Item 1. FINANCIAL STATEMENTS

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions of dollars, except par value)

			September 30, 2021						December 31, 2020
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	3,498					$	3,313
Receivables, net			8,627						6,109
Inventories			6,227						6,038
Prepaid expenses and other			438						384
Total current assets			18,790						15,844
Property, plant, and equipment, at cost			48,235						46,967
Accumulated depreciation			(17,795)						(16,578)
Property, plant, and equipment, net			30,440						30,389
Deferred charges and other assets, net			5,461						5,541
Total assets			$	54,691					$	51,774
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and finance lease obligations			$	1,162					$	723
Accounts payable			9,820						6,082
Accrued expenses			1,539						994
Taxes other than income taxes payable			1,548						1,372
Income taxes payable			244						112
Total current liabilities			14,313						9,283
Debt and finance lease obligations, less current portion			13,071						13,954
Deferred income tax liabilities			5,110						5,275
Other long-term liabilities			3,608						3,620
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			6,830						6,814
Treasury stock, at cost; 264,680,113 and 265,096,171 common shares			(15,696)						(15,719)
Retained earnings			27,673						28,953
Accumulated other comprehensive loss			(1,338)						(1,254)
Total Valero Energy Corporation stockholders’ equity			17,476						18,801
Noncontrolling interests			1,113						841
Total equity			18,589						19,642
Total liabilities and equity			$	54,691					$	51,774

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(millions of dollars, except per share amounts)

(unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Revenues (a)			$	29,520					$	15,809					$	78,074					$	48,308
Cost of sales:
Cost of materials and other			26,624						14,801						70,865						43,832
Lower of cost or market (LCM) inventory valuation adjustment			—						(313)						—						(19)
Operating expenses (excluding depreciation and amortization expense reflected below)			1,348						1,117						4,218						3,268
Depreciation and amortization expense			630						602						1,772						1,737
Total cost of sales			28,602						16,207						76,855						48,818
Other operating expenses			19						25						69						30
General and administrative expenses (excluding depreciation and amortization expense reflected below)			195						186						579						532
Depreciation and amortization expense			11						12						35						37
Operating income (loss)			693						(621)						536						(1,109)
Other income, net			32						48						179						107
Interest and debt expense, net of capitalized interest			(152)						(143)						(451)						(410)
Income (loss) before income tax expense (benefit)			573						(716)						264						(1,412)
Income tax expense (benefit)			65						(337)						86						(614)
Net income (loss)			508						(379)						178						(798)
Less: Net income attributable to noncontrolling interests			45						85						257						264
Net income (loss) attributable to Valero Energy Corporation stockholders			$	463					$	(464)					$	(79)					$	(1,062)
Earnings (loss) per common share			$	1.13					$	(1.14)					$	(0.20)					$	(2.62)
Weighted-average common shares outstanding (in millions)			407						407						407						407
Earnings (loss) per common share – assuming dilution			$	1.13					$	(1.14)					$	(0.20)					$	(2.62)
Weighted-average common shares outstanding – assuming dilution (in millions)			408						407						407						407
__________________________
Supplemental information:
(a) Includes excise taxes on sales by certain of our international operations			$	1,610					$	1,339					$	4,152					$	3,491

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(millions of dollars)

(unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Net income (loss)			$	508					$	(379)					$	178					$	(798)
Other comprehensive income (loss):
Foreign currency translation adjustment			(259)						217						(114)						(252)
Net gain on pension and other postretirement benefits			16						12						44						36
Net gain (loss) on cash flow hedges			(17)						5						(14)						9
Other comprehensive income (loss) before income tax expense (benefit)			(260)						234						(84)						(207)
Income tax expense (benefit) related to items of other comprehensive income (loss)			(1)						4						8						9
Other comprehensive income (loss)			(259)						230						(92)						(216)
Comprehensive income (loss)			249						(149)						86						(1,014)
Less: Comprehensive income attributable to noncontrolling interests			35						87						249						268
Comprehensive income (loss) attributable to Valero Energy Corporation stockholders			$	214					$	(236)					$	(163)					$	(1,282)

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(millions of dollars)

(unaudited)

			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 June 30, 2021			$	7					$	6,819					$	(15,696)					$	27,610					$	(1,089)					$	17,651					$	1,053					$	18,704
Net income			—						—						—						463						—						463						45						508
Dividends on common stock ($0.98 per share)			—						—						—						(400)						—						(400)						—						(400)
Stock-based compensation expense			—						11						—						—						—						11						—						11
Contributions from noncontrolling interests			—						—						—						—						—						—						25						25
Other comprehensive loss			—						—						—						—						(249)						(249)						(10)						(259)
Balance as of September 30, 2021			$	7					$	6,830					$	(15,696)					$	27,673					$	(1,338)					$	17,476					$	1,113					$	18,589
Balance as of June 30, 2020			$	7					$	6,824					$	(15,760)					$	30,575					$	(1,799)					$	19,847					$	787					$	20,634
Net income (loss)			—						—						—						(464)						—						(464)						85						(379)
Dividends on common stock ($0.98 per share)			—						—						—						(399)						—						(399)						—						(399)
Stock-based compensation expense			—						12						—						—						—						12						—						12
Transactions in connection with stock-based compensation plans			—						(2)						1						—						—						(1)						—						(1)
Distributions to noncontrolling interests			—						—						—						—						—						—						(81)						(81)
Other comprehensive income			—						—						—						—						228						228						2						230
Balance as of September 30, 2020			$	7					$	6,834					$	(15,759)					$	29,712					$	(1,571)					$	19,223					$	793					$	20,016

