crude oil	0.82		(0.86)
Brent less LLS crude oil	1.91		1.47
Brent less Argus Sour Crude Index (ASCI) crude oil	3.26		3.56
Brent less Maya crude oil	6.89		6.57
LLS crude oil	41.24		62.71
LLS less ASCI crude oil	1.35		2.09
LLS less Maya crude oil	4.98		5.10
WTI crude oil	39.31		57.03

Natural gas (dollars per million British Thermal Units (MMBtu))	2.00		2.47

Products (dollars per barrel)
U.S. Gulf Coast:
Conventional Blendstock of Oxygenate Blending (CBOB) gasoline less Brent	2.97		4.37
Ultra-low-sulfur (ULS) diesel less Brent	7.11		14.90
Propylene less Brent	(12.12)		(22.31)
CBOB gasoline less LLS	4.88		5.84
ULS diesel less LLS	9.02		16.37
Propylene less LLS	(10.22)		(20.84)
U.S. Mid-Continent:
CBOB gasoline less WTI	6.96		13.62
ULS diesel less WTI	12.11		22.77
North Atlantic:
CBOB gasoline less Brent	5.50		7.20
ULS diesel less Brent	9.17		17.22
U.S. West Coast:
CARBOB 87 gasoline less ANS	10.33		16.28
CARB diesel less ANS	12.42		19.30
CARBOB 87 gasoline less WTI	13.36		24.29
CARB diesel less WTI	15.44		27.31

Average Market Reference Prices and Differentials, (continued)


	Year Ended December 31,
	2020		2019
Renewable diesel
New York Mercantile Exchange ULS diesel (dollars per gallon)	$	1.25	$	1.94
Biodiesel RIN (dollars per RIN)	0.64		0.48
California Low-Carbon Fuel Standard (dollars per metric ton)	200.12		196.82
Chicago Board of Trade (CBOT) soybean oil (dollars per pound)	0.32		0.29

Ethanol

CBOT corn (dollars per bushel)	3.64		3.84
New York Harbor (NYH) ethanol (dollars per gallon)	1.36		1.53

2020 Compared to 2019

Total Company, Corporate, and Other

The following table includes selected financial data for the total company, corporate, and other for 2020 and 2019. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 37 and 38, unless otherwise noted.


	Year Ended December 31,
	2020		2019		Change
Revenues	$	64,912	$	108,324	$	(43,412)
Cost of sales (see notes (a) through (c) beginning on page 44)	65,652		103,546		(37,894)
General and administrative expenses (excluding depreciation and amortization expense)	756		868		(112)

Operating income (loss)	(1,579)		3,836		(5,415)
Adjusted operating income (loss) (see note (f) on page 49)	(1,309)		3,699		(5,008)

Interest and debt expense, net of capitalized interest	(563)		(454)		(109)
Income tax expense (benefit)	(903)		702		(1,605)
Net income attributable to noncontrolling interests (see note (b) on page 44)	314		362		(48)

Revenues decreased by $43.4 billion in 2020 compared to 2019 primarily due to decreases in refined petroleum product prices associated with sales made by our refining segment. The decrease in revenues was partially offset by a decrease in cost of sales of $37.9 billion and a decrease in general and administrative expenses (excluding depreciation and amortization expense) of $112 million, which resulted in a $5.4 billion decrease in operating income, from $3.8 billion of operating income in 2019 to an operating loss of $1.6 billion in 2020. The decrease in cost of sales was primarily due to decreases in crude oil and other feedstock costs, partially offset by the $224 million LIFO liquidation adjustment, which is described in note (a) on page 44.

Adjusted operating income decreased by $5.0 billion, from $3.7 billion of adjusted operating income in 2019 to an adjusted operating loss of $1.3 billion in 2020. The $5.0 billion decrease includes a $112 million decrease in general and administrative expenses (excluding depreciation and amortization

expense) associated with our corporate activities, and this decrease is discussed below. The remaining components of the decrease in adjusted operating income are discussed by segment in the segment analysis that follows.

General and administrative expenses (excluding depreciation and amortization expense) decreased by $112 million in 2020 compared to 2019 primarily due to a decrease in employee incentive compensation expenses of $37 million, a decrease in charitable contributions of $20 million, lower advertising expenses of $18 million, and lower taxes other than income taxes of $16 million, as well as the effect from transaction costs of $7 million associated with the Merger Transaction with VLP in 2019.

“Interest and debt expense, net of capitalized interest” increased by $109 million in 2020 compared to 2019 primarily due to interest expense associated with public debt offerings in 2020 and finance leases that commenced in the latter part of 2019 and the first nine months of 2020. See Notes 6 and 10 in Notes to Consolidated Financial Statements for additional details.

Income tax expense decreased by $1.6 billion in 2020 compared to 2019 primarily as a result of lower income before income tax expense. Our effective tax rate was 45 percent in 2020 compared to 20 percent in 2019. The effective tax rate for 2020 was impacted by a U.S. federal tax net operating loss (NOL) carried back to 2015 when the U.S. federal statutory rate was 35 percent, as described in Note 16 of Notes to Consolidated Financial Statements.

