CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.
These unaudited financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and
nine
months ended
September 30, 2016
and
2015
included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited financial statements. Operating results for the three and
nine
months ended
September 30, 2016
are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
The balance sheet as of
December 31, 2015
has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended
December 31, 2015
.
Reclassifications
Certain amounts reported as of
December 31, 2015
have been reclassified in order to conform to the 2016 presentation, including the retrospective adoption of certain amendments to the Accounting Standards Codification (ASC) effective January 1, 2016. The adoption of the amendments to ASC Subtopic 835-30, “Interest–Imputation of Interest,” resulted in the reclassification of certain debt issuance costs from “deferred charges and other assets, net” to “debt and capital lease obligations, less current portion.” The adoption of the amendments to ASC Topic 740, “Income Taxes” resulted in the reclassification of current deferred income tax assets and current deferred income tax liabilities to noncurrent deferred income tax liabilities. The following table presents our previously reported balance sheet line items retrospectively adjusted for the adoption of these pronouncements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Previously
Reported
|
|
Reclassifications
|
|
Currently
Reported
|
Assets
|
|
|
|
|
|
Current deferred income taxes
|
$
|
74
|
|
|
$
|
(74
|
)
|
|
$
|
—
|
|
Deferred charges and other assets, net
|
2,668
|
|
|
(42
|
)
|
|
2,626
|
|
Liabilities
|
|
|
|
|
|
Current deferred income taxes
|
366
|
|
|
(366
|
)
|
|
—
|
|
Debt and capital lease obligations,
less current portion
|
7,250
|
|
|
(42
|
)
|
|
7,208
|
|
Deferred income taxes
|
6,768
|
|
|
292
|
|
|
7,060
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Accounting Pronouncements Adopted During the Period
In February 2015, the provisions of ASC Topic 810, “Consolidation,” were amended to improve consolidation guidance for certain types of legal entities. The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. With the adoption of this guidance effective January 1, 2016, we determined that Valero Energy Partners LP (VLP) is a VIE. Since we previously consolidated the financial statements of VLP, the adoption of this guidance did not affect our financial position or results of operations. See
Note 9
for disclosures related to our consolidated VIEs.
In April 2015, the provisions of ASC Subtopic 835-30, “Interest–Imputation of Interest,” were amended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a note be reported in the balance sheet as a direct deduction from the face amount of that note, consistent with debt discounts, and that amortization of debt issuance costs be reported as interest expense. In August 2015, these provisions were further amended with guidance from the Securities and Exchange Commission staff, which provides that the staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These provisions are to be applied retrospectively and are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. The adoption of this guidance effective January 1, 2016 did not materially affect our financial position and did not affect our results of operations because we already reported the amortization of debt issuance costs as interest expense. See “Basis of Presentation–Reclassifications” above for the reclassified presentation in our balance sheet. Debt issuance costs associated with our line-of-credit arrangements will continue to be reported in the balance sheet as “deferred charges and other assets, net.”
In May 2015, the provisions of ASC Topic 820, “Fair Value Measurements,” were amended to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured using the net asset value per share practical expedient and limits those disclosures to investments for which the entity has elected to measure the fair value using that practical expedient. These provisions are to be applied retrospectively and are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. The adoption of this guidance effective January 1, 2016 did not affect our financial position or results of operations.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In September 2015, the provisions of ASC Topic 805, “Business Combinations,” were amended to simplify the accounting and reporting of adjustments made to provisional amounts recognized in a business combination. The amendment requires that an acquirer (i) record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and (ii) present separately on the statement of income or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, and should be applied prospectively to adjustments made to provisional amounts that occur after the effective date. The adoption of this guidance effective January 1, 2016 did not affect our financial position or results of operations; however, it may result in changes to the manner in which adjustments to provisional amounts recognized in a future business combination, if any, are presented in our financial statements.
In November 2015, the provisions of ASC Topic 740, “Income Taxes,” were amended to simplify the presentation of deferred income taxes. The amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The amendments are effective for financial statements for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of any interim or annual period. The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Entities applying the guidance retrospectively should disclose in the first interim and first annual period of adoption the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods. Effective January 1, 2016, we adopted this guidance on a retrospective basis, but such adoption did not materially affect our financial position and it did not impact our results of operations. See “Basis of Presentation–Reclassifications” above for the reclassified presentation. Adoption of this guidance simplifies the future presentation of our deferred income tax assets and liabilities.