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY (Continued)

(millions of dollars)

(unaudited)

			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, 2020			$	7					$	6,814					$	(15,719)					$	28,953					$	(1,254)					$	18,801					$	841					$	19,642
Net income (loss)			—						—						—						(79)						—						(79)						257						178
Dividends on common stock ($2.94 per share)			—						—						—						(1,201)						—						(1,201)						—						(1,201)
Stock-based compensation expense			—						52						—						—						—						52						—						52
Transactions in connection with stock-based compensation plans			—						(36)						23						—						—						(13)						—						(13)
Contributions from noncontrolling interests			—						—						—						—						—						—						25						25
Distributions to noncontrolling interests			—						—						—						—						—						—						(2)						(2)
Other comprehensive loss			—						—						—						—						(84)						(84)						(8)						(92)
Balance as of September 30, 2021			$	7					$	6,830					$	(15,696)					$	27,673					$	(1,338)					$	17,476					$	1,113					$	18,589
Balance as of December 31, 2019			$	7					$	6,821					$	(15,648)					$	31,974					$	(1,351)					$	21,803					$	733					$	22,536
Net income (loss)			—						—						—						(1,062)						—						(1,062)						264						(798)
Dividends on common stock ($2.94 per share)			—						—						—						(1,200)						—						(1,200)						—						(1,200)
Stock-based compensation expense			—						48						—						—						—						48						—						48
Transactions in connection with stock-based compensation plans			—						(35)						19						—						—						(16)						—						(16)
Open market stock purchases			—						—						(130)						—						—						(130)						—						(130)
Distributions to noncontrolling interests			—						—						—						—						—						—						(208)						(208)
Other comprehensive income (loss)			—						—						—						—						(220)						(220)						4						(216)
Balance as of September 30, 2020			$	7					$	6,834					$	(15,759)					$	29,712					$	(1,571)					$	19,223					$	793					$	20,016

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of dollars)

(unaudited)

			Nine Months Ended September 30,
			2021						2020
Cash flows from operating activities:
Net income (loss)			$	178					$	(798)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense			1,807						1,774
LCM inventory valuation adjustment			—						(19)
Gain on sale of partial interest in MVP Terminalling, LLC (MVP)			(62)						—
Deferred income tax expense (benefit)			(150)						177
Changes in current assets and current liabilities			1,630						(232)
Changes in deferred charges and credits and other operating activities, net			2						(50)
Net cash provided by operating activities			3,405						852
Cash flows from investing activities:
Capital expenditures (excluding variable interest entities (VIEs))			(368)						(775)
Capital expenditures of VIEs:
Diamond Green Diesel Holdings LLC (DGD)			(730)						(311)
Other VIEs			(59)						(196)
Deferred turnaround and catalyst cost expenditures (excluding VIEs)			(544)						(529)
Deferred turnaround and catalyst cost expenditures of DGD			(6)						(18)
Proceeds from sale of partial interest in MVP			270						—
Investments in unconsolidated joint ventures			(8)						(39)
Other investing activities, net			33						16
Net cash used in investing activities			(1,412)						(1,852)
Cash flows from financing activities:
Proceeds from debt issuances and borrowings (excluding VIEs)			—						4,320
Proceeds from borrowings of VIEs:
DGD			100						—
Other VIEs			29						202
Repayments of debt and finance lease obligations (excluding VIEs)			(672)						(461)
Repayments of debt of VIEs			(4)						(4)
Purchases of common stock for treasury			(15)						(147)
Common stock dividend payments			(1,201)						(1,200)
Contributions from noncontrolling interests			25						—
Distributions to noncontrolling interests			(2)						(208)
Other financing activities, net			1						(32)
Net cash provided by (used in) financing activities			(1,739)						2,470
Effect of foreign exchange rate changes on cash			(69)						(6)
Net increase in cash and cash equivalents			185						1,464
Cash and cash equivalents at beginning of period			3,313						2,583
Cash and cash equivalents at end of period			$	3,498					$	4,047

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

General

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. The term “DGD,” as used in this report, may refer to Diamond Green Diesel Holdings LLC, its wholly owned consolidated subsidiary — Diamond Green Diesel LLC, or both of them taken as a whole.

These unaudited financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of our results for the nine months ended September 30, 2021 have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The financial statements presented herein should be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, 2020.

The balance sheet as of December 31, 2020 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2020.

