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

113K characters. Original on sec.gov · Markdown

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 “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,” “may,” “strive,” “seek,” “potential,” “opportunity,” “aimed,” “considering,” “continue,” and similar expressions.

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

the effects and impact of the emergence of new variants of the COVID-19 virus and government responses thereto;
the effect, impact, potential duration or timing, or other implications of the Russia-Ukraine conflict;
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 liquid transportation fuel 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 sustaining 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 business, financial condition, results of operations, and liquidity;
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 purchase 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 business, financial condition, results of operations, and liquidity;
the effect of general economic and other conditions, including inflation and economic activity levels, 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/displacement 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:

the effects arising out of the Russia-Ukraine conflict, including with respect to changes in trade flows and impacts to crude oil and other markets;
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, 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;
the effects of war or hostilities, and political and economic conditions, in countries 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 to agree on and to maintain crude oil price and production controls;
the level of consumer demand, consumption and overall economic activity, including the effects from seasonal fluctuations and market prices;
refinery, renewable diesel plant, or ethanol plant overcapacity or undercapacity;
the risk that any transactions 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 compliance credits (primarily RINs needed to comply with the RFS) under the Renewable and Low-Carbon Fuel Blending Programs and emission credits needed under other environmental emissions programs;
delay of, cancellation of, or failure to implement planned capital or other 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, waste and renewable feedstocks, 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, environmental regulations, changes to income tax rates, introduction of a global minimum tax, windfall taxes, tax changes or restrictions impacting the foreign repatriation of cash, actions implemented under the Renewable and Low-Carbon Fuel Blending Programs and other environmental emissions programs, including changes to volume requirements or other obligations or exemptions under the RFS, and actions arising from the EPA’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 trade restrictions, expropriation or impoundment of assets, failure of foreign governments and state-owned entities to honor their contracts, property disputes, economic instability, restrictions on the transfer of funds, duties and tariffs, transportation delays, import and export controls, labor unrest, security issues involving key personnel, 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 other joint venture members 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 the effect thereof on consumer demand; 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, 2021.

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 applicable 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 applicable 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 GAAP. These non-GAAP financial measures include adjusted operating income (including adjusted operating income 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 54 for reconciliations of adjusted operating income (including adjusted operating income for each of our reportable segments, as applicable) and Refining, Renewable Diesel, and Ethanol segment margin to their most directly comparable 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 61 for a reconciliation of capital investments attributable to Valero to its most directly comparable GAAP financial measure. Beginning on page 60, we disclose the reasons why we believe our use of this non-GAAP financial measure provides useful information.

OVERVIEW AND OUTLOOK

Overview

Business Operations Update

Our results for the third quarter and first nine months of 2022 were favorably impacted by the effect from the ongoing recovery in the worldwide demand for petroleum-based transportation fuels while the worldwide supply of those products remained constrained. This supply and demand imbalance has contributed to increases in the market prices of petroleum-based transportation fuels (as well as crude oil and other feedstocks that are processed to make these products) and in refining margins. Supply has remained constrained for a variety of reasons, including, but not limited to, effects from refinery closures and disruptions in the crude oil and petroleum-based products markets resulting from the Russia-Ukraine conflict. Refineries closed over the last two years and other refineries ceased crude oil processing and are being transitioned to renewable fuel production. In addition, these negative impacts to the supply of petroleum-based products were exacerbated during the second quarter of 2022 by the Russia-Ukraine conflict as a result of countries and private market participants responding to the conflict by taking actions to refrain from purchasing and transporting Russian crude oil and petroleum-based products; however, some of the uncertainties and related impacts dissipated during the third quarter.

The strong demand for our products and the increase in refining margins were the primary contributors to us reporting $2.8 billion of net income attributable to Valero stockholders for the third quarter of 2022 and $8.4 billion of net income attributable to Valero stockholders for the first nine months of 2022. Our operating results, including operating results by segment, are described in the following summary under “Third Quarter Results” and “First Nine Months Results.” Detailed descriptions can be found under “RESULTS OF OPERATIONS.”

Our operations generated $8.5 billion of cash during the first nine months of 2022. This cash, along with cash on hand, was used to make $2.1 billion of capital investments in our business and return $4.0 billion to our stockholders through purchases of common stock for treasury and dividend payments. In addition, we completed various debt reduction and refinancing transactions that reduced our debt by $2.3 billion during the first nine months of 2022. As a result of this and other activity, our cash and cash equivalents decreased by $153 million, from $4.1 billion as of December 31, 2021 to $4.0 billion as of September 30, 2022. We had $8.6 billion in liquidity as of September 30, 2022. 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.”

Third Quarter Results

For the third quarter of 2022, we reported net income attributable to Valero stockholders of $2.8 billion compared to $463 million for the third quarter of 2021. The increase of $2.4 billion was primarily due to higher operating income of $3.1 billion, partially offset by higher income tax expense of $751 million. The details of our operating income (loss) and adjusted operating income by segment and in total are reflected on the following page. Adjusted operating income excludes the adjustments reflected in the tables in note (g) beginning on page 54.


	Three Months Ended September 30,
	2022		2021		Change
Refining segment:
Operating income	$	3,810	$	835	$	2,975
Adjusted operating income	3,816		911		2,905
Renewable Diesel segment:
Operating income	212		108		104
Adjusted operating income	212		109		103
Ethanol segment:
Operating income (loss)	1		(44)		45
Adjusted operating income	1		4		(3)
Total company:
Operating income	3,792		693		3,099
Adjusted operating income	3,798		818		2,980

While our operating income increased by $3.1 billion in the third quarter of 2022 compared to the third quarter of 2021, adjusted operating income increased by $3.0 billion primarily due to the following:

Refining segment. Refining segment adjusted operating income increased by $2.9 billion primarily due to higher gasoline and distillate (primarily diesel) margins, partially offset by lower margins on other products and higher operating expenses (excluding depreciation and amortization expense).
Renewable Diesel segment. Renewable Diesel segment adjusted operating income increased by $103 million primarily due to higher sales volumes and higher renewable diesel prices, partially offset by higher feedstock costs and higher operating expenses (excluding depreciation and amortization expense).
Ethanol segment. Ethanol segment adjusted operating income decreased by $3 million primarily due to higher corn prices, higher operating expenses (excluding depreciation and amortization expense), and lower production volumes, partially offset by higher ethanol and corn related co-product prices.