In March 2016, the provisions of ASC Topic 718, “Compensation–Stock Compensation,” were amended to simplify the accounting and reporting for employee share-based payments. These amendments involve several aspects of the accounting for share-based payment transactions, including accounting for income taxes as it pertains to the recognition of excess tax benefits and tax deficiencies in the statements of income, forfeitures, minimum statutory tax withholding requirements, as well as classification of excess tax benefits and employee taxes paid in the statement of cash flows. These provisions are effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments provide specific transition and disclosure guidance for each provision. Effective January 1, 2016, we adopted this guidance on a prospective basis, and such adoption did not materially affect our financial position, results of operations, or cash flows. Excess tax benefits, which were previously reported in cash flows from financing activities, are currently reported in cash flows from operating activities.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting Pronouncements Not Yet Adopted
In May 2014, the ASC was amended and a new accounting standard, ASC Topic 606, “Revenue from Contracts with Customers,” was issued to clarify the principles for recognizing revenue. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures. A multi-disciplined implementation team has gained an understanding of the standard’s revenue recognition model, is completing the review and documentation of our contracts, and is analyzing whether enhancements are needed to our business and accounting systems.
In July 2015, the provisions of ASC Topic 330, “Inventory” were amended to simplify the measurement of inventory measured using the first-in, first-out or average cost methods. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2017 will not affect our financial position or results of operations.
In January 2016, the provisions of ASC Subtopic 825-10, “Financial Instruments–Overall,” were amended to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.
In February 2016, the ASC was amended and a new accounting standard, ASC Topic 842, “Leases,” was issued to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures. A multi-disciplined implementation team has gained an understanding of the accounting and disclosure provisions of the standard and is in the process of analyzing the impacts to our business and accounting systems, including the development of new accounting systems to account for our leases and support the required disclosures.
In October 2016, the provisions of ASC Topic 740, “Income Taxes,” were amended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The amendments require an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory immediately when the transfer occurs. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The amendments should be applied on a modified retrospective basis with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption for the recognition of income tax consequences of intra-entity transfers of assets other than inventory that occur before the adoption date. The adoption of this guidance effective January 1, 2018 is not expected to materially affect our financial position or results of operations; however, certain deferred charges associated with intra-entity transfers of assets other than inventory will be reported in our balance sheet primarily as a reduction to our deferred income tax liabilities.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 2016, the provisions of ASC Topic 810, “Consolidation,” were amended to provide guidance on how a reporting entity that is a single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary. These provisions are effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The amendments should be applied on a retrospective basis to all relevant prior periods beginning with the fiscal year in which the VIE guidance was adopted with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this guidance effective January 1, 2017 will not affect our financial position or results of operations.
Effective October 1, 2016, we (i) transferred ownership of all of our assets in Aruba, other than certain hydrocarbon inventories and working capital, to Refineria di Aruba N.V. (RDA), an entity wholly-owned by the Government of Aruba (GOA), (ii) settled our obligations under various agreements with the GOA, including agreements that required us to dismantle our leasehold improvements under certain conditions, and (iii) sold the working capital of our Aruba operations, including hydrocarbon inventories, to the GOA, CITGO Aruba Refining N.V. (CAR), and CITGO Petroleum Corporation (together with CAR and certain other affiliates, collectively, CITGO). We refer to this transaction as the “Aruba Disposition.” The agreements associated with the Aruba Disposition were finalized in September 2016, including approval of such agreements by the Aruba Parliament. We no longer own any assets or have any operations in Aruba.
In June 2016, we recognized an asset impairment loss of
$56 million
representing all of the remaining carrying value of our long-lived assets in Aruba. These assets were primarily related to our crude oil and refined products terminal and transshipment facility in Aruba (collectively, the Aruba Terminal), which were included in our refining segment. We recognized the impairment loss at that time because we concluded that it was more likely than not that we would ultimately transfer ownership of these assets to the GOA as a result of agreements entered into in June 2016 between the GOA and CITGO providing for, among other things, the GOA’s lease of those assets to CITGO. (See
Note 12
for disclosure related to the method to determine fair value.) We had previously written off all of the carrying value of the long-lived assets of the refining operations (the Aruba Refinery) and recognized an asset retirement obligation upon the suspension of operations of those assets in 2012. Therefore, there was no other significant effect to our results of operations from the Aruba Disposition during the three and nine months ended September 30, 2016, except with respect to income taxes, which are discussed below. In addition, the net cash impact to us upon effectiveness of the Aruba Disposition on October 1, 2016, was not significant.