Significant Accounting Policies

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.

Adoption of Accounting Pronouncement

The following Financial Accounting Standards Board (FASB) Accounting Standards Update (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

2. UNCERTAINTIES

At the onset of the COVID-19 pandemic in March 2020, governmental authorities around the world imposed restrictions, such as stay-at-home orders and other social distancing measures, to slow the spread of COVID-19. These measures resulted in significant economic disruption globally as reduced economic

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

activity negatively impacted many businesses, including our business. We experienced a decline in the demand for most of the transportation fuels that we produce and sell, and thus also a decline in the market prices of those products, due to a decrease in the level of individual movement and travel resulting from the restrictions and general public health concerns. Some governmental authorities began lifting restrictions in the latter part of 2020 and this has continued throughout the first nine months of 2021. These actions have contributed to increasing levels of individual movement and travel and a resulting increase in the demand for and market prices of our products. However, some governmental authorities continue to impose some level of restrictions due in part to new outbreaks, including those related to new variants of the COVID-19 virus.

The distribution of vaccines beginning in late 2020 has helped decrease rates of infection and contributed to the lifting of many restrictions. The ongoing distribution of vaccines may result in the continued lifting of restrictions globally and may be seen as a key factor contributing to the ongoing restoration of public confidence, and thus also to stimulating and increasing global economic activity. However, the risk remains that vaccines may not be distributed widely on a timely basis, they may not be as effective against new variants of the virus, the distribution of some or all of the vaccines may be paused or withdrawn due to concerns with potential side effects, and/or the level of individuals’ willingness to receive a vaccine may not be as strong or as timely as needed. Additionally, many governmental authorities have recently announced requirements and mandates, including steep fines for non-compliance, on employers concerning workforce vaccination and testing. Many large companies across the globe, independent of such government regulations, have also begun implementing vaccine requirements and mandates for their workforce, or as a prerequisite to providing customers certain goods and services in person. These requirements and mandates have evoked mixed reactions and have created additional challenges and costs, both administratively and operationally, for employers and employees. Developments with respect to such requirements and mandates are evolving at a rapid pace and the ultimate impact thereof remains uncertain.

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 and may continue to be significant. We believe we have proactively responded to many of the known impacts of the pandemic on our business to the extent practicable and we strive to continue to do so, but there can be no assurance that these or other measures will be fully effective.

3. INVENTORIES

Inventories consisted of the following (in millions):

			September 30, 2021						December 31, 2020
Refinery feedstocks			$	1,646					$	1,979
Refined petroleum products and blendstocks			3,944						3,425
Renewable diesel feedstocks and products			113						50
Ethanol feedstocks and products			233						297
Materials and supplies			291						287
Inventories			$	6,227					$	6,038

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 last-in, first-out (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.

The market value of our LIFO inventories 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 $313 million during the three months ended September 30, 2020. The net benefit of $19 million for the nine months ended September 30, 2020 was due to the foreign currency translation effect of the portion of the LCM inventory valuation adjustment attributable to our international operations. As of September 30, 2021 and December 31, 2020, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $5.2 billion and $1.3 billion, respectively.

During the three and nine months ended September 30, 2020, we recognized the impact of an expected liquidation of LIFO inventory layers that increased cost of materials and other by $326 million. Our LIFO inventory levels decreased throughout the first nine months of 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. Consequently, we expected our LIFO inventory levels as of December 31, 2020 would remain below their December 31, 2019 levels.

Our non-LIFO inventories accounted for $1.2 billion and $918 million of our total inventories as of September 30, 2021 and December 31, 2020, respectively.

4. PROPERTY, PLANT, AND EQUIPMENT

In September 2021 and 2020, we reduced the estimated useful lives of our ethanol plants in Jefferson, Wisconsin and Riga, Michigan, respectively, which reduced their net book values to estimated salvage value. The additional depreciation expense for the three and nine months ended September 30, 2021 and 2020 of $48 million and $30 million, respectively, resulting from these changes did not have a material impact on our results of operations nor was there a material impact to our financial position.

The Jefferson plant was temporarily idled in 2020 at the onset of the COVID-19 pandemic in response to the decreased demand for ethanol resulting from the effects of the pandemic on our business, and we had previously evaluated this plant for potential impairment assuming that operations would resume. However, we completed an evaluation of the plant during the third quarter of 2021 and concluded that it

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

was no longer a strategic asset for our ethanol business. As a result, the plant’s operations have permanently ceased.

The Riga plant was temporarily idled in 2019 due to corn quality issues with the local third-party corn feedstock supply. Although we expected operations to resume after an improved corn harvest, we completed an evaluation of this plant during the third quarter of 2020 and concluded that it was no longer a strategic asset for our ethanol business. The plant’s operations permanently ceased at that time.

5. DEBT

Public Debt

In September 2021, we redeemed our Floating Rate Senior Notes due September 15, 2023 (the Floating Rate Notes) for $575 million, or 100.00 percent of stated value, plus accrued and unpaid interest.