First Nine Months Results

For the first nine months of 2022, we reported net income attributable to Valero stockholders of $8.4 billion compared to a net loss attributable to Valero stockholders of $79 million for the first nine months of 2021. The increase of $8.5 billion was primarily due to higher operating income of $10.9 billion, partially offset by higher income tax expense of $2.3 billion. The details of our operating income (loss) and adjusted operating income by segment and in total are reflected on the following page. Adjusted operating income excludes the adjustments reflected in the tables in note (g) beginning on page 54.


	Nine Months Ended September 30,
	2022		2021		Change
Refining segment:
Operating income	$	11,473	$	592	$	10,881
Adjusted operating income	11,407		879		10,528
Renewable Diesel segment:
Operating income	513		559		(46)
Adjusted operating income	513		560		(47)
Ethanol segment:
Operating income (loss)	103		(1)		104
Adjusted operating income	82		47		35
Total company:
Operating income	11,395		536		10,859
Adjusted operating income	11,328		872		10,456

While our operating income increased by $10.9 billion in the first nine months of 2022 compared to the first nine months of 2021, adjusted operating income increased by $10.5 billion primarily due to the following:

Refining segment. Refining segment adjusted operating income increased by $10.5 billion primarily due to higher gasoline and distillate (primarily diesel) margins and higher throughput volumes, partially offset by lower margins on other products and higher operating expenses (excluding depreciation and amortization expense).
Renewable Diesel segment. Renewable Diesel segment adjusted operating income decreased by $47 million primarily due to higher feedstock costs, an unfavorable impact from commodity derivative instruments associated with our price risk management activities, and higher operating expenses (excluding depreciation and amortization expense), partially offset by higher sales volumes and higher renewable diesel prices.
Ethanol segment. Ethanol segment adjusted operating income increased by $35 million primarily due to higher ethanol and corn related co-product prices, partially offset by higher corn prices and higher operating expenses (excluding depreciation and amortization expense).

Outlook

Many uncertainties remain with respect to the supply and demand imbalance in the petroleum-based products market worldwide, and while it is difficult to predict the ultimate economic impacts this may have on us, we have noted several factors below that have impacted or may impact our results of operations during the fourth quarter of 2022.

Gasoline and diesel demand have returned to near pre-pandemic levels and are expected to follow typical seasonal patterns. Jet fuel demand continues to improve but remains below pre-pandemic levels.
Light product (primarily gasoline and diesel) inventories in the U.S. are below historical levels and should support continued high utilization of refining capacity.
Crude oil discounts are expected to remain near current levels absent changes in crude oil supply or availability.
Renewable diesel margins are expected to remain consistent with current levels.
Ethanol demand is expected to follow typical seasonal patterns.

RESULTS OF OPERATIONS

The following tables, including the reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures in note (g) beginning on page 54, highlight our results of operations, our operating performance, and market reference prices that directly impact our operations. Note references in this section can be found on pages 53 through 57.

Third Quarter Results -

Financial Highlights By Segment and Total Company

(millions of dollars)


	Three Months Ended September 30, 2022
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
Revenues:
Revenues from external customers	$	42,280	$	967	$	1,207	$	—	$	44,454
Intersegment revenues	9		508		179		(696)		—
Total revenues	42,289		1,475		1,386		(696)		44,454
Cost of sales:
Cost of materials and other	36,389		1,161		1,203		(689)		38,064

Operating expenses (excluding depreciation and amortization expense reflected below)	1,516		69		162		(1)		1,746
Depreciation and amortization expense	568		33		20		—		621
Total cost of sales	38,473		1,263		1,385		(690)		40,431
Other operating expenses	6		—		—		—		6
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—		—		—		214		214
Depreciation and amortization expense	—		—		—		11		11
Operating income by segment	$	3,810	$	212	$	1	$	(231)	3,792
Other income, net (e)									74
Interest and debt expense, net of capitalized interest									(138)
Income before income tax expense									3,728
Income tax expense									816
Net income									2,912
Less: Net income attributable to noncontrolling interests									95
Net income attributable to Valero Energy Corporation stockholders									$	2,817

Third Quarter Results -

Financial Highlights By Segment and Total Company (continued)

(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 (c)	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

Third Quarter Results -

Average Market Reference Prices and Differentials


	Three Months Ended September 30,
	2022		2021
Refining
Feedstocks (dollars per barrel)
Brent crude oil	$	97.59	$	73.22
Brent less West Texas Intermediate (WTI) crude oil	5.83		2.64
Brent less WTI Houston crude oil	3.69		2.01
Brent less Dated Brent crude oil	(2.97)		(0.25)
Brent less Alaska North Slope (ANS) crude oil	(1.53)		0.49
Brent less Argus Sour Crude Index (ASCI) crude oil	8.23		4.52
Brent less Maya crude oil	13.11		7.01
Brent less Western Canadian Select (WCS) Houston crude oil	17.68		7.74
WTI crude oil	91.76		70.58

Natural gas (dollars per million British Thermal Units (MMBtu))	7.31		4.25

Product margins (dollars per barrel)
U.S. Gulf Coast:
Conventional Blendstock of Oxygenate Blending (CBOB) gasoline less Brent	13.81		16.90
Ultra-low-sulfur (ULS) diesel less Brent	49.12		14.15
Propylene less Brent	(46.73)		(5.21)
U.S. Mid-Continent:
CBOB gasoline less WTI	27.38		20.84
ULS diesel less WTI	60.36		19.37
North Atlantic:
CBOB gasoline less Brent	28.28		20.82
ULS diesel less Brent	52.30		16.32
U.S. West Coast:
California Reformulated Gasoline Blendstock of Oxygenate Blending (CARBOB) 87 gasoline less ANS	48.06		27.49
California Air Resources Board (CARB) diesel less ANS	50.26		18.55
CARBOB 87 gasoline less WTI	55.42		29.64
CARB diesel less WTI	57.62		20.70

