Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This Form 10-Q, including without limitation our disclosures below under the heading “OVERVIEW AND OUTLOOK*,*” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “scheduled,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “will,” “may,” “strive,” “seek,” “potential,” “opportunity,” “aimed,” “considering,” “continue,” and similar expressions.

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

the effect, impact, potential duration or timing, or other implications of the COVID-19 pandemic, government restrictions, requirements, or mandates in response thereto, variants of the COVID-19 virus, vaccine distribution and administration levels, economic activity, and global crude oil production levels, and any expectations we may have with respect thereto, including with respect to our responses thereto, our operations and the production levels of our assets;
future refining segment margins, including gasoline and distillate margins, and discounts;
future renewable diesel segment margins;
future ethanol segment margins;
expectations regarding feedstock costs, including crude oil differentials, product prices for each of our segments, and operating expenses;
anticipated levels of crude oil and refined petroleum product inventories and storage capacity;
expectations regarding the levels of, and timing with respect to, the production and operations at our existing refineries and plants and projects under construction;
our anticipated level of capital investments, including deferred turnaround and catalyst cost expenditures, our expected allocation between, and/or within, growth capital expenditures and maintenance capital expenditures, capital expenditures for environmental and other purposes, and joint venture investments, the expected timing applicable to such capital investments and any related projects, and the effect of those capital investments on our results of operations and financial position;
our anticipated level of cash distributions or contributions, such as our dividend payment rate and contributions to our qualified pension plans and other postretirement benefit plans;
our ability to meet future cash requirements, whether from funds generated from our operations or our ability to access financial markets effectively, and our ability to maintain sufficient liquidity;
our evaluation of, and expectations regarding, any future activity under our share repurchase program or transactions involving our debt securities;
anticipated trends in the supply of, and demand for, crude oil and other feedstocks and refined petroleum products, renewable diesel, and ethanol and corn related co-products in the regions where we operate, as well as globally;
expectations regarding environmental, tax, and other regulatory matters, including the anticipated amounts and timing of payment with respect to our deferred tax liabilities, matters impacting our ability to repatriate cash held by our foreign subsidiaries, and the anticipated effect thereof on our results of operations and financial position;
the effect of general economic and other conditions on refining, renewable diesel, and ethanol industry fundamentals;
expectations regarding our risk management activities, including the anticipated effects of our hedge transactions;
expectations regarding our counterparties, including our ability to pass on increased compliance costs and timely collect receivables, and the credit risk within our accounts receivable or accounts payable;
expectations regarding adoptions of new, or changes to existing, low-carbon fuel standards or policies, blending and tax credits, or efficiency standards that impact demand for renewable fuels; and
expectations regarding our publicly announced greenhouse gas (GHG) emissions reduction/offset targets and our current and any future carbon transition projects.

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

demand for, and supplies of, refined petroleum products (such as gasoline, diesel, jet fuel, and petrochemicals), renewable diesel, and ethanol and corn related co-products;
demand for, and supplies of, crude oil and other feedstocks;
the effects of public health threats, pandemics, and epidemics, such as the COVID-19 pandemic and variants of the virus, governmental and societal responses thereto, including requirements and mandates with respect to vaccines, vaccine distribution and administration levels, and the adverse impacts of the foregoing on our business, financial condition, results of operations, and liquidity, including, but not limited to, our growth, operating costs, administrative costs, supply chain, labor availability, logistical capabilities, customer demand for our products, and industry demand generally, margins, production and throughput capacity, utilization, inventory value, cash position, taxes, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally;
acts of terrorism aimed at either our refineries and plants or third-party facilities that could impair our ability to produce or transport refined petroleum products, renewable diesel, ethanol, or corn related co-products, to receive feedstocks, or otherwise operate efficiently;
political and economic conditions in nations that produce crude oil or other feedstocks or consume refined petroleum products, renewable diesel, ethanol or corn related co-products;
the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree on and to maintain crude oil price and production controls;
the level of consumer demand, consumption and overall economic activity, including seasonal fluctuations;
refinery, renewable diesel plant, or ethanol plant overcapacity or undercapacity;
our ability to successfully integrate any acquired businesses into our operations;
the risk that any divestitures may not provide the anticipated benefits or may result in unforeseen detriments;
the actions taken by competitors, including both pricing and adjustments to refining capacity or renewable fuels production in response to market conditions;
the level of competitors’ imports into markets that we supply;
accidents, unscheduled shutdowns, weather events, civil unrest, expropriation of assets, and other economic, diplomatic, legislative, or political events or developments, terrorism, cyberattacks, or other catastrophes or disruptions affecting our operations, production facilities, machinery, pipelines and other logistics assets, equipment, or information systems, or any of the foregoing of our suppliers, customers, or third-party service providers;
changes in the cost or availability of transportation or storage capacity for feedstocks and our products;
political pressure and influence of environmental groups and other stakeholders upon policies and decisions related to the production, transportation, storage, refining, processing, marketing, and sales of crude oil or other feedstocks, refined petroleum products, renewable diesel, ethanol, or corn related co-products;
the price, availability, technology related to, and acceptance of alternative fuels and alternative-fuel vehicles, as well as sentiment and perceptions with respect to GHG emissions more generally;
the levels of government subsidies for, and executive orders, mandates, or other policies with respect to, alternative fuels, alternative-fuel vehicles, and other low-carbon technologies or initiatives, including those related to carbon capture, carbon sequestration, and low-carbon fuels, or affecting the price of natural gas and/or electricity;
the volatility in the market price of biofuel credits (primarily RINs needed to comply with the RFS) and emission credits needed under the other environmental emissions programs;
delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;
earthquakes, hurricanes, tornadoes, and other weather events, which can unforeseeably affect the price or availability of electricity, natural gas, crude oil, rendered and recycled materials, corn, and other feedstocks, critical supplies, refined petroleum products, renewable diesel, and ethanol;
rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by governmental authorities, such as tariffs, environmental regulations, changes to income tax rates, introduction of a global minimum tax, tax changes or restrictions impacting the foreign repatriation of cash, actions implemented under the biofuel programs and the other environmental emissions programs, including changes to volume requirements or other obligations or exemptions under the RFS, and actions arising from the U.S. Environmental Protection Agency’s or other governmental agencies’ regulations, policies, or initiatives concerning GHGs, including mandates for or bans of specific technology, which may adversely affect our business or operations;
changing economic, regulatory, and political environments and related events in the various countries in which we operate or otherwise do business, including expropriation or impoundment of assets, failure of foreign governments and state-owned entities to honor their contracts, property disputes, and decisions, investigations, regulations, issuances or revocations of permits and other authorizations, and other actions, policies and initiatives by the states, counties, cities, and other jurisdictions in the countries in which we operate or otherwise do business;
changes in the credit ratings assigned to our debt securities and trade credit;
the operating, financing, and distribution decisions of our joint ventures or joint venture partners that we do not control;
changes in currency exchange rates, including the value of the Canadian dollar, the pound sterling, the euro, the Mexican peso, and the Peruvian sol relative to the U.S. dollar;
the adequacy of capital resources and liquidity, including availability, timing, and amounts of cash flow or our ability to borrow or access financial markets;
the costs, disruption, and diversion of resources associated with campaigns and negative publicity commenced by investors, stakeholders, or other interested parties;
overall economic conditions, including the stability and liquidity of financial markets; and
other factors generally described in the “Risk Factors” section included in our annual report on Form 10-K for the year ended December 31, 2020.

Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those expressed, suggested, or forecast in any forward-looking statements. Such forward-looking statements speak only as of the date of this quarterly report on Form 10-Q and we do not intend to update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing, as it may be updated or modified by our future filings with the U.S. Securities and Exchange Commission (SEC). We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events unless we are required by the securities laws to do so.