In September 2016 and in connection with the Aruba Disposition, our U.S. subsidiaries were unable to collect any outstanding debt obligations owed to them by our Aruba subsidiaries, which resulted in the recognition by us of an income tax benefit in the U.S. of
$42 million
during the three and
nine
months ended
September 30, 2016
. We had no income tax effect in Aruba from the cancellation of debt or other effects of the Aruba Disposition because of net operating loss carryforwards associated with our operations in Aruba against which we had previously recorded a full valuation allowance.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Refinery feedstocks
|
$
|
2,244
|
|
|
$
|
2,404
|
|
Refined products and blendstocks
|
3,283
|
|
|
3,774
|
|
Ethanol feedstocks and products
|
202
|
|
|
242
|
|
Materials and supplies
|
250
|
|
|
244
|
|
Inventories, before lower of cost or market
inventory valuation reserve
|
5,979
|
|
|
6,664
|
|
Lower of cost or market inventory valuation reserve
|
—
|
|
|
(766
|
)
|
Inventories
|
$
|
5,979
|
|
|
$
|
5,898
|
|
Inventories are valued at the lower of cost or market. As of
December 31, 2015
, we had a valuation reserve of
$766 million
in order to state our inventories at market. As of
September 30, 2016
, we reevaluated our inventories and determined that our cost was lower than market. As a result, for the
nine
months ended
September 30, 2016
, we recorded a change in our lower of cost or market inventory valuation reserve that resulted in a net benefit to our results of operations of
$747 million
. The income statement benefit for the
nine
months ended
September 30, 2016
differs from the change in the balance sheet reserve due to the foreign currency effect of inventories held by our international operations.
As of
September 30, 2016
, the replacement cost (market value) of last-in, first-out (LIFO) inventories exceeded their LIFO carrying amounts by
$1.2 billion
. As of
September 30, 2016
and
December 31, 2015
, our non-LIFO inventories accounted for
$675 million
and
$668 million
, respectively, of our total inventories.
|
|
4.
|
DEBT AND CAPITAL LEASE OBLIGATIONS
|
Credit Facilities
Revolver
We have a
$3 billion
revolving credit facility (the Revolver) that matures in
November 2020
. We have the option to increase the aggregate commitments under the Revolver to
$4.5 billion
, subject to certain conditions. The Revolver also provides for the issuance of letters of credit of up to
$2.0 billion
.
No
amounts were outstanding under the Revolver as of
September 30, 2016
or
December 31, 2015
, and we had no borrowings under the Revolver during the
nine
months ended
September 30, 2016
and
2015
.
VLP Revolver
VLP has a
$750 million
senior unsecured revolving credit facility (the VLP Revolver) that matures in
November 2020
. The VLP Revolver is available only to the operations of VLP, and creditors of VLP do not have recourse against Valero. VLP has the option to increase the aggregate commitments under the VLP Revolver to
$1.0 billion
, subject to certain conditions. The VLP Revolver also provides for the issuance of letters of credit of up to
$100 million
. Outstanding borrowings under the VLP Revolver bear interest at a variable rate, which was
1.8125
percent as of
September 30, 2016
.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the
nine
months ended
September 30, 2016
, VLP borrowed
$139 million
and
$210 million
under the VLP Revolver in connection with VLP’s acquisitions from us of the McKee Terminal Services Business in
April 2016
and the Meraux and Three Rivers Terminal Services Business in
September 2016
, respectively, and made
no
repayments under the VLP Revolver. During the
nine
months ended
September 30, 2015
, VLP borrowed
$200 million
under the VLP Revolver in connection with VLP’s acquisition from us of the Houston and St. Charles Terminal Services Business and repaid
$25 million
on the VLP Revolver. Borrowings outstanding under the VLP Revolver were
$524 million
and
$175 million
as of
September 30, 2016
and
December 31, 2015
, respectively.
Canadian Revolver
One of our Canadian subsidiaries has a
C$50 million
committed revolving credit facility (the Canadian Revolver) that matures in
November 2016
.
No
amounts were outstanding under the Canadian Revolver as of
September 30, 2016
or
December 31, 2015
, and we had no borrowings under the Canadian Revolver during the
nine
months ended
September 30, 2016
and
2015
.