Third Quarter Results -

Average Market Reference Prices and Differentials (continued)


	Three Months Ended September 30,
	2022		2021
Renewable Diesel
New York Mercantile Exchange ULS diesel (dollars per gallon)	$	3.55	$	2.13
Biodiesel RIN (dollars per RIN)	1.71		1.60
California Low-Carbon Fuel Standard (dollars per metric ton)	86.21		175.75
Chicago Board of Trade (CBOT) soybean oil (dollars per pound)	0.66		0.62

Ethanol
CBOT corn (dollars per bushel)	6.60		5.58
New York Harbor ethanol (dollars per gallon)	2.58		2.37

Total Company, Corporate, and Other

The following table includes selected financial data for the total company, corporate, and other for the third quarter of 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Three Months Ended September 30,
	2022		2021		Change
Revenues	$	44,454	$	29,520	$	14,934


Cost of sales (see note (c))	40,431		28,602		11,829

Operating income	3,792		693		3,099
Adjusted operating income (see note (g))	3,798		818		2,980
Other income, net (see note (e))	74		32		42

Income tax expense	816		65		751
Net income attributable to noncontrolling interests	95		45		50

Revenues increased by $14.9 billion in the third quarter of 2022 compared to the third quarter of 2021 primarily due to increases in product prices for the petroleum-based transportation fuels associated with sales made by our Refining segment. This increase in revenues was partially offset by an increase in cost of sales of $11.8 billion, which was primarily due to increases in crude oil and other feedstock costs. These changes resulted in a $3.1 billion increase in operating income, from $693 million in the third quarter of 2021 to $3.8 billion in the third quarter of 2022.

Adjusted operating income increased by $3.0 billion, from $818 million in the third quarter of 2021 to $3.8 billion in the third quarter of 2022. The components of this $3.0 billion increase in adjusted operating income are discussed by segment in the segment analyses that follow.

“Other income, net” increased by $42 million in the third quarter of 2022 compared to the third quarter of 2021 primarily due to a benefit of $26 million in the third quarter of 2022 from the early retirement of debt, as more fully described in note (e).

Income tax expense increased by $751 million in the third quarter of 2022 compared to the third quarter of 2021 primarily as a result of higher income before income tax expense.

Net income attributable to noncontrolling interests increased by $50 million in the third quarter of 2022 compared to the third quarter of 2021 primarily due to higher earnings associated with DGD. See Note 6 of Condensed Notes to Consolidated Financial Statements regarding our accounting for DGD.

Refining Segment Results

The following table includes selected financial and operating data of our Refining segment for the third quarter of 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Three Months Ended September 30,
	2022		2021		Change




Operating income	$	3,810	$	835	$	2,975
Adjusted operating income (see note (g))	3,816		911		2,905

Refining margin (see note (g))	$	5,900	$	2,655	$	3,245
Operating expenses (excluding depreciation and amortization expense reflected below)	1,516		1,195		321
Depreciation and amortization expense	568		549		19

Throughput volumes (thousand barrels per day) (see note (h))	3,005		2,864		141

Refining segment operating income increased by $3.0 billion in the third quarter of 2022 compared to the third quarter of 2021; however, Refining segment adjusted operating income, which excludes the adjustments in the table in note (g), increased by $2.9 billion in the third quarter of 2022 compared to the third quarter of 2021. 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 $3.2 billion in the third quarter of 2022 compared to the third quarter of 2021.

Refining segment margin is primarily affected by the prices for the petroleum-based transportation fuels that we sell and the cost of crude oil and other feedstocks that we process. The table on page 41 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 2022 compared to the third quarter of 2021.

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

◦An increase in distillate (primarily diesel) margins had a favorable impact of approximately $3.4 billion.

◦An increase in gasoline margins had a favorable impact of approximately $420 million.

◦Lower margins on other products had an unfavorable impact of approximately $540 million.

Refining segment operating expenses (excluding depreciation and amortization expense) increased by $321 million primarily due to higher energy costs of $187 million, higher costs of compliance with environmental emissions programs of $56 million, higher maintenance expense of $31 million, and higher chemicals and catalyst costs of $27 million.

Renewable Diesel Segment Results

The following table includes selected financial and operating data of our Renewable Diesel segment for the third quarter of 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Three Months Ended September 30,
	2022		2021		Change


Operating income	$	212	$	108	$	104

Adjusted operating income (see note (g))	212		109		103

Renewable Diesel margin (see note (g))	$	314	$	146	$	168
Operating expenses (excluding depreciation and amortization expense reflected below)	69		26		43
Depreciation and amortization expense	33		11		22

Sales volumes (thousand gallons per day) (see note (h))	2,231		671		1,560

Renewable Diesel segment operating income increased by $104 million in the third quarter of 2022 compared to the third quarter of 2021; however, Renewable Diesel segment adjusted operating income, which excludes the adjustment in the table in note (g), increased by $103 million in the third quarter of 2022 compared to the third quarter of 2021. The components of this increase, along with the reasons for the changes in those components, are outlined below.

Renewable Diesel segment margin increased by $168 million in the third quarter of 2022 compared to the third quarter of 2021.

Renewable Diesel segment margin is primarily affected by the price for the renewable diesel that we sell and the cost of the feedstocks that we process. The table on page 42 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 2022 compared to the third quarter of 2021.

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

◦An increase in sales volumes of 1.6 million gallons per day had a favorable impact of approximately $420 million. The increase in sales volumes was primarily due to the additional production capacity resulting from the expansion of DGD’s existing renewable diesel plant (the DGD Plant) that commenced operations in the fourth quarter of 2021.

