Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for Valero Energy Corporation. Our management evaluated the effectiveness of Valero’s internal control over financial reporting as of December 31, 2020. 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, 2020, 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 64 of this report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Valero Energy Corporation:

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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2021 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of gross unrecognized tax benefits

As discussed in Note 16 to the consolidated financial statements, as of December 31, 2020, the Company has gross unrecognized tax benefits, excluding related interest and penalties, of $847 million. The Company’s tax positions are subject to examination by local taxing authorities and the resolution of such examinations may span multiple years. Due to the complexities inherent in the interpretation of income tax laws in domestic and international jurisdictions, it is uncertain whether some of the Company’s income tax positions will be sustained upon examination.

We identified the assessment of the Company’s gross unrecognized tax benefits as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s interpretation of income tax laws and assessing the Company’s estimate of the ultimate resolution of its income tax positions.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax process. This included controls to evaluate which of the Company’s income tax positions may not be sustained upon examination and estimate the gross unrecognized tax benefits. We involved domestic and international income tax professionals with specialized skills and knowledge, who assisted in:

obtaining an understanding and evaluating the Company’s income tax positions as filed or intended to be filed
evaluating the Company’s interpretation of income tax laws by developing an independent assessment of the Company’s income tax positions and comparing the results to the Company’s assessment
inspecting settlements and communications with applicable taxing authorities
assessing the expiration of applicable statutes of limitations.

In addition, we evaluated the Company’s ability to estimate its gross unrecognized tax benefits by comparing historical uncertain income tax positions, including the gross unrecognized tax benefits, to actual results upon conclusion of tax examinations.

/s/ KPMG LLP

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

San Antonio, Texas

February 23, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Valero Energy Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited Valero Energy Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2021 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 23, 2021

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions of dollars, except par value)


	December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	3,313	$	2,583
Receivables, net	6,109		8,988
Inventories	6,038		7,013
Prepaid expenses and other	384		385
Total current assets	15,844		18,969
Property, plant, and equipment, at cost	46,967		44,294
Accumulated depreciation	(16,578)		(15,030)
Property, plant, and equipment, net	30,389		29,264
Deferred charges and other assets, net	5,541		5,631
Total assets	$	51,774	$	53,864
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and finance lease obligations	$	723	$	494
Accounts payable	6,082		10,205
Accrued expenses	994		949
Taxes other than income taxes payable	1,372		1,304
Income taxes payable	112		208
Total current liabilities	9,283		13,160
Debt and finance lease obligations, less current portion	13,954		9,178
Deferred income tax liabilities	5,275		5,103
Other long-term liabilities	3,620		3,887
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	6,814		6,821
Treasury stock, at cost; 265,096,171 and 264,209,742 common shares	(15,719)		(15,648)
Retained earnings	28,953		31,974
Accumulated other comprehensive loss	(1,254)		(1,351)
Total Valero Energy Corporation stockholders’ equity	18,801		21,803
Noncontrolling interests	841		733
Total equity	19,642		22,536
Total liabilities and equity	$	51,774	$	53,864

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(millions of dollars, except per share amounts)


	Year Ended December 31,
	2020		2019		2018
Revenues (a)	$	64,912	$	108,324	$	117,033
Cost of sales:
Cost of materials and other	58,933		96,476		104,732
Lower of cost or market (LCM) inventory valuation adjustment	(19)		—		—
Operating expenses (excluding depreciation and amortization expense reflected below)	4,435		4,868		4,690
Depreciation and amortization expense	2,303		2,202		2,017
Total cost of sales	65,652		103,546		111,439
Other operating expenses	35		21		45
General and administrative expenses (excluding depreciation and amortization expense reflected below)	756		868		925
Depreciation and amortization expense	48		53		52

Operating income (loss)	(1,579)		3,836		4,572
Other income, net	132		104		130
Interest and debt expense, net of capitalized interest	(563)		(454)		(470)
Income (loss) before income tax expense (benefit)	(2,010)		3,486		4,232
Income tax expense (benefit)	(903)		702		879


Net income (loss)	(1,107)		2,784		3,353
Less: Net income attributable to noncontrolling interests	314		362		231
Net income (loss) attributable to Valero Energy Corporation stockholders	$	(1,421)	$	2,422	$	3,122








Earnings (loss) per common share	$	(3.50)	$	5.84	$	7.30
Weighted-average common shares outstanding (in millions)	407		413		426




Earnings (loss) per common share – assuming dilution	$	(3.50)	$	5.84	$	7.29
Weighted-average common shares outstanding – assuming dilution (in millions)	407		414		428
__________________________
Supplemental information:
(a) Includes excise taxes on sales by certain of our international operations	$	4,797	$	5,595	$	5,626

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(millions of dollars)


	Year Ended December 31,
	2020		2019		2018
Net income (loss)	$	(1,107)	$	2,784	$	3,353
Other comprehensive income (loss):
Foreign currency translation adjustment	161		349		(517)
Net gain (loss) on pension and other postretirement benefits	(80)		(234)		49
Net gain (loss) on cash flow hedges	2		(8)		—
Other comprehensive income (loss) before income tax expense (benefit)	83		107		(468)
Income tax expense (benefit) related to items of other comprehensive income (loss)	(16)		(48)		10
Other comprehensive income (loss)	99		155		(478)
Comprehensive income (loss)	(1,008)		2,939		2,875
Less: Comprehensive income attributable to noncontrolling interests	316		361		229
Comprehensive income (loss) attributable to Valero Energy Corporation stockholders	$	(1,324)	$	2,578	$	2,646

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 Loss		Total		Non- controlling Interests		Total Equity
Balance as of December 31, 2017	$	7	$	7,039	$	(13,315)	$	29,200	$	(940)	$	21,991	$	909	$	22,900
Reclassification of stranded income tax effects	—		—		—		91		(91)		—		—		—
Net income	—		—		—		3,122		—		3,122		231		3,353
Dividends on common stock ($3.20 per share)	—		—		—		(1,369)		—		(1,369)		—		(1,369)
Stock-based compensation expense	—		82		—		—		—		82		—		82
Transactions in connection with stock-based compensation plans	—		(70)		(99)		—		—		(169)		—		(169)
Open market stock purchases	—		—		(1,511)		—		—		(1,511)		—		(1,511)
Contributions from noncontrolling interests	—		—		—		—		—		—		32		32
Distributions to noncontrolling interests	—		—		—		—		—		—		(116)		(116)
Other	—		(3)		—		—		—		(3)		10		7
Other comprehensive loss	—		—		—		—		(476)		(476)		(2)		(478)
Balance as of December 31, 2018	7		7,048		(14,925)		31,044		(1,507)		21,667		1,064		22,731

Net income	—		—		—		2,422		—		2,422		362		2,784
Dividends on common stock ($3.60 per share)	—		—		—		(1,492)		—		(1,492)		—		(1,492)
Stock-based compensation expense	—		77		—		—		—		77		—		77
Transactions in connection with stock-based compensation plans	—		(50)		30		—		—		(20)		—		(20)
Open market stock purchases	—		—		(753)		—		—		(753)		—		(753)
Acquisition of Valero Energy Partners LP (VLP) publicly held common units	—		(328)		—		—		—		(328)		(622)		(950)

Distributions to noncontrolling interests	—		—		—		—		—		—		(70)		(70)
Other	—		74		—		—		—		74		—		74
Other comprehensive income (loss)	—		—		—		—		156		156		(1)		155
Balance as of December 31, 2019	7		6,821		(15,648)		31,974		(1,351)		21,803		733		22,536
Net income (loss)	—		—		—		(1,421)		—		(1,421)		314		(1,107)
Dividends on common stock ($3.92 per share)	—		—		—		(1,600)		—		(1,600)		—		(1,600)
Stock-based compensation expense	—		76		—		—		—		76		—		76
Transactions in connection with stock-based compensation plans	—		(83)		59		—		—		(24)		—		(24)
Open market stock purchases	—		—		(130)		—		—		(130)		—		(130)

Distributions to noncontrolling interests	—		—		—		—		—		—		(208)		(208)

Other comprehensive income	—		—		—		—		97		97		2		99
Balance as of December 31, 2020	$	7	$	6,814	$	(15,719)	$	28,953	$	(1,254)	$	18,801	$	841	$	19,642

See Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of dollars)


	Year Ended December 31,
	2020		2019		2018
Cash flows from operating activities:
Net income (loss)	$	(1,107)	$	2,784	$	3,353
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense	2,351		2,255		2,069
LCM inventory valuation adjustment	(19)		—		—

Deferred income tax expense	158		234		203
Changes in current assets and current liabilities	(345)		294		(1,297)
Changes in deferred charges and credits and other operating activities, net	(90)		(36)		43
Net cash provided by operating activities	948		5,531		4,371
Cash flows from investing activities:
Capital expenditures (excluding variable interest entities (VIEs))	(1,014)		(1,627)		(1,463)
Capital expenditures of VIEs:
Diamond Green Diesel Holdings LLC (DGD)	(523)		(142)		(165)
Other VIEs	(251)		(225)		(124)
Deferred turnaround and catalyst cost expenditures (excluding VIEs)	(623)		(762)		(888)
Deferred turnaround and catalyst cost expenditures of DGD	(25)		(18)		(27)
Investments in unconsolidated joint ventures	(54)		(164)		(181)
Peru Acquisition, net of cash acquired	—		—		(468)
Acquisition of ethanol plants	—		(3)		(320)
Acquisitions of undivided interests	—		(72)		(212)
Minor acquisitions	—		—		(88)
Other investing activities, net	65		12		8
Net cash used in investing activities	(2,425)		(3,001)		(3,928)
Cash flows from financing activities:
Proceeds from debt issuances and borrowings (excluding VIEs)	4,320		1,892		1,258
Proceeds from borrowings of VIEs	250		239		109
Repayments of debt and finance lease obligations (excluding VIEs)	(490)		(1,811)		(1,366)
Repayments of debt of VIEs	(5)		(6)		(6)
Purchases of common stock for treasury	(156)		(777)		(1,708)
Common stock dividend payments	(1,600)		(1,492)		(1,369)
Acquisition of VLP publicly held common units	—		(950)		—
Contributions from noncontrolling interests	—		—		32
Distributions to noncontrolling interests	(208)		(70)		(116)
Other financing activities, net	(34)		(22)		(2)
Net cash provided by (used in) financing activities	2,077		(2,997)		(3,168)
Effect of foreign exchange rate changes on cash	130		68		(143)
Net increase (decrease) in cash and cash equivalents	730		(399)		(2,868)
Cash and cash equivalents at beginning of year	2,583		2,982		5,850
Cash and cash equivalents at end of year	$	3,313	$	2,583	$	2,982

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

The terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.

We are an international manufacturer and marketer of transportation fuels and petrochemical products. We own 15 petroleum refineries with a combined throughput capacity of approximately 3.2 million barrels per day as of December 31, 2020 that are located in the United States (U.S.), Canada, and the United Kingdom (U.K.). We are also a joint venture partner in DGD, which owns a renewable diesel plant in Norco, Louisiana with a production capacity of 290 million gallons per year as of December 31, 2020. We also own 13 ethanol plants with a combined production capacity of 1.69 billion gallons per year as of December 31, 2020 that are located in the Mid-Continent region of the U.S. We sell our products primarily in the U.S., Canada, the U.K., Ireland, and Latin America.

As discussed in Note 2, the outbreak of COVID-19 and its development into a pandemic in March 2020 has resulted in significant economic disruption globally. While demand and market prices for most of our products increased during the second half of 2020 compared to the low product demand during the first half of 2020, developments with respect to COVID-19 have been occurring at a rapid pace and the risk remains that circumstances could change. For instance, beginning in the latter part of the second quarter of 2020, certain governmental authorities in the U.S. and other countries across the world began lifting many of the restrictions put in place to slow the spread of COVID-19. 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. Food and Drug Administration 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. Therefore, our operating results for the year ended December 31, 2020 do not fully reflect the impact this disruption will likely continue to have on us.

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

Certain prior year amounts have been reclassified to conform to the 2020 presentation. The changes were due to (i) the reclassification of amounts for income taxes receivable from prepaid expenses and other to

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

“receivables, net” in the consolidated balance sheets and (ii) the reclassification of amounts for repayments of debt and finance lease obligations from “other financing activities, net” in the consolidated statements of cash flows to repayments of debt and finance lease obligations (excluding VIEs).

Significant Accounting Policies

Principles of Consolidation

These financial statements include those of Valero, our wholly owned subsidiaries, and VIEs in which we have a controlling financial interest. Our VIEs are described in Note 13. 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.

Cash Equivalents

Our cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have a maturity of three months or less when acquired.

Receivables

Trade receivables are carried at amortized cost, which is the original invoice amount adjusted for cash collections, write-offs, and foreign exchange. We maintain an allowance for credit losses, which is adjusted based on management’s assessment of our customers’ historical collection experience, known or expected credit risks, and industry and economic conditions.