During the nine months ended September 30, 2020, the following activity occurred:

• In September 2020, we issued the following senior notes:

**◦**the Floating Rate Notes, which bore 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;

◦$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 that were issued in April 2020 (see below); 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.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit Facilities

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):

																		September 30, 2021
						Facility Amount						Maturity Date						Outstanding Borrowings						Letters of Credit Issued (a)						Availability
Committed facilities:
Valero Revolver						$	4,000					March 2024						$	—					$	288					$	3,712
Canadian Revolver						C$	150					November 2021						C$	—					C$	5					C$	145
Accounts receivable sales facility (b)						$	1,300					July 2022						$	—					n/a						$	1,300
Letter of credit facility						$	50					November 2021						n/a						$	—					$	50
Committed facilities of VIEs (c):
DGD Revolver						$	400					March 2024						$	100					$	7					$	293
IEnova Revolver						$	743					February 2028						$	627					n/a						$	116
Uncommitted facilities:
Letter of credit facilities						n/a						n/a						n/a						$	127					n/a

---

(a)Letters of credit issued as of September 30, 2021 expire at various times in 2021 through 2023.

(b)In July 2021, we extended the maturity date of this facility to July 2022 and increased the facility amount from $1.0 billion to $1.3 billion.

(c)Creditors of our VIEs do not have recourse against us.

Activity under our credit facilities was as follows (in millions):

			Nine Months Ended September 30,
			2021						2020
Borrowings:
Accounts receivable sales facility			$	—					$	300
DGD Revolver			100						—
IEnova Revolver			29						202
Repayments:
Accounts receivable sales facility			—						(400)

DGD Revolver

In March 2021, DGD (as described in Note 7) entered into a $400 million unsecured revolving credit facility (the DGD Revolver) that matures in March 2024. DGD has the option to increase the aggregate commitments under the DGD Revolver to $550 million, subject to certain restrictions. Initially, the DGD Revolver also provided for the issuance of letters of credit of up to $10 million. In September 2021, the DGD Revolver was amended to increase the letter of credit facility from $10 million to $50 million and to limit DGD’s indebtedness arising under other letters of credit that DGD may obtain up to $25 million at

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

any one time outstanding. This restriction does not impact Valero’s other letter of credit facilities. The DGD Revolver is only available to the operations of DGD. DGD’s lender does not have recourse against us.

Outstanding borrowings under the DGD Revolver generally bear interest, at DGD’s option, at either (i) an alternate base rate plus the applicable margin or (ii) an adjusted LIBOR rate for the applicable interest period in effect from time to time plus the applicable margin. The DGD Revolver also requires payments for customary fees, including unused commitment fees, letter of credit fees, and administrative agent fees. As of September 30, 2021, the variable interest rate on the DGD Revolver was 1.840 percent.

IEnova Revolver

In May 2021, the borrowing capacity under the IEnova Revolver was increased from $660 million to $743 million. As of September 30, 2021 and December 31, 2020, the variable weighted-average interest rate on the IEnova Revolver was 3.497 percent and 3.870 percent, respectively. The IEnova Revolver is available only to the operations of Central Mexico Terminals (as described in Note 7). IEnova does not have recourse against us.

Other Disclosures

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Interest and debt expense			$	162					$	162					$	488					$	468
Less: Capitalized interest			10						19						37						58
Interest and debt expense, net of capitalized interest			$	152					$	143					$	451					$	410

6. EQUITY

Share Activity

There was no significant share activity during the nine months ended September 30, 2021 and 2020.

Common Stock Dividends

On October 27, 2021, our board of directors declared a quarterly cash dividend of $0.98 per common share payable on December 9, 2021 to holders of record at the close of business on November 18, 2021.

VALERO ENERGY CORPORATION

CONDENSED 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):

			Three Months Ended September 30,
			2021																								2020
			Foreign Currency Translation Adjustment						Defined Benefit Plans Items						Gains (Losses) on Cash Flow Hedges						Total						Foreign Currency Translation Adjustment						Defined Benefit Plans Items						Gains (Losses) on Cash Flow Hedges						Total
Balance as of beginning of period			$	(373)					$	(715)					$	(1)					$	(1,089)					$	(1,144)					$	(653)					$	(2)					$	(1,799)
Other comprehensive income (loss) before reclassifications			(255)						—						(8)						(263)						217						—						—						217
Amounts reclassified from accumulated other comprehensive loss			—						10						2						12						—						9						2						11
Effect of exchange rates			—						2						—						2						—						—						—						—
Other comprehensive income (loss)			(255)						12						(6)						(249)						217						9						2						228
Balance as of end of period			$	(628)					$	(703)					$	(7)					$	(1,338)					$	(927)					$	(644)					$	—					$	(1,571)