◦Higher renewable diesel prices had a favorable impact of approximately $153 million.

◦An increase in the cost of the feedstocks that we process had an unfavorable impact of approximately $432 million.

Renewable Diesel segment operating expenses (excluding depreciation and amortization expense) increased by $43 million primarily due to increased costs resulting from the expansion of the DGD Plant that commenced operations in the fourth quarter of 2021.
Renewable Diesel segment depreciation and amortization expense increased by $22 million primarily due to depreciation expense of $13 million associated with the expansion of the DGD Plant that commenced operations in the fourth quarter of 2021 and higher depreciation expense of $3 million associated with finance leases.

Ethanol Segment Results

The following table includes selected financial and operating data of our Ethanol segment for the third quarter of 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Three Months Ended September 30,
	2022		2021		Change



Operating income (loss)	$	1	$	(44)	$	45
Adjusted operating income (see note (g))	1		4		(3)

Ethanol margin (see note (g))	$	183	$	154	$	29
Operating expenses (excluding depreciation and amortization expense reflected below)	162		128		34
Depreciation and amortization expenses (see note (c))	20		70		(50)

Production volumes (thousand gallons per day) (see note (h))	3,498		3,625		(127)

Ethanol segment operating income increased by $45 million in the third quarter of 2022 compared to the third quarter of 2021; however, Ethanol segment adjusted operating income, which excludes the adjustments in the table in note (g), decreased by $3 million in the third quarter of 2022 compared to the third quarter of 2021. 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 increased by $29 million in the third quarter of 2022 compared to the third quarter of 2021.

Ethanol segment margin is primarily affected by prices for the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 42 reflects market reference prices that we believe had a material impact on the change in our Ethanol segment margin in the third quarter of 2022 compared to the third quarter of 2021.

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

◦Higher ethanol prices had a favorable impact of approximately $79 million.

◦Higher prices for the co-products that we produce, primarily dry distillers grains (DDGs) and inedible distillers corn oil (DCO), had a favorable impact of approximately $46 million.

◦Higher corn prices had an unfavorable impact of approximately $85 million.

◦A decrease in production volumes of 127,000 gallons per day had an unfavorable impact of approximately $9 million.

Ethanol segment operating expenses (excluding depreciation and amortization expense) increased by $34 million primarily due to higher energy costs.

First Nine Months Results -

Financial Highlights By Segment and Total Company

(millions of dollars)


	Nine Months Ended September 30, 2022
	Refining		Renewable Diesel		Ethanol		Corporate and Eliminations		Total
Revenues:
Revenues from external customers	$	128,588	$	2,417	$	3,632	$	—	$	134,637
Intersegment revenues	24		1,490		507		(2,021)		—
Total revenues	128,612		3,907		4,139		(2,021)		134,637
Cost of sales:
Cost of materials and other (a)	111,308		3,129		3,533		(2,011)		115,959

Operating expenses (excluding depreciation and amortization expense reflected below)	4,111		178		464		(2)		4,751
Depreciation and amortization expense (c)	1,682		87		37		—		1,806
Total cost of sales	117,101		3,394		4,034		(2,013)		122,516
Other operating expenses	38		—		2		—		40
General and administrative expenses (excluding depreciation and amortization expense reflected below) (d)	—		—		—		652		652
Depreciation and amortization expense	—		—		—		34		34
Operating income by segment	$	11,473	$	513	$	103	$	(694)	11,395
Other income, net (e)									87
Interest and debt expense, net of capitalized interest									(425)
Income before income tax expense									11,057
Income tax expense									2,410
Net income									8,647
Less: Net income attributable to noncontrolling interests									232
Net income attributable to Valero Energy Corporation stockholders									$	8,415

First Nine Months Results -

Financial Highlights By Segment and Total Company (continued)

(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 (b)	67,417		724		3,204		(480)		70,865

Operating expenses (excluding depreciation and amortization expense reflected below) (b)	3,730		86		403		(1)		4,218
Depreciation and amortization expense (c)	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)

First Nine Months Results -

Average Market Reference Prices and Differentials


	Nine Months Ended September 30,
	2022		2021
Refining
Feedstocks (dollars per barrel)
Brent crude oil	$	102.21	$	67.77
Brent less WTI crude oil	3.91		2.94
Brent less WTI Houston crude oil	2.28		2.03
Brent less Dated Brent crude oil	(2.92)		0.06
Brent less ANS crude oil	(0.19)		0.46
Brent less ASCI crude oil	6.58		3.62
Brent less Maya crude oil	9.84		5.95
Brent less WCS Houston crude oil	13.22		6.77
WTI crude oil	98.29		64.84

Natural gas (dollars per MMBtu)	6.29		8.95

Product margins (dollars per barrel)
U.S. Gulf Coast:
CBOB gasoline less Brent	20.27		13.82
ULS diesel less Brent	44.34		12.44
Propylene less Brent	(38.04)		(2.37)
U.S. Mid-Continent:
CBOB gasoline less WTI	26.49		18.53
ULS diesel less WTI	49.26		18.33
North Atlantic:
CBOB gasoline less Brent	29.18		16.58
ULS diesel less Brent	51.67		14.43
U.S. West Coast:
CARBOB 87 gasoline less ANS	43.86		23.08
CARB diesel less ANS	46.97		15.99
CARBOB 87 gasoline less WTI	47.96		25.55
CARB diesel less WTI	51.07		18.47

First Nine Months Results -

Average Market Reference Prices and Differentials (continued)


	Nine Months Ended September 30,
	2022		2021
Renewable Diesel
New York Mercantile Exchange ULS diesel (dollars per gallon)	$	3.54	$	1.96
Biodiesel RIN (dollars per RIN)	1.61		1.49
California Low-Carbon Fuel Standard (dollars per metric ton)	109.71		185.29
CBOT soybean oil (dollars per pound)	0.71		0.58