NON-GAAP FINANCIAL MEASURES

The discussions in “OVERVIEW AND OUTLOOK,” “RESULTS OF OPERATIONS,” and “LIQUIDITY AND CAPITAL RESOURCES” below include references to financial measures that are not defined under U.S. GAAP. These non-GAAP financial measures include adjusted operating income (loss) (including adjusted operating income (loss) for each of our reportable segments, as applicable); refining, renewable diesel, and ethanol segment margin; and capital investments attributable to Valero. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods, to help assess our cash flows, and because we believe they provide useful information as discussed further below. See the tables in note (g) beginning on page 57 for reconciliations of adjusted operating income (loss) (including adjusted operating income (loss) for each of our reportable segments, as applicable) and refining, renewable diesel, and ethanol segment margin to their most directly comparable U.S. GAAP financial measures. Also in note (g), we disclose the reasons why we believe our use of such non-GAAP financial measures provides useful information. See the table on page 64 for a reconciliation of capital investments attributable to Valero to its most directly comparable U.S. GAAP financial measure. Beginning on page 63, we disclose the reasons why we believe our use of this non-GAAP financial measure provides useful information.

IMPACT OF THE COVID-19 PANDEMIC TO OUR BUSINESS

The COVID-19 pandemic has negatively impacted our business. Although we have experienced improvements in 2021, the broader implications of the pandemic on our results of operations and financial position remain uncertain. Information about the uncertainties of the COVID-19 pandemic on our business is discussed in Note 2 of Condensed Notes to Consolidated Financial Statements.

OVERVIEW AND OUTLOOK

Overview

Business Operations Update

Our business continued to recover throughout the third quarter of 2021 as a result of ongoing improvements in the demand for and market prices of refined petroleum products, primarily gasoline and diesel, with demand for these products near pre-pandemic levels for most of the first nine months of 2021, and we have recently experienced demand for diesel well in excess of pre-pandemic levels. Jet fuel demand has also continued to improve throughout the third quarter and first nine months of 2021, although at a slower pace than other products we produce relative to pre-pandemic levels. These ongoing improvements in demand and an associated increase in refining margins contributed to us reporting net income attributable to Valero stockholders of $463 million for the third quarter of 2021.

Refining margins have improved more slowly than demand over the first nine months of 2021, although the improvement has been more significant during the third quarter of 2021 as refined product inventories continued to fall, especially in the U.S. In fact, U.S. refined product inventories are at five-year lows due to the effect of increased demand, the impact from lower production resulting from a portion of U.S. Gulf Coast refining capacity being offline in late August and most of September 2021 because of Hurricane Ida, and the impact of lower imports from Europe as rising natural gas prices in Europe have made their supply less economic. Renewable diesel margins have remained strong over the first nine months of 2021 due to continued demand for this low-carbon transportation fuel. However, our renewable diesel operations were negatively impacted during the third quarter of 2021 as a result of Hurricane Ida. We shut down two refineries and our renewable diesel plant in Louisiana in preparation for the storm, and although the refineries and the plant sustained minimal damage, we were delayed from restarting operations until electrical supply and other utilities were restored and from shipping product to our customers until the Mississippi River was reopened to ship and barge traffic.

While we reported positive earnings for the third quarter of 2021, we generated a net loss attributable to Valero stockholders of $79 million for the first nine months of 2021. The factor primarily impacting the nine-month results was a significant increase in the cost of electricity and natural gas at certain of our refineries and ethanol plants arising out of Winter Storm Uri. We incurred excess energy costs estimated at $579 million, or $467 million after taxes, in February 2021.

Our results of operations for the third quarter and the first nine months of 2021 are more fully discussed in “Third Quarter Results” and “First Nine Months Results” below and in “RESULTS OF OPERATIONS” beginning on page 41.

Despite the lingering, but improving, impacts of the pandemic on our operations, the negative effects arising out of Winter Storm Uri on energy costs at certain of our refineries and ethanol plants, and the negative effects of Hurricane Ida on our renewable diesel operations, our operations generated $3.4 billion of cash during the first nine months of 2021. Approximately a quarter of that amount, however, was due to the receipt of our 2020 U.S. federal income tax refund of $962 million. In addition, we received proceeds of $270 million from the sale of a partial interest in MVP in April 2021, made $1.7 billion in capital investments, redeemed the total outstanding balance of our $575 million Floating Rate Notes due in 2023, and paid $1.2 billion in dividends during the nine-month period. As a result of this and other activity, our cash and cash equivalents increased by $185 million, from $3.3 billion as of December 31, 2020 to $3.5 billion as of September 30, 2021. We did not issue any debt or make any borrowings under our credit facilities (excluding activity with respect to the committed facilities of our VIEs) during the first nine months of 2021, and we had $8.5 billion in liquidity as of September 30, 2021.

The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found under “LIQUIDITY AND CAPITAL RESOURCES” beginning on page 61.

Third Quarter Results

For the third quarter of 2021, we reported net income attributable to Valero stockholders of $463 million compared to a net loss of $464 million for the third quarter of 2020. The increase of $927 million was primarily due to higher operating income of $1.3 billion, partially offset by higher income tax expense of $402 million.

While our operating income increased by $1.3 billion in the third quarter of 2021 compared to the third quarter of 2020, adjusted operating income also increased by $1.3 billion. Adjusted operating income excludes the adjustments reflected in the table in note (g) on page 60.

The $1.3 billion increase in adjusted operating income was primarily due to the following:

Refining segment. Refining segment adjusted operating income increased by $1.4 billion primarily due to higher gasoline and distillate (primarily diesel) margins and higher throughput volumes, partially offset by the higher costs of biofuel credits and higher operating expenses (excluding depreciation and amortization expense). This is more fully described on pages 45 and 46.
Renewable diesel segment. Renewable diesel segment adjusted operating income decreased by $75 million primarily due to higher feedstock costs and lower sales volumes, partially offset by higher renewable diesel prices. This is more fully described on pages 46 and 47.
Ethanol segment. Ethanol segment adjusted operating income decreased by $32 million primarily due to higher corn prices and higher operating expenses (excluding depreciation and amortization expense), partially offset by higher ethanol and corn related co-product prices. This is more fully described on pages 47 and 48.

First Nine Months Results

For the first nine months of 2021, we reported a net loss attributable to Valero stockholders of $79 million compared to $1.1 billion for the first nine months of 2020. The improvement of $983 million was primarily due to higher operating income of $1.6 billion, partially offset by higher income tax expense of $700 million. The increase in operating income included the favorable effect from a $326 million charge recognized in the first nine months of 2020 for the expected liquidation of LIFO inventory layers, which is described in Note 3 of Condensed Notes to Consolidated Financial Statements.

While our operating income increased by $1.6 billion in the first nine months of 2021 compared to the first nine months of 2020, adjusted operating income increased by $1.4 billion. Adjusted operating income excludes the adjustments reflected in the table in note (g) on page 60.

The $1.4 billion increase in adjusted operating income was primarily due to the following:

Refining segment. Refining segment adjusted operating income increased by $1.3 billion primarily due to higher margins on gasoline, distillates (primarily diesel), and other products and higher throughput volumes, partially offset by the higher costs of biofuel credits, lower discounts

on crude oils, and estimated excess energy costs arising out of Winter Storm Uri. This is more fully described on pages 52 and 53.