Inventories

The cost of (i) refinery feedstocks and refined petroleum products and blendstocks, (ii) renewable diesel feedstocks (i.e., rendered and recycled materials, including animal fats, used cooking oils, and other vegetable oils) and products, and (iii) ethanol feedstocks and products 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. To the extent the aggregate market value of our LIFO inventories subsequently increases, we recognize an increase to the value of our inventories (not to exceed cost) and a gain 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 feedstock processing facilities and supporting logistical infrastructure (Units), and these Units are improved continuously. 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 and renewable diesel segments 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 and our renewable diesel plant. 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 20 to 30 years.

Under the composite method of depreciation, the cost of an improvement is added to the composite group to which it relates and is depreciated over that group’s estimated useful life. We design improvements to our refineries and renewable diesel plant 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. The estimated useful life of our corn processing facilities is 20 years.

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. Finance lease ROU (defined below) assets are amortized as discussed in “Leases” below.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, renewable diesel plant, and ethanol plants, 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, are deferred when incurred and amortized on a straight-line basis over the estimated useful life of the specific catalyst;
operating lease ROU (defined below) assets, which are amortized as discussed in “Leases” below;
investments in unconsolidated joint ventures;
noncurrent income taxes receivable;
intangible assets, which are amortized over their estimated useful lives; and
goodwill.

Leases

We evaluate if a contract is or contains a lease at inception of the contract. If we determine that a contract is or contains a lease, we recognize a right-of-use (ROU) asset and lease liability at the commencement date of the lease based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit rate when readily determinable. If not determinable, our centrally managed treasury group provides an incremental borrowing rate based on quoted interest rates obtained from financial institutions. The rate used is for a term similar to the duration of the lease based on information available at the commencement date. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.

We recognize ROU assets and lease liabilities for leasing arrangements with terms greater than one year. Except for the marine transportation asset class, we account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets. Our marine transportation contracts include non-lease components, such as maintenance and crew costs. We allocate the consideration in these contracts based on pricing information provided by the third-party broker.

Expense for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term and is reflected in the appropriate income statement line item based on the leased asset’s function. Amortization expense of a finance lease ROU asset is recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term. However, if the lessor transfers ownership of the finance lease ROU asset to us at the end of the lease term, the finance lease ROU asset is amortized over the useful life of the leased asset. Amortization expense is reflected in “depreciation and amortization

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

expense.” Interest expense is incurred based on the carrying value of the lease liability and is reflected in “interest and debt expense, net of capitalized interest.”

Impairment of Assets

Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.

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

Goodwill is not amortized, but is tested for impairment annually on October 1st and in interim periods when events or changes in circumstance indicate that the fair value of a reporting unit with goodwill is below its carrying amount. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

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 obligations with respect to certain of our assets related to our refining and ethanol segments to clean and/or dispose of various component parts of the assets at the time they are retired. However, these component parts can be used for extended and indeterminate periods of time as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain all our assets and continue making improvements to those assets based on technological advances. As a result, we believe that our assets related to our refining and ethanol segments 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Legal Contingencies

We are subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. We accrue losses associated with legal claims when such losses are probable and reasonably estimable. If we determine that a loss is probable and cannot estimate a specific amount for that loss but can estimate a range of loss, the best estimate within the range is accrued. If no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. Estimates are adjusted as additional information becomes available or circumstances change. Legal defense costs associated with loss contingencies are expensed in the period incurred.

Foreign Currency Translation

Generally, our international subsidiaries use their local currency as their functional currency. Balance sheet amounts are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Income statement amounts are translated into U.S. dollars using the exchange rates in effect at the time the underlying transactions occur. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive loss.

Revenue Recognition

Our revenues are primarily generated from contracts with customers. We generate revenue from contracts with customers from the sale of products by our refining, renewable diesel, and ethanol segments. Revenues are recognized when we satisfy our performance obligation to transfer products to our customers, which typically occurs at a point in time upon shipment or delivery of the products, and for an amount that reflects the transaction price that is allocated to the performance obligation.

The customer is able to direct the use of, and obtain substantially all of the benefits from, the products at the point of shipment or delivery. As a result, we consider control to have transferred upon shipment or delivery because we have a present right to payment at that time, the customer has legal title to the asset, we have transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.

Our contracts with customers state the final terms of the sale, including the description, quantity, and price for goods sold. Payment is typically due in full within two to ten days of delivery. In the normal course of business, we generally do not accept product returns.

The transaction price is the consideration that we expect to be entitled to in exchange for our products. The transaction price for substantially all of our contracts is generally based on commodity market pricing (i.e., variable consideration). As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. Some of our contracts also contain variable consideration in the form of sales incentives to our customers, such as discounts and rebates. For contracts that include variable consideration, we estimate the factors that determine the variable consideration in order to establish the transaction price.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We have elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer (e.g., sales tax, use tax, value-added tax, etc.). We continue to include in the transaction price excise taxes that are imposed on certain inventories in our international operations. The amount of such taxes is provided in supplemental information in a footnote on the statements of income.

There are instances where we provide shipping services in relation to the goods sold to our customer. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are included in cost of materials and other. We have elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities rather than as a promised service and we have included these activities in cost of materials and other.

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 nonmonetary 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, renewable diesel feedstocks and products, 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, emission credits under various cap-and-trade systems, as defined in Note 20); (iv) the blender’s tax credit recognized on qualified biodiesel mixtures; (v) gains and losses on our commodity derivative instruments; and (vi) certain excise taxes.

“Operating expenses (excluding depreciation and amortization expense)” include costs to operate our refineries, renewable diesel and 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 18.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 concerning various GHG emission programs, including cap-and-trade systems. These programs are described in Note 21 under “Risk Management Activities by Type of Risk—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 20 for disclosure of our fair value liability.

Stock-Based Compensation

Compensation expense for our share-based compensation plans is based on the fair value of the awards granted and is recognized in income on a straight-line basis over the shorter of (i) the requisite service period of each award or (ii) 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. Stranded income tax effects are released from accumulated other comprehensive loss to retained earnings on an individual item basis as those items are reclassified into income.

We have elected to classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.

We have elected to treat the global intangible low-taxed income (GILTI) tax as a period 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 securities are included in the computation of basic earnings per share using the two-class method. Earnings per common share – assuming dilution is computed by dividing net income attributable to Valero stockholders by the weighted-average number of common shares outstanding for the year increased by the effect of dilutive securities. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Financial Instruments

Our financial instruments include cash and cash equivalents, receivables, payables, debt, operating and finance lease obligations, commodity derivative contracts, and foreign currency derivative contracts. The estimated fair values of these financial instruments approximate their carrying amounts, except for certain debt as discussed in Note 20.

Derivatives and Hedging

All derivative instruments, not designated as normal purchases or sales, are recorded in the balance sheet as either assets or liabilities measured at their fair values with changes in fair value recognized currently in income. To manage commodity price risk, we primarily use cash flow hedges and economic hedges, and we also use fair value hedges from time to time. The cash flow effects of all of our derivative instruments are reflected in operating activities in the consolidated statements of cash flows.

Accounting Pronouncements Adopted During 2020

We adopted the following Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASUs) on January 1, 2020. Our adoption of these ASUs did not have a material impact on our financial statements or related disclosures.


ASU		Basis of Adoption
2016-13	Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (including codification improvements in ASUs 2018-19 and 2019-11 and ASU 2020-02—Financial Instruments—Credit Losses (Topic 326): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119)	Cumulative effect
2018-15	Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract	Prospectively
2019-12	Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Prospectively

The following FASB ASU was issued and adopted by us on March 12, 2020. Our adoption of this ASU did not have a material impact on our financial statements or related disclosures.


ASU															Basis of Adoption
2020-04			Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting												Prospectively

Accounting Pronouncement Adopted During January 2021

The following FASB ASU was issued and adopted by us on January 7, 2021. Our adoption of this ASU did not have a material impact on our financial statements or related disclosures.


ASU		Basis of Adoption
2021-01	Reference Rate Reform (Topic 848): Scope	Prospectively

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. UNCERTAINTIES AND CERTAIN SIGNIFICANT ACCOUNTING ESTIMATES

Overview

The outbreak of COVID-19 and its development into a pandemic in March 2020 and certain developments in the global oil markets have impacted and continue to impact our business. We have responded in multiple ways to the impacts from these matters 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 eight of our ethanol plants and reduced production at our remaining ethanol plants, in each case in order to address the decreased demand for ethanol. We have since increased the production 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.

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 business 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 any measures we have taken or may take will be fully effective. As a result, we expect these matters may affect our estimates and assumptions on amounts reported in the financial statements and accompanying notes in the near term.

Impairment Analysis of Long-Lived Assets

Due to the adverse economic conditions discussed above, we reviewed our significant operating assets for the existence of impairment indicators during the year ended December 31, 2020. As a result, we reduced the estimated useful life of the ethanol plant in Riga, Michigan in September 2020 and evaluated six other ethanol plants and one refinery for potential impairment as of December 31, 2020, considering current economic conditions on our future estimated cash flows. Based on our analysis, we determined that the carrying amount of these assets was recoverable, as the undiscounted future cash flows from each asset exceeded its respective carrying value. The impact from the reduction in estimated useful life of the Riga, Michigan ethanol plant did not have a material impact on our results of operations or financial position; however, this plant ceased operations in 2020. We will continue to evaluate the economic conditions and their impact on our assumptions.

Impairment Analysis of Goodwill

We have $260 million of goodwill as of December 31, 2020. All of our goodwill is allocated to one reporting unit, the U.S. Gulf Coast refining region. Our annual test for the impairment of goodwill is performed on October 1 of each year. However, as discussed above, there were adverse changes in the capital and commodity markets that contributed to a significant decline in our common stock price compared to the price as of December 31, 2019 and early March 2020. Despite the decline in our common

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

stock price, we determined our goodwill was not impaired as of October 1 and December 31, 2020. Nonetheless, we will continue to evaluate the economic conditions and their impact on our assumptions.

Inventory Valuation

See Note 5 regarding the estimates used to determine the market value of our inventories, as well as the recognition of a liquidation of LIFO inventory layers.

3. MERGER AND ACQUISITIONS

Merger with VLP

On January 10, 2019, we completed our acquisition of all of the outstanding publicly held common units of VLP pursuant to a definitive Agreement and Plan of Merger (Merger Agreement, and together with the transactions contemplated thereby, the Merger Transaction) with VLP. Upon completion of the Merger Transaction, each outstanding publicly held common unit was converted into the right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units were automatically canceled and ceased to exist. Upon completion of the Merger Transaction, we paid aggregate merger consideration of $950 million, which was funded with available cash on hand.

Prior to the completion of the Merger Transaction, we consolidated the financial statements of VLP and reflected noncontrolling interests on our balance sheet for the portion of VLP’s partners’ capital held by VLP’s public common unitholders. Upon completion of the Merger Transaction, VLP became our indirect wholly owned subsidiary and, as a result, we no longer reflect noncontrolling interests on our balance sheet with respect to VLP. In addition, we no longer attribute a portion of VLP’s net income to noncontrolling interests. Because we had a controlling financial interest in VLP before the Merger Transaction and retained our controlling financial interest in VLP after the Merger Transaction, the change in our ownership interest in VLP as a result of the merger was accounted for as an equity transaction. Accordingly, we did not recognize a gain or loss on the Merger Transaction.

Acquisition of Ethanol Plants

On November 15, 2018, we acquired three ethanol plants from two subsidiaries of Green Plains Inc. located in Bluffton, Indiana; Lakota, Iowa; and Riga, Michigan with a combined ethanol production capacity of 280 million gallons per year for total cash consideration of $320 million including working capital of $20 million. This acquisition was accounted for as an asset acquisition. Our Riga, Michigan ethanol plant ceased operations in 2020.

Peru Acquisition

On May 14, 2018, we acquired 100 percent of the issued and outstanding equity interests in Pure Biofuels del Peru S.A.C. (now known as Valero Peru S.A.C.) (Valero Peru) from Pegasus Capital Advisors L.P. and various minority equity holders. Valero Peru markets refined petroleum products through its logistics assets in Peru. Valero Peru owns a terminal at the Port of Callao, near Lima, with approximately 1 million barrels of storage capacity for refined petroleum and renewable products. Through one of its subsidiaries, Valero Peru also owns a 180,000-barrel storage terminal in Paita, in Northern Peru, which is scheduled to commence operations in the first quarter of 2021, pending regulatory approvals. This acquisition, which is referred to as the Peru Acquisition, was consistent with our general business strategy and broadens the geographic diversity of our refining segment. This acquisition was accounted for as a business combination.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, based on an independent appraisal that was completed in the fourth quarter of 2018 (in millions). We paid $468 million from available cash on hand, of which $132 million was for working capital. During the third and fourth quarters of 2018, we recognized immaterial adjustments to the preliminary amounts recorded for the Peru Acquisition with a corresponding adjustment to goodwill due to the completion of the independent appraisal. These adjustments did not have a material effect on our results of operations for the year ended December 31, 2018.