Net income attributable to noncontrolling interests decreased by $48 million in 2020 compared to 2019 primarily due to lower earnings associated with DGD. The decrease in DGD’s earnings is primarily due to the effect of a $156 million benefit for the 2018 blender’s tax credit recognized in 2019, of which 50 percent is attributable to the holder of the noncontrolling interest, as described in note (b) on page 44.

Refining Segment Results

The following table includes selected financial and operating data of our refining segment for 2020 and 2019. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 37 and 38, respectively, unless otherwise noted.


	Year Ended December 31,
	2020		2019		Change
Operating income (loss)	$	(1,342)	$	4,022	$	(5,364)
Adjusted operating income (loss) (see note (f) on page 48)	(1,105)		4,040		(5,145)


Refining margin (see note (f) on page 46)	$	4,977	$	10,391	$	(5,414)
Operating expenses (excluding depreciation and amortization expense reflected below)	3,944		4,289		(345)
Depreciation and amortization expense	2,138		2,062		76

Throughput volumes (thousand BPD) (see note (g) on page 49)	2,555		2,952		(397)

Refining segment operating income decreased by $5.4 billion in 2020; however, refining segment adjusted operating income, which excludes the adjustments in the table in note (f) on page 48, decreased

by $5.1 billion in 2020 compared to 2019. The components of this decrease, along with the reasons for the changes in those components, are outlined below.

Refining segment margin decreased by $5.4 billion in 2020 compared to 2019.

Refining segment margin is primarily affected by the prices of the refined petroleum products that we sell and the cost of crude oil and other feedstocks that we process. The table on page 39 reflects market reference prices and differentials that we believe had a material impact on the change in our refining segment margin in 2020 compared to 2019.

The decrease in refining segment margin was primarily due to the following:

◦A decrease in distillate (primarily diesel) margins had an unfavorable impact of approximately $3.4 billion.

◦A decrease in gasoline margins had an unfavorable impact of approximately $1.7 billion.

◦A decrease in throughput volumes of 397,000 BPD had an unfavorable impact of $773 million. As noted in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 33 through 35, as a result of the economic disruption from the COVID-19 pandemic, we reduced the amount of crude oil processed at our refineries and limited the production of gasoline and jet fuel at certain of our refineries during the early months of the pandemic. While we have since increased the production of most of our products and restarted the gasoline-making units that we had temporarily idled at certain of our refineries in order to align with increasing demand for most of our products, we expect to continue to operate most of our refineries at reduced rates.

◦An increase in the cost of biofuel credits (primarily RINs in the U.S.) had an unfavorable impact of $330 million. See Note 21 of Notes to Consolidated Financial Statements for additional information on our government and regulatory compliance programs.

◦Higher margins on other products had a favorable impact of approximately $1.1 billion.

Refining segment operating expenses (excluding depreciation and amortization expense) decreased by $345 million primarily due to lower natural gas and electricity costs of $161 million, lower chemical and catalyst costs of $78 million, lower maintenance expenses of $40 million, and lower employee incentive compensation costs of $28 million. The decrease in operating expenses was primarily due to lower production.
Refining segment depreciation and amortization expense associated with our cost of sales increased by $76 million primarily due to an increase in depreciation expense of $118 million associated with capital projects that were completed and finance leases that commenced in the latter part of 2019 and the first nine months of 2020, partially offset by lower refinery turnaround and catalyst amortization expense of $33 million.

Renewable Diesel Segment Results

The following table includes selected financial and operating data of our renewable diesel segment for 2020 and 2019. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 37 and 38, respectively, unless otherwise noted.


	Year Ended December 31,
	2020		2019		Change
Operating income	$	638	$	732	$	(94)
Adjusted operating income (see note (f) on page 48)	638		576		62


Renewable diesel margin (see note (f) on page 47)	$	767	$	701	$	66
Operating expenses (excluding depreciation and amortization expense reflected below)	85		75		10
Depreciation and amortization expense	44		50		(6)

Sales volumes (thousand gallons per day) (see note (g) on page 49)	787		760		27

Renewable diesel segment operating income decreased by $94 million in 2020; however, renewable diesel segment adjusted operating income, which excludes the adjustment in the table in note (f) on page 48, increased by $62 million in 2020 compared to 2019. The increase was primarily due to higher renewable diesel segment margin.

Renewable diesel segment margin increased by $66 million in 2020 compared to 2019. The increase was primarily due to a favorable impact from commodity derivative instruments associated with our price risk management activities. We recognized a hedge gain of $34 million in 2020 compared to a hedge loss of $24 million in 2019, resulting in a favorable change of $58 million between the years.

Ethanol Segment Results

The following table includes selected financial and operating data of our ethanol segment for 2020 and 2019. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 37 and 38, respectively, unless otherwise noted.