Renewable diesel segment. Renewable diesel segment adjusted operating income increased by $49 million primarily due to higher renewable diesel prices, partially offset by higher feedstock costs, an unfavorable impact from commodity derivative instruments associated with our price risk management activities, lower sales volumes, and higher operating expenses (excluding depreciation and amortization expense). This is more fully described on pages 54 and 55.
Ethanol segment. Ethanol segment adjusted operating income increased by $100 million primarily due to higher ethanol and corn related co-product prices and higher production volumes, partially offset by higher corn prices and estimated excess energy costs arising out of Winter Storm Uri. This is more fully described on pages 55 and 56.

Outlook

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

Gasoline and diesel product demand has returned to near pre-pandemic levels and is expected to follow typical seasonal patterns. Jet fuel demand continues to slowly improve but remains below pre-pandemic levels.
Sour crude oil discounts are expected to continue to improve as OPEC production increases in response to anticipated continued growth in global crude oil demand.
Renewable diesel margins are expected to moderate somewhat from the levels achieved in the third quarter; however, these effects may be offset by an expected increase in sales volumes following the start up in October 2021 of the expansion of DGD’s renewable diesel plant in Louisiana. The plant’s renewable diesel production capacity was recently expanded by 400 million gallons per year, from 290 million gallons to 690 million gallons per year.
Ethanol margins are expected to improve due to lower corn prices.

RESULTS OF OPERATIONS

The following tables, including the reconciliations of non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures in note (g) beginning on page 57, highlight our results of operations, our operating performance, and market reference prices and margins that directly impact our operations.

Third Quarter Results -

Financial Highlights By Segment and Total Company

(millions of dollars)


	Three Months Ended September 30, 2021
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
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 (d)	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
Other income, net									32
Interest and debt expense, net of capitalized interest									(152)
Income before income tax expense									573
Income tax expense									65
Net income									508
Less: Net income attributable to noncontrolling interests									45
Net income attributable to Valero Energy Corporation stockholders									$	463

See note references on pages 56 through 60.

Third Quarter Results -

Financial Highlights By Segment and Total Company (continued)

(millions of dollars)


	Three Months Ended September 30, 2020
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
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 (b)	14,103		128		670		(100)		14,801
LCM inventory valuation adjustment (c)	(296)		—		(17)		—		(313)
Operating expenses (excluding depreciation and amortization expense reflected below)	989		23		105		—		1,117
Depreciation and amortization expense (d)	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)
Other income, net									48
Interest and debt expense, net of capitalized interest									(143)
Loss before income tax benefit									(716)
Income tax benefit									(337)
Net loss									(379)
Less: Net income attributable to noncontrolling interests									85
Net loss attributable to Valero Energy Corporation stockholders									$	(464)

See note references on pages 56 through 60.

Third Quarter Results -

Average Market Reference Prices and Differentials


	Three Months Ended September 30,
	2021		2020		Change
Refining
Feedstocks (dollars per barrel)
Brent crude oil	$	73.22	$	43.38	$	29.84
Brent less West Texas Intermediate (WTI) crude oil	2.64		2.47		0.17
Brent less Alaska North Slope (ANS) crude oil	0.49		0.64		(0.15)
Brent less Louisiana Light Sweet (LLS) crude oil	1.72		0.88		0.84
Brent less Argus Sour Crude Index (ASCI) crude oil	4.52		1.71		2.81
Brent less Maya crude oil	7.01		4.19		2.82
LLS crude oil	71.51		42.50		29.01
LLS less ASCI crude oil	2.81		0.83		1.98
LLS less Maya crude oil	5.30		3.31		1.99
WTI crude oil	70.58		40.91		29.67

Natural gas (dollars per million British Thermal Units (MMBtu))	4.25		1.99		2.26

Product margins (dollars per barrel)
U.S. Gulf Coast:
Conventional Blendstock of Oxygenate Blending (CBOB) gasoline less Brent	16.90		4.96		11.94
Ultra-low-sulfur (ULS) diesel less Brent	14.15		5.19		8.96
Propylene less Brent	(5.21)		(12.69)		7.48
CBOB gasoline less LLS	18.61		5.84		12.77
ULS diesel less LLS	15.86		6.07		9.79
Propylene less LLS	(3.50)		(11.81)		8.31
U.S. Mid-Continent:
CBOB gasoline less WTI	20.84		8.17		12.67
ULS diesel less WTI	19.37		8.54		10.83
North Atlantic:
CBOB gasoline less Brent	20.82		8.08		12.74
ULS diesel less Brent	16.32		6.79		9.53
U.S. West Coast:
California Reformulated Gasoline Blendstock of Oxygenate Blending (CARBOB) 87 gasoline less ANS	27.49		13.19		14.30
California Air Resources Board (CARB) diesel less ANS	18.55		9.34		9.21
CARBOB 87 gasoline less WTI	29.64		15.02		14.62
CARB diesel less WTI	20.70		11.17		9.53

Third Quarter Results -

Average Market Reference Prices and Differentials, (continued)


	Three Months Ended September 30,
	2021		2020		Change
Renewable diesel
New York Mercantile Exchange ULS diesel (dollars per gallon)	$	2.13	$	1.20	$	0.93
Biodiesel RIN (dollars per RIN)	1.60		0.67		0.93
California Low-Carbon Fuel Standard (dollars per metric ton)	175.75		195.60		(19.85)
Chicago Board of Trade (CBOT) soybean oil (dollars per pound)	0.62		0.32		0.30

Ethanol
CBOT corn (dollars per bushel)	5.58		3.40		2.18
New York Harbor ethanol (dollars per gallon)	2.37		1.46		0.91

Total Company, Corporate, and Other

The following table includes selected financial data for the total company, corporate, and other for the third quarter of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 41 and 42, unless otherwise noted.


	Three Months Ended September 30,
	2021		2020		Change
Revenues	$	29,520	$	15,809	$	13,711
Cost of sales (see note (b) on page 56)	28,602		16,207		12,395




Operating income (loss)	693		(621)		1,314
Adjusted operating income (loss) (see note (g) on page 60)	760		(553)		1,313


Income tax expense (benefit)	65		(337)		402
Net income attributable to noncontrolling interests	45		85		(40)

Revenues increased by $13.7 billion in the third quarter of 2021 compared to the third quarter of 2020 primarily due to increases in refined petroleum product prices, as well as an increase in the volume of refined petroleum products sold by our refining segment. This increase in revenues was partially offset by an increase in cost of sales of $12.4 billion primarily due to increases in crude oil and other feedstock costs, resulting in a $1.3 billion increase in operating income, from an operating loss of $621 million in the third quarter of 2020 to operating income of $693 million in the third quarter of 2021.

Adjusted operating income also increased by $1.3 billion, from an adjusted operating loss of $553 million in the third quarter of 2020 to adjusted operating income of $760 million in the third quarter of 2021. The components of this increase in adjusted operating income are discussed by segment in the segment analyses that follow.

Income tax expense increased by $402 million in the third quarter of 2021 compared to the third quarter of 2020 primarily as a result of higher income before income tax expense. Our effective tax rate was 11 percent for the third quarter of 2021, which primarily reflects the permanent benefit to our estimated annual effective tax rate from the portion of DGD’s net income that is not taxable to us and a benefit for the settlement of the audits of certain state tax returns in the third quarter of 2021, compared to 47 percent

for the third quarter of 2020. The effective tax rate for the third quarter of 2020 was impacted by the U.S. federal tax NOL for 2020, which was carried back to 2015 when the U.S. statutory rate was 35 percent. See Note 9 of Condensed Notes to Consolidated Financial Statements for additional information on these tax matters.

Net income attributable to noncontrolling interests decreased by $40 million in the third quarter of 2021 compared to the third quarter of 2020 primarily due to lower earnings associated with DGD. As described in Note 7 of Condensed Notes to Consolidated Financial Statements, DGD is a joint venture that we consolidate, and DGD’s operations comprise our renewable diesel segment. See the renewable diesel segment analysis below for the reasons for the lower earnings associated with DGD.