			Nine Months Ended September 30,
			2021																								2020
			Foreign Currency Translation Adjustment						Defined Benefit Plans Items						Gains (Losses) on Cash Flow Hedges						Total						Foreign Currency Translation Adjustment						Defined Benefit Plans Items						Gains (Losses) on Cash Flow Hedges						Total
Balance as of beginning of period			$	(515)					$	(737)					$	(2)					$	(1,254)					$	(676)					$	(672)					$	(3)					$	(1,351)
Other comprehensive income (loss) before reclassifications			(113)						1						(20)						(132)						(251)						—						19						(232)
Amounts reclassified from accumulated other comprehensive loss			—						32						15						47						—						28						(16)						12
Effect of exchange rates			—						1						—						1						—						—						—						—
Other comprehensive income (loss)			(113)						34						(5)						(84)						(251)						28						3						(220)
Balance as of end of period			$	(628)					$	(703)					$	(7)					$	(1,338)					$	(927)					$	(644)					$	—					$	(1,571)

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. VARIABLE INTEREST ENTITIES

Consolidated VIEs

We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary. As of September 30, 2021, our significant consolidated VIEs included:

• DGD, a joint venture with a subsidiary of Darling Ingredients Inc., which owns and operates a plant that processes rendered and recycled materials, including animal fats, used cooking oils, and other vegetable oils, into renewable diesel; and

• Central Mexico Terminals, which 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. We do not have an ownership interest in Central Mexico Terminals.

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 other 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.

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

			September 30, 2021
			DGD						Central Mexico Terminals						Other						Total
Assets
Cash and cash equivalents			$	159					$	—					$	17					$	176
Other current assets			191						10						22						223
Property, plant, and equipment, net			2,110						676						93						2,879
Liabilities
Current liabilities, including current portion of debt and finance lease obligations			$	320					$	700					$	13					$	1,033
Debt and finance lease obligations, less current portion			28						—						22						50

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

			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

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.

On April 19, 2021, we sold a 24.99 percent membership interest in MVP, an unconsolidated joint venture with a subsidiary of Magellan Midstream Partners, L.P. (Magellan), for $270 million that resulted in a gain of $62 million, which is included in “other income, net.” MVP owns and operates a marine terminal located adjacent to the Houston Ship Channel in Pasadena, Texas. We retained a 25.01 percent membership interest in MVP.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. EMPLOYEE BENEFIT PLANS

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

			Pension Plans												Other Postretirement Benefit Plans
			2021						2020						2021						2020
Three months ended September 30
Service cost			$	40					$	35					$	1					$	1
Interest cost			19						21						2						3
Expected return on plan assets			(48)						(44)						—						—
Amortization of:
Net actuarial loss			21						18						—						—
Prior service credit			(5)						(4)						(2)						(2)
Special charges			3						2						—						—
Net periodic benefit cost			$	30					$	28					$	1					$	2
Nine months ended September 30
Service cost			$	121					$	105					$	4					$	4
Interest cost			55						64						5						7
Expected return on plan assets			(144)						(134)						—						—
Amortization of:
Net actuarial loss			61						55						—						—
Prior service credit			(14)						(14)						(5)						(5)
Special charges			7						3						—						—
Net periodic benefit cost			$	86					$	79					$	4					$	6

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.”

As previously disclosed in our annual report on Form 10-K for the year ended December 31, 2020, we plan to contribute approximately $128 million to our pension plans and $22 million to our other postretirement benefit plans during 2021. During the nine months ended September 30, 2021, we contributed $121 million and $12 million to our pension and other postretirement benefit plans, respectively. During the nine months ended September 30, 2020, we contributed $28 million and $12 million to our pension and other postretirement benefit plans, respectively.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES

Our income tax expense for the three and nine months ended September 30, 2021 included a permanent income tax benefit to our estimated annual effective tax rate from DGD’s share of pre-tax income that is not taxable to us and a benefit for the settlement of the audits of certain state tax returns for 2004 through 2006. In addition, income tax expense for the nine months ended September 30, 2021 included a $64 million charge, which resulted from certain statutory income tax rate changes (primarily an increase in the United Kingdom (U.K.) rate from 19 percent to 25 percent effective in 2023) that were enacted during the three months ended June 30, 2021. The variation in the customary relationship of our effective tax rate to the U.S. federal statutory rate for the three and nine months ended September 30, 2021 was primarily due to these components of our tax expense.

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. Our income tax benefit for the three and nine months ended September 30, 2020, therefore, included a tax benefit of $121 million and $238 million, respectively, attributable to the carryback of our 2020 tax net operating loss (NOL) to our 2015 income tax year when we paid U.S. 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 three and nine months ended September 30, 2020 was primarily due to this income tax benefit.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. EARNINGS (LOSS) PER COMMON SHARE