	Year Ended December 31,
	2020		2019		Change
Operating income (loss)	$	(69)	$	3	$	(72)
Adjusted operating income (loss) (see note (f) on page 48)	(36)		4		(40)

Ethanol margin (see note (f) on page 47)	$	461	$	598	$	(137)
Operating expenses (excluding depreciation and amortization expense reflected below)	406		504		(98)
Depreciation and amortization expense (see note (d) on page 45)	121		90		31

Production volumes (thousand gallons per day) (see note (g) on page 49)	3,588		4,269		(681)

Ethanol segment operating income decreased by $72 million in 2020; however, ethanol segment adjusted operating income, which excludes the adjustments in the table in note (f) on page 48, decreased by $40 million in 2020 compared to 2019. The components of this decrease, along with the reasons for the changes in these components, are outlined below.

Ethanol segment margin decreased by $137 million in 2020 compared to 2019.

Ethanol segment margin is primarily affected by prices of the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 40 reflects market reference prices that we believe had a material impact on the change in our ethanol segment margin in 2020 compared to 2019.

The decrease in ethanol segment margin was primarily due to the following:

◦Lower ethanol prices had an unfavorable impact of approximately $166 million.

◦A decrease in production volumes of 681,000 gallons per day had an unfavorable impact of approximately $92 million. As noted in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 33 through 35, as a result of the economic disruption from the COVID-19 pandemic, eight of our ethanol plants were temporarily idled and production was reduced at our remaining ethanol plants during the early months of the pandemic. However, demand for ethanol began to recover during the latter part of 2020, and as a result, most of our ethanol plants have recently increased production to meet current product demand.

◦Higher prices on the co-products that we produce, primarily DDGs, had a favorable impact of approximately $79 million.

◦Lower corn prices had a favorable impact of approximately $45 million.

Ethanol segment operating expenses (excluding depreciation and amortization expense) decreased by $98 million primarily due to lower natural gas and electricity costs of $43 million, lower chemical and catalyst costs of $23 million, and lower maintenance expenses of $15 million. The decrease in operating expenses was primarily due to lower production.

The following notes relate to references on pages 32 through 44.

(a)Cost of materials and other for the year ended December 31, 2020 includes a charge of $224 million related to the liquidation of LIFO inventory layers attributable to our refining and ethanol segments. Our inventory levels decreased throughout 2020 due to lower production resulting from lower demand for our products caused by the negative economic impacts of COVID-19 on our business. As a result, our inventory levels at December 31, 2020 were below their December 31, 2019 levels. Of the $224 million charge recognized for the year ended December 31, 2020, $222 million and $2 million is attributable to our refining and ethanol segments, respectively.

(b)Cost of materials and other for the years ended December 31, 2020 and 2019 includes a benefit related to the blender’s tax credit. The legislation authorizing the credit through December 31, 2022 was passed and signed into law in December 2019. As a result, for the year ended December 31, 2020, we recognized a benefit of $297 million related to the blender’s tax credit attributable to renewable diesel volumes blended during 2020. The legislation also reinstated the credit retroactively to volumes blended during 2019 and 2018, and

consequently, we recognized a benefit of $449 million in December 2019 for the blender’s tax credit attributable to volumes blended during those two years. The entire amount was recognized by us in December 2019 because the law was enacted in that month.

The above-mentioned pre-tax benefits are attributable to our reportable segments and stockholders as follows:


	Year Ended December 31,
	2020		2019
Blender’s tax credit by reportable segment
Refining:
Amount related to reporting period	$	9	$	16
Amount related to prior periods but recognized in reporting period	—		2
Total	9		18
Renewable diesel:
Amount related to reporting period	288		275
Amount related to prior periods but recognized in reporting period	—		156
Total	288		431
Total recognized in reporting period	$	297	$	449


Interests to which blender’s tax credit is attributable
Valero Energy Corporation stockholders:
Amount related to reporting period	$	153	$	154
Amount related to prior periods but recognized in reporting period	—		80
Total	153		234
Noncontrolling interest:
Amount related to reporting period	144		137
Amount related to prior periods but recognized in reporting period	—		78
Total	144		215
Total recognized in reporting period	$	297	$	449

(c)The market value of our inventories accounted for under the LIFO method fell below their historical cost on an aggregate basis as of March 31, 2020. As a result, we recorded an LCM inventory valuation adjustment of $2.5 billion in March 2020. The market value of our LIFO inventories improved due to the subsequent recovery in market prices, which resulted in a full reversal of the reserve by September 30, 2020. The LCM inventory valuation adjustment for the year ended December 31, 2020 reflects a net benefit of $19 million due solely to the foreign currency translation effect of the portion of the LCM inventory valuation adjustments attributable to our international operations.

(d)Depreciation and amortization expense for the year ended December 31, 2020 includes $30 million in accelerated depreciation related to a change in the estimated useful life of one of our ethanol plants.

(e)“Other income, net” for the year ended December 31, 2019 includes a $22 million charge from the early redemption of $850 million of our 6.125 percent senior notes due February 1, 2020.