Refining Segment Results

The following table includes selected financial and operating data of our refining segment for the third quarter of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 41 and 42, respectively, unless otherwise noted.


	Three Months Ended September 30,
	2021		2020		Change




Operating income (loss)	$	835	$	(629)	$	1,464
Adjusted operating income (loss) (see note (g) on page 59)	853		(575)		1,428

Refining margin (see note (g) on page 57)	$	2,597	$	952	$	1,645
Operating expenses (excluding depreciation and amortization expense reflected below)	1,195		989		206
Depreciation and amortization expense	549		538		11

Throughput volumes (thousand barrels per day) (see note (h) on page 60)	2,864		2,526		338

Refining segment operating income increased by $1.5 billion in the third quarter of 2021; however, refining segment adjusted operating income, which excludes the adjustments in the table in note (g) on page 59, increased by $1.4 billion in the third quarter of 2021 compared to the third quarter of 2020. The components of this increase in the adjusted results, along with the reasons for the changes in those components, are outlined below.

Refining segment margin increased by $1.6 billion in the third quarter of 2021 compared to the third quarter of 2020.

Refining segment margin is primarily affected by the prices of the refined petroleum products that we sell and the cost of crude oil and other feedstocks that we process. The table on page 43 reflects market reference prices and differentials that we believe had a material impact on the change in our refining segment margin in the third quarter of 2021 compared to the third quarter of 2020.

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

◦An increase in gasoline margins had a favorable impact of approximately $1.1 billion.

◦An increase in distillate (primarily diesel) margins had a favorable impact of approximately $645 million.

◦An increase in throughput volumes of 338,000 barrels per day had a favorable impact of approximately $127 million. As noted in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 38 and 39, the impacts of the COVID-19 pandemic have continued to subside so far in 2021. As a result, we have increased production of most of our products at our refineries to align with improvements in demand.

◦An increase in the cost of biofuel credits (primarily RINs in the U.S.) had an unfavorable impact of $475 million. See Note 14 of Condensed Notes to Consolidated Financial Statements for additional information on our government and regulatory compliance programs.

*•*Refining segment operating expenses (excluding depreciation and amortization expense) increased by $206 million primarily due to higher natural gas and electricity costs of $129 million, an increase in certain employee compensation expenses of $27 million, and higher chemical and catalyst costs of $14 million.

Renewable Diesel Segment Results

The following table includes selected financial and operating data of our renewable diesel segment for the third quarter of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 41 and 42, respectively, unless otherwise noted.


	Three Months Ended September 30,
	2021		2020		Change


Operating income	$	108	$	184	$	(76)
Adjusted operating income (see note (g) on page 59)	109		184		(75)

Renewable diesel margin (see note (g) on page 58)	$	146	$	217	$	(71)
Operating expenses (excluding depreciation and amortization expense reflected below)	26		23		3
Depreciation and amortization expense	11		10		1

Sales volumes (thousand gallons per day) (see note (h) on page 60)	671		870		(199)

Renewable diesel segment operating income decreased by $76 million in the third quarter of 2021, and renewable diesel segment adjusted operating income, which excludes the adjustment in the table in note (g) on page 59, decreased by $75 million in the third quarter of 2021 compared to the third quarter of 2020. This decrease in the adjusted results was primarily due to lower renewable diesel segment margin.

Renewable diesel segment margin decreased by $71 million in the third quarter of 2021 compared to the third quarter of 2020. Renewable diesel segment margin is primarily affected by the price of the renewable diesel that we sell and the cost of the feedstocks that we process. The table on page 44 reflects market reference prices that we believe had a material impact on the change in our renewable diesel segment margin in the third quarter of 2021 compared to the third quarter of 2020.

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

An increase in the cost of the feedstocks we process had an unfavorable impact of approximately $139 million.
A decrease in sales volumes of 199,000 gallons per day primarily attributed to unplanned downtime at the DGD plant due to Hurricane Ida had an unfavorable impact of approximately $52 million. See “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 38 and 39 for further discussion of the impact of Hurricane Ida on our renewable diesel segment.
Higher renewable diesel prices had a favorable impact of approximately $131 million.

Ethanol Segment Results

The following table includes selected financial and operating data of our ethanol segment for the third quarter of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 41 and 42, respectively, unless otherwise noted.


	Three Months Ended September 30,
	2021		2020		Change



Operating income (loss)	$	(44)	$	22	$	(66)
Adjusted operating income (see note (g) on page 59)	4		36		(32)

Ethanol margin (see note (g) on page 58)	$	154	$	165	$	(11)
Operating expenses (excluding depreciation and amortization expense reflected below)	128		105		23
Depreciation and amortization expenses (see note (d) on page 56)	70		54		16

Production volumes (thousand gallons per day) (see note (h) on page 60)	3,625		3,800		(175)

Ethanol segment operating income decreased by $66 million in the third quarter of 2021; however, ethanol segment adjusted operating income, which excludes the adjustments in the table in note (g) on page 59, decreased by $32 million in the third quarter of 2021 compared to the third quarter of 2020. The components of this decrease in the adjusted results, along with the reasons for the changes in those components, are outlined below.

Ethanol segment margin decreased by $11 million in the third quarter of 2021 compared to the third quarter of 2020.

Ethanol segment margin is primarily affected by prices of the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 44 reflects market reference prices that we believe had a material impact on the change in our ethanol segment margin in the third quarter of 2021 compared to the third quarter of 2020.

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

◦Higher corn prices had an unfavorable impact of approximately $406 million.

◦Higher ethanol prices had a favorable impact of approximately $318 million.

◦Higher prices on the co-products that we produce, primarily distillers grains, had a favorable impact of approximately $77 million.

Ethanol segment operating expenses (excluding depreciation and amortization expense) increased by $23 million primarily due to higher natural gas and electricity costs.

First Nine Months Results -

Financial Highlights By Segment and Total Company

(millions of dollars)


	Nine Months Ended September 30, 2021
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
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 (a)	67,417		724		3,204		(480)		70,865

Operating expenses (excluding depreciation and amortization expense reflected below) (a)	3,730		86		403		(1)		4,218
Depreciation and amortization expense (d)	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
Other income, net (e)									179
Interest and debt expense, net of capitalized interest									(451)
Income before income tax expense									264
Income tax expense (f)									86
Net income									178
Less: Net income attributable to noncontrolling interests									257
Net loss attributable to Valero Energy Corporation stockholders									$	(79)

See note references on pages 56 through 60.

First Nine Months Results -

Financial Highlights By Segment and Total Company (continued)

(millions of dollars)


	Nine Months Ended September 30, 2020
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
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 (b)	41,769		393		1,984		(314)		43,832
LCM inventory valuation adjustment (c)	(19)		—		—		—		(19)
Operating expenses (excluding depreciation and amortization expense reflected below)	2,912		63		293		—		3,268
Depreciation and amortization expense (d)	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)
Other income, net									107
Interest and debt expense, net of capitalized interest									(410)
Loss before income tax benefit									(1,412)
Income tax benefit									(614)
Net loss									(798)
Less: Net income attributable to noncontrolling interests									264
Net loss attributable to Valero Energy Corporation stockholders									$	(1,062)

See note references on pages 56 through 60.