Ethanol
CBOT corn (dollars per bushel)	7.02		5.85
New York Harbor ethanol (dollars per gallon)	2.60		2.18

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 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Nine Months Ended September 30,
	2022		2021		Change
Revenues	$	134,637	$	78,074	$	56,563

Cost of sales (see notes (a) through (c))	122,516		76,855		45,661


General and administrative expenses (excluding depreciation and amortization expense) (see note (d))	652		579		73


Operating income	11,395		536		10,859
Adjusted operating income (see note (g))	11,328		872		10,456
Other income, net (see note (e))	87		179		(92)

Income tax expense (see note (f))	2,410		86		2,324
Net income attributable to noncontrolling interests	232		257		(25)

Revenues increased by $56.6 billion in the first nine months of 2022 compared to the first nine months of 2021 primarily due to increases in product prices for the refined petroleum-based transportation fuels associated with sales made by our Refining segment. This increase in revenues was partially offset by an increase in cost of sales of $45.7 billion, which was primarily due to increases in crude oil and other feedstock costs, and an increase in general and administrative expenses (excluding depreciation and amortization expense) of $73 million, which was primarily due to an increase of $36 million in certain employee compensation expenses and a charge of $20 million for an environmental reserve adjustment (see note (d)). These changes resulted in a $10.9 billion increase in operating income, from $536 million in the first nine months of 2021 to $11.4 billion in the first nine months of 2022.

Adjusted operating income increased by $10.5 billion, from $872 million in the first nine months of 2021 to $11.3 billion in the first nine months of 2022. The components of this $10.5 billion increase in adjusted operating income are discussed by segment in the segment analyses that follow.

“Other income, net” decreased by $92 million in the first nine months of 2022 compared to the first nine months of 2021 primarily due to a net charge of $24 million in the first nine months of 2022 from the early retirement of debt and the effect of the gain of $62 million in the first nine months of 2021 on the sale of a 24.99 percent membership interest in MVP, resulting in a decrease of $86 million. This decrease was partially offset by the effect of an asset impairment loss of $24 million in the first nine months of 2021 resulting from the cancellation of a pipeline extension project by a nonconsolidated joint venture, Diamond Pipeline LLC. These items are more fully described in note (e).

Income tax expense increased by $2.3 billion in the first nine months of 2022 compared to the first nine months of 2021 primarily as a result of higher income before income tax expense.

Net income attributable to noncontrolling interests decreased by $25 million in the first nine months of 2022 compared to the first nine months of 2021 primarily due to lower earnings associated with DGD.

Refining Segment Results

The following table includes selected financial and operating data of our Refining segment for the first nine months of 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Nine Months Ended September 30,
	2022		2021		Change
Operating income	$	11,473	$	592	$	10,881
Adjusted operating income (see note (g))	11,407		879		10,528

Refining margin (see note (g))	$	17,200	$	6,235	$	10,965

Operating expenses (excluding depreciation and amortization expense reflected below) (see note (b))	4,111		3,730		381

Depreciation and amortization expense	1,682		1,626		56

Throughput volumes (thousand barrels per day) (see note (h))	2,923		2,705		218

Refining segment operating income increased by $10.9 billion in the first nine months of 2022 compared to the first nine months of 2021; however, Refining segment adjusted operating income, which excludes the adjustments in the table in note (g), increased by $10.5 billion in the first nine months of 2022 compared to the first nine months of 2021. The components of this increase, along with the reasons for the changes in those components, are outlined below.

Refining segment margin increased by $11.0 billion in the first nine months of 2022 compared to the first nine months of 2021.

Refining segment margin is primarily affected by the prices for the petroleum-based transportation fuels that we sell and the cost of crude oil and other feedstocks that we process. The table on page 48 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 2022 compared to the first nine months of 2021.

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

◦An increase in distillate (primarily diesel) margins had a favorable impact of approximately $8.2 billion.

◦An increase in gasoline margins had a favorable impact of approximately $2.7 billion.

◦An increase in throughput volumes of 218,000 barrels per day had a favorable impact of approximately $1.3 billion.

◦Lower margins on other products had an unfavorable impact of approximately $800 million.

Refining segment operating expenses (excluding depreciation and amortization expense) increased by $381 million primarily due to higher costs of compliance with environmental emissions programs of $124 million, higher chemicals and catalyst costs of $73 million, higher maintenance expense of $65 million, and an increase in energy costs of $49 million.

Renewable Diesel Segment Results

The following table includes selected financial and operating data of our Renewable Diesel segment for the first nine months of 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Nine Months Ended September 30,
	2022		2021		Change
Operating income	$	513	$	559	$	(46)
Adjusted operating income (see note (g))	513		560		(47)

Renewable Diesel margin (see note (g))	$	778	$	681	$	97
Operating expenses (excluding depreciation and amortization expense reflected below)	178		86		92
Depreciation and amortization expense	87		35		52

Sales volumes (thousand gallons per day) (see note (h))	2,084		819		1,265

Renewable Diesel segment operating income decreased by $46 million in the first nine months of 2022 compared to the first nine months of 2021; however, Renewable Diesel segment adjusted operating income, which excludes the adjustment in the table in note (g), decreased by $47 million in the first nine months of 2022 compared to the first nine months of 2021. The components of this decrease, along with the reasons for the changes in those components, are outlined below.

Renewable Diesel segment margin increased by $97 million in the first nine months of 2022 compared to the first nine months of 2021.

Renewable Diesel segment margin is primarily affected by the price for the renewable diesel that we sell and the cost of the feedstocks that we process. The table on page 49 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 2022 compared to the first nine months of 2021.

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

◦An increase in sales volumes of 1.3 million gallons per day had a favorable impact of approximately $1.2 billion. The increase in sales volumes was primarily due to the additional production capacity resulting from the expansion of the DGD Plant that commenced operations in the fourth quarter of 2021.