Accounts Receivable Sales Facility
We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell eligible trade receivables on a revolving basis. In July 2016, we amended our agreement to decrease the facility from
$1.4 billion
to
$1.3 billion
and extended the maturity date to
July 2017
. Proceeds from the sale of receivables under this facility are reflected as debt. Under this program, one of our marketing subsidiaries (Valero Marketing) sells eligible receivables, without recourse, to another of our subsidiaries (Valero Capital), whereupon the receivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells an undivided percentage ownership interest in the eligible receivables, without recourse, to the third-party entities and financial institutions. To the extent that Valero Capital retains an ownership interest in the receivables it has purchased from Valero Marketing, such interest is included in our financial statements solely as a result of the consolidation of the financial statements of Valero Capital with those of Valero Energy Corporation; the receivables are not available to satisfy the claims of the creditors of Valero Marketing or Valero Energy Corporation.
During the
nine
months ended
September 30, 2016
and
2015
, we had no proceeds from or repayments under the accounts receivable sales facility.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary of Credit Facilities
We had outstanding borrowings, letters of credit issued, and availability under our revolving credit facilities as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
Facility
Amount
|
|
Maturity Date
|
|
Outstanding
Borrowings
|
|
Letters of
Credit
|
|
Availability
|
Committed facilities:
|
|
|
|
|
|
|
|
|
|
|
Revolver
|
|
$
|
3,000
|
|
|
November 2020
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
2,947
|
|
VLP Revolver
|
|
$
|
750
|
|
|
November 2020
|
|
$
|
524
|
|
|
$
|
—
|
|
|
$
|
226
|
|
Canadian Revolver
|
|
C$
|
50
|
|
|
November 2016
|
|
C$
|
—
|
|
|
C$
|
10
|
|
|
C$
|
40
|
|
Accounts receivable
sales facility (a)
|
|
$
|
1,300
|
|
|
July 2017
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
1,051
|
|
Letter of credit facilities
|
|
$
|
275
|
|
|
November 2016 and June 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
275
|
|
Uncommitted facilities:
|
|
|
|
|
|
|
|
|
|
|
Letter of credit facilities
|
|
$
|
650
|
|
|
N/A
|
|
$
|
—
|
|
|
$
|
185
|
|
|
$
|
465
|
|
___________________
|
|
(a)
|
As of
September 30, 2016
, the actual availability under the accounts receivable sales facility fell below the facility borrowing capacity to
$1.2 billion
primarily due to a decrease in eligible trade receivables as a result of the current market price environment for the finished products that we produce.
|
Non-Bank Debt
During the
nine
months ended
September 30, 2016
, we issued
$1.25 billion
of
3.4
percent senior notes due
September 15, 2026
. Proceeds from this debt issuance totaled
$1.246 billion
. We also incurred
$10 million
of debt issuance costs. During the
nine
months ended
September 30, 2016
, we had
no
repayments under our non-bank debt.
In October 2016, we redeemed our
6.125
percent senior notes with a maturity date of
June 15, 2017
for
$778 million
, or
103.70
percent of stated value, and our
7.2
percent senior notes with a maturity date of
October 15, 2017
for
$213 million
, or
106.27
percent of stated value.
During the
nine
months ended
September 30, 2015
, we issued
$600 million
of
3.65
percent senior notes due
March 15, 2025
and
$650 million
of
4.9
percent senior notes due
March 15, 2045
. Proceeds from these debt issuances totaled
$1.246 billion
. We also incurred
$12 million
of debt issuance costs. In addition, we made scheduled debt repayments of
$400 million
related to our
4.5
percent senior notes and
$75 million
related to our
8.75
percent debentures.
Other Debt
In June 2016, a joint venture in Canada that we consolidate entered into a
C$72 million
senior secured credit facility. This non-revolving credit facility bears interest at a fixed rate (as defined by the lender) plus the applicable margin and matures in
June 2023
. During the
nine
months ended
September 30, 2016
, borrowings under this facility totaled
C$72 million
and debt repayments totaled
C$2 million
. As of
September 30, 2016
, the effective interest rate of this facility was
3.85
percent.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capitalized Interest
Capitalized interest was
$14 million
and
$18 million
for the three months ended
September 30, 2016
and
2015
, respectively, and
$53 million
and
$50 million
for the
nine
months ended
September 30, 2016
and
2015
, respectively.