First Nine Months Results -

Average Market Reference Prices and Differentials


	Nine Months Ended September 30,
	2021		2020		Change
Refining
Feedstocks (dollars per barrel)
Brent crude oil	$	67.77	$	42.50	$	25.27
Brent less WTI crude oil	2.94		4.27		(1.33)
Brent less ANS crude oil	0.46		1.00		(0.54)
Brent less LLS crude oil	1.29		2.20		(0.91)
Brent less ASCI crude oil	3.62		3.62		—
Brent less Maya crude oil	5.95		7.66		(1.71)
LLS crude oil	66.48		40.30		26.18
LLS less ASCI crude oil	2.33		1.42		0.91
LLS less Maya crude oil	4.66		5.46		(0.80)
WTI crude oil	64.84		38.23		26.61

Natural gas (dollars per MMBtu)	8.95		1.82		7.13

Product margins (dollars per barrel)
U.S. Gulf Coast:
CBOB gasoline less Brent	13.82		2.61		11.21
ULS diesel less Brent	12.44		7.11		5.33
Propylene less Brent	(2.37)		(15.48)		13.11
CBOB gasoline less LLS	15.11		4.81		10.30
ULS diesel less LLS	13.73		9.31		4.42
Propylene less LLS	(1.08)		(13.28)		12.20
U.S. Mid-Continent:
CBOB gasoline less WTI	18.53		7.35		11.18
ULS diesel less WTI	18.33		12.41		5.92
North Atlantic:
CBOB gasoline less Brent	16.58		5.13		11.45
ULS diesel less Brent	14.43		9.34		5.09
U.S. West Coast:
CARBOB 87 gasoline less ANS	23.08		10.15		12.93
CARB diesel less ANS	15.99		12.31		3.68
CARBOB 87 gasoline less WTI	25.55		13.42		12.13
CARB diesel less WTI	18.47		15.58		2.89

First Nine Months Results -

Average Market Reference Prices and Differentials, (continued)


	Nine Months Ended September 30,
	2021		2020		Change
Renewable diesel
New York Mercantile Exchange ULS diesel (dollars per gallon)	$	1.96	$	1.24	$	0.72
Biodiesel RIN (dollars per RIN)	1.49		0.56		0.93
California Low-Carbon Fuel Standard (dollars per metric ton)	185.29		200.88		(15.59)
CBOT soybean oil (dollars per pound)	0.58		0.30		0.28

Ethanol
CBOT corn (dollars per bushel)	5.85		3.46		2.39
New York Harbor ethanol (dollars per gallon)	2.18		1.32		0.86

Total Company, Corporate, and Other

The following table includes selected financial data for the total company, corporate, and other for the first nine months of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 48 and 49, unless otherwise noted.


	Nine Months Ended September 30,
	2021		2020		Change
Revenues	$	78,074	$	48,308	$	29,766
Cost of materials and other (see notes (a) and (b) on page 56)	70,865		43,832		27,033

Operating expenses (excluding depreciation and amortization expense) (see note (a) on page 56)	4,218		3,268		950
LIFO liquidation adjustment (see note (b) on page 56)	—		326		(326)
General and administrative expenses (excluding depreciation and amortization expense)	579		532		47


Operating income (loss)	536		(1,109)		1,645
Adjusted operating income (loss) (see note (g) on page 60)	653		(742)		1,395
Other income, net (see note (e) on page 56)	179		107		72
Interest and debt expense, net of capitalized interest	(451)		(410)		(41)
Income tax expense (benefit) (see note (f) on page 57)	86		(614)		700
Net income attributable to noncontrolling interests	257		264		(7)

Revenues increased by $29.8 billion in the first nine months of 2021 compared to the first nine months of 2020 primarily due to increases in refined petroleum product prices associated with sales made by our refining segment. This increase in revenues was partially offset by an increase in cost of materials and other of $27.0 billion primarily due to increases in crude oil and other feedstock costs, higher operating expenses (excluding depreciation and amortization expense) of $950 million primarily due to estimated excess energy costs of $532 million arising out of Winter Storm Uri, and an increase in general and administrative expenses (excluding depreciation and amortization expense) of $47 million primarily due to an increase in certain employee compensation expenses of $36 million and higher advertising expenses of $11 million. The increase in cost of materials and other was partially offset by the favorable effect from a $326 million LIFO liquidation adjustment in the first nine months of 2020. These changes resulted

in a $1.6 billion increase in operating income, from an operating loss of $1.1 billion in the first nine months of 2020 to operating income of $536 million in the first nine months of 2021.

Adjusted operating income increased by $1.4 billion, from an adjusted operating loss of $742 million in the first nine months of 2020 to adjusted operating income of $653 million in the first nine months of 2021. The components of this $1.4 billion increase in adjusted operating income are discussed by segment in the segment analyses that follow.

“Other income, net” increased by $72 million in the first nine months of 2021 compared to the first nine months of 2020 primarily due to the gain of $62 million on the sale of a 24.99 percent membership interest in MVP, partially offset by an asset impairment loss of $24 million resulting from the cancellation of a pipeline extension project by our unconsolidated joint venture, Diamond Pipeline LLC. These matters are more fully described in note (e) on page 56.

“Interest and debt expense, net of capitalized interest” increased by $41 million in the first nine months of 2021 compared to the first nine months of 2020 primarily due to interest expense associated with $4.0 billion aggregate principal amount of debt we issued in public debt offerings in 2020. See Note 5 of Condensed Notes to Consolidated Financial Statements for additional details.

Income tax expense increased by $700 million in the first nine months of 2021 compared to the first nine months of 2020 primarily as a result of a higher income before income tax expense. In addition, the increase in income tax expense was impacted by a $64 million charge, which resulted from certain statutory tax rate changes, as discussed in note (f) on page 57, as well as the effect of a benefit in the first nine months of 2020 of $238 million associated with the U.S. federal tax NOL for 2020, which was carried back to 2015 when the U.S. federal statutory rate was 35 percent. See Note 9 of Condensed Notes to Consolidated Financial Statements for additional information on these tax matters.

Refining Segment Results

The following table includes selected financial and operating data of our refining segment for the first nine months of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 48 and 49, respectively, unless otherwise noted.


	Nine Months Ended September 30,
	2021		2020		Change
Operating income (loss)	$	592	$	(965)	$	1,557
Adjusted operating income (loss) (see note (g) on page 59)	660		(629)		1,289

Refining margin (see note (g) on page 57)	$	6,016	$	3,890	$	2,126
Operating expenses (excluding depreciation and amortization expense reflected below) (see notes (a) on page 56)	3,730		2,912		818

Depreciation and amortization expense	1,626		1,607		19

Throughput volumes (thousand barrels per day) (see note (h) on page 60)	2,705		2,557		148

Refining segment operating income increased by $1.6 billion in the first nine months of 2021; however, refining segment adjusted operating income, which excludes the adjustments in the table in note (g) on page 59, increased by $1.3 billion in the first nine months of 2021 compared to the first nine months of

The components of this increase in the adjusted results, along with the reasons for the changes in those components, are outlined below.

Refining segment margin increased by $2.1 billion in the first nine months of 2021 compared to the first nine months of 2020.

Refining segment margin is primarily affected by the prices of the refined petroleum products that we sell and the cost of crude oil and other feedstocks that we process. The table on page 50 reflects market reference prices and differentials that we believe had a material impact on the change in our refining segment margin in the first nine months of 2021 compared to the first nine months of 2020.

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

◦An increase in gasoline margins had a favorable impact of approximately $2.8 billion.

◦An increase in distillate (primarily diesel) margins had a favorable impact of approximately $890 million.

◦Higher margins on other products had a favorable impact of approximately $349 million.

◦An increase in throughput volumes of 148,000 barrels per day had a favorable impact of approximately $224 million. As noted in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 38 and 39, the impacts of the COVID-19 pandemic have continued to subside so far in 2021. As a result, we have increased production of most of our products at our refineries to align with improvements in demand.

◦An increase in the cost of biofuel credits (primarily RINs in the U.S.) had an unfavorable impact of $1.2 billion. See Note 14 of Condensed Notes to Consolidated Financial Statements for additional information on our government and regulatory compliance programs.