◦Higher Renewable Diesel prices had a favorable impact of approximately $526 million.

◦An increase in the cost of the feedstocks that we process had an unfavorable impact of approximately $1.4 billion.

◦Price risk management activities had an unfavorable impact of $252 million. We recognized a loss of $289 million in the first nine months of 2022 compared to a loss of $37 million in the first nine months of 2021.

Renewable Diesel segment operating expenses (excluding depreciation and amortization expense) increased by $92 million primarily due to increased costs resulting from the expansion of the DGD Plant that commenced operations in the fourth quarter of 2021.
Renewable Diesel segment depreciation and amortization expense increased by $52 million primarily due to depreciation expense associated with the expansion of the DGD Plant that commenced operations in the fourth quarter of 2021.

Ethanol Segment Results

The following table includes selected financial and operating data of our Ethanol segment for the first nine months of 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.


	Nine Months Ended September 30,
	2022		2021		Change
Operating income (loss)	$	103	$	(1)	$	104
Adjusted operating income (see note (g))	82		47		35

Ethanol margin (see note (g))	$	606	$	513	$	93
Operating expenses (excluding depreciation and amortization expense reflected below) (see note (b))	464		403		61
Depreciation and amortization expense (see note (c))	37		111		(74)

Production volumes (thousand gallons per day) (see note (h))	3,799		3,797		2

The Ethanol segment operating income increased by $104 million in the first nine months of 2022 compared to the first nine months of 2021; however, Ethanol segment adjusted operating income, which excludes the adjustments in the table in note (g), increased by $35 million in the first nine months of 2022

compared to the first nine months of 2021. 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 $93 million in the first nine months of 2022 compared to the first nine months of 2021.

Ethanol segment margin is primarily affected by prices for the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 49 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 2022 compared to the first nine months of 2021.

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

◦Higher ethanol prices had a favorable impact of approximately $365 million.

◦Higher prices for the co-products that we produce, primarily DDGs and inedible DCO, had a favorable impact of approximately $131 million.

◦Higher corn prices had an unfavorable impact of approximately $403 million.

Ethanol segment operating expenses (excluding depreciation and amortization expense) increased by $61 million primarily due to higher energy costs of $40 million and higher chemical and catalyst costs of $16 million.

The following notes relate to references on pages 35 through 52.

(a)Under the RFS program, the EPA is required to set annual quotas for the volume of renewable fuels that obligated parties, such as us, must blend into petroleum-based transportation fuels consumed in the U.S. The quotas are used to determine an obligated party’s renewable volume obligation (RVO). The EPA released a final rule on June 3, 2022 that, among other things, reduced the quotas for 2020 and, for the first time, established quotas for 2021 and 2022.

In 2020, we recognized the cost of the RVO using the 2020 quotas set by the EPA at that time, and in 2021 and the three months ended March 31, 2022, we recognized the cost of the RVO using our estimates of the quotas. As a result of the final rule released by the EPA as noted above, we recognized a benefit of $104 million in June 2022 primarily related to the modification of the 2020 quotas. The impacts to the estimated cost of the RVO recognized by us in 2021 and the three months ended March 31, 2022 were not significant; however, there were impacts in the 2021 quarterly periods as follows: (i) benefit of $80 million for the three months ended March 31, 2021; (ii) benefit of $81 million for the three months ended June 30, 2021; (iii) benefit of $58 million for the three months ended September 30, 2021, resulting in a benefit of $219 million for the nine months ended September 30, 2021; and (iv) charge of $220 million related to the three months ended December 31, 2021.

(b)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 for the nine months ended September 30, 2021 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

(c)Depreciation and amortization expense includes the following:

◦a gain of $23 million in the nine months ended September 30, 2022 on the sale of our ethanol plant located in Jefferson, Wisconsin (Jefferson ethanol plant); and

◦accelerated depreciation of $48 million in the three and nine months ended September 30, 2021 related to a change in the estimated useful life of our Jefferson ethanol plant.

(d)General and administrative expenses (excluding depreciation and amortization expense) for the nine months ended September 30, 2022 includes a charge of $20 million for an environmental reserve adjustment associated with a non-operating site.

(e)“Other income, net” includes the following:

◦a gain of $26 million in the three months ended September 30, 2022 and a net charge of $24 million in the nine months ended September 30, 2022 related to the early retirement of approximately $1.25 billion and $2.65 billion aggregate principal amount, respectively, of various series of our senior notes;

◦a gain of $62 million in the nine months ended September 30, 2021 on the sale of a 24.99 percent membership interest in MVP; and

◦a charge of $24 million in the nine months ended September 30, 2021 representing our portion of the asset impairment loss recognized by Diamond Pipeline LLC, a nonconsolidated 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 income tax rate changes (primarily an increase in the U.K. rate from 19 percent to 25 percent effective in 2023) were enacted during the second quarter of 2021 that resulted in the remeasurement of our deferred tax liabilities. Under GAAP, we are required to recognize the effect of a change in tax law in the period of enactment. As a result, we recognized deferred income tax expense of $64 million in the nine months ended September 30, 2021, which represented the net increase in our deferred tax liabilities resulting from the changes in the income tax rates.