Current assets, net of cash acquired	$	158
Property, plant, and equipment	102
Deferred charges and other assets	466

Current liabilities, excluding current portion of debt	(26)
Debt assumed, including current portion	(137)
Deferred income tax liabilities	(62)
Other long-term liabilities	(27)
Noncontrolling interest	(6)
Total consideration, net of cash acquired	$	468

Deferred charges and other assets primarily include identifiable intangible assets of $200 million and goodwill of $260 million. Identifiable intangible assets, which consist of customer contracts and relationships, are amortized on a straight-line basis over ten years. Goodwill is calculated as the excess of the consideration transferred over the estimated fair values of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill represents the future economic benefits expected to be recognized from our expansion into the Latin American refined petroleum products markets arising from other assets acquired that were not individually identified and separately recognized. We determined that the entire balance of goodwill is related to the refining segment. None of the goodwill is deductible for tax purposes.

Our statements of income include the results of operations of Valero Peru since the date of acquisition, and such results are reflected in the refining segment and allocated to one reporting unit, the U.S. Gulf Coast refining region. Results of operations since the date of acquisition, supplemental pro forma financial information, and acquisition-related costs have not been presented for the Peru Acquisition as such information is not material to our results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. RECEIVABLES

Receivables consisted of the following (in millions):


	December 31,
	2020		2019
Receivables from contracts with customers	$	3,642	$	5,610
Receivables from certain purchase and sale arrangements	1,212		2,484
Receivables before allowance for credit losses	4,854		8,094

Allowance for credit losses	(47)		(36)
Receivables after allowance for credit losses	4,807		8,058
Income taxes receivable	1,024		84
Other receivables	278		846
Receivables, net	$	6,109	$	8,988

The increase to our income taxes receivable relates to the income tax benefit recorded during the year ended December 31, 2020 as described in Note 16.

There were no significant changes in our allowance for credit losses during the years ended December 31, 2020, 2019, and 2018.

5. INVENTORIES

Inventories consisted of the following (in millions):


	December 31,
	2020		2019
Refinery feedstocks	$	1,979	$	2,399
Refined petroleum products and blendstocks	3,425		4,034
Renewable diesel feedstocks and products	50		46
Ethanol feedstocks and products	297		260
Materials and supplies	287		274


Inventories	$	6,038	$	7,013

We compare the market value of inventories to their cost on an aggregate basis, excluding materials and supplies. In determining the market value of our inventories, we assume that feedstocks are converted into refined products, which requires us to make estimates regarding the refined products expected to be produced from those feedstocks and the conversion costs required to convert those feedstocks into refined products. We also estimate the usual and customary transportation costs required to move the inventory from our plants to the appropriate points of sale. We then apply an estimated selling price to our inventories. If the aggregate market value is less than the aggregate cost, we recognize a loss for the difference in our statements of income. To the extent the aggregate market value of our LIFO inventories

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

subsequently increases, we recognize an increase to the value of our inventories (not to exceed cost) and a gain in our statements of income.

The market value of our LIFO inventory fell below their LIFO inventory carrying amounts as of March 31, 2020, and as a result, we recorded an LCM inventory valuation reserve of $2.5 billion in order to state our inventories at market. As of September 30, 2020, we reevaluated our inventories and determined that our cost was lower than market. As a result, our LCM inventory valuation reserve was fully reversed as of September 30, 2020. The change in our LCM inventory valuation reserve resulted in a net benefit of $19 million for the year ended December 31, 2020 due to the foreign currency translation effect of the portion of the LCM inventory valuation adjustment attributable to our international operations. As of December 31, 2020 and 2019, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $1.3 billion and $2.5 billion, respectively.

During the year ended December 31, 2020, we had a liquidation of LIFO inventory layers that increased cost of materials and other by $224 million. Our LIFO inventory levels decreased during the year ended December 31, 2020 due to lower production resulting from lower demand for our products caused by the negative economic impacts of the COVID-19 pandemic on our business.

Our non-LIFO inventories accounted for $918 million and $1.4 billion of our total inventories as of December 31, 2020 and 2019, respectively.

6. LEASES

General

We have entered into long-term leasing arrangements for the right to use various classes of underlying assets as follows:

Pipelines, Terminals, and Tanks includes facilities and equipment used in the storage, transportation, production, and sale of refinery feedstock, refined petroleum product, ethanol, and corn inventories;
Marine Transportation includes time charters for ocean-going tankers and coastal vessels;
Rail Transportation includes railcars and related storage facilities;
Feedstock Processing Equipment includes machinery, equipment, and various facilities used in our refining, renewable diesel, and ethanol operations;
Energy and Gases includes facilities and equipment related to industrial gases and power used in our operations;
Real Estate includes land and rights-of-way associated with our refineries, plants, and pipelines and other logistics assets, as well as office facilities; and
Other includes equipment primarily used at our corporate offices, such as printers and copiers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition to fixed lease payments, some arrangements contain provisions for variable lease payments. Certain leases for pipelines, terminals, and tanks provide for variable lease payments based on, among other things, throughput volumes in excess of a base amount. Certain marine transportation leases contain provisions for payments that are contingent on usage. Additionally, if the rental increases are not scheduled in the lease, such as an increase based on subsequent changes in the index or rate, those rents are considered variable lease payments. In all instances, variable lease payments are recognized in the period in which the obligation for those payments is incurred.

Lease Costs and Other Supplemental Information

In accordance with FASB Accounting Standards Codification (ASC) Topic 842, “Leases,” (Topic 842), our total lease cost comprises costs that are included in our income statement, as well as costs capitalized as part of an item of property, plant, and equipment or inventory. Total lease cost by class of underlying asset was as follows (in millions):


	Pipelines, Terminals, and Tanks			Transportation					Feedstock Processing Equipment		Energy and Gases		Real Estate		Other		Total
			Marine			Rail
Year ended December 31, 2020
Finance lease cost:
Amortization of ROU assets	$	109		$	—		$	2	$	13	$	4	$	—	$	—	$	128
Interest on lease liabilities	92			—			—		3		3		—		—		98
Operating lease cost	165			156			61		15		7		26		4		434
Variable lease cost	53			40			1		3		—		2		—		99
Short-term lease cost	9			45			—		37		—		—		—		91
Sublease income	—			(10)			—		—		—		(2)		—		(12)
Total lease cost	$	428		$	231		$	64	$	71	$	14	$	26	$	4	$	838

Year ended December 31, 2019
Finance lease cost:
Amortization of ROU assets	$	44		$	—		$	—	$	7	$	3	$	—	$	—	$	54
Interest on lease liabilities	47			—			—		1		2		—		—		50
Operating lease cost	182			145			52		20		9		27		4		439
Variable lease cost	66			35			—		1		—		1		—		103
Short-term lease cost	9			53			—		29		—		—		—		91
Sublease income	—			(27)			—		—		—		(3)		—		(30)
Total lease cost	$	348		$	206		$	52	$	58	$	14	$	25	$	4	$	707

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with FASB ASC Topic 840, “Leases,” which was superseded by Topic 842, “rental expense, net of sublease rental income” for the year ended December 31, 2018 was as follows (in millions):


Minimum rental expense	$	515
Contingent rental expense	19
Total rental expense	534
Less: Sublease rental income	31
Rental expense, net of sublease rental income	$	503

The following table presents additional information related to our operating and finance leases (in millions, except for lease terms and discount rates):


	December 31, 2020						December 31, 2019
	Operating Leases			Finance Leases			Operating Leases			Finance Leases
Supplemental balance sheet information
ROU assets, net reflected in the following balance sheet line items:
Property, plant, and equipment, net	$	—		$	1,622		$	—		$	790
Deferred charges and other assets, net	1,204			—			1,329			—
Total ROU assets, net	$	1,204		$	1,622		$	1,329		$	790

Current lease liabilities reflected in the following balance sheet line items:
Current portion of debt and finance lease obligations	$	—		$	120		$	—		$	41
Accrued expenses	285			—			331			—
Noncurrent lease liabilities reflected in the following balance sheet line items:
Debt and finance lease obligations, less current portion	—			1,544			—			750
Other long-term liabilities	885			—			959			—
Total lease liabilities	$	1,170		$	1,664		$	1,290		$	791

Other supplemental information
Weighted-average remaining lease term	7.6 years			14.5 years			7.7 years			19.7 years
Weighted-average discount rate	4.7		%	4.1		%	4.9		%	5.2		%

Supplemental cash flow information related to our operating and finance leases is presented in Note 19.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MVP Terminal Finance Lease

We have a 50 percent membership interest in MVP Terminalling, LLC (MVP), an unconsolidated joint venture formed in September 2017 with a subsidiary of Magellan Midstream Partners LP (Magellan). MVP owns and operates a marine terminal (the MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal upon completion of construction of the terminal, which occurred in the first quarter of 2020. During the three months ended March 31, 2020, we recognized a finance lease ROU asset and related liability of approximately $1.4 billion in connection with this agreement. The lease term included the initial term of 12 years and renewal option periods. In the fourth quarter of 2020, we evaluated our strategy with regard to certain of our logistics investments, including MVP. As a result of this review, we formally notified MVP that we do not intend to renew the terminaling agreement after its initial noncancelable term. Consequently, we reassessed the lease term and remeasured the finance lease liability based on the shortened lease term. We derecognized approximately $600 million of the finance lease liability and related ROU asset, which are noncash financing and investing activities, respectively. As of December 31, 2020, the total lease liability was approximately $800 million.

Maturity Analysis

The remaining minimum lease payments due under our long-term leases were as follows (in millions):


	December 31, 2020				December 31, 2019
	Operating Leases		Finance Leases		Operating Leases		Finance Leases
2020	n/a		n/a		$	376	$	88
2021	$	324	$	187	250		86
2022	231		182		194		87
2023	194		187		160		91
2024	155		178		125		82
2025	107		178		n/a		n/a
Thereafter	435		1,498		498		1,011
Total undiscounted lease payments	1,446		2,410		1,603		1,445
Less: Amount associated with discounting	276		746		313		654
Total lease liabilities	$	1,170	$	1,664	$	1,290	$	791

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. PROPERTY, PLANT, AND EQUIPMENT

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


	December 31,
	2020		2019
Land	$	485	$	476
Crude oil processing facilities	32,246		31,419
Transportation and terminaling facilities	5,290		5,179
Rendered and recycled materials processing facilities	631		628
Corn processing facilities	1,212		1,201
Administrative buildings	1,038		1,015
Finance lease ROU assets (see Note 6)	1,902		944
Other	1,764		1,701
Construction in progress	2,399		1,731
Property, plant, and equipment, at cost	46,967		44,294
Accumulated depreciation	(16,578)		(15,030)
Property, plant, and equipment, net	$	30,389	$	29,264

As described in Note 6, our finance lease ROU assets arise from leasing arrangements for the right to use various classes of underlying assets including (i) pipelines, terminals, and tanks, (ii) marine and rail transportation, and (iii) feedstock processing equipment. Accumulated amortization of finance lease ROU assets was $280 million and $155 million as of December 31, 2020 and 2019, respectively.

Depreciation expense for the years ended December 31, 2020, 2019, and 2018 was $1.6 billion, $1.5 billion, and $1.4 billion, respectively.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. DEFERRED CHARGES AND OTHER ASSETS

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


	December 31,
	2020		2019
Deferred turnaround and catalyst costs, net	$	1,703	$	1,778
Operating lease ROU assets, net (see Note 6)	1,204		1,329
Investments in unconsolidated joint ventures	972		942
Income taxes receivable	589		525
Intangible assets, net	248		283
Goodwill	260		260
Other	565		514
Deferred charges and other assets, net	$	5,541	$	5,631

Amortization expense for deferred turnaround and catalyst costs and intangible assets was $748 million, $759 million, and $668 million for the years ended December 31, 2020, 2019, and 2018, respectively.