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Earnings (loss) per common share:
Net income (loss) attributable to Valero stockholders			$	463					$	(464)					$	(79)					$	(1,062)
Less: Income allocated to participating securities			1						1						4						4
Net income (loss) available to common stockholders			$	462					$	(465)					$	(83)					$	(1,066)
Weighted-average common shares outstanding			407						407						407						407
Earnings (loss) per common share			$	1.13					$	(1.14)					$	(0.20)					$	(2.62)
Earnings (loss) per common share – assuming dilution:
Net income (loss) attributable to Valero stockholders			$	463					$	(464)					$	(79)					$	(1,062)
Less: Income allocated to participating securities			1						1						4						4
Net income (loss) available to common stockholders			$	462					$	(465)					$	(83)					$	(1,066)
Weighted-average common shares outstanding			407						407						407						407
Effect of dilutive securities			1						—						—						—
Weighted-average common shares outstanding – assuming dilution			408						407						407						407
Earnings (loss) per common share – assuming dilution			$	1.13					$	(1.14)					$	(0.20)					$	(2.62)

Participating securities include restricted stock and performance awards granted under our 2020 Omnibus Stock Incentive Plan (OSIP) or our 2011 OSIP. Dilutive securities include participating securities as well as outstanding stock options granted under our 2011 OSIP.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. 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):

			September 30, 2021						December 31, 2020
Receivables from contracts with customers, included in receivables, net			$	5,597					$	3,642
Contract liabilities, included in accrued expenses			67						55

During the nine months ended September 30, 2021 and 2020, we recognized as revenue $44 million and $53 million that was included in contract liabilities as of December 31, 2020 and 2019, respectively. Revenue recognized during the three months ended September 30, 2021 and 2020 related to contract liabilities was not material.

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 September 30, 2021, 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 products manufactured by our refineries and sold by this segment include gasolines and blendstocks, distillates, and other products.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

• The renewable diesel segment represents the operations of DGD, our consolidated joint venture as discussed in Note 7. 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.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables reflect information about our operating income (loss) by reportable segment (in millions):

			Refining						Renewable Diesel						Ethanol						Corporate and Eliminations						Total
Three months ended September 30, 2021
Revenues:
Revenues from external customers			$	27,989					$	342					$	1,189					$	—					$	29,520
Intersegment revenues			3						60						115						(178)						—
Total revenues			27,992						402						1,304						(178)						29,520
Cost of sales:
Cost of materials and other			25,395						256						1,150						(177)						26,624
Operating expenses (excluding depreciation and amortization expense reflected below)			1,195						26						128						(1)						1,348
Depreciation and amortization expense			549						11						70						—						630
Total cost of sales			27,139						293						1,348						(178)						28,602
Other operating expenses			18						1						—						—						19
General and administrative expenses (excluding depreciation and amortization expense reflected below)			—						—						—						195						195
Depreciation and amortization expense			—						—						—						11						11
Operating income (loss) by segment			$	835					$	108					$	(44)					$	(206)					$	693
Three months ended September 30, 2020
Revenues:
Revenues from external customers			$	14,727					$	305					$	777					$	—					$	15,809
Intersegment revenues			2						40						58						(100)						—
Total revenues			14,729						345						835						(100)						15,809
Cost of sales:
Cost of materials and other			14,103						128						670						(100)						14,801
LCM inventory valuation adjustment			(296)						—						(17)						—						(313)
Operating expenses (excluding depreciation and amortization expense reflected below)			989						23						105						—						1,117
Depreciation and amortization expense			538						10						54						—						602
Total cost of sales			15,334						161						812						(100)						16,207
Other operating expenses			24						—						1						—						25
General and administrative expenses (excluding depreciation and amortization expense reflected below)			—						—						—						186						186
Depreciation and amortization expense			—						—						—						12						12
Operating income (loss) by segment			$	(629)					$	184					$	22					$	(198)					$	(621)

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

			Refining						Renewable Diesel						Ethanol						Corporate and Eliminations						Total
Nine months ended September 30, 2021
Revenues:
Revenues from external customers			$	73,426					$	1,190					$	3,458					$	—					$	78,074
Intersegment revenues			7						215						259						(481)						—
Total revenues			73,433						1,405						3,717						(481)						78,074
Cost of sales:
Cost of materials and other			67,417						724						3,204						(480)						70,865
Operating expenses (excluding depreciation and amortization expense reflected below)			3,730						86						403						(1)						4,218
Depreciation and amortization expense			1,626						35						111						—						1,772
Total cost of sales			72,773						845						3,718						(481)						76,855
Other operating expenses			68						1						—						—						69
General and administrative expenses (excluding depreciation and amortization expense reflected below)			—						—						—						579						579
Depreciation and amortization expense			—						—						—						35						35
Operating income (loss) by segment			$	592					$	559					$	(1)					$	(614)					$	536
Nine months ended September 30, 2020
Revenues:
Revenues from external customers			$	45,327					$	850					$	2,131					$	—					$	48,308
Intersegment revenues			6						150						160						(316)						—
Total revenues			45,333						1,000						2,291						(316)						48,308
Cost of sales:
Cost of materials and other			41,769						393						1,984						(314)						43,832
LCM inventory valuation adjustment			(19)						—						—						—						(19)
Operating expenses (excluding depreciation and amortization expense reflected below)			2,912						63						293						—						3,268
Depreciation and amortization expense			1,607						33						97						—						1,737
Total cost of sales			46,269						489						2,374						(314)						48,818
Other operating expenses			29						—						1						—						30
General and administrative expenses (excluding depreciation and amortization expense reflected below)			—						—						—						532						532
Depreciation and amortization expense			—						—						—						37						37
Operating income (loss) by segment			$	(965)					$	511					$	(84)					$	(571)					$	(1,109)