(f)We use certain financial measures (as noted below) that are not defined under U.S. GAAP and are considered to be non-GAAP financial measures.

We have defined these non-GAAP measures and believe they are useful to the external users of our financial statements, including industry analysts, investors, lenders, and rating agencies. We believe these measures are useful to assess our ongoing financial performance because, when reconciled to their most comparable U.S. GAAP measures, they provide improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These non-GAAP measures should not be considered as alternatives to their most comparable U.S. GAAP measures nor should they be considered in isolation or as a substitute for an analysis of our results of operations as reported under U.S. GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures used by other companies because we may define them differently, which diminishes their utility.

Non-GAAP financial measures are as follows:

**◦**Refining margin is defined as refining operating income (loss) excluding the blender’s tax credit not attributable to volumes blended during the applicable period, the LIFO liquidation adjustment, the LCM inventory valuation adjustment, operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.


	Year Ended December 31,
	2020		2019
Reconciliation of refining operating income (loss) to refining margin
Refining operating income (loss)	$	(1,342)	$	4,022
Adjustments:
Blender’s tax credit (see note (b))	—		(2)
LIFO liquidation adjustment (see note (a))	222		—
LCM inventory valuation adjustment (see note (c))	(19)		—
Operating expenses (excluding depreciation and amortization expense)	3,944		4,289
Depreciation and amortization expense	2,138		2,062
Other operating expenses	34		20
Refining margin	$	4,977	$	10,391

**◦**Renewable diesel margin is defined as renewable diesel operating income excluding the blender’s tax credit not attributable to volumes blended during the applicable period, operating expenses (excluding depreciation and amortization expense), and depreciation and amortization expense, as reflected in the table below.


	Year Ended December 31,
	2020		2019
Reconciliation of renewable diesel operating income to renewable diesel margin
Renewable diesel operating income	$	638	$	732
Adjustments:
Blender’s tax credit (see note (b))	—		(156)
Operating expenses (excluding depreciation and amortization expense)	85		75
Depreciation and amortization expense	44		50
Renewable diesel margin	$	767	$	701

**◦**Ethanol margin is defined as ethanol operating income (loss) excluding the LIFO liquidation adjustment, operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.


	Year Ended December 31,
	2020		2019
Reconciliation of ethanol operating income (loss) to ethanol margin
Ethanol operating income (loss)	$	(69)	$	3
Adjustments:
LIFO liquidation adjustment (see note (a))	2		—
Operating expenses (excluding depreciation and amortization expense)	406		504
Depreciation and amortization expense (see note (d))	121		90
Other operating expenses	1		1
Ethanol margin	$	461	$	598

**◦**Adjusted refining operating income (loss) is defined as refining segment operating income (loss) excluding the blender’s tax credit not attributable to volumes blended during the applicable period, the LIFO liquidation adjustment, the LCM inventory valuation adjustment, and other operating expenses, as reflected in the table below.


	Year Ended December 31,
	2020		2019
Reconciliation of refining operating income (loss) to adjusted refining operating income
Refining operating income (loss)	$	(1,342)	$	4,022
Adjustments:
Blender’s tax credit (see note (b))	—		(2)
LIFO liquidation adjustment (see note (a))	222		—
LCM inventory valuation adjustment (see note (c))	(19)		—
Other operating expenses	34		20
Adjusted refining operating income (loss)	$	(1,105)	$	4,040

**◦**Adjusted renewable diesel operating income is defined as renewable diesel segment operating income excluding the blender’s tax credit not attributable to volumes blended during the applicable period, as reflected in the table below.


	Year Ended December 31,
	2020		2019
Reconciliation of renewable diesel operating income to adjusted renewable diesel operating income
Renewable diesel operating income	$	638	$	732
Adjustments:
Blender’s tax credit (see note (b))	—		(156)
Adjusted renewable diesel operating income	$	638	$	576

**◦**Adjusted ethanol operating income (loss) is defined as ethanol segment operating income (loss) excluding the LIFO liquidation adjustment, the change in estimated useful life, and other operating expenses, as reflected in the table below.


	Year Ended December 31,
	2020		2019
Reconciliation of ethanol operating income (loss) to adjusted ethanol operating income (loss)
Ethanol operating income (loss)	$	(69)	$	3
Adjustments:
LIFO liquidation adjustment (see note (a))	2		—
Change in estimated useful life (see note (d))	30		—
Other operating expenses	1		1
Adjusted ethanol operating income (loss)	$	(36)	$	4

◦Adjusted operating income (loss) is defined as total company operating income (loss) excluding the blender’s tax credit not attributable to volumes blended during the applicable period, the LIFO liquidation adjustment, the LCM inventory valuation adjustment, the change in estimated useful life, and other operating expenses, as reflected in the table below.