◦Lower discounts on crude oils had an unfavorable impact of approximately $1.2 billion.

*•*Refining segment operating expenses (excluding depreciation and amortization expense) increased by $818 million primarily due to higher energy costs, which includes the effect of estimated excess energy costs arising out of Winter Storm Uri of $478 million (see note (a) on page 56).

Renewable Diesel Segment Results

The following table includes selected financial and operating data of our renewable diesel segment for the first nine months of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 48 and 49, respectively, unless otherwise noted.


	Nine Months Ended September 30,
	2021		2020		Change
Operating income	$	559	$	511	$	48
Adjusted operating income (see note (g) on page 59)	560		511		49

Renewable diesel margin (see note (g) on page 58)	$	681	$	607	$	74
Operating expenses (excluding depreciation and amortization expense reflected below)	86		63		23
Depreciation and amortization expense	35		33		2

Sales volumes (thousand gallons per day) (see note (h) on page 60)	819		844		(25)

Renewable diesel segment operating income increased by $48 million in the first nine months of 2021; however, renewable diesel segment adjusted operating income, which excludes the adjustment in the table in note (g) on page 59, increased by $49 million in the first nine months of 2021 compared to the first nine months of 2020. The components of this increase in the adjusted results, along with the reasons for the changes in those components, are outlined below.

Renewable diesel segment margin increased by $74 million in the first nine months of 2021 compared to the first nine months of 2020. Renewable diesel segment margin is primarily affected by the price of the renewable diesel that we sell and the cost of the feedstocks that we process. The table on page 51 reflects market reference prices that we believe had a material impact on the change in our renewable diesel segment margin in the first nine months of 2021 compared to the first nine months of 2020.

The increase in renewable diesel segment margin was primarily due to the following:

◦Higher renewable diesel prices had a favorable impact of approximately $504 million.

◦An increase in the cost of the feedstocks we process had an unfavorable impact of approximately $294 million.

◦Price risk management activities had an unfavorable impact of $79 million. We recognized a hedge loss of $37 million in the first nine months of 2021 compared to a hedge gain of $42 million in the first nine months of 2020.

◦A decrease in sales volumes of 25,000 gallons per day primarily attributed to unplanned downtime at the DGD plant due to Hurricane Ida had an unfavorable impact of approximately $25 million. See “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 38 and 39 for further discussion of the impact of Hurricane Ida on our renewable diesel segment.

Renewable diesel segment operating expenses (excluding depreciation and amortization expense) increased by $23 million primarily due to higher maintenance expenses of $7 million, an increase in certain employee compensation expenses of $7 million, and higher chemical and catalyst costs of $2 million.

Ethanol Segment Results

The following table includes selected financial and operating data of our ethanol segment for the first nine months of 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables on pages 48 and 49, respectively, unless otherwise noted.


	Nine Months Ended September 30,
	2021		2020		Change
Operating loss	$	(1)	$	(84)	$	83
Adjusted operating income (loss) (see note (g) on page 59)	47		(53)		100

Ethanol margin (see note (g) on page 58)	$	513	$	307	$	206
Operating expenses (excluding depreciation and amortization expense reflected below) (see note (a) on page 56)	403		293		110
Depreciation and amortization expense (see note (d) on page 56)	111		97		14

Production volumes (thousand gallons per day) (see note (h) on page 60)	3,797		3,408		389

The ethanol segment operating loss decreased by $83 million in the first nine months of 2021; however, ethanol segment adjusted operating income, which excludes the adjustments in the table in note (g) on page 59, increased by $100 million in the first nine months of 2021 compared to the first nine months of 2020. The components of this increase in the adjusted results, along with the reasons for the changes in those components, are outlined below.

Ethanol segment margin increased by $206 million in the first nine months of 2021 compared to the first nine months of 2020.

Ethanol segment margin is primarily affected by prices of the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 51 reflects market reference prices that we believe had a material impact on the change in our ethanol segment margin in the first nine months of 2021 compared to the first nine months of 2020.

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

◦Higher ethanol prices had a favorable impact of approximately $490 million.

◦Higher prices on the co-products that we produce, primarily distillers grains, had a favorable impact of approximately $152 million.

◦An increase in production volumes of 389,000 gallons per day had a favorable impact of approximately $66 million. As noted in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update” on pages 38 and 39, the impacts of the COVID-19

pandemic have continued to subside so far in 2021. As a result, we have increased the aggregate production of ethanol across our plants to align with improvements in demand.

◦Higher corn prices had an unfavorable impact of approximately $489 million.

Ethanol segment operating expenses (excluding depreciation and amortization expense) increased by $110 million primarily due to higher energy costs, which includes the effect of estimated excess energy costs arising out of Winter Storm Uri of $54 million (see note (a) on page 56).

The following notes relate to references on pages 37 through 56.

(a)In mid-February 2021, many of our refineries and plants were impacted to varying extents by the severe cold, utility disruptions, and higher energy costs arising out of Winter Storm Uri. The higher energy costs resulted from an increase in the prices of natural gas and electricity that significantly exceeded rates that we consider normal, such as the average rates we incurred the month preceding the storm. As a result, our operating income for the nine months ended September 30, 2021 includes estimated excess energy costs of $579 million.

The above-mentioned pre-tax estimated excess energy charge is reflected in our statement of income line items and attributable to our reportable segments as follows (in millions):


	Refining		Renewable Diesel		Ethanol		Total
Cost of materials and other	$	47	$	—	$	—	$	47
Operating expenses (excluding depreciation and amortization expense)	478		—		54		532
Total estimated excess energy costs	$	525	$	—	$	54	$	579

(b)Cost of materials and other for the three and nine months ended September 30, 2020 includes a charge of $326 million for the impact of an expected liquidation of LIFO inventory layers attributable to our refining segment. Our inventory levels decreased throughout the first nine months of 2020 due to lower demand for our products resulting from the negative economic impacts of the COVID-19 pandemic on our business. Consequently, we expected our inventory levels as of December 31, 2020 would remain below their December 31, 2019 levels.

(c)The market value of our inventories accounted for under the LIFO method fell below their historical cost on an aggregate basis as of March 31, 2020. As a result, we recorded an LCM inventory valuation adjustment of $2.5 billion in March 2020. The market value of our LIFO inventories improved due to the subsequent recovery in market prices, which resulted in a reversal of $2.2 billion in the three months ended June 30, 2020 and the remaining amount in the three months ended September 30, 2020. Of the $313 million benefit recognized in the three months ended September 30, 2020, $296 million and $17 million is attributable to our refining and ethanol segments, respectively. The LCM inventory valuation adjustment for the nine months ended September 30, 2020 reflects a net benefit of $19 million due solely to the foreign currency translation effect of the portion of the LCM inventory valuation adjustments attributable to our international operations.

(d)Depreciation and amortization expense for the three and nine months ended September 30, 2021 and 2020 includes accelerated depreciation of $48 million and $30 million, respectively, related to changes in the estimated useful lives of two of our ethanol plants.

(e)On April 19, 2021, we sold a 24.99 percent membership interest in MVP for $270 million. “Other income, net” for the nine months ended September 30, 2021 includes a gain on the sale of $62 million.

“Other income, net” for the nine months ended September 30, 2021 also includes a $24 million charge representing our portion of the asset impairment loss recognized by Diamond Pipeline LLC, an unconsolidated

joint venture with a subsidiary of Plains All American Pipeline, L.P., resulting from the joint venture’s cancellation of its pipeline extension project.