Capital Lease Obligations
In October 2016, we entered into agreements under which we expect to lease storage tanks located at three of our refineries. The leases will not commence until certain required regulatory permitting occurs. The lease agreements will be accounted for as capital leases and we expect to recognize capital lease assets and related obligations of approximately
$490 million
. These capital lease agreements have initial terms of
10
years each and each agreement has successive
10
-year automatic renewal terms.
|
|
5.
|
COMMITMENTS AND CONTINGENCIES
|
Environmental Matters
We are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village) and during 2015, one of these companies assumed the ongoing remediation in the Village pursuant to a federal court order. We had previously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issued by the U.S. Environmental Protection Agency (EPA). The parties involved in the initial response may have further claims among themselves for costs already incurred. We also continue to be engaged in site assessment and interim measures at the adjacent shutdown refinery site, which we acquired as part of an acquisition in 2005, and we are in litigation with other potentially responsible parties and the Illinois EPA relating to the remediation of the site. In each of these matters, we have various defenses, limitations, and potential rights for contribution from the other responsible parties. We have recorded a liability for our expected contribution obligations. However, because of the unpredictable nature of these cleanups, the methodology for allocation of liabilities, and the State of Illinois’ failure to directly sue third parties responsible for historic contamination at the site, it is reasonably possible that we could incur a loss in a range of
$0
to
$200 million
in excess of the amount of our accrual to ultimately resolve these matters. Factors underlying this estimated range are expected to change from time to time, and actual results may vary significantly from this estimate.
Litigation Matters
We are party to claims and legal proceedings arising in the ordinary course of business. We have not recorded a loss contingency liability with respect to some of these matters because we have determined that it is remote that a loss has been incurred. For other matters, we have recorded a loss contingency liability where we have determined that it is probable that a loss has been incurred and that the loss is reasonably estimable. These loss contingency liabilities are not material to our financial position. We re-evaluate and update our loss contingency liabilities as matters progress over time, and we believe that any changes to the recorded liabilities will not be material to our financial position, results of operations, or liquidity.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of Balances
The following is a reconciliation of the beginning and ending balances of equity attributable to our stockholders, equity attributable to noncontrolling interests, and total equity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Valero
Stockholders’
Equity
|
|
Non-
controlling
Interests (a)
|
|
Total
Equity
|
|
Valero
Stockholders’
Equity
|
|
Non-
controlling
Interests (a)
|
|
Total
Equity
|
Balance as of
beginning of period
|
$
|
20,527
|
|
|
$
|
827
|
|
|
$
|
21,354
|
|
|
$
|
20,677
|
|
|
$
|
567
|
|
|
$
|
21,244
|
|
Net income
|
1,922
|
|
|
79
|
|
|
2,001
|
|
|
3,692
|
|
|
14
|
|
|
3,706
|
|
Dividends
|
(840
|
)
|
|
—
|
|
|
(840
|
)
|
|
(608
|
)
|
|
—
|
|
|
(608
|
)
|
Stock-based
compensation expense
|
33
|
|
|
—
|
|
|
33
|
|
|
27
|
|
|
—
|
|
|
27
|
|
Tax deduction in excess
of stock-based
compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
Transactions
in connection with
stock-based
compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuances
|
4
|
|
|
—
|
|
|
4
|
|
|
29
|
|
|
—
|
|
|
29
|
|
Stock purchases
|
(43
|
)
|
|
—
|
|
|
(43
|
)
|
|
(136
|
)
|
|
—
|
|
|
(136
|
)
|
Stock purchases under
purchase program
|
(1,120
|
)
|
|
—
|
|
|
(1,120
|
)
|
|
(1,965
|
)
|
|
—
|
|
|
(1,965
|
)
|
Issuance of Valero
Energy Partners LP
common units
|
—
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Contributions from
noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Distributions to
noncontrolling interests
|
—
|
|
|
(54
|
)
|
|
(54
|
)
|
|
—
|
|
|
(39
|
)
|
|
(39
|
)
|
Transfers from
noncontrolling interests,
net of tax (b)
|
43
|
|
|
(68
|
)
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive
income (loss)
|
(187
|
)
|
|
1
|
|
|
(186
|
)
|
|
(428
|
)
|
|
—
|
|
|
(428
|
)
|
Balance as of end of period
|
$
|
20,339
|
|
|
$
|
791
|
|
|
$
|
21,130
|
|
|
$
|
21,321
|
|
|
$
|
547
|
|
|
$
|
21,868
|
|
___________________________
|
|
(a)
|
The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See
Note 9
for information about our consolidated VIEs.