	Year Ended December 31,
	2020		2019
Reconciliation of total company operating income (loss) to adjusted operating income (loss)
Total company operating income (loss)	$	(1,579)	$	3,836
Adjustments:
Blender’s tax credit (see note (b))	—		(158)
LIFO liquidation adjustment (see note (a))	224		—
LCM inventory valuation adjustment (see note (c))	(19)		—
Change in estimated useful life (see note (d))	30		—
Other operating expenses	35		21
Adjusted operating income (loss)	$	(1,309)	$	3,699

(g)We use throughput volumes, sales volumes, and production volumes for the refining segment, renewable diesel segment, and ethanol segment, respectively, due to their general use by others who operate facilities similar to those included in our segments.

LIQUIDITY AND CAPITAL RESOURCES

Overview

During the first half of 2020, our liquidity was negatively impacted by the significant economic effects resulting from the COVID-19 pandemic as described in “OVERVIEW AND OUTLOOK—*Overview—*Business Operations Update.” However, we took a number of actions to address the economic environment and its impact on our liquidity, most notably two public debt offerings totaling $4.0 billion before deducting the underwriting discounts and debt issuance costs, which are described in Note 10 of Notes to Consolidated Financial Statements. We took other actions to address our liquidity and those actions are described in “OVERVIEW AND OUTLOOK—*Overview—*Business Operations Update” on pages 33 through 35 and in the discussion of matters impacting our liquidity and capital resources below. As a result of the actions taken during 2020, our liquidity position has improved as of December 31, 2020 compared to the end of the first quarter of 2020, which was when the pandemic began to have a negative impact on our business.

Our Liquidity

Our liquidity consisted of the following as of December 31, 2020 (in millions):


Available borrowing capacity from committed facilities:
Valero Revolver	$	3,966
364-day Revolving Credit Facility	875
Canadian Revolver(a)	114
Accounts receivable sales facility	885
Letter of credit facility	50
Total available borrowing capacity	5,890
Cash and cash equivalents(b)	3,152
Total liquidity	$	9,042

(a)The amount for our Canadian Revolver is shown in U.S. dollars. As set forth in the summary of our credit facilities in Note 10 of Notes to Consolidated Financial Statements, the availability under our Canadian Revolver as of December 31, 2020 in Canadian dollars was C$145 million.

(b)Excludes $161 million of cash and cash equivalents related to our variable interest entities (VIEs) that is available for use only by our VIEs.

Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 10 of Notes to Consolidated Financial Statements.

We believe that cash provided by operations, along with cash from our public debt offerings in April and September of 2020 and available borrowings under our credit facilities, is sufficient to fund our ongoing operating requirements and other commitments. We expect that, to the extent necessary, we can raise additional cash through equity or debt financings in the public and private capital markets or the arrangement of additional credit facilities. However, there can be no assurances regarding the availability of any future financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us.

Cash Flows

Components of our cash flows are set forth below (in millions):


	Year Ended December 31,
	2020		2019
Cash flows provided by (used in):
Operating activities	$	948	$	5,531
Investing activities	(2,425)		(3,001)
Financing activities:
Borrowings	4,570		2,131
Other financing activities	(2,493)		(5,128)
Financing activities	2,077		(2,997)
Effect of foreign exchange rate changes on cash	130		68
Net increase (decrease) in cash and cash equivalents	$	730	$	(399)

Cash Flows for the Year Ended December 31, 2020

During the year ended December 31, 2020, we used $948 million of cash generated by our operations and $4.6 billion in borrowings to make $2.4 billion of investments in our business, fund $2.5 billion of other financing activities, and increase our available cash on hand by $730 million. The borrowings are described in Note 10 of Notes to Consolidated Financial Statements.

As previously noted, our operations generated $948 million of cash in 2020, which was negatively impacted by an unfavorable change in working capital of $345 million. The change in working capital was affected primarily by a $740 million use of cash11 resulting from the rapid decline in market prices of refined petroleum products and crude oil as a result of the negative economic effects of the COVID-19 pandemic that impacted our receivables and accounts payable. This use of cash, along with other uses of cash, were partially offset by a $1.0 billion source of cash driven by a reduction in inventory levels on hand. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 19 of Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of our net loss.

Our investing activities of $2.4 billion consisted of $2.5 billion in capital investments, as defined below, of which $548 million related to self-funded capital investments by DGD, and $251 million was related to capital expenditures of VIEs other than DGD.

Other financing activities of $2.5 billion consisted primarily of $1.6 billion in dividend payments, $490 million of payments of debt and finance lease obligations, $208 million to pay distributions to noncontrolling interests, and $156 million for the purchase of common stock for treasury.

Cash Flows for the Year Ended December 31, 2019

During the year ended December 31, 2019, we used $5.5 billion of cash generated by our operations, $2.1 billion in borrowings, and $399 million of cash on hand to make $3.0 billion of investments in our business and fund $5.1 billion of other financing activities. The borrowings are described in Note 10 of Notes to Consolidated Financial Statements.

As previously noted, our operations generated $5.5 billion of cash in 2019, driven primarily by net income of $2.8 billion, noncash charges to income of $2.5 billion, and a positive change in working capital of $294 million. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 19 of Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of our net income.