VALERO ENERGY CORPORATION

CONDENSED 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):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Refining:
Gasolines and blendstocks			$	13,132					$	7,021					$	34,293					$	19,258
Distillates			11,588						6,327						31,044						21,369
Other product revenues			3,269						1,379						8,089						4,700
Total refining revenues			27,989						14,727						73,426						45,327
Renewable diesel:
Renewable diesel			342						305						1,190						850
Ethanol:
Ethanol			948						624						2,683						1,685
Distillers grains			241						153						775						446
Total ethanol revenues			1,189						777						3,458						2,131
Revenues			$	29,520					$	15,809					$	78,074					$	48,308

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

			September 30, 2021						December 31, 2020
Refining			$	45,975					$	42,939
Renewable diesel			2,588						1,659
Ethanol			1,621						1,728
Corporate and eliminations			4,507						5,448
Total assets			$	54,691					$	51,774

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. 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):

			Nine Months Ended September 30,
			2021						2020
Decrease (increase) in current assets:
Receivables, net			$	(2,643)					$	3,229
Inventories			(232)						1,577
Prepaid expenses and other			28						70
Increase (decrease) in current liabilities:
Accounts payable			3,624						(4,893)
Accrued expenses			538						17
Taxes other than income taxes payable			200						(24)
Income taxes payable			115						(208)
Changes in current assets and current liabilities			$	1,630					$	(232)

Changes in current assets and current liabilities for the nine months ended September 30, 2021 were primarily due to the following:

• the increase in receivables was primarily due to an increase in refined petroleum product prices in September 2021 compared to December 2020 combined with an increase in refined petroleum product sales volumes, partially offset by a decrease in income taxes receivable associated with the receipt of a $962 million refund related to our U.S federal income tax return for 2020;

• the increase in accounts payable was primarily due to an increase in crude oil and other feedstock prices in September 2021 compared to December 2020 combined with an increase in crude oil and other feedstock volumes purchased; and

• the increase in accrued expenses was primarily due to an increase in our environmental credit obligations under fixed-price contracts that resulted from higher prices for Renewable Identification Numbers (RINs) in September 2021 compared to December 2020.

Changes in current assets and current liabilities for the nine months ended September 30, 2020 were primarily due to the following:

• the decrease in receivables was due to (i) a decrease of $3.6 billion as a result of a decrease in sales volumes combined with a decrease in refined petroleum product prices in September 2020 compared to December 2019 and (ii) the collection of $449 million for a blender’s tax credit receivable attributable to volumes blended during 2019 and 2018, partially offset by an increase in income taxes receivable of $770 million primarily due to the recognition of a current income tax benefit;

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

• the decrease in inventories was primarily due to lower inventory levels in September 2020 compared to December 2019; and

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

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

			Nine Months Ended September 30,
			2021						2020
Interest paid in excess of amount capitalized, including interest on finance leases			$	397					$	338
Income taxes paid (refunded), net			(876)						206

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

			Nine Months Ended September 30,
			2021												2020
			Operating Leases						Finance Leases						Operating Leases						Finance Leases
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows			$	296					$	53					$	329					$	74
Investing cash flows			1						—						1						—
Financing cash flows			—						97						—						51
Changes in lease balances resulting from new and modified leases (a)			366						93						211						1,506

---

(a)Noncash activity for the nine months ended September 30, 2020 primarily included $1.4 billion for a finance lease right-of-use asset and related liability recognized in connection with the terminaling agreement with MVP.

There were no significant noncash investing and financing activities during the nine months ended September 30, 2021 and 2020, except as noted in the table above.

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. FAIR VALUE MEASUREMENTS

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 September 30, 2021 and December 31, 2020.

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.

			September 30, 2021
																					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			$	785					$	—					$	—					$	785					$	(677)					$	(48)					$	60					$	—
Physical purchase contracts			—						6						—						6						n/a						n/a						6						n/a
Foreign currency contracts			4						—						—						4						n/a						n/a						4						n/a
Investments of certain benefit plans			84						—						6						90						n/a						n/a						90						n/a
Total			$	873					$	6					$	6					$	885					$	(677)					$	(48)					$	160
Liabilities
Commodity derivative contracts			$	736					$	—					$	—					$	736					$	(677)					$	(59)					$	—					$	(55)
Environmental credit obligations			—						94						—						94						n/a						n/a						94						n/a
Physical purchase contracts			—						5						—						5						n/a						n/a						5						n/a
Foreign currency contracts			5						—						—						5						n/a						n/a						5						n/a
Total			$	741					$	99					$	—					$	840					$	(677)					$	(59)					$	104

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

			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

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 14. 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.