|
|
|
(b)
|
“Transfers from noncontrolling interests, net of tax” reflects an adjustment to reallocate VLP equity activity between our ownership interest in VLP and that of the noncontrolling interests. This reallocation occurred due to the expiration of the subordination period on August 10, 2016 and as a result of a change in ownership interest resulting from VLP’s issuances of equity following that date. During the subordination period, we held certain common units in VLP that were subordinate to other common units held by us and VLP’s public unitholders. Upon expiration of the subordination period, all unitholders have equal ownership rights.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share Activity
Activity in the number of shares of common stock and treasury stock was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Common
Stock
|
|
Treasury
Stock
|
Balance as of beginning of period
|
673
|
|
|
(200
|
)
|
|
673
|
|
|
(159
|
)
|
Transactions in connection with
stock-based compensation plans:
|
|
|
|
|
|
|
|
Stock issuances
|
—
|
|
|
1
|
|
|
—
|
|
|
3
|
|
Stock purchases
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Stock purchases under purchase program
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
(32
|
)
|
Balance as of end of period
|
673
|
|
|
(220
|
)
|
|
673
|
|
|
(190
|
)
|
Treasury Stock
We purchase shares of our common stock as authorized under our common stock purchase program and to meet our obligations under employee stock-based compensation plans.
On
September 21, 2016
, our board of directors authorized our purchase of up to an additional
$2.5 billion
of our outstanding common stock with no expiration date.
Common Stock Dividends
On
November 2, 2016
, our board of directors declared a quarterly cash dividend of
$0.60
per common share payable on
December 15, 2016
to holders of record at the close of business on
November 22, 2016
.
Income Tax Effects Related to Components of Other Comprehensive Loss
The tax effects allocated to each component of other comprehensive loss were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Before-
Tax
Amount
|
|
Tax
Expense
(Benefit)
|
|
Net
Amount
|
|
Before-
Tax
Amount
|
|
Tax
Expense
(Benefit)
|
|
Net
Amount
|
Foreign currency translation adjustment
|
$
|
(117
|
)
|
|
$
|
—
|
|
|
$
|
(117
|
)
|
|
$
|
(270
|
)
|
|
$
|
—
|
|
|
$
|
(270
|
)
|
Pension and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified into income related to:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
(9
|
)
|
|
(3
|
)
|
|
(6
|
)
|
|
(10
|
)
|
|
(3
|
)
|
|
(7
|
)
|
Net actuarial loss
|
12
|
|
|
4
|
|
|
8
|
|
|
16
|
|
|
5
|
|
|
11
|
|
Settlement
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net gain (loss) on pension and other
postretirement benefits
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
6
|
|
|
2
|
|
|
4
|
|
Other comprehensive loss
|
$
|
(117
|
)
|
|
$
|
1
|
|
|
$
|
(118
|
)
|
|
$
|
(264
|
)
|
|
$
|
2
|
|
|
$
|
(266
|
)
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Before-
Tax
Amount
|
|
Tax
Expense
(Benefit)
|
|
Net
Amount
|
|
Before-
Tax
Amount
|
|
Tax
Expense
(Benefit)
|
|
Net
Amount
|
Foreign currency translation adjustment
|
$
|
(197
|
)
|
|
$
|
—
|
|
|
$
|
(197
|
)
|
|
$
|
(439
|
)
|
|
$
|
—
|
|
|
$
|
(439
|
)
|
Pension and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous gain arising during the period
|
—
|
|
|
(8
|
)
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amounts reclassified into income related to:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
(27
|
)
|
|
(10
|
)
|
|
(17
|
)
|
|
(30