Our investing activities of $3.0 billion consisted primarily of $2.9 billion in capital investments, as defined below, of which $160 million is related to self-funded capital investments by DGD, and $225 million was related to capital expenditures of VIEs other than DGD.

Other financing activities of $5.1 billion consisted primarily of $1.8 billion of payments of debt and finance lease obligations, $1.5 billion in dividend payments, $950 million to acquire all of the outstanding publicly held common units of VLP, and $777 million for the purchase of common stock for treasury.

11 Represents the net cash flow change in “receivables, net” of $3.3 billion and accounts payable of $4.1 billion during the year ended December 31, 2020, as described in Note 19 of Notes to Consolidated Financial Statements.

Capital Investments

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

We have historically acquired our refineries at amounts significantly below their replacement costs, whereas our improvements are made at full replacement value. As such, the costs for improving our refinery assets increase over time and are significant in relation to the amounts we paid to acquire our refineries. We make improvements to our refineries in order to maintain and enhance their operating reliability, to meet environmental obligations with respect to reducing emissions and removing prohibited elements from the products we produce, or to enhance their profitability. Reliability and environmental improvements generally do not increase the throughput capacities of our refineries. Improvements that enhance refinery profitability may increase throughput capacity, but many of these improvements allow our refineries to process different types of crude oil and to refine crude oil into products with higher market values. Therefore, many of our improvements do not increase throughput capacity significantly.

Our capital investments include capital expenditures, deferred turnaround and catalyst cost expenditures, and investments in unconsolidated joint ventures. Capital investments attributable to Valero, which is a non-GAAP financial measure, reflects our net share of capital investments and is defined as all capital expenditures, deferred turnaround and catalyst cost expenditures, and investments in unconsolidated joint ventures presented in our consolidated statements of cash flows, excluding the portion of DGD’s capital investments attributable to our joint venture partner and all of the capital expenditures of other VIEs.

We are a 50/50 joint venture partner in DGD and consolidate DGD’s financial statements; as a result, all of DGD’s net cash provided by operating activities (or operating cash flow) is included in our consolidated net cash provided by operating activities. DGD’s partners use DGD’s operating cash flow (excluding changes in its current assets and current liabilities) to fund its capital investments rather than distribute all of that cash to themselves. Because DGD’s operating cash flow is effectively attributable to each partner, only 50 percent of DGD’s capital investments should be attributed to our net share of capital investments. We also exclude the capital expenditures of our other consolidated VIEs because we do not operate those VIEs. We believe capital investments attributable to Valero is an important measure because it more accurately reflects our capital investments.

Capital investments attributable to Valero should not be considered as an alternative to capital investments, its most comparable U.S. GAAP measure, nor should it be considered in isolation or as a substitute for an analysis of our cash flows as reported under U.S. GAAP. In addition, this non-GAAP measure may not be comparable to similarly titled measures used by other companies because we may define it differently, which may diminish its utility.


	Year Ended December 31,
	2020		2019
Reconciliation of capital investments to capital investments attributable to Valero
Capital expenditures (excluding VIEs)	$	1,014	$	1,627
Capital expenditures of VIEs:
DGD	523		142
Other VIEs	251		225
Deferred turnaround and catalyst cost expenditures (excluding VIEs)	623		762
Deferred turnaround and catalyst cost expenditures of DGD	25		18
Investments in unconsolidated joint ventures	54		164
Capital investments	2,490		2,938
Adjustments:
DGD’s capital investments attributable to our joint venture partner	(274)		(80)
Capital expenditures of other VIEs	(251)		(225)
Capital investments attributable to Valero	$	1,965	$	2,633

We expect to incur capital investments and capital investments attributable to Valero in 2021 as follows by reportable segment (in millions):


Refining	$	1,600
Renewable diesel	720
Ethanol	40
Corporate	25
Capital investments	2,385
Adjustments:
DGD’s capital investments attributable to our joint venture partner	(360)
Capital expenditures of other VIEs	(25)
Capital investments attributable to Valero	$	2,000

Approximately 60 percent of the capital investments attributable to Valero are for sustaining the business and 40 percent are for growth strategies, almost half of which is allocated to expanding the renewable diesel business. However, we continuously evaluate our capital budget and make changes as conditions warrant. This capital investment estimate excludes strategic acquisitions, if any.

Other Matters Impacting Liquidity and Capital Resources

Stock Purchase Program

On January 23, 2018, our board of directors authorized the 2018 Program for the purchase of our outstanding common stock. As of December 31, 2020, we had $1.4 billion available for purchase under the 2018 Program, which has no expiration date. We have not purchased any shares of our common stock under the 2018 Program since mid-March 2020, and we will evaluate the timing of repurchases when appropriate. We have no obligation to make purchases under this program.

Pension Plan Funding

We plan to contribute $128 million to our pension plans and $22 million to our other postretirement benefit plans during 2021. See Note 14 of Notes to Consolidated Financial Statements for a discussion of our employee benefit plans.