• 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.

• 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

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in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.

• Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily RINs in the U.S.) needed to satisfy our blending obligation under the U.S. federal Renewable Fuel Standard (RFS) and similar biofuel blending programs, such as the U.K. Renewable Transport Fuel Obligation, (collectively, the biofuels programs); and (ii) emission credits needed under various other environmental emissions programs (collectively, the other environmental emissions programs). To the degree we are unable to blend biofuels (such as ethanol and biodiesel, including renewable diesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the other environmental emissions programs, we also must purchase emission credits to comply with these programs. These programs are described in Note 14 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 a market approach based on quoted prices from an independent pricing service.

Nonrecurring Fair Value Measurements

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.

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):

									September 30, 2021												December 31, 2020
			Fair Value Hierarchy						Carrying Amount						Fair Value						Carrying Amount						Fair Value
Financial assets:
Cash and cash equivalents			Level 1						$	3,498					$	3,498					$	3,313					$	3,313
Financial liabilities:
Debt (excluding finance leases)			Level 2						12,573						14,574						13,013						15,103

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14. PRICE RISK MANAGEMENT ACTIVITIES

General

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 13), 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.

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As of September 30, 2021, 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						1,162						501
Futures – short						3,400						501
Derivatives designated as economic hedges:
Crude oil and refined petroleum products:
Futures – long						63,320						1,354
Futures – short						61,498						1,173
Corn:
Futures – long						85,540						1,615
Futures – short						103,295						6,395
Physical contracts – long						16,441						4,792

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 our 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 September 30, 2021, we had foreign currency contracts to purchase $463 million of U.S. dollars and $1.1 billion of U.S. dollar equivalent Canadian dollars. Of these commitments, $425 million matured on or before October 25, 2021 and the remaining $1.138 billion will mature by December 6, 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 as appropriate. 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, such as the biofuels programs described in Note 13, 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, or local governments thereof, set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in their jurisdictions. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to

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the volatility in the market price of these credits, and we manage that risk by purchasing biofuel credits as appropriate. The cost of meeting our credit obligations under the biofuels programs was $618 million and $143 million for the three months ended September 30, 2021 and 2020, respectively, and $1.6 billion and $391 million for the nine months ended September 30, 2021 and 2020, respectively. These amounts are reflected in cost of materials and other.

We are subject to additional requirements under the other environmental emissions programs as discussed in Note 13. Under these other environmental emissions programs, we purchase various emission credits to comply with these programs. Therefore, we are exposed to the volatility in the market price of these credits. The cost of the various credits under the other environmental emissions programs are significant; however, we recovered substantially all of these costs from our customers for the three and nine months ended September 30, 2021 and 2020 and expect to continue to recover the majority of these costs in the future. For the three and nine months ended September 30, 2021 and 2020, the net cost of meeting our credit obligations under these other environmental emissions programs was immaterial.

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of September 30, 2021 and December 31, 2020 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 13 for additional information related to the fair values of our derivative instruments.

As indicated in Note 13, 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 table, however, is 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						September 30, 2021												December 31, 2020
						Asset Derivatives						Liability Derivatives						Asset Derivatives						Liability Derivatives
Derivatives designated as hedging instruments:
Commodity contracts			Receivables, net						$	18					$	41					$	4					$	17
Derivatives not designated as hedging instruments:
Commodity contracts			Receivables, net						$	767					$	695					$	399					$	388
Physical purchase contracts			Inventories						6						5						13						—
Foreign currency contracts			Receivables, net						4						—						—						—
Foreign currency contracts			Accrued expenses						—						5						—						4
Total									$	777					$	705					$	412					$	392

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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						Three Months Ended September 30,												Nine Months Ended September 30,
2021						2020			2021						2020
Commodity contracts:
Gain (loss) recognized in other comprehensive income (loss) on derivatives						n/a						$	(21)					$	2					$	(52)					$	52
Gain (loss) reclassified from accumulated other comprehensive loss into income						Revenues						(3)						(3)						(37)						42

For cash flow hedges, no component of any derivative instrument’s gains or losses was excluded from the assessment of hedge effectiveness for the three and nine months ended September 30, 2021 and 2020. For the three and nine months ended September 30, 2021 and 2020, 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 September 30, 2021 was immaterial. For the three and nine months ended September 30, 2021 and 2020, 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 three and nine months ended September 30, 2021 and 2020 are described in Note 6.

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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						Three Months Ended September 30,												Nine Months Ended September 30,
2021						2020			2021						2020
Commodity contracts						Revenues						$	(7)					$	(4)					$	13					$	(3)
Commodity contracts						Cost of materials and other						6						118						(51)						106
Commodity contracts						Operating expenses (excluding depreciation and amortization expense)						(1)						—						2						2
Foreign currency contracts						Cost of materials and other						19						(6)						17						43
Foreign currency contracts						Other income, net						(28)						56						55						(49)