(f)Certain statutory tax rate changes were enacted during the second quarter of 2021 (primarily an increase in the U.K. rate from 19 percent to 25 percent effective in 2023) which resulted in the remeasurement of our deferred tax liabilities. Under U.S. GAAP, we are required to recognize the effect of a change in tax law in the period of enactment. As a result, we recognized income tax expense of $64 million during the nine months ended September 30, 2021, which represents the net increase in our deferred tax liabilities resulting from the change in the tax rates.

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

We have defined these non-GAAP measures and believe they are useful to the external users of our financial statements, including industry analysts, investors, lenders, and rating agencies. We believe our adjusted operating income measures (including for our refining and ethanol segments) are useful to assess our ongoing financial performance because, when reconciled to their most comparable U.S. GAAP measures, they provide improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. We believe our refining margin, renewable diesel margin, and ethanol margin, as applicable, are important measures of the relevant segment’s operating and financial performance because, with respect to such segment, it is the most comparable measure to the industry’s market reference product margins, which are used by industry analysts, investors, and others to evaluate our performance. These non-GAAP measures should not be considered as alternatives to their most comparable U.S. GAAP measures nor should they be considered in isolation or as a substitute for an analysis of our results of operations as reported under U.S. GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures used by other companies because we may define them differently, which diminishes their utility.

Non-GAAP measures are as follows:

**◦**Refining margin is defined as refining segment operating income (loss) excluding the LIFO liquidation adjustment, the LCM inventory valuation adjustment, operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reconciliation of refining operating income (loss) to refining margin
Refining operating income (loss)	$	835	$	(629)	$	592	$	(965)
Adjustments:
LIFO liquidation adjustment (see note (b))	—		326		—		326
LCM inventory valuation adjustment (see note (c))	—		(296)		—		(19)
Operating expenses (excluding depreciation and amortization expense) (see note (a))	1,195		989		3,730		2,912
Depreciation and amortization expense	549		538		1,626		1,607
Other operating expenses	18		24		68		29
Refining margin	$	2,597	$	952	$	6,016	$	3,890

**◦**Renewable diesel margin is defined as renewable diesel segment operating income excluding operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reconciliation of renewable diesel operating income to renewable diesel margin
Renewable diesel operating income	$	108	$	184	$	559	$	511
Adjustments:

Operating expenses (excluding depreciation and amortization expense)	26		23		86		63
Depreciation and amortization expense	11		10		35		33
Other operating expenses	1		—		1		—
Renewable diesel margin	$	146	$	217	$	681	$	607

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reconciliation of ethanol operating income (loss) to ethanol margin
Ethanol operating income (loss)	$	(44)	$	22	$	(1)	$	(84)
Adjustments:
LCM inventory valuation adjustment (see note (c))	—		(17)		—		—
Operating expenses (excluding depreciation and amortization expense) (see note (a))	128		105		403		293
Depreciation and amortization expense (see note (d))	70		54		111		97
Other operating expenses	—		1		—		1
Ethanol margin	$	154	$	165	$	513	$	307

◦Adjusted refining operating income (loss) is defined as refining segment operating income (loss) excluding the LIFO liquidation adjustment, the LCM inventory valuation adjustment, and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reconciliation of refining operating income (loss) to adjusted refining operating income (loss)
Refining operating income (loss)	$	835	$	(629)	$	592	$	(965)
Adjustments:
LIFO liquidation adjustment (see note (b))	—		326		—		326
LCM inventory valuation adjustment (see note (c))	—		(296)		—		(19)
Other operating expenses	18		24		68		29
Adjusted refining operating income (loss)	$	853	$	(575)	$	660	$	(629)

**◦**Adjusted renewable diesel operating income is defined as renewable diesel segment operating income excluding other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reconciliation of renewable diesel operating income to adjusted renewable diesel operating income
Renewable diesel operating income	$	108	$	184	$	559	$	511



Adjustment: Other operating expenses	1		—		1		—
Adjusted renewable diesel operating income	$	109	$	184	$	560	$	511

**◦**Adjusted ethanol operating income (loss) is defined as ethanol segment operating income (loss) excluding the changes in estimated useful lives, the LCM inventory valuation adjustment, and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reconciliation of ethanol operating income (loss) to adjusted ethanol operating income (loss)
Ethanol operating income (loss)	$	(44)	$	22	$	(1)	$	(84)
Adjustments:
Changes in estimated useful lives (see note (d))	48		30		48		30
LCM inventory valuation adjustment (see note (c))	—		(17)		—		—
Other operating expenses	—		1		—		1
Adjusted ethanol operating income (loss)	$	4	$	36	$	47	$	(53)

**◦**Adjusted operating income (loss) is defined as total company operating income (loss) excluding the changes in estimated useful lives, the LIFO liquidation adjustment, the LCM inventory valuation adjustment, and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reconciliation of total company operating income (loss) to adjusted operating income (loss)
Total company operating income (loss)	$	693	$	(621)	$	536	$	(1,109)
Adjustments:
Changes in estimated useful lives (see note (d))	48		30		48		30
LIFO liquidation adjustment (see note (b))	—		326		—		326
LCM inventory valuation adjustment (see note (c))	—		(313)		—		(19)
Other operating expenses	19		25		69		30
Adjusted operating income (loss)	$	760	$	(553)	$	653	$	(742)

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

LIQUIDITY AND CAPITAL RESOURCES

Overview

During the nine months ended September 30, 2021, our liquidity was positively impacted by the cash generated by our operations notwithstanding the lingering impacts of the COVID-19 pandemic, excess energy costs arising out of Winter Storm Uri, and the effects of Hurricane Ida, as described in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update.”

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

Our Liquidity

Our liquidity consisted of the following as of September 30, 2021 (in millions):


Available capacity from our committed facilities (a):
Valero Revolver	$	3,712
Canadian Revolver (b)	114
Accounts receivable sales facility	1,300
Letter of credit facility	50
Total available capacity	5,176
Cash and cash equivalents (c)	3,322
Total liquidity	$	8,498

(a)Excludes the committed facilities of our VIEs.

(b)The amount for our Canadian Revolver is shown in U.S. dollars. As set forth in the summary of our credit facilities in Note 5 of Condensed Notes to Consolidated Financial Statements, the availability under our Canadian Revolver as of September 30, 2021 in Canadian dollars was C$145 million.

(c)Excludes $176 million of cash and cash equivalents related to our VIEs that is available for use only by our VIEs.

Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 5 of Condensed Notes to Consolidated Financial Statements.

Cash Flows

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


	Nine Months Ended September 30,
	2021		2020
Cash flows provided by (used in):
Operating activities	$	3,405	$	852
Investing activities	(1,412)		(1,852)
Financing activities:
Borrowings	129		4,522
Other financing activities	(1,868)		(2,052)
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 Flows for the Nine Months Ended September 30, 2021

In the first nine months of 2021, we used $3.4 billion of cash generated by our operations to make $1.4 billion of investments in our business, fund $1.9 billion of other financing activities, and increase our available cash on hand by $185 million.

As previously noted, our operations generated $3.4 billion of cash in the first nine months of 2021, driven primarily by a positive change in working capital of $1.6 billion, noncash charges to income of $1.6 billion, and net income of $178 million. Our net income of $178 million reflects the unfavorable impact of increased energy costs at certain of our refineries and ethanol plants due to effects arising out of Winter Storm Uri, as described in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update.” Noncash charges included $1.8 billion of depreciation and amortization expense, partially offset by a $150 million deferred income tax benefit and a $62 million gain on the sale of a partial interest in MVP, as described in Note 7 of Condensed Notes to Consolidated Financial Statements. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 12 of Condensed Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of the significant components of our net income.