9. 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,
	2020		2019		2020		2019
Operating lease liabilities (see Note 6)	$	285	$	331	$	885	$	959
Liability for unrecognized tax benefits (see Note 16)	—		—		859		954
Defined benefit plan liabilities (see Note 14)	45		37		878		834
Repatriation tax liability (see Note 16) (a)	—		—		422		508
Environmental liabilities	59		27		272		319
Wage and other employee-related liabilities	210		292		124		121
Accrued interest expense	99		83		—		—
Contract liabilities from contracts with customers (see Note 18)	56		55		—		—
Environmental credit obligations (see Note 20)	159		31		—		—



Other accrued liabilities	81		93		180		192
Accrued expenses and other long-term liabilities	$	994	$	949	$	3,620	$	3,887

(a)The current portion of repatriation tax liability is included in income taxes payable and was $54 million as of December 31, 2020 and 2019.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. DEBT AND FINANCE LEASE OBLIGATIONS

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


	Final Maturity		December 31,
		2020			2019
Credit facilities:
Valero Revolver	2024		$	—		$	—
364-day Revolving Credit Facility	2021		—			—
IEnova Revolver	2028		598			348
Canadian Revolver	2021		—			—
Accounts receivable sales facility	2021		—			100
Public debt:
Valero Senior Notes
6.625%	2037		1,500			1,500
3.4%	2026		1,250			1,250
2.85%	2025		1,050			—
4.0%	2029		1,000			1,000
1.2%	2024		925			—
2.7%	2023		850			—
4.35%	2028		750			750
7.5%	2032		750			750
4.9%	2045		650			650
3.65%	2025		600			600
2.15%	2027		600			—
Floating Rate Notes at 1.3665%	2023		575			—
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
4.5%	2028		500			500
Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.0%	2040		300			300
Debenture, 7.65%	2026		100			100
Other debt	Various		31			47
Net unamortized debt issuance costs and other			(90)			(88)
Total debt			13,013			8,881
Finance lease obligations (see Note 6)			1,664			791
Total debt and finance lease obligations			14,677			9,672
Less: Current portion			723			494
Debt and finance lease obligations, less current portion			$	13,954		$	9,178

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit Facilities

Valero Revolver

We have a revolving credit facility (the Valero Revolver) with a borrowing capacity of $4 billion that matures in March 2024. The Valero Revolver also provides for the issuance of letters of credit of up to $2.4 billion.

Outstanding borrowings under the Valero Revolver bear interest, at our option, at either (i) 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 (ii) 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, 2020, 2019, and 2018.

364-day Revolving Credit Facility

In April 2020, we entered into an $875 million 364-Day Credit Agreement (the 364-day Revolving Credit Facility) with several lenders. This facility provides for a revolving credit facility in an aggregate principal amount of up to $875 million and matures 364 days from April 13, 2020.

Borrowings under this facility bear interest at the base rate or the eurodollar rate (at our election) plus an applicable rate ranging from 0.150 percent to 1.700 percent, based upon the elected interest rate type and our debt ratings from certain rating agencies. The facility requires us to pay a commitment fee accruing on the daily amount of used and unused commitments of the lenders, which is also based upon our debt ratings mentioned above. The interest and commitment fees under this facility are payable quarterly. The facility also requires us to pay a customary agency fee to the administrative agent. The facility contains various customary covenants and events of default.

IEnova Revolver

Central Mexico Terminals (as described in Note 13) has a combined unsecured revolving credit facility (IEnova Revolver) with IEnova (defined in Note 13) that matures in February 2028. In November 2019, the borrowing capacity under the IEnova Revolver was increased from $340 million to $491 million, and during the year ended December 31, 2020, it was increased to $660 million. IEnova may terminate this revolver at any time and demand repayment of all outstanding amounts; therefore, all outstanding borrowings are reflected in current portion of debt. The IEnova Revolver is available only to the operations of Central Mexico Terminals, and the creditors of Central Mexico Terminals do not have recourse against us.

Outstanding borrowings under this revolver bear interest at the three-month LIBO rate for the applicable interest period in effect from time to time plus the applicable margin. The interest rate under this revolver is subject to adjustment, with agreement by both parties, based upon changes in market conditions. As of December 31, 2020 and 2019, the variable rate was 3.870 percent and 5.749 percent, respectively.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the years ended December 31, 2020, 2019, and 2018 Central Mexico Terminals borrowed $250 million, $239 million, and $109 million, respectively, and had no repayments under this revolver.

Canadian Revolver

In November 2020, one of our Canadian subsidiaries amended its committed revolving credit facility (the Canadian Revolver) of C$150 million to extend the maturity date from November 2020 to November 2021. The Canadian Revolver also provides for the issuance of letters of credit.

We had no borrowings or repayments under this revolver during the years ended December 31, 2020, 2019, and 2018.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell eligible trade receivables on a revolving basis. In July 2020, we extended the maturity date of this facility to July 2021 and decreased the facility amount from $1.3 billion to $1.0 billion. 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, 2020 and 2019, $1.4 billion and $2.2 billion, respectively, of our accounts receivable composed the designated pool of accounts receivable included in the program. All amounts outstanding under the accounts receivable sales facility are reflected as debt on our balance sheets and proceeds and repayments are reflected as cash flows from financing activities on the statements of cash flows.

During the year ended December 31, 2020, we sold $300 million of eligible receivables under our accounts receivable sales facility and repaid $400 million. During the year ended December 31, 2019, we sold $900 million of eligible receivables under our accounts receivable sales facility and repaid $900 million. The variable interest rate on the borrowings outstanding under this facility as of December 31, 2019 was 2.3866 percent. During the year ended December 31, 2018, we had no proceeds from or repayments under the accounts receivable sales facility.

VLP Revolver

As of December 31, 2018, VLP had a $750 million senior unsecured revolving credit facility (the VLP Revolver) with a group of lenders that was scheduled to mature in November 2020. However, on January 10, 2019, in connection with the completion of the Merger Transaction as described in Note 3, the VLP Revolver was terminated.

During the year ended December 31, 2018, VLP repaid the outstanding balance of $410 million on the VLP Revolver using proceeds from its public offering of $500 million 4.5 percent Senior Notes as described in “Public Debt” below.

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 (amounts in millions and currency in U.S. dollars, except as noted):


				December 31, 2020
	Facility Amount		Maturity Date	Outstanding Borrowings		Letters of Credit Issued (a)		Availability

Committed facilities:
Valero Revolver	$	4,000	March 2024	$	—	$	34	$	3,966
364-day Revolving Credit Facility	$	875	April 2021	$	—	n/a		$	875
Canadian Revolver	C$	150	November 2021	C$	—	C$	5	C$	145
Accounts receivable sales facility (b)	$	1,000	July 2021	$	—	n/a		$	885
Letter of credit facility (c)	$	50	November 2021	n/a		$	—	$	50
Committed facility of VIE (d):
IEnova Revolver	$	660	February 2028	$	598	n/a		$	62
Uncommitted facilities:
Letter of credit facilities	n/a		n/a	n/a		$	150	n/a

(a)Letters of credit issued as of December 31, 2020 expire at various times in 2021 through 2023.

(b)The available borrowing capacity was lower than the facility amount due to low product prices impacting the amount of eligible receivables.

(c)We extended the maturity date of the letter of credit facility from November 2020 to November 2021.

(d)Creditors of our VIE do not have recourse against us.

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.

Public Debt

During the year ended December 31, 2020, the following activity occurred:

In September 2020, we issued the following senior notes:

◦$575 million of Floating Rate Senior Notes due September 15, 2023 (the Floating Rate Notes), which bear interest at a rate of three-month London Interbank Offered Rate (LIBOR) plus 1.150 percent per annum, subject to certain adjustments set forth in the terms of the Floating Rate Notes;

◦$925 million of 1.200 percent Senior Notes due March 15, 2024;

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

◦$400 million of 2.850 percent Senior Notes due April 15, 2025 that constitute an additional issuance of our 2.850 percent Senior Notes due April 15, 2025, of which $650 million aggregate principal amount was issued in April 2020; and

◦$600 million of 2.150 percent Senior Notes due September 15, 2027.

In April 2020, we issued $850 million of 2.700 percent Senior Notes due April 15, 2023 and $650 million of 2.850 percent Senior Notes due April 15, 2025.

Proceeds from the April and September 2020 debt issuances totaled $4.020 billion before deducting the underwriting discount and other debt issuance costs.

During the year ended December 31, 2019, the following activity occurred:

We issued $1 billion of 4.00 percent Senior Notes due April 1, 2029. Proceeds from this debt issuance totaled $992 million before deducting the underwriting discount and other debt issuance costs. The proceeds were used to redeem our 6.125 percent Senior Notes due February 1, 2020 for $871 million, or 102.48 percent of stated value, which includes an early redemption fee of $21 million that is reflected in “other income, net” in our statement of income for the year ended December 31, 2019.
In connection with the completion of the Merger Transaction as described in Note 3, Valero Energy Corporation, the parent company, entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment, when due, of the following debt issued by VLP, one of its wholly owned subsidiaries, that was outstanding upon completion of the Merger Transaction:

◦$500 million of 4.375 percent Senior Notes due December 15, 2026; and

◦$500 million of 4.5 percent Senior Notes due March 15, 2028.

Effective March 31, 2020, we early applied the U.S. SEC’s Final Rule Release No. 33-10762, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities. This rule allows us to cease providing the previously required condensed consolidating financial information in our periodic reports while the senior notes issued by VLP noted above are outstanding, as VLP’s reporting obligation was suspended on January 22, 2019 in connection with the completion of the Merger Transaction.

During the year ended December 31, 2018, the following activity occurred:

We issued $750 million of 4.35 percent Senior Notes due June 1, 2028. Proceeds from this debt issuance totaled $749 million before deducting the underwriting discount and other debt issuance costs. The proceeds were used to redeem our 9.375 percent Senior Notes due March 15, 2019 for $787 million, or 104.9 percent of stated value, which includes an early redemption fee of $37 million that is reflected in “other income, net” in our statement of income for the year ended December 31, 2018.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

VLP issued $500 million of 4.5 percent Senior Notes due March 15, 2028. Proceeds from this debt issuance totaled $498 million before deducting the underwriting discount and other debt issuance costs. The proceeds were available only to the operations of VLP and were used to repay the outstanding balance of $410 million on the VLP Revolver and $85 million on its notes payable to us, which is eliminated in consolidation.

Other Debt

During the year ended December 31, 2018, we retired $137 million of debt assumed in connection with the Peru Acquisition with available cash on hand.

Other Disclosures

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


	Year Ended December 31,
	2020		2019		2018
Interest and debt expense	$	638	$	544	$	557
Less: Capitalized interest	75		90		87
Interest and debt expense, net of capitalized interest	$	563	$	454	$	470

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

Principal maturities for our debt obligations as of December 31, 2020 were as follows (in millions):


2021 (a)	$	603
2022	6
2023	1,445
2024	925
2025	1,650
Thereafter	8,474
Net unamortized debt issuance costs and other	(90)
Total debt	$	13,013

(a)As of December 31, 2020, our debt obligations due in 2021 include $598 million associated with borrowings under the IEnova Revolver.

11. COMMITMENTS AND CONTINGENCIES

Purchase Obligations

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 is associated with suppliers’ financing arrangements. These purchase obligations are not reflected as liabilities.

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.

12. 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, 2017	673	(240)

Open market stock purchases	—	(16)
Balance as of December 31, 2018	673	(256)
Transactions in connection with stock-based compensation plans	—	1
Open market stock purchases	—	(9)
Balance as of December 31, 2019	673	(264)
Transactions in connection with stock-based compensation plans	—	1
Open market stock purchases	—	(2)
Balance as of December 31, 2020	673	(265)

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, 2020 or 2019.

Treasury Stock

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

On September 21, 2016, our board of directors authorized our purchase of up to $2.5 billion of our outstanding common stock with no expiration date, and we completed that program during 2018. On January 23, 2018, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding common stock (the 2018 Program) with no expiration date. During the years ended December 31, 2020, 2019, and 2018, we purchased $83 million, $752 million, and $1.5 billion,

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

respectively, of our common stock under our programs. As of December 31, 2020, we have approval under the 2018 Program to purchase approximately $1.4 billion of our common stock.

Common Stock Dividends

On January 26, 2021, our board of directors declared a quarterly cash dividend of $0.98 per common share payable on March 4, 2021 to holders of record at the close of business on February 11, 2021.