(g)We use certain financial measures (as noted below) that are not defined under 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 these measures are useful to assess our ongoing financial performance because, when reconciled to their most comparable GAAP measures, they provide improved comparability between periods after adjusting for certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These non-GAAP measures should not be considered as alternatives to their most comparable GAAP

measures nor should they be considered in isolation or as a substitute for an analysis of our results of operations as reported under 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 excluding the modification of RVO adjustment (as defined in note (a)), 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,
	2022		2021		2022		2021
Reconciliation of Refining operating income to Refining margin
Refining operating income	$	3,810	$	835	$	11,473	$	592
Adjustments:
Modification of RVO (see note (a))	—		58		(104)		219

Operating expenses (excluding depreciation and amortization expense) (see note (b))	1,516		1,195		4,111		3,730
Depreciation and amortization expense	568		549		1,682		1,626
Other operating expenses	6		18		38		68
Refining margin	$	5,900	$	2,655	$	17,200	$	6,235

**◦**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,
	2022		2021		2022		2021
Reconciliation of Renewable Diesel operating income to Renewable Diesel margin
Renewable Diesel operating income	$	212	$	108	$	513	$	559
Adjustments:

Operating expenses (excluding depreciation and amortization expense)	69		26		178		86
Depreciation and amortization expense	33		11		87		35
Other operating expenses	—		1		—		1
Renewable Diesel margin	$	314	$	146	$	778	$	681

**◦**Ethanol margin is defined as Ethanol segment operating income (loss) 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,
	2022		2021		2022		2021
Reconciliation of Ethanol operating income (loss) to Ethanol margin
Ethanol operating income (loss)	$	1	$	(44)	$	103	$	(1)
Adjustments:

Operating expenses (excluding depreciation and amortization expense) (see note (b))	162		128		464		403
Depreciation and amortization expense (see note (c))	20		70		37		111
Other operating expenses	—		—		2		—
Ethanol margin	$	183	$	154	$	606	$	513

**◦**Adjusted Refining operating income is defined as Refining segment operating income excluding the modification of RVO adjustment and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Reconciliation of Refining operating income to adjusted Refining operating income
Refining operating income	$	3,810	$	835	$	11,473	$	592
Adjustments:
Modification of RVO (see note (a))	—		58		(104)		219

Other operating expenses	6		18		38		68
Adjusted Refining operating income	$	3,816	$	911	$	11,407	$	879

**◦**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,
	2022		2021		2022		2021
Reconciliation of Renewable Diesel operating income to adjusted Renewable Diesel operating income
Renewable Diesel operating income	$	212	$	108	$	513	$	559

Adjustment: Other operating expenses	—		1		—		1
Adjusted Renewable Diesel operating income	$	212	$	109	$	513	$	560

**◦**Adjusted Ethanol operating income is defined as Ethanol segment operating income (loss) excluding the gain on sale of ethanol plant, the change in estimated useful life of ethanol plant, and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Reconciliation of Ethanol operating income (loss) to adjusted Ethanol operating income
Ethanol operating income (loss)	$	1	$	(44)	$	103	$	(1)
Adjustments:
Gain on sale of ethanol plant (see note (c))	—		—		(23)		—
Change in estimated useful life of ethanol plant (see note (c))	—		48		—		48
Other operating expenses	—		—		2		—
Adjusted Ethanol operating income	$	1	$	4	$	82	$	47

**◦**Adjusted operating income is defined as total company operating income excluding the modification of RVO adjustment, the gain on sale of ethanol plant, the change in estimated useful life of ethanol plant, the environmental reserve adjustment, and other operating expenses, as reflected in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Reconciliation of total company operating income to adjusted operating income
Total company operating income	$	3,792	$	693	$	11,395	$	536
Adjustments:
Modification of RVO (see note (a))	—		58		(104)		219

Gain on sale of ethanol plant (see note (c))	—		—		(23)		—
Change in estimated useful life of ethanol plant (see note (c))	—		48		—		48
Environmental reserve adjustment (see note (d))	—		—		20		—
Other operating expenses	6		19		40		69
Adjusted operating income	$	3,798	$	818	$	11,328	$	872

(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

Our Liquidity

Our liquidity consisted of the following as of September 30, 2022 (in millions):


Available capacity from our committed facilities (a):
Valero Revolver	$	3,462
Canadian Revolver (b)	106
Accounts receivable sales facility	1,300
Letter of credit facility	50
Total available capacity	4,918
Cash and cash equivalents (c)	3,729
Total liquidity	$	8,647

(a)Excludes the committed facilities of the consolidated 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 4 of Condensed Notes to Consolidated Financial Statements, the availability under our Canadian Revolver as of September 30, 2022 in Canadian dollars was C$145 million.

(c)Excludes $240 million of cash and cash equivalents related to the consolidated VIEs that is available for use only by the VIEs.

Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 4 of Condensed Notes to Consolidated Financial Statements.

We believe we have sufficient funds from operations and from available capacity under our credit facilities to fund our ongoing operating requirements and other commitments over the next 12 months and thereafter for the foreseeable future. We expect that, to the extent necessary, we can raise additional cash through equity or debt financings in the public and private capital markets or the arrangement of additional credit facilities. However, there can be no assurances regarding the availability of any future financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us.

Cash Flows

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


	Nine Months Ended September 30,
	2022		2021
Cash flows provided by (used in):
Operating activities	$	8,478	$	3,405
Investing activities	(2,070)		(1,412)
Financing activities:
Debt issuances and borrowings	2,596		129
Repayments of debt and finance lease obligations (including premiums paid on early retirement of debt)	(5,051)		(676)
Other financing activities	(3,814)		(1,192)
Financing activities	(6,269)		(1,739)
Effect of foreign exchange rate changes on cash	(292)		(69)
Net increase (decrease) in cash and cash equivalents	$	(153)	$	185

Cash Flows for the Nine Months Ended September 30, 2022

In the first nine months of 2022, we used $8.5 billion of cash generated by our operations, $2.6 billion in debt issuances and borrowings, and $153 million of cash on hand to make $2.1 billion of investments in our business, repay $5.1 billion of debt and finance lease obligations (including premiums paid on the early retirement of debt), and fund $3.8 billion of other financing activities. The debt issuance, borrowings, and repayments are described in Note 4 of Condensed Notes to Consolidated Financial Statements.

As previously noted, our operations generated $8.5 billion of cash in the first nine months of 2022, driven primarily by net income of $8.6 billion and noncash charges to income of $1.4 billion, partially offset by an unfavorable change in working capital of $1.6 billion. Noncash charges primarily included $1.8 billion of depreciation and amortization expense, partially offset by a $161 million deferred income tax benefit. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 11 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 primarily consisted of $2.1 billion in capital investments, as defined below under “Capital Investments,” of which $695 million related to capital investments made by DGD and $30 million related to capital expenditures of VIEs other than DGD.