Environmental Matters

Our operations are subject to extensive environmental regulations by governmental authorities relating to the discharge of materials into the environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of gasolines and distillates. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades in any of our refineries or plants could require material additional expenditures to comply with environmental laws and regulations. See Note 9 of Notes to Consolidated Financial Statements for disclosure of our environmental liabilities.

Tax Matters

Under deferrals provided by recently passed legislation, such as the CARES Act in the U.S., and by various taxing authorities under other existing legislation, we deferred approximately $440 million of income and indirect (e.g., VAT and motor fuel taxes) tax payments due in the first and second quarters of 2020. As of December 31, 2020, we had approximately $250 million of deferred tax payments. Of the $250 million, approximately 70 percent will be paid in 2021 and 30 percent in 2022.

We take tax positions in our tax returns from time to time that may not be ultimately allowed by the relevant taxing authority. When we take such positions, we evaluate the likelihood of sustaining those positions and determine the amount of tax benefit arising from such positions, if any, that should be recognized in our financial statements. Tax benefits not recognized by us are recorded as a liability for unrecognized tax benefits, which represents our potential future obligation to various taxing authorities if the tax positions are not sustained.

As of December 31, 2020, our liability for unrecognized tax benefits, excluding related interest and penalties, was $821 million. Of this amount, $525 million is associated with refund claims associated with taxes paid on incentive payments received from the U.S. federal government for blending biofuels into refined petroleum products. We recorded a tax refund receivable of $525 million in connection with our refund claims, but we also recorded a liability for unrecognized tax benefits of $525 million due to the complexity of this matter and uncertainties with respect to sustaining these refund claims. Therefore, our financial position, results of operations, and liquidity will not be negatively impacted if we are unsuccessful in sustaining these refund claims. The remaining liability for unrecognized tax benefits, excluding related interest and penalties, of $296 million represents our potential future obligations to various taxing authorities if the tax positions associated with that liability are not sustained.

Details about our liability for unrecognized tax benefits, along with other information about our unrecognized tax benefits, are included in Note 16 of Notes to Consolidated Financial Statements.

Cash Held by Our International Subsidiaries

As of December 31, 2020, $2.5 billion of our cash and cash equivalents was held by our international subsidiaries. Cash held by our international subsidiaries can be repatriated to us without any U.S. federal income tax consequences, but certain other taxes may apply, including, but not limited to, withholding taxes imposed by certain international jurisdictions and U.S. state income taxes. Therefore, there is a cost to repatriate cash held by certain of our international subsidiaries to us, but we believe that such amount is not material to our financial position or liquidity.

Concentration of Customers

Our operations have a concentration of customers in the refining industry and customers who are refined petroleum product wholesalers and retailers. These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions including the uncertainties concerning the COVID-19 pandemic and volatility in the global oil markets. However, we believe that our portfolio of accounts receivable is sufficiently diversified to the extent necessary to minimize potential credit risk. Historically, we have not had any significant problems collecting our accounts receivable. See also Item 1A, “RISK FACTORS”—Risks Related to Our Business, Industry, and Operations—Developments with respect to low-carbon fuel policies and the market for alternative fuels may affect demand for our renewable fuels and could adversely affect our financial performance.

OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any transactions, agreements, or other contractual arrangements that would result in off-balance sheet liabilities.

CONTRACTUAL OBLIGATIONS

Our contractual obligations as of December 31, 2020 are summarized below (in millions).


	Payments Due by Year
	2021		2022		2023		2024		2025		Thereafter		Total
Debt and finance lease obligations (a)	$	790	$	188	$	1,632	$	1,103	$	1,828	$	9,972	$	15,513
Debt obligations – interest payments	550		544		524		501		469		3,544		6,132
Operating lease liabilities (b)	324		231		194		155		107		435		1,446
Purchase obligations	14,641		1,871		1,268		1,246		1,124		2,445		22,595
Other long-term liabilities (c)	—		129		225		235		259		1,887		2,735
Total	$	16,305	$	2,963	$	3,843	$	3,240	$	3,787	$	18,283	$	48,421

(a)Debt obligations exclude amounts related to unamortized discounts and debt issuance costs. Finance lease obligations include related interest expense. Debt obligations due in 2021 include $598 million associated with borrowings under the IEnova Revolver (as defined and described in Note 10 of Notes to Consolidated Financial Statements) for the construction of terminals in Mexico by Central Mexico Terminals (as defined and described

in Note 13 of Notes to Consolidated Financial Statements). The IEnova Revolver is only available to the operations of Central Mexico Terminals, and its creditors do not have recourse against us.

(b)Operating lease liabilities include related interest expense.

(c)Other long-term liabilities exclude amounts related to the long-term portion of operating lease liabilities that are separately presented above.

Debt and Finance Lease Obligations

Our debt and finance lease obligations are described in Notes 10 and 6, respectively, of Notes to Consolidated Financial Statements.