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, 2020
Foreign currency translation adjustment	$	161	$	—	$	161
Pension and other postretirement benefits:
Loss arising during the year related to:
Net actuarial loss	(128)		(26)		(102)

Prior service cost	(5)		(1)		(4)

Amounts reclassified into income related to:
Net actuarial loss	74		17		57
Prior service credit	(26)		(6)		(20)
Curtailment and settlement loss	5		1		4
Net loss on pension and other postretirement benefits	(80)		(15)		(65)
Derivative instruments designated and qualifying as cash flow hedges:
Net gain arising during the year	36		3		33
Net gain reclassified into income	(34)		(4)		(30)
Net gain on cash flow hedges	2		(1)		3
Other comprehensive income	$	83	$	(16)	$	99

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Before-Tax Amount		Tax Expense (Benefit)		Net Amount
Year ended December 31, 2019
Foreign currency translation adjustment	$	349	$	—	$	349
Pension and other postretirement benefits:
Loss arising during the year related to:
Net actuarial loss	(245)		(54)		(191)

Prior service cost	(3)		(1)		(2)
Miscellaneous loss	—		4		(4)
Amounts reclassified into income related to:
Net actuarial loss	38		9		29
Prior service credit	(28)		(6)		(22)
Curtailment and settlement loss	4		1		3
Net loss on pension and other postretirement benefits	(234)		(47)		(187)
Derivative instruments designated and qualifying as cash flow hedges:
Net loss arising during the year	(6)		(1)		(5)
Net gain reclassified into income	(2)		—		(2)
Net loss on cash flow hedges	(8)		(1)		(7)
Other comprehensive income	$	107	$	(48)	$	155

Year ended December 31, 2018
Foreign currency translation adjustment	$	(517)	$	—	$	(517)
Pension and other postretirement benefits:
Gain arising during the year related to:
Net actuarial gain	1		—		1

Prior service credit	7		1		6

Amounts reclassified into income related to:
Net actuarial loss	63		14		49
Prior service credit	(29)		(7)		(22)
Curtailment and settlement loss	7		2		5
Net gain on pension and other postretirement benefits	49		10		39




Other comprehensive loss	$	(468)	$	10	$	(478)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Loss

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


	Foreign Currency Translation Adjustment		Defined Benefit Plans Items		Gains (Losses) on Cash Flow Hedges		Total
Balance as of December 31, 2017	$	(507)	$	(433)	$	—	$	(940)
Other comprehensive income (loss) before reclassifications	(515)		7		—		(508)
Amounts reclassified from accumulated other comprehensive loss	—		32		—		32
Other comprehensive income (loss)	(515)		39		—		(476)
Reclassification of stranded income tax effects	—		(91)		—		(91)
Balance as of December 31, 2018	(1,022)		(485)		—		(1,507)
Other comprehensive income (loss) before reclassifications	346		(197)		(2)		147
Amounts reclassified from accumulated other comprehensive loss	—		10		(1)		9
Other comprehensive income (loss)	346		(187)		(3)		156
Balance as of December 31, 2019	(676)		(672)		(3)		(1,351)
Other comprehensive income (loss) before reclassifications	161		(106)		14		69
Amounts reclassified from accumulated other comprehensive loss	—		41		(13)		28
Other comprehensive income (loss)	161		(65)		1		97
Balance as of December 31, 2020	$	(515)	$	(737)	$	(2)	$	(1,254)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


Details about Accumulated Other Comprehensive Loss Components										Affected Line Item in the Statement of Income
	Year Ended December 31,
	2020			2019			2018
Amortization of items related to defined benefit pension plans:
Net actuarial loss		$	(74)		$	(38)		$	(63)	(a) Other income, net
Prior service credit		26			28			29		(a) Other income, net
Curtailment and settlement		(5)			(4)			(7)		(a) Other income, net
		(53)			(14)			(41)		Total before tax
		12			4			9		Tax benefit
		$	(41)		$	(10)		$	(32)	Net of tax

Gains on cash flow hedges:
Commodity contracts		$	34		$	2		$	—	Revenues
		34			2			—		Total before tax
		(4)			—			—		Tax expense
		$	30		$	2		$	—	Net of tax

Total reclassifications for the year		$	(11)		$	(8)		$	(32)	Net of tax

(a)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost, as discussed in Note 14.

13. 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 (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) 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 VIE, 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 consolidated VIEs:

DGD is a joint venture with a subsidiary of Darling Ingredients Inc. that owns and operates a plant that processes rendered and recycled materials, including animal fats, used cooking oils, and other vegetable oils, into renewable diesel. The plant is located in Norco, Louisiana next to our

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

St. Charles Refinery. Our significant agreements with DGD include an operations agreement that outlines our responsibilities as operator of the plant.

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) with certain power to direct the activities that most significantly impact DGD’s economic performance. Because this agreement conveys such power to us and is separate from our ownership rights, we determined that DGD was 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.

Central Mexico Terminals is a collective group of three subsidiaries of Infraestructura Energetica Nova, S.A.B. de C.V. (IEnova), a Mexican company and subsidiary of Sempra Energy, a U.S. public company. We have terminaling agreements with Central Mexico Terminals that represent variable interests because we have determined them to be finance 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 finance 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 Central Mexico Terminals’ revenues will be derived from us; therefore, we believe there is limited risk to us associated with Central Mexico 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 us 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 (i) 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 (ii) our 50 percent ownership interests provide us with significant economic rights and obligations.

The assets of our VIEs can only be used to settle their own obligations and the creditors of our VIEs 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 the performance of our consolidated VIEs, net of intercompany eliminations, to the extent of our ownership interest in each VIE.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2020
	DGD		Central Mexico Terminals		Other		Total
Assets
Cash and cash equivalents	$	144	$	1	$	16	$	161
Other current assets	219		24		8		251
Property, plant, and equipment, net	1,232		590		96		1,918
Liabilities
Current liabilities, including current portion of debt and finance lease obligations	$	90	$	620	$	8	$	718
Debt and finance lease obligations, less current portion	1		—		25		26


	December 31, 2019
	DGD		Central Mexico Terminals		Other		Total
Assets
Cash and cash equivalents	$	85	$	—	$	25	$	110
Other current assets	567		33		89		689
Property, plant, and equipment, net	706		381		105		1,192
Liabilities
Current liabilities, including current portion of debt and finance lease obligations	$	66	$	409	$	8	$	483
Debt and finance lease obligations, less current portion	—		—		31		31

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 accounted for as equity investments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. EMPLOYEE BENEFIT PLANS

Defined Benefit Plans

We have defined benefit pension plans, some of which are subject to collective bargaining agreements, that cover most of our employees. These plans provide eligible employees with retirement income based primarily on years of service and compensation during specific periods under final average pay and cash balance formulas. We fund all of 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’s 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 postretirement benefits under our plans as determined by the terms of the relevant acquisition agreement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Pension Plans				Other Postretirement Benefit Plans
	December 31,				December 31,
	2020		2019		2020		2019
Changes in benefit obligation
Benefit obligation as of beginning of year	$	3,239	$	2,639	$	336	$	292
Service cost	140		119		6		5
Interest cost	85		98		9		11

Participant contributions	—		—		12		11




Benefits paid	(195)		(154)		(28)		(29)
Actuarial loss	339		528		23		41
Other	17		9		—		5

Benefit obligation as of end of year	$	3,625	$	3,239	$	358	$	336

Changes in plan assets (a)
Fair value of plan assets as of beginning of year	$	2,709	$	2,236	$	—	$	—
Actual return on plan assets	413		490		—		—
Valero contributions	129		128		16		18
Participant contributions	—		—		12		11

Benefits paid	(195)		(154)		(28)		(29)
Other	11		9		—		—

Fair value of plan assets as of end of year	$	3,067	$	2,709	$	—	$	—

Reconciliation of funded status (a)
Fair value of plan assets as of end of year	$	3,067	$	2,709	$	—	$	—
Less: Benefit obligation as of end of year	3,625		3,239		358		336
Funded status as of end of year	$	(558)	$	(530)	$	(358)	$	(336)

Accumulated benefit obligation	$	3,398	$	3,039	n/a		n/a

(a)Plan assets include only the assets associated with pension plans subject to legal minimum funding standards. Plan assets associated with U.S. nonqualified pension plans are not included here because they are not protected from our creditors and therefore cannot be reflected as a reduction from our obligations under the pension plans. As a result, the reconciliation of funded status does not reflect the effect of plan assets that exist for all of our defined benefit plans. See Note 20 for the assets associated with certain U.S. nonqualified pension plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The actuarial loss for the year ended December 31, 2020 primarily resulted from a decrease in the discount rates used to determine our benefit obligations for our pension plans from 3.14 percent in 2019 to 2.62 percent in 2020. The actuarial loss for the year ended December 31, 2019 primarily resulted from a decrease in the discount rates used to determine our benefit obligations for our pension plans from 4.25 percent in 2018 to 3.14 percent in 2019.

The fair value of our plan assets as of December 31, 2020 and 2019 were favorably impacted by the return on plan assets resulting primarily from an improvement in equity market prices for each year.

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,
	2020		2019		2020		2019
Deferred charges and other assets, net	$	7	$	5	$	—	$	—
Accrued expenses	(24)		(17)		(21)		(20)
Other long-term liabilities	(541)		(518)		(337)		(316)
	$	(558)	$	(530)	$	(358)	$	(336)

The following table presents information for our pension plans with projected benefit obligations in excess of plan assets (in millions):


	December 31,
	2020		2019
Projected benefit obligation	$	3,561	$	3,182
Fair value of plan assets	2,997		2,647

The following table presents information for our pension plans with accumulated benefit obligations in excess of plan assets (in millions):


	December 31,
	2020		2019
Accumulated benefit obligation	$	3,336	$	2,760
Fair value of plan assets	2,997		2,402

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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
2021	$	195	$	21
2022	227		21
2023	199		21
2024	202		20
2025	215		20
2026-2030	1,107		90

We plan to contribute $128 million to our pension plans and $22 million to our other postretirement benefit plans during 2021.

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


	Pension Plans						Other Postretirement Benefit Plans
	Year Ended December 31,						Year Ended December 31,
	2020		2019		2018		2020		2019		2018
Service cost	$	140	$	119	$	133	$	6	$	5	$	6
Interest cost	85		98		91		9		11		10
Expected return on plan assets	(179)		(166)		(163)		—		—		—
Amortization of:
Net actuarial (gain) loss	74		41		65		—		(3)		(2)
Prior service credit	(19)		(19)		(18)		(7)		(9)		(11)
Special charges	5		4		7		—		1		—
Net periodic benefit cost	$	106	$	77	$	115	$	8	$	5	$	3

The components of net periodic benefit cost other than the service cost component (i.e., the non-service cost components) are included in “other income, net” in the statements of income.

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.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,
	2020		2019		2018		2020		2019		2018
Net gain (loss) arising during the year:
Net actuarial gain (loss)	$	(105)	$	(204)	$	(8)	$	(23)	$	(41)	$	9
Prior service (cost) credit	(5)		—		7		—		(3)		—

Net (gain) loss reclassified into income:
Net actuarial (gain) loss	74		41		65		—		(3)		(2)
Prior service credit	(19)		(19)		(18)		(7)		(9)		(11)
Curtailment and settlement loss	5		4		7		—		—		—

Total changes in other comprehensive income (loss)	$	(50)	$	(178)	$	53	$	(30)	$	(56)	$	(4)

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


	Pension Plans				Other Postretirement Benefit Plans
	December 31,				December 31,
	2020		2019		2020		2019
Net actuarial (gain) loss	$	1,014	$	988	$	4	$	(20)
Prior service credit	(66)		(90)		(13)		(19)
Total	$	948	$	898	$	(9)	$	(39)

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


	Pension Plans				Other Postretirement Benefit Plans
	December 31,				December 31,
	2020		2019		2020		2019
Discount rate	2.62	%	3.14	%	2.64	%	3.32	%
Rate of compensation increase	3.66	%	3.75	%	n/a		n/a
Interest crediting rate for cash balance plans	3.03	%	3.03	%	n/a		n/a

The discount rate assumption used to determine the benefit obligations as of December 31, 2020 and 2019 for the majority of our pension plans and other postretirement benefit plans was based on the Aon AA Only Above Median yield curve and considered the timing of the projected cash outflows under our

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

plans. This curve was designed by Aon, our actuarial consultant, to provide a means for plan sponsors to value the liabilities of their pension plans or postretirement benefit plans. To develop this curve, a hypothetical double-A yield curve represented by a series of annualized individual discount rates with maturities from one-half year to 99 years is constructed. Each bond issue underlying the double-A yield curve is required to have an average rating of double-A when averaging all available ratings by Moody’s Investors Service, Standard & Poor’s Ratings Services, and Fitch Ratings. Only the bonds representing the 50 percent highest yielding issuances of this double-A yield curve are then included in the Aon AA Only Above Median yield curve.