Other financing activities of $3.8 billion consisted primarily of $2.8 billion for purchases of common stock for treasury and $1.2 billion in dividend payments.

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, repay $676 million of debt and finance lease obligations, fund $1.2 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. See note (b) on page 53 regarding the effects of Winter Storm Uri. Noncash charges primarily 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 6 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 11 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, of which $736 million related to capital investments made by DGD and $59 million 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 6 of Condensed Notes to Consolidated Financial Statements.

Other financing activities of $1.2 billion consisted primarily of $1.2 billion in dividend payments and $15 million for purchases of common stock for treasury.

Our Capital Resources

Our material cash requirements as of September 30, 2022 primarily consisted of working capital requirements, capital investments, contractual obligations, and other matters, as described below. Our operations have historically generated positive cash flows to fulfill our working capital requirements and other uses of cash as discussed below.

Capital Investments

Capital investments are comprised of our capital expenditures, deferred turnaround and catalyst cost expenditures, and investments in nonconsolidated joint ventures, as reflected in our consolidated statements of cash flows as shown on page 6. Capital investments exclude strategic investments or acquisitions, if any.

We have publicly announced GHG emissions reduction/displacement 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 have been completed or are already in execution and the associated capital investments are included in our expected capital investments for 2022 discussed below. 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.

Capital Investments Attributable to Valero

Capital investments attributable to Valero is a non-GAAP financial measure that reflects our net share of capital investments and is defined as all capital expenditures, deferred turnaround and catalyst cost expenditures, and investments in nonconsolidated joint ventures, excluding the portion of DGD’s capital investments attributable to the other joint venture member and all of the capital expenditures of other consolidated VIEs.

We are a 50 percent joint venture member in DGD and consolidate its 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 members 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 member, only 50 percent of DGD’s capital investments should be attributed to our net share of capital investments. We also exclude all of the capital expenditures of other VIEs that we consolidate because we do not operate those VIEs. See Note 6 of Condensed Notes to Consolidated Financial Statements for more information about the VIEs that we consolidate. 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, which is the most comparable GAAP measure, nor should it be considered in isolation or as a substitute for an analysis of our cash flows as reported under GAAP. In addition, this non-GAAP measure may not be comparable to similarly titled measures used by other companies because we may define it differently, which may diminish its utility.


		Nine Months Ended September 30,
	2022			2021
Reconciliation of capital investments to capital investments attributable to Valero
Capital expenditures (excluding VIEs)		$	552		$	368
Capital expenditures of VIEs:
DGD		682			730
Other VIEs		30			59
Deferred turnaround and catalyst cost expenditures (excluding VIEs)		820			544
Deferred turnaround and catalyst cost expenditures of DGD		13			6
Investments in nonconsolidated joint ventures		1			8
Capital investments		2,098			1,715
Adjustments:
DGD’s capital investments attributable to the other joint venture member		(347)			(368)
Capital expenditures of other VIEs		(30)			(59)
Capital investments attributable to Valero		$	1,721		$	1,288

We have developed an extensive multi-year capital investment program, which we update and revise based on changing internal and external factors. As previously disclosed in our annual report on Form 10-K for the year ended December 31, 2021, we expect to incur $2.0 billion for capital investments attributable to Valero during 2022. 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 approximately 50 percent is allocated to expanding our low-carbon businesses.

Contractual Obligations

As of September 30, 2022, our contractual obligations included debt obligations, interest payments related to debt obligations, operating lease liabilities, finance lease obligations, other long-term liabilities, and purchase obligations. In the ordinary course of business, we had debt-related activities during the nine months ended September 30, 2022, as described in Note 4 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, 2022.

We raised $4.0 billion of incremental debt in 2020 due to the negative impacts of the COVID-19 pandemic on our business. During the third quarter of 2022, we reduced our debt by $1.25 billion. This transaction, combined with debt reduction and refinancing transactions completed in the second half of 2021 and the first half of 2022, have collectively reduced our debt by approximately $3.6 billion. We will continue to evaluate further deleveraging opportunities.

Other Matters Impacting Liquidity and Capital Resources

Treasury Stock Purchases

During the three and nine months ended September 30, 2022, we purchased for treasury 8,444,754 shares for $928 million and 24,202,035 shares for $2.8 billion, respectively. We completed all authorized share purchases under the 2018 Program during the second quarter of 2022. On July 7, 2022, our Board authorized our purchase of up to an additional $2.5 billion of shares under the July 2022 Program with no

expiration date. On October 26, 2022, our Board authorized our purchase of up to an additional $2.5 billion with no expiration date, which is in addition to the amount remaining under the July 2022 Program. We will continue to evaluate the timing of purchases when appropriate. We have no obligation to make purchases under this program.

Pension Plan Funding

As disclosed in our annual report on Form 10-K for the year ended December 31, 2021, we plan to contribute approximately $116 million to our pension plans and $22 million to our other postretirement benefit plans during 2022. For the nine months ended September 30, 2022, we have contributed $107 million to our pension plans and $11 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 many of our products. 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.

Cash Held by Our Foreign Subsidiaries

As of September 30, 2022, $3.2 billion of our cash and cash equivalents was held by our foreign subsidiaries. Cash held by our foreign subsidiaries can be repatriated to us through dividends without any U.S. federal income tax consequences, but certain other taxes may apply, including, but not limited to, withholding taxes imposed by certain foreign jurisdictions, U.S. state income taxes, and U.S. federal income tax on foreign exchange gains. Therefore, there is a cost to repatriate cash held by certain of our foreign subsidiaries to us, but we believe that such amount is not material to our financial position and 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 other worldwide events causing volatility in the global crude 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.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with 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. There have been no changes to the critical accounting policies disclosed in our annual report on Form 10-K for the year ended December 31, 2021.

Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.