Our debt and financing agreements do not have rating agency triggers that would automatically require us to post additional collateral. However, in the event of certain downgrades of our senior unsecured debt by the ratings agencies, the cost of borrowings under some of our bank credit facilities and other arrangements may increase. As of December 31, 2020, all of our ratings on our senior unsecured debt, including debt guaranteed by us, are at or above investment grade level as follows:


Rating Agency						Rating
Moody’s Investors Service						Baa2 (negative outlook)
Standard & Poor’s Ratings Services						BBB (negative outlook)
Fitch Ratings						BBB (negative outlook)

We cannot provide assurance that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell, or hold our securities. Each rating should be evaluated independently of any other rating. Any future reduction below investment grade or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing and the cost of such financings.

Debt Obligations – Interest Payments

Interest payments for our debt obligations as described in Note 10 of Notes to Consolidated Financial Statements are the expected payments based on information available as of December 31, 2020.

Operating Lease Liabilities

Our operating lease liabilities arise from leasing arrangements for the right to use various classes of underlying assets as described in Note 6 of Notes to Consolidated Financial Statements. Operating lease liabilities are recognized for leasing arrangements with terms greater than one year and are not reduced by minimum lease payments to be received by us under subleases.

Purchase Obligations

A purchase obligation is an enforceable and legally binding agreement to purchase goods or services that specifies significant terms, including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum, or variable price provisions, and (iii) the approximate timing of the transaction. We have various purchase obligations under certain crude oil and other feedstock supply arrangements, industrial gas supply arrangements (such as hydrogen supply arrangements), natural gas supply arrangements, and various throughput, transportation and terminaling agreements. We enter into these contracts to ensure an adequate supply of feedstock and utilities and adequate storage capacity to operate our refineries and 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. The purchase obligation amounts shown in the

preceding table include both short- and long-term obligations and are based on (i) fixed or minimum quantities to be purchased and (ii) fixed or estimated prices to be paid based on current market conditions.

Other Long-Term Liabilities

Our other long-term liabilities are described in Note 9 of Notes to Consolidated Financial Statements. For purposes of reflecting amounts for other long-term liabilities in the preceding table, we made our best estimate of expected payments for each type of liability based on information available as of December 31, 2020.

NEW ACCOUNTING PRONOUNCEMENTS

As discussed in Note 1 of Notes to Consolidated Financial Statements, certain new financial accounting pronouncements became effective in 2020 and January 2021. The effect on our financial statements upon adoption of these pronouncements is discussed in the above-referenced note.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance 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. The following summary provides further information about our critical accounting policies that involve critical accounting estimates, and should be read in conjunction with Note 1 of Notes to Consolidated Financial Statements, which summarizes our significant accounting policies. The following accounting policies involve estimates that are considered critical due to the level of subjectivity and judgment involved, as well as the impact on our financial position and results of operations. We believe that all of our estimates are reasonable. Unless otherwise noted, estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining our estimates is not practicable due to the number of assumptions and contingencies involved, and the wide range of possible outcomes.

Unrecognized Tax Benefits

The evaluation of tax positions and the determination of the benefit arising from such positions that are recognized in our financial statements requires us to make significant judgments and estimates based on an analysis of complex tax laws and regulations and related interpretations. These judgments and estimates are subject to change due to many factors, including the progress of ongoing tax audits, case law, and changes in legislation.

Details of our liability for unrecognized tax benefits, along with other information about our unrecognized tax benefits, are included in Note 16 of Notes to Consolidated Financial Statements.

Impairment of Long-Lived Assets and Goodwill

Long-lived assets (primarily property, plant, and equipment) 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.

In order to test for recoverability, we must make estimates of projected cash flows related to the asset being evaluated; such estimates include, but are not limited to, assumptions about future sales volumes, commodity prices, operating costs, margins, the use or disposition of the asset, the asset’s estimated remaining useful life, and future expenditures necessary to maintain the asset’s existing service potential. Due to the significant subjectivity of the assumptions used to test for recoverability, changes in market conditions could result in significant impairment charges in the future, thus affecting our earnings.

Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. We first evaluate qualitative factors to determine if it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill, by taking into consideration relevant events and circumstances. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no further testing is necessary. However, if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the quantitative goodwill impairment test. An impairment loss is recognized if the carrying amount of the reporting unit, including goodwill, exceeds its fair value.

During 2020, we performed qualitative assessments of the reporting unit to which our goodwill is related to determine if the quantitative impairment test was necessary. We considered company-specific information, such as current and future financial performance, as well as external factors, that could affect the fair value of the reporting unit. We evaluated (i) the impact that the COVID-19 pandemic had on the demand for our products and utilization of our U.S. refineries, (ii) the expected contribution from the reporting unit, which historically has had strong performance, and (iii) the estimated margin between the carrying amount and the implied enterprise value of our reporting unit. Due to the significant subjectivity of the assumptions used to test for impairment, changes in market conditions could result in significant impairment charges in the future, thus affecting our earnings.

As of December 31, 2020, we determined there was no impairment of our long-lived assets or goodwill as discussed in Note 2 of Notes to Consolidated Financial Statements.

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