We based our discount rate assumption on the Aon 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,
	2020		2019		2018		2020		2019		2018
Discount rate	3.14	%	4.24	%	3.59	%	3.32	%	4.40	%	3.72	%
Expected long-term rate of return on plan assets	7.20	%	7.22	%	7.24	%	n/a		n/a		n/a
Rate of compensation increase	3.75	%	3.78	%	3.86	%	n/a		n/a		n/a
Interest crediting rate for cash balance plans	3.03	%	3.04	%	3.04	%	n/a		n/a		n/a

The assumed health care cost trend rates were as follows:


	December 31,
	2020		2019
Health care cost trend rate assumed for the next year	6.83	%	7.32	%
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

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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, 2020 and 2019 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 unadjusted quoted prices 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 or inputs other than quoted prices that are observable. 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 Hierarchy						Total as of December 31, 2020
	Level 1		Level 2		Level 3
Equity securities (a)	$	682	$	—	$	—	$	682



Mutual funds	244		—		—		244


Corporate debt instruments (a)	—		297		—		297
Government securities	85		142		—		227


Common collective trusts (b)	—		1,066		—		1,066
Pooled separate accounts (c)	—		316		—		316
Private funds	—		128		—		128
Insurance contract	—		15		—		15
Interest and dividends receivable	5		—		—		5
Cash and cash equivalents	98		—		—		98
Securities transactions payable, net	(11)		—		—		(11)
Total pension plan assets	$	1,103	$	1,964	$	—	$	3,067

See notes on page 110.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Fair Value Hierarchy						Total as of December 31, 2019
	Level 1		Level 2		Level 3
Equity securities (a)	$	831	$	1	$	—	$	832



Mutual funds	213		—		—		213


Corporate debt instruments (a)	—		293		—		293
Government securities	53		148		—		201


Common collective trusts (b)	—		751		—		751
Pooled separate accounts (c)	—		250		—		250
Private funds	—		104		—		104
Insurance contract	—		17		—		17
Interest and dividends receivable	5		—		—		5
Cash and cash equivalents	59		—		—		59
Securities transactions payable, net	(16)		—		—		(16)
Total pension plan assets	$	1,145	$	1,564	$	—	$	2,709

(a)This class of securities includes domestic and international stocks, which are held in a wide range of industry sectors.

(b)This class primarily includes investments in approximately 80 percent equities and 20 percent bonds as of December 31, 2020. As of December 31, 2019, this class included primarily investments in approximately 75 percent equities and 25 percent bonds.

(c)This class primarily includes investments in approximately 60 percent equities and 40 percent bonds as of December 31, 2020 and 2019. These pension assets are held by our international pension plans.

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, 2020, the target allocations for plan assets under our primary pension plan are 70 percent equity securities and 30 percent fixed income investments.

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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Defined Contribution Plans

We have defined contribution plans that cover most of our employees. Our contributions to these plans are based on employees’ compensation and/or a partial match of employee contributions to the plans. Our contributions to these defined contribution plans were $80 million, $77 million, and $74 million for the years ended December 31, 2020, 2019, and 2018, respectively.

15. STOCK-BASED COMPENSATION

Overview

Under our 2020 Omnibus Stock Incentive Plan (the 2020 OSIP), various stock and stock-based awards may be granted to employees, non-employee directors, and third-party service providers. The 2020 OSIP permits grants of (i) restricted stock and restricted stock units; (ii) stock options (including incentive and non-qualified stock options); (iii) stock appreciation rights; (iv) performance awards of cash, stock, or other securities; and (v) other stock-based awards (e.g., stock unit awards). Awards under the 2020 OSIP are granted at the discretion of our compensation committee and may be subject to vesting or performance periods, performance goals, or other restrictions. The 2020 OSIP was approved by our stockholders on April 30, 2020, and as of such date, any shares of common stock that were available to be awarded under the 2011 Omnibus Stock Incentive Plan (the 2011 OSIP) became available for issuance under the 2020 OSIP and any shares of common stock subject to awards under the 2011 OSIP outstanding as of April 30, 2020, that are subsequently forfeited, terminated, canceled or rescinded, settled in cash in lieu of common stock, exchanged for awards not involving common stock, or expire unexercised also become available for issuance under the 2020 OSIP. No future awards will be made under the 2011 OSIP. As of December 31, 2020, 14,787,213 shares of our common stock remained available to be awarded under the 2020 OSIP.

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


	Year Ended December 31,
	2020		2019		2018
Stock-based compensation expense:
Restricted stock	$	63	$	64	$	63
Performance awards	15		23		22
Stock options and other awards	2		2		1
Total stock-based compensation expense	$	80	$	89	$	86
Tax benefit recognized on stock-based compensation expense	$	13	$	19	$	18
Tax benefit realized for tax deductions resulting from exercises and vestings	1		17		32

The following is a discussion of our significant stock-based compensation arrangement.

Restricted Stock

Employees, non-employee directors, and third-party service providers are eligible to receive restricted stock, which 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

grant. The fair value of each share of restricted stock 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, 2020	1,091,854	$	93.38
Granted	1,126,483	55.62
Vested	(770,727)	82.80
Forfeited	(9,698)	93.73
Nonvested shares as of December 31, 2020	1,437,912	69.47

As of December 31, 2020, there was $57 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:


	Year Ended December 31,
	2020		2019		2018
Weighted-average grant-date fair value per share of restricted stock granted	$	55.62	$	98.75	$	92.12
Fair value of restricted stock vested (in millions)	35		74		80

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. INCOME TAXES

Income Statement Components

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


	Year Ended December 31,
	2020		2019		2018
U.S. operations	$	(2,072)	$	2,496	$	3,168
International operations	62		990		1,064
Income (loss) before income tax expense (benefit)	$	(2,010)	$	3,486	$	4,232

Statutory income tax rates applicable to the countries in which we operate during each of the years ended December 31, 2020, 2019, and 2018 were as follows:


U.S.	21	%
Canada	15	%
U.K.	19	%
Ireland	13	%
Peru	30	%
Mexico	30	%

The following is a reconciliation of income tax expense (benefit) computed by applying statutory income tax rates to actual income tax expense (benefit) (in millions):


	U.S.				International				Total
	Amount		Percent		Amount		Percent		Amount		Percent
Year ended December 31, 2020
Income tax benefit at statutory rates	$	(435)	21.0	%	$	(10)	(16.1)	%	$	(445)	22.1	%
U.S. state and Canadian provincial tax expense (benefit), net of federal income tax effect	(33)		1.6	%	27		43.5	%	(6)		0.3	%
Permanent differences	(23)		1.1	%	15		24.2	%	(8)		0.4	%
CARES Act (a)	(360)		17.4	%	—		—		(360)		17.9	%

Lapse of federal statute of limitations	(39)		1.8	%	—		—		(39)		1.9	%
Change in tax law	—		—		21		33.9	%	21		(1.0)	%
Tax effects of income associated with noncontrolling interests	(66)		3.2	%	(8)		(12.9)	%	(74)		3.7	%
Other, net	7		(0.3)	%	1		1.6	%	8		(0.4)	%
Income tax expense (benefit)	$	(949)	45.8	%	$	46	74.2	%	$	(903)	44.9	%

See notes on page 114.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	U.S.				International				Total
	Amount		Percent		Amount		Percent		Amount		Percent
Year ended December 31, 2019
Income tax expense at statutory rates	$	524	21.0	%	$	147	14.8	%	$	671	19.2	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	16		0.7	%	88		8.9	%	104		3.0	%
Permanent differences	(36)		(1.5)	%	10		1.0	%	(26)		(0.7)	%
GILTI tax (b)	115		4.6	%	—		—		115		3.3	%
Foreign tax credits	(95)		(3.8)	%	—		—		(95)		(2.7)	%
Repatriation withholding tax	45		1.8	%	—		—		45		1.3	%
Tax effects of income associated with noncontrolling interests	(77)		(3.1)	%	2		0.2	%	(75)		(2.2)	%
Other, net	(36)		(1.4)	%	(1)		(0.1)	%	(37)		(1.1)	%
Income tax expense	$	456	18.3	%	$	246	24.8	%	$	702	20.1	%

Year ended December 31, 2018
Income tax expense at statutory rates	$	665	21.0	%	$	163	15.3	%	$	828	19.6	%
U.S. state and Canadian provincial tax expense, net of federal income tax effect	44		1.4	%	80		7.5	%	124		2.9	%
Permanent differences	(9)		(0.3)	%	—		—		(9)		(0.2)	%
GILTI tax (b)	67		2.1	%	—		—		67		1.6	%
Foreign tax credits	(50)		(1.6)	%	—		—		(50)		(1.2)	%
Effects of Tax Reform (b)	(12)		(0.4)	%	—		—		(12)		(0.3)	%
Tax effects of income associated with noncontrolling interests	(49)		(1.5)	%	—		—		(49)		(1.2)	%
Other, net	(23)		(0.7)	%	3		0.3	%	(20)		(0.5)	%
Income tax expense	$	633	20.0	%	$	246	23.1	%	$	879	20.7	%

(a)See “CARES Act” on page 119 for a discussion of significant changes in tax law in the U.S that were enacted in 2020.

(b)Relates to the Tax Cuts and Jobs Act of 2017 (Tax Reform), which, among other provisions, resulted in a minimum tax on the income of international subsidiaries (the GILTI tax).

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Components of income tax expense (benefit) were as follows (in millions):


	U.S.		International		Total
Year ended December 31, 2020
Current:
Country	$	(1,033)	$	(34)	$	(1,067)
U.S. state / Canadian provincial	9		(3)		6
Total current	(1,024)		(37)		(1,061)
Deferred:
Country	126		53		179
U.S. state / Canadian provincial	(51)		30		(21)
Total deferred	75		83		158
Income tax expense (benefit)	$	(949)	$	46	$	(903)

Year ended December 31, 2019
Current:
Country	$	145	$	186	$	331
U.S. state / Canadian provincial	37		100		137
Total current	182		286		468
Deferred:
Country	290		(28)		262
U.S. state / Canadian provincial	(16)		(12)		(28)
Total deferred	274		(40)		234
Income tax expense	$	456	$	246	$	702

Year ended December 31, 2018
Current:
Country	$	432	$	141	$	573
U.S. state / Canadian provincial	37		66		103
Total current	469		207		676
Deferred:
Country	145		25		170
U.S. state / Canadian provincial	19		14		33
Total deferred	164		39		203
Income tax expense	$	633	$	246	$	879

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Taxes Paid (Refunded)

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


	Year Ended December 31,
	2020		2019			2018
U.S.	$	130	$	(298)	(a)	$	1,016
International	73		182			345
Income taxes paid (refunded), net	$	203	$	(116)		$	1,361

(a)This amount includes a refund of $348 million, including interest, that we received related to the settlement of the combined audit of our U.S. federal income tax returns for 2010 and 2011. See “Tax Returns Under Audit – U.S. Federal” on page 119.

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,
	2020		2019
Deferred income tax assets:
Tax credit carryforwards	$	681	$	683
Net operating losses (NOLs)	678		582
Inventories	70		141

Compensation and employee benefit liabilities	199		213
Environmental liabilities	64		69
Other	128		156
Total deferred income tax assets	1,820		1,844
Valuation allowance	(1,223)		(1,200)
Net deferred income tax assets	597		644

Deferred income tax liabilities:
Property, plant, and equipment	4,895		4,924
Deferred turnaround costs	302		331
Inventories	269		217
Investments	171		122
Other	235		153
Total deferred income tax liabilities	5,872		5,747
Net deferred income tax liabilities	$	5,275	$	5,103

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We had the following income tax credit and loss carryforwards as of December 31, 2020 (in millions):


	Amount		Expiration
U.S. state income tax credits (gross amount)	$	86	2021 through 2033
U.S. state income tax credits (gross amount)	17		Unlimited
U.S. foreign tax credits	598		2027
U.S. state income tax NOLs (gross amount)	12,333		2021 through 2040
U.S. state income tax NOLs (gross amount)	34		Unlimited
International NOLs (gross amount)	20		2021 through 2030
International NOLs (gross amount)	120		Unlimited

We have recorded a valuation allowance as of December 31, 2020 and 2019 due to uncertainties related to our ability to utilize some of our deferred income tax assets associated with our U.S. foreign tax credits, certain U.S. state income tax credits, and certain NOLs before they expire. The valuation allowance is based on our estimates of future taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. The valuation allowance increased by $23 million in 2020 primarily due to an increase in U.S. state income tax NOLs.

As of December 31, 2020, the cumulative undistributed earnings of our international subsidiaries that is considered permanently reinvested in those countries were approximately $3.2 billion. We are able to distribute cash via a dividend from our international subsidiaries with a full dividend received deduction in the U.S. However, there may be a cost to repatriate the undistributed earnings of certain of our international subsidiaries to us, including, but not limited to, withholding taxes imposed by certain international jurisdictions and U.S. state income taxes. It is not practicable to estimate the amount of additional tax that would be payable on those earnings, if distributed.

Unrecognized Tax Benefits

Change in Unrecognized Tax Benefits

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


	Year Ended December 31,
	2020		2019		2018
Balance as of beginning of year	$	897	$	970	$	941
Additions for tax positions related to the current year	5		19		23
Additions for tax positions related to prior years	9		30		28
Reductions for tax positions related to prior years	(20)		(101)		(19)
Reductions for tax positions related to the lapse of applicable statute of limitations	(44)		(14)		(1)
Settlements	—		(7)		(2)

Balance as of end of year	$	847	$	897	$	970

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Liability for Unrecognized Tax Benefits

The following is a reconciliation of unrecognized tax benefits to our liability for unrecognized tax benefits presented in our balance sheets (in millions).