|
)
|
|
(10
|
)
|
|
(20
|
)
|
Net actuarial loss
|
36
|
|
|
13
|
|
|
23
|
|
|
47
|
|
|
16
|
|
|
31
|
|
Settlement
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net gain on pension and other
postretirement benefits
|
6
|
|
|
(5
|
)
|
|
11
|
|
|
17
|
|
|
6
|
|
|
11
|
|
Other comprehensive loss
|
$
|
(191
|
)
|
|
$
|
(5
|
)
|
|
$
|
(186
|
)
|
|
$
|
(422
|
)
|
|
$
|
6
|
|
|
$
|
(428
|
)
|
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined
Benefit
Plans
Items
|
|
Total
|
Balance as of December 31, 2015
|
$
|
(605
|
)
|
|
$
|
(328
|
)
|
|
$
|
(933
|
)
|
Other comprehensive income (loss)
before reclassifications
|
(198
|
)
|
|
8
|
|
|
(190
|
)
|
Amounts reclassified from accumulated
other comprehensive loss
|
—
|
|
|
3
|
|
|
3
|
|
Net other comprehensive income (loss)
|
(198
|
)
|
|
11
|
|
|
(187
|
)
|
Balance as of September 30, 2016
|
$
|
(803
|
)
|
|
$
|
(317
|
)
|
|
$
|
(1,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined
Benefit
Plans
Items
|
|
Total
|
Balance as of December 31, 2014
|
$
|
1
|
|
|
$
|
(368
|
)
|
|
$
|
(367
|
)
|
Other comprehensive loss
before reclassifications
|
(439
|
)
|
|
—
|
|
|
(439
|
)
|
Amounts reclassified from accumulated
other comprehensive loss
|
—
|
|
|
11
|
|
|
11
|
|
Net other comprehensive income (loss)
|
(439
|
)
|
|
11
|
|
|
(428
|
)
|
Balance as of September 30, 2015
|
$
|
(438
|
)
|
|
$
|
(357
|
)
|
|
$
|
(795
|
)
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
7.
|
EMPLOYEE BENEFIT PLANS
|
The components of net periodic benefit cost related to our defined benefit plans were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement
Benefit Plans
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Three months ended September 30:
|
|
|
|
|
|
|
|
Service cost
|
$
|
28
|
|
|
$
|
27
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
21
|
|
|
24
|
|
|
3
|
|
|
4
|
|
Expected return on plan assets
|
(35
|
)
|
|
(33
|
)
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service credit
|
(5
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
(5
|
)
|
Net actuarial (gain) loss
|
13
|
|
|
16
|
|
|
(1
|
)
|
|
—
|
|
Special credits
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
15
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30:
|
|
|
|
|
|
|
|
Service cost
|
$
|
84
|
|
|
$
|
82
|
|
|
$
|
5
|
|
|
$
|
6
|
|
Interest cost
|
63
|
|
|
73
|
|
|
9
|
|
|
11
|
|
Expected return on plan assets
|
(104
|
)
|
|
(100
|
)
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service credit
|
(15
|
)
|
|
(16
|
)
|
|
(12
|
)
|
|
(14
|
)
|
Net actuarial (gain) loss
|
37
|
|
|
47
|
|
|
(1
|
)
|
|
—
|
|
Special charges (credits)
|
(7
|
)
|
|
5
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
58
|
|
|
$
|
91
|
|
|
$
|
1
|
|
|
$
|
3
|
|
We contributed
$132 million
and
$114 million
, respectively, to our pension plans and
$12 million
and
$11 million
, respectively, to our other postretirement benefit plans during the
nine
months ended
September 30, 2016
and
2015
. Of the
$132 million
contributed to our pension plans during the nine months ended
September 30, 2016
,
$100 million
was discretionary and was contributed during the third quarter of 2016.
As a result of the discretionary pension contributions discussed above, our expected contributions to our pension plans have increased to
$136 million
for 2016. Our anticipated contributions to our other postretirement benefit plans during 2016 have not changed from the amount previously disclosed in our financial statements for the year ended December 31, 2015.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
8.