Our investing activities of $1.4 billion consisted of $1.7 billion in capital investments, as defined below, of which $736 million related to self-funded capital investments by DGD, and $59 million was related to capital expenditures of VIEs other than DGD. These activities were partially offset by $270 million received from the sale of a partial interest in MVP, as described in Note 7 of Condensed Notes to Consolidated Financial Statements.

Other financing activities of $1.9 billion consisted primarily of $1.2 billion in dividend payments, $672 million of payments of debt and finance lease obligations (excluding VIEs), and $15 million for the purchase of common stock for treasury in connection with stock-based compensation plans.

Cash Flows for the Nine Months Ended September 30, 2020

In the first nine months of 2020, we used $852 million of cash generated by our operations and $4.5 billion in borrowings to make $1.9 billion of investments in our business, fund $2.1 billion of other

financing activities, and increase our available cash on hand by $1.4 billion. The borrowings are described in Note 5 of Condensed Notes to Consolidated Financial Statements.

As previously noted, our operations generated $852 million of cash in the first nine months of 2020, which resulted from noncash charges to income of $1.9 billion, partially offset by an unfavorable change in working capital of $232 million. Noncash charges primarily included $1.8 billion of depreciation and amortization expense and $177 million of deferred income tax expense. The change in working capital was affected primarily by a $1.3 billion use of cash1 resulting from the rapid decline in market prices of refined petroleum products and crude oil as a result of the negative economic effects of the COVID-19 pandemic that impacted our receivables and accounts payable. This use of cash, along with other uses of cash, were partially offset by a $1.6 billion source of cash driven by a reduction in inventory levels on hand. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 12 of Condensed Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of the significant components of our net loss.

Our investing activities of $1.9 billion consisted of $1.9 billion in capital investments, as defined below, of which $329 million related to self-funded capital investments by DGD, and $196 million was related to capital expenditures of VIEs other than DGD.

Other financing activities of $2.1 billion consisted primarily of $1.2 billion in dividend payments, $461 million of payments of debt and finance lease obligations (excluding VIEs), $208 million to pay distributions to noncontrolling interests, and $147 million for the purchase of common stock for treasury.

Capital Investments

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

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

Capital investments attributable to Valero should not be considered as an alternative to capital investments, its most comparable U.S. GAAP measure, nor should it be considered in isolation or as a substitute for an analysis of our cash flows as reported under U.S. GAAP. In addition, this non-GAAP

1 Represents the net cash flow change in “receivables, net” of $3.6 billion and accounts payable of $4.9 billion during the nine months ended September 30, 2020, as described in Note 12 of Condensed Notes to Consolidated Financial Statements.

measure may not be comparable to similarly titled measures used by other companies because we may define it differently, which may diminish its utility.


	Nine Months Ended September 30,
	2021		2020
Reconciliation of capital investments to capital investments attributable to Valero
Capital expenditures (excluding VIEs)	$	368	$	775
Capital expenditures of VIEs:
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
Investments in unconsolidated joint ventures	8		39
Capital investments	1,715		1,868
Adjustments:
DGD’s capital investments attributable to our joint venture partner	(368)		(165)
Capital expenditures of other VIEs	(59)		(196)
Capital investments attributable to Valero	$	1,288	$	1,507

As previously disclosed in our annual report on Form 10-K for the year ended December 31, 2020, we expect to incur $2.0 billion for capital investments attributable to Valero during 2021; however, we continuously evaluate our capital budget and make changes as conditions warrant. Approximately 60 percent of the expected capital investments attributable to Valero are for sustaining the business and 40 percent are for growth strategies, of which over 60 percent is allocated to expanding the renewable diesel business.

We have publicly announced GHG emissions reduction/offset targets for 2025 and 2035. We believe that our expected allocation of growth capital into lower-carbon projects is consistent with such targets. Certain of these lower-carbon projects are already in execution and the associated capital investments are included in our expected capital investments for 2021 discussed above. Our capital investments in future years to achieve these targets are expected to include investments associated with certain lower-carbon projects currently at various stages of progress, evaluation, or approval.

Other Matters Impacting Liquidity and Capital Resources

Stock Purchase Program

As of September 30, 2021, we had $1.4 billion available for purchase under our stock purchase program, which has no expiration date. We have not purchased any shares of our common stock under our stock purchase program since mid-March 2020, and we will evaluate the timing of repurchases when appropriate. We have no obligation to make purchases under this program.

Pension Plan Funding

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. As described in Note 8 of Condensed Notes to Consolidated

Financial Statements, during the nine months ended September 30, 2021 we contributed $121 million to our pension plans and $12 million to our other postretirement benefit plans.

Environmental Matters

Our operations are subject to extensive environmental regulations by governmental authorities relating to the discharge of materials into the environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of gasolines and distillates. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades in any of our refineries or plants could require material additional expenditures to comply with environmental laws and regulations. See Note 14 of Condensed Notes to Consolidated Financial Statements for additional information on our government and regulatory compliance program and related costs.

Tax Matters

We deferred approximately $250 million of value-added and motor fuel tax payments that were due in 2020 as permitted by various taxing authorities to help companies address the negative impacts of the COVID-19 pandemic. Of this amount, approximately 90 percent will be paid in 2021 and 10 percent in 2022. During the first nine months of 2021, we paid approximately $125 million of these tax payments.

Cash Held by Our International Subsidiaries

As of September 30, 2021, $3.0 billion of our cash and cash equivalents was held by our international subsidiaries. Cash held by our international subsidiaries can be repatriated to us without any U.S. federal income tax consequences, but certain other taxes may apply, including, but not limited to, withholding taxes imposed by certain international jurisdictions and U.S. state income taxes. Therefore, there is a cost to repatriate cash held by certain of our international subsidiaries to us, but we believe that such amount is not material to our financial position or liquidity.

Concentration of Customers

Our operations have a concentration of customers in the refining industry and customers who are refined petroleum product wholesalers and retailers. These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions, including the uncertainties concerning the COVID-19 pandemic and volatility in the global oil markets. However, we believe that our portfolio of accounts receivable is sufficiently diversified to the extent necessary to minimize potential credit risk. Historically, we have not had any significant problems collecting our accounts receivable.

Contractual Obligations

As of September 30, 2021, our contractual obligations included debt, finance lease obligations, operating lease obligations, purchase obligations, and other long-term liabilities. In the ordinary course of business, we had debt-related activities during the nine months ended September 30, 2021, as described in Note 5 of Condensed Notes to Consolidated Financial Statements. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the nine months ended September 30, 2021.

Our 4.0 percent Gulf Opportunity Zone Revenue Bonds Series 2010 (GO Zone Bonds), which total $300 million, are due December 1, 2040, but are subject to mandatory tender on June 1, 2022, (the Mandatory Tender Date), at a price equal to par plus accrued and unpaid interest up to, but excluding, the Mandatory Tender Date. However, we have the option to effectuate a remarketing of these bonds, and we

currently expect to remarket them effective on or soon after the Mandatory Tender Date or otherwise refinance them, but we cannot provide any assurance that we will be able to do so. The GO Zone Bonds are reflected in current portion of debt and finance lease obligations as of September 30, 2021.

Central Mexico Terminals’ outstanding borrowings under the IEnova Revolver are also reflected in current portion of debt and finance lease obligations as of September 30, 2021 as IEnova can demand repayment from Central Mexico Terminals, but we do not expect IEnova to demand repayment during the next 12 months. Central Mexico Terminals is owned by IEnova. See Note 7 of Condensed Notes to Consolidated Financial Statements for a description of and accounting for Central Mexico Terminals.

CRITICAL ACCOUNTING 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 our financial statements and accompanying notes. Actual results could differ from those estimates. As of September 30, 2021, there were no significant changes to our critical accounting estimates since the date our annual report on Form 10-K for the year ended December 31, 2020 was filed.

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