	December 31,
	2020		2019
Unrecognized tax benefits	$	847	$	897
Tax refund claims not yet filed but that we intend to file	(26)		(29)
Interest and penalties	110		100
Liability for unrecognized tax benefits presented in our balance sheets	$	931	$	968

Our liability for unrecognized tax benefits is reflected in the following balance sheet line items (in millions):


	December 31,
	2020		2019

Income taxes payable	$	59	$	—
Other long-term liabilities	859		954
Deferred tax liabilities	13		14
Liability for unrecognized tax benefits presented in our balance sheets	$	931	$	968

As of December 31, 2020, our liability for unrecognized tax benefits included $525 million of 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.

Other Disclosures

As of December 31, 2020 and 2019, there was $729 million and $762 million, respectively, of unrecognized tax benefits that if recognized would reduce our annual effective tax rate.

Interest and penalties incurred during the years ended December 31, 2020, 2019, and 2018 were immaterial.

During the next 12 months, it is reasonably possible that our tax audit resolutions could reduce our liability for unrecognized tax benefits either because our tax positions are sustained upon audit or because we agree to their disallowance. We do not expect these reductions to have a material impact on our financial statements because such reductions would not materially affect our annual effective tax rate.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Tax Returns Under Audit

U.S. Federal

In 2019, we settled the combined audit related to our U.S. federal income tax returns for 2010 and 2011 and received a refund of $348 million, including interest. We did not have a significant change to our liability for unrecognized tax benefits upon settlement of the audit. As of December 31, 2020, our U.S. federal income tax returns for 2012 through 2015, 2017, and 2018 were under audit by the Internal Revenue Service (IRS). The IRS has proposed adjustments for certain open years and we are currently contesting the proposed adjustments with the Office of Appeals of the IRS. We are continuing to work with the IRS to resolve these matters and we believe that they will be resolved for amounts consistent with our recorded amounts of unrecognized tax benefits associated with these matters.

We have amended our U.S federal income tax returns for 2005 through 2011 to exclude from taxable income incentive payments received from the U.S. federal government for blending biofuels into refined petroleum products, and we have claimed $525 million in refunds. The 2005 through 2009 amended return refund claims have been disallowed by the IRS and we are currently evaluating our options to contest the disallowance of these adjustments. As noted above in the discussion of our liability for unrecognized tax benefits, an ultimate disallowance of these refund claims would not negatively impact our financial position, results of operations, and liquidity.

U.S. State

As of December 31, 2020, our California tax returns for 2004 through 2007 and 2011 through 2016 were under audit by the state of California. We do not expect the ultimate disposition of these audits will result in a material change to our financial position, results of operations, or liquidity. We believe these audits will be resolved for amounts consistent with our recorded amounts for unrecognized tax benefits associated with these audits.

International

As of December 31, 2020, our Canadian subsidiary’s federal tax returns for 2013 through 2016 were under audit by the Canada Revenue Agency and our Quebec provincial tax returns for 2013 through 2016 were under audit by Revenue Quebec. We are also protesting proposed adjustments related to our Peruvian subsidiary’s federal tax returns for 2016 and 2018, which were under audit by La Superintendencia Nacional de Aduanas y de Administración Tributaria. Additionally, our U.K. subsidiary’s tax returns for 2017 and 2018 were opened for inquiry by Her Majesty’s Revenue and Customs. We do not expect the ultimate disposition of these audits or inquiries will result in a material change to our financial position, results of operations, or liquidity.

CARES Act

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended. The most significant changes affecting us were as follows:

Modification of the limitations previously set by Tax Reform by providing that tax NOLs arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. This provision allows the taxpayer to recover taxes previously paid at a 35 percent federal income tax rate during

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

tax years prior to 2018. In addition, the CARES Act removed the taxable income limitation to allow a tax NOL to fully offset taxable income for tax years beginning before January 1, 2021.

Increased the deductibility of interest expense from 30 percent to 50 percent of adjusted taxable income for 2019 and 2020. Also, a taxpayer can elect to use its 2019 adjusted taxable income in 2020 to determine the deductible amount of interest expense in that year.

Our income tax benefit for the year ended December 31, 2020 included a tax benefit of $360 million attributable to the tax NOL carryback provided under the CARES Act for our 2020 tax NOL to our 2015 tax year in which we paid federal income taxes at a 35 percent tax rate. The variation in the customary relationship of our effective tax rate to the U.S. federal statutory rate for the year ended December 31, 2020 was primarily due to this income tax benefit.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. EARNINGS (LOSS) PER COMMON SHARE

Earnings (loss) per common share were computed as follows (dollars and shares in millions, except per share amounts):


	Year Ended December 31,
	2020		2019		2018
Earnings (loss) per common share
Net income (loss) attributable to Valero stockholders	$	(1,421)	$	2,422	$	3,122
Less: Income allocated to participating securities	5		7		9
Net income (loss) available to common shareholders	$	(1,426)	$	2,415	$	3,113

Weighted-average common shares outstanding	407		413		426

Earnings (loss) per common share	$	(3.50)	$	5.84	$	7.30

Earnings (loss) per common share – assuming dilution
Net income (loss) attributable to Valero stockholders	$	(1,421)	$	2,422	$	3,122
Less: Income allocated to participating securities	5		7		9
Net income (loss) available to common shareholders	$	(1,426)	$	2,415	$	3,113

Weighted-average common shares outstanding	407		413		426
Effect of dilutive securities	—		1		2
Weighted-average common shares outstanding – assuming dilution	407		414		428

Earnings (loss) per common share – assuming dilution	$	(3.50)	$	5.84	$	7.29

Participating securities include restricted stock and performance awards granted under our 2020 OSIP or our 2011 OSIP. Dilutive securities include participating securities as well as outstanding stock options granted under our 2020 OSIP or our 2011 OSIP.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. REVENUES AND SEGMENT INFORMATION

Revenue from Contracts with Customers

Disaggregation of Revenue

Revenue is presented in the table below under “Segment Information” disaggregated by product because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements.

Contract Balances

Contract balances were as follows (in millions):


	December 31,
	2020		2019		Decrease
Receivables from contracts with customers, included in receivables, net	$	3,642	$	5,610	$	(1,968)
Contract liabilities, included in accrued expenses	55		55		—

Receivables from contracts with customers is a component of “receivables, net” as presented in Note 4. The decrease in “receivables, net” is described in Note 19.

During the years ended December 31, 2020, 2019, and 2018, we recognized as revenue $50 million, $31 million, and $54 million, respectively, that was included in contract liabilities as of December 31, 2019, 2018, and 2017, respectively.

Remaining Performance Obligations

We have spot and term contracts with customers, the majority of which are spot contracts with no remaining performance obligations. We do not disclose remaining performance obligations for contracts that have terms of one year or less. The transaction price for our remaining term contracts includes a fixed component and variable consideration (i.e., a commodity price), both of which are allocated entirely to a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance obligation. The fixed component is not material and the variable consideration is highly uncertain. Therefore, as of December 31, 2020, we have not disclosed the aggregate amount of the transaction price allocated to our remaining performance obligations.

Segment Information

We have three reportable segments — refining, renewable diesel, and ethanol. Each segment is a strategic business unit that offers different products and services by employing unique technologies and marketing strategies and whose operations and operating performance are managed and evaluated separately. Operating performance is measured based on the operating income generated by the segment, 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. The following is a description of each segment’s business operations.

The refining segment includes the operations of our petroleum refineries, the associated marketing activities, and logistics assets that support our refining operations. The principal

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

products manufactured by our refineries and sold by this segment include gasolines and blendstocks, distillates, and other products.

The renewable diesel segment represents the operations of DGD, our consolidated joint venture as discussed in Note 13. The principal product manufactured by DGD and sold by this segment is renewable diesel. This segment sells some renewable diesel to the refining segment, which is then sold to that segment’s customers.
The ethanol segment includes the operations of our ethanol plants, the associated marketing activities, and logistics assets that support our ethanol operations. The principal products manufactured by our ethanol plants are ethanol and distillers grains. This segment sells some ethanol to the refining segment for blending into gasoline, which is sold to that segment’s customers as a finished gasoline product.

Operations that are not included in any of the reportable segments are included in the corporate category.

The following tables reflect information about our operating income (loss) and total expenditures for long-lived assets by reportable segment (in millions):


	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
Year ended December 31, 2020
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	56,093		500		2,784		(444)		58,933
LCM inventory valuation adjustment	(19)		—		—		—		(19)
Operating expenses (excluding depreciation and amortization expense reflected below)	3,944		85		406		—		4,435
Depreciation and amortization expense	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)

Total expenditures for long-lived assets (a)	$	1,838	$	548	$	23	$	27	$	2,436

(a)See note on page 124.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
Year ended December 31, 2019
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	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

Total expenditures for long-lived assets (a)	$	2,581	$	160	$	47	$	58	$	2,846



Year ended December 31, 2018
Revenues:
Revenues from external customers	$	113,093	$	508	$	3,428	$	4	$	117,033
Intersegment revenues	25		170		210		(405)		—
Total revenues	113,118		678		3,638		(401)		117,033
Cost of sales:
Cost of materials and other	101,866		262		3,008		(404)		104,732
Operating expenses (excluding depreciation and amortization expense reflected below)	4,154		66		470		—		4,690
Depreciation and amortization expense	1,910		29		78		—		2,017

Total cost of sales	107,930		357		3,556		(404)		111,439
Other operating expenses	45		—		—		—		45
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—		—		—		925		925
Depreciation and amortization expense	—		—		—		52		52


Operating income by segment	$	5,143	$	321	$	82	$	(974)	$	4,572

Total expenditures for long-lived assets (a)	$	2,767	$	192	$	373	$	44	$	3,376

(a)Total expenditures for long-lived assets includes amounts related to capital expenditures; deferred turnaround and catalyst costs; and property, plant, and equipment for acquisitions.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides a disaggregation of revenues from external customers for our principal products by reportable segment (in millions):


	Year Ended December 31,
	2020		2019		2018
Refining:
Gasolines and blendstocks	$	26,278	$	42,798	$	46,596
Distillates	28,234		51,942		55,037


Other product revenues	6,328		9,006		11,460
Total refining revenues	60,840		103,746		113,093
Renewable diesel:
Renewable diesel	1,055		970		508
Ethanol:
Ethanol	2,353		2,889		2,713
Distillers grains	664		717		715
Total ethanol revenues	3,017		3,606		3,428
Corporate – other revenues	—		2		4

Revenues	$	64,912	$	108,324	$	117,033

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 revenues.


	Year Ended December 31,
	2020		2019		2018
U.S.	$	45,174	$	77,173	$	82,992
Canada	4,294		7,915		9,211
U.K. and Ireland	9,268		13,584		15,208
Other countries	6,176		9,652		9,622
Revenues	$	64,912	$	108,324	$	117,033

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,
	2020		2019
U.S.	$	28,184	$	27,485
Canada	1,877		1,886
U.K. and Ireland	1,353		1,232
Mexico and Peru	738		497
Total long-lived assets	$	32,152	$	31,100

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	December 31,
	2020		2019
Refining	$	42,939	$	46,613
Renewable diesel	1,659		1,412
Ethanol	1,728		2,069
Corporate and eliminations	5,448		3,770
Total assets	$	51,774	$	53,864

As of December 31, 2020 and 2019, our investments in unconsolidated joint ventures accounted for under the equity method were $972 million and $942 million, respectively, all of which related to the refining segment and are reflected in “deferred charges and other assets, net” as presented in Note 8.

19. SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income (loss) is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):


	Year Ended December 31,
	2020		2019		2018
Decrease (increase) in current assets:
Receivables, net	$	2,773	$	(1,041)	$	(460)
Inventories	1,007		(385)		(197)

Prepaid expenses and other	101		—		(74)
Increase (decrease) in current liabilities:
Accounts payable	(4,068)		1,534		304
Accrued expenses	48		(27)		(113)
Taxes other than income taxes payable	37		60		(73)
Income taxes payable	(243)		153		(684)
Changes in current assets and current liabilities	$	(345)	$	294	$	(1,297)

Changes in current assets and current liabilities for the year ended December 31, 2020 were as follows:

the decrease in receivables was due to (i) a decrease of $3.3 billion as a result of a decrease in sales volumes combined with a decrease in commodity prices in December 2020 compared to December 2019, (ii) the collection of $449 million for a blender’s tax credit receivable attributable to volumes blended during 2019 and 2018, and (iii) an increase in income taxes receivable of $1.0 billion primarily due to the recognition of a current income tax benefit;
the decrease in inventories was primarily due to a reduction of higher-cost inventory volumes in our refining segment in December 2020 compared to December 2019; and

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the decrease in accounts payable was due to a decrease in crude oil and other feedstock volumes purchased combined with a decrease in commodity prices in December 2020 compared to December 2019.