|
EARNINGS PER COMMON SHARE
|
Earnings per common share were computed as follows (dollars and shares in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Participating
Securities
|
|
Common
Stock
|
|
Participating
Securities
|
|
Common
Stock
|
Earnings per common share:
|
|
|
|
|
|
|
|
Net income attributable to Valero stockholders
|
|
|
$
|
613
|
|
|
|
|
$
|
1,377
|
|
Less dividends paid:
|
|
|
|
|
|
|
|
Common stock
|
|
|
275
|
|
|
|
|
198
|
|
Participating securities
|
|
|
1
|
|
|
|
|
1
|
|
Undistributed earnings
|
|
|
$
|
337
|
|
|
|
|
$
|
1,178
|
|
Weighted-average common shares outstanding
|
1
|
|
|
458
|
|
|
2
|
|
|
491
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Distributed earnings
|
$
|
0.60
|
|
|
$
|
0.60
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
Undistributed earnings
|
0.73
|
|
|
0.73
|
|
|
2.39
|
|
|
2.39
|
|
Total earnings per common share
|
$
|
1.33
|
|
|
$
|
1.33
|
|
|
$
|
2.79
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
Earnings per common share –
assuming dilution:
|
|
|
|
|
|
|
|
Net income attributable to Valero stockholders
|
|
|
$
|
613
|
|
|
|
|
$
|
1,377
|
|
Weighted-average common shares outstanding
|
|
|
458
|
|
|
|
|
491
|
|
Common equivalent shares:
|
|
|
|
|
|
|
|
Stock options
|
|
|
1
|
|
|
|
|
1
|
|
Performance awards and
nonvested restricted stock
|
|
|
1
|
|
|
|
|
2
|
|
Weighted-average common shares outstanding –
assuming dilution
|
|
|
460
|
|
|
|
|
494
|
|
Earnings per common share – assuming dilution
|
|
|
$
|
1.33
|
|
|
|
|
$
|
2.79
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Participating
Securities
|
|
Common
Stock
|
|
Participating
Securities
|
|
Common
Stock
|
Earnings per common share:
|
|
|
|
|
|
|
|
Net income attributable to Valero stockholders
|
|
|
$
|
1,922
|
|
|
|
|
$
|
3,692
|
|
Less dividends paid:
|
|
|
|
|
|
|
|
Common stock
|
|
|
837
|
|
|
|
|
606
|
|
Participating securities
|
|
|
3
|
|
|
|
|
2
|
|
Undistributed earnings
|
|
|
$
|
1,082
|
|
|
|
|
$
|
3,084
|
|
Weighted-average common shares outstanding
|
1
|
|
|
465
|
|
|
2
|
|
|
503
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Distributed earnings
|
$
|
1.80
|
|
|
$
|
1.80
|
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
Undistributed earnings
|
2.32
|
|
|
2.32
|
|
|
6.11
|
|
|
6.11
|
|
Total earnings per common share
|
$
|
4.12
|
|
|
$
|
4.12
|
|
|
$
|
7.31
|
|
|
$
|
7.31
|
|
|
|
|
|
|
|
|
|
Earnings per common share –
assuming dilution:
|
|
|
|
|
|
|
|
Net income attributable to Valero stockholders
|
|
|
$
|
1,922
|
|
|
|
|
$
|
3,692
|
|
Weighted-average common shares outstanding
|
|
|
465
|
|
|
|
|
503
|
|
Common equivalent shares:
|
|
|
|
|
|
|
|
Stock options
|
|
|
1
|
|
|
|
|
2
|
|
Performance awards and
nonvested restricted stock
|
|
|
1
|
|
|
|
|
1
|
|
Weighted-average common shares outstanding –
assuming dilution
|
|
|
467
|
|
|
|
|
506
|
|
Earnings per common share – assuming dilution
|
|
|
$
|
4.12
|
|
|
|
|
$
|
7.30
|
|
Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
9.
|
VARIABLE INTEREST ENTITIES
|
In the normal course of business, we have financial interests in certain entities that have been determined to be VIEs. We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary such that we have (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to make this determination, we evaluated our contractual arrangements with the VIEs, including arrangements for the use of assets, purchases of products and services, debt, equity, or management of operating activities.
The following discussion summarizes our involvement with our VIEs:
|
|
•
|
VLP is a publicly traded master limited partnership whose common limited partner units are traded on the New York Stock Exchange under “VLP.” We formed VLP in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. VLP’s assets include crude oil and refined products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of
ten
of our refineries. As of
September 30, 2016
, we owned a
66.6
percent limited partner interest and a
2
percent general partner interest in VLP, and public unitholders owned a
31.4
percent limited partner interest.
|
VLP was determined to be a VIE because the public limited partners of VLP (
i.e.
, parties other than entities under common control with the general partner) lack the power to direct the activities of VLP that most significantly impact its economic performance because they do not have substantive kick-out rights over the general partner or substantive participating rights in VLP. Furthermore, we determined that we are the primary beneficiary of VLP because (a) we are the single decision maker and because our general partner interest provides us with the sole power to direct the activities that most significantly impact VLP’s economic performance and (b) our
66.6
percent limited partner interest and
2
percent general partner interest provide us with significant economic rights and obligations. All of VLP’s revenues are derived from us; therefore, there is limited risk to us associated with VLP