Changes in current assets and current liabilities for the year ended December 31, 2019 were as follows:

the increase in receivables was due to (i) an increase in commodity prices and sales volumes in December 2019 compared to December 2018, (ii) a receivable of $449 million for the blender’s tax credit attributable to volumes blended during 2019 and 2018, and (iii) an income tax refund of $348 million, including interest, associated with the settlement of the combined audit related to our U.S. federal income tax returns for 2010 and 2011;
the increase in inventories was due to an increase in commodity prices and higher inventory levels in December 2019 compared to December 2018;
the increase in accounts payable was due to an increase in commodity prices in December 2019 compared to December 2018 combined with an increase in crude oil and other feedstock volumes purchased and the timing of payments of invoices; and
the increase in income taxes payable was primarily due to higher pre-tax income in the fourth quarter of 2019.

Changes in current assets and current liabilities for the year ended December 31, 2018 were as follows:

the increase in receivables was due to an increase in sales volumes, partially offset by a decrease in commodity prices in December 2018 compared to December 2017;
the increase in inventories was primarily due to higher inventory levels in December 2018 compared to December 2017;
the increase in accounts payable was due to an increase in crude oil and other feedstock volumes purchased, partially offset by a decrease in commodity prices in December 2018 compared to December 2017;
the decrease in accrued expenses was mainly due to the timing of payments on our environmental compliance program obligations; and
the decrease in income taxes payable was primarily due to (i) $527 million of payments in early 2018 related to 2017 tax liabilities and (ii) $181 million of payments in late 2018 that were applied to 2019 tax liabilities.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Year Ended December 31,
	2020		2019		2018
Interest paid in excess of amount capitalized, including interest on finance leases	$	526	$	452	$	463
Income taxes paid (refunded), net (see Note 16)	203		(116)		1,361

Supplemental cash flow information related to our operating and finance leases was as follows (in millions):


	Year Ended December 31,
	2020				2019
	Operating Leases		Finance Leases		Operating Leases		Finance Leases
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows	$	444	$	97	$	441	$	50
Investing cash flows	1		—		1		—
Financing cash flows	—		80		—		40
Changes in lease balances resulting from new and modified leases (a)	263		950		1,756		239

(a)Noncash activity for the year ended December 31, 2020 primarily included approximately $800 million for a finance lease ROU asset and related liability recognized in connection with the terminaling agreement with MVP described in Note 6. Noncash activity for the year ended December 31, 2019 included $1.3 billion for operating lease ROU assets and related liabilities recorded on January 1, 2019 upon adoption of Topic 842.

Prior to our adoption of Topic 842 in 2019, we were considered the accounting owner of the MVP Terminal during its construction due to our membership interest in MVP and because we determined that the terminaling agreement was a capital lease. Accordingly, as of December 31, 2018, we had recorded an asset of $539 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 $292 million payable to Magellan. The amounts recorded for the portion of the construction costs associated with the payable to Magellan were noncash investing and financing activities, respectively, for the year ended December 31, 2018. Noncash investing and financing activities for the year ended December 31, 2018 also included the recognition of finance lease assets and related obligations primarily for the lease of storage tanks.

On January 1, 2019, as a result of our adoption of Topic 842, we derecognized the asset and liability related to MVP discussed above and recorded our equity investment in MVP of $247 million, which is included in “deferred charges and other assets, net.” These amounts were noncash investing and financing activities for the year ended December 31, 2019.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

There were no significant noncash investing and financing activities during the year ended December 31, 2020, except as noted in the table above.

20. FAIR VALUE MEASUREMENTS

General

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

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

U.S. GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. The 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, 2020 and 2019.

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, 2020
							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	$	403	$	—	$	—	$	403	$	(373)	$	(18)	$	12	$	—
Physical purchase contracts	—		13		—		13		n/a		n/a		13		n/a

Investments of certain benefit plans	74		—		8		82		n/a		n/a		82		n/a

Total	$	477	$	13	$	8	$	498	$	(373)	$	(18)	$	107

Liabilities
Commodity derivative contracts	$	405	$	—	$	—	$	405	$	(373)	$	(32)	$	—	$	(44)
Environmental credit obligations	—		96		—		96		n/a		n/a		96		n/a

Foreign currency contracts	4		—		—		4		n/a		n/a		4		n/a

Total	$	409	$	96	$	—	$	505	$	(373)	$	(32)	$	100

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	December 31, 2019
							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	$	617	$	—	$	—	$	617	$	(612)	$	—	$	5	$	—

Foreign currency contracts	27		—		—		27		n/a		n/a		27		n/a
Investments of certain benefit plans	65		—		9		74		n/a		n/a		74		n/a

Total	$	709	$	—	$	9	$	718	$	(612)	$	—	$	106

Liabilities
Commodity derivative contracts	$	668	$	—	$	—	$	668	$	(612)	$	(56)	$	—	$	(84)
Environmental credit obligations	—		2		—		2		n/a		n/a		2		n/a
Physical purchase contracts	—		3		—		3		n/a		n/a		3		n/a
Foreign currency contracts	10		—		—		10		n/a		n/a		10		n/a
Total	$	678	$	5	$	—	$	683	$	(612)	$	(56)	$	15

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, which are used to reduce the impact of price volatility on our results of operations and cash flows as discussed in Note 21. These contracts are measured at fair value using a market approach based on quoted prices from the commodity exchange and are categorized in Level 1 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 plan 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 plan 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 and foreign currency swap agreements related to our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of our operations. These contracts are valued based on quoted foreign currency exchange rates and are categorized in Level 1 of the fair value hierarchy.
Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily RINs in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California Global Warming Solutions Act (the California cap-and-trade system, also known as AB 32) and similar programs, (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 described in Note 21 under “Risk Management Activities by Type of Risk—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 into or out of Level 3 for assets and liabilities held as of December 31, 2020 and 2019 that were measured at fair value on a recurring basis.

There was no significant activity during the years ended December 31, 2020, 2019, and 2018 related to the fair value amounts categorized in Level 3 as of December 31, 2020 and 2019.

Nonrecurring Fair Value Measurements

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019.

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, 2020				December 31, 2019
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	Level 1	$	3,313	$	3,313	$	2,583	$	2,583
Financial liabilities
Debt (excluding finance leases)	Level 2	13,013		15,103		8,881		10,583

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. PRICE RISK MANAGEMENT ACTIVITIES

We are exposed to market risks primarily related to the volatility in the price of commodities, 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 20), as summarized below under “Fair Values of Derivative Instruments.” The effect of these derivative instruments on our income and other comprehensive income (loss) is summarized below under “Effect of Derivative Instruments on Income and Other Comprehensive Income (Loss).”

Risk Management Activities by Type of Risk

Commodity Price Risk

We are exposed to market risks related to the volatility in the price of feedstocks (primarily crude oil and corn), the products we produce (primarily refined petroleum products), 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, such as futures and options. 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.

We primarily use commodity derivative instruments as cash flow hedges and economic hedges. Our objectives for entering into each type of hedge is described below.

*•*Cash flow hedges – The objective of our cash flow hedges is to lock in the price of forecasted purchases and/or product sales at existing market prices that we deem favorable.

*•*Economic hedges – Our objectives for holding economic hedges are to (i) manage price volatility in certain feedstock and product inventories and (ii) lock in the price of forecasted purchases and/or product sales at existing market prices that we deem favorable.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2020, we had the following outstanding commodity derivative instruments that were used as cash flow hedges and 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 corn contracts that are presented in thousands of bushels).


	Notional Contract Volumes by Year of Maturity
	2021	2022
Derivatives designated as cash flow hedges
Refined petroleum products:
Futures – long	334	—
Futures – short	1,364	—

Derivatives designated as economic hedges
Crude oil and refined petroleum products:


Futures – long	53,205	1
Futures – short	50,518	—





Corn:
Futures – long	49,840	10
Futures – short	78,135	155
Physical contracts – long	27,144	145

Foreign Currency Risk

We are exposed to exchange rate fluctuations on transactions related to our international operations that are denominated in currencies other than the local (functional) currencies of those operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency contracts. These contracts are not designated as hedging instruments for accounting purposes and therefore are classified as economic hedges. As of December 31, 2020, we had foreign currency contracts to purchase $325 million of U.S. dollars and $1.6 billion of U.S. dollar equivalent Canadian dollars. Of these commitments, $1.1 billion matured on or before February 16, 2021 and the remaining $800 million will mature by April 15, 2021.

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 motor fuels 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

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the U.S.). We are exposed to the volatility in the market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. For the years ended December 31, 2020, 2019, and 2018, the cost of meeting our obligations under these compliance programs was $648 million, $318 million, and $536 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 20. 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 substantially all of these costs from our customers for the years ended December 31, 2020, 2019, and 2018 and expect to continue to recover the majority of these costs in the future. For the years ended December 31, 2020, 2019, and 2018, 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, 2020 and 2019 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 20 for additional information related to the fair values of our derivative instruments.

As indicated in Note 20, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The 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, 2020						December 31, 2019
		Asset Derivatives			Liability Derivatives			Asset Derivatives			Liability Derivatives
Derivatives designated as hedging instruments
Commodity contracts	Receivables, net		$	4		$	17		$	9		$	20



Derivatives not designated as hedging instruments
Commodity contracts	Receivables, net		$	399		$	388		$	608		$	648


Physical purchase contracts	Inventories		13			—			—			3
Foreign currency contracts	Receivables, net		—			—			27			—
Foreign currency contracts	Accrued expenses		—			4			—			10
Total			$	412		$	392		$	635		$	661

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 and Other Comprehensive Income (Loss)

The following table provides information about the gain (loss) recognized in income and other comprehensive income (loss) due to fair value adjustments of our cash flow hedges (in millions):


Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivatives	Year Ended December 31,
2020	2019	2018
Commodity contracts:
Gain (loss) recognized in other comprehensive income (loss) on derivatives	N/A	$	38	$	(6)	$	—
Gain reclassified from accumulated other comprehensive loss into income	Revenues	34		2		—

For cash flow hedges, no component of any derivative instrument’s gains or losses was excluded from the assessment of hedge effectiveness for the years ended December 31, 2020, 2019, and 2018. For the years ended December 31, 2020, 2019, and 2018, cash flow hedges primarily related to forward sales of renewable diesel. The estimated deferred after-tax loss that is expected to be reclassified into revenues over the next 12 months as a result of the hedged transactions that are forecasted to occur as of December 31, 2020 was immaterial. For the years ended December 31, 2020, 2019, and 2018, there were no amounts reclassified from accumulated other comprehensive loss into income as a result of the discontinuance of cash flow hedge accounting. The changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2020, 2019, and 2018 are described in Note 12.

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides information about the gain (loss) recognized in income on our derivative instruments with respect to our economic hedges and our foreign currency hedges and the line items in the statements of income in which such gains (losses) are reflected (in millions):


Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Year Ended December 31,
	2020	2019		2018
Commodity contracts	Revenues	$	—	$	5	$	—
Commodity contracts	Cost of materials and other	99		(68)		(165)
Commodity contracts	Operating expenses (excluding depreciation and amortization expense)	2		—		7
Foreign currency contracts	Cost of materials and other	27		(21)		56
Foreign currency contracts	Other income, net	(13)		75		(43)

VALERO ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. QUARTERLY FINANCIAL DATA (Unaudited)

The following tables summarize quarterly financial data for the years ended December 31, 2020 and 2019 (in millions, except per share amounts):


	2020 Quarter Ended
	March 31 (b)		June 30 (b)		September 30 (b) (c)		December 31 (c)
Revenues	$	22,102	$	10,397	$	15,809	$	16,604
Gross profit (loss) (a)	(2,085)		1,973		(398)		(230)
Operating income (loss)	(2,277)		1,789		(621)		(470)

Net income (loss)	(1,754)		1,335		(379)		(309)
Net income (loss) attributable to Valero Energy Corporation stockholders	(1,851)		1,253		(464)		(359)
Earnings (loss) per common share	(4.54)		3.07		(1.14)		(0.88)

Earnings (loss) per common share – assuming dilution	(4.54)		3.07		(1.14)		(0.88)

	2019 Quarter Ended
	March 31		June 30		September 30		December 31
Revenues	$	24,263	$	28,933	$	27,249	$	27,879
Gross profit (a)	533		1,123		1,119		2,003
Operating income	308		908		881		1,739

Net income	167		648		639		1,330
Net income attributable to Valero Energy Corporation stockholders	141		612		609		1,060
Earnings per common share	0.34		1.47		1.48		2.58

Earnings per common share – assuming dilution	0.34		1.47		1.48		2.58

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

(b)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 as described in Note 5. The market value of our LIFO inventories improved due to the subsequent recovery in market prices, which resulted in a reversal of $2.2 billion in the quarter ended June 30, 2020 and the remaining amount in the quarter ended September 30, 2020.

(c)We recorded a charge of $326 million in September 2020 due to the expected liquidation of LIFO inventory layers as described in Note 5. We recognized a benefit of $102 million in December 2020 to adjust the $326 million estimate to the $224 million actual charge for the year ended December 31, 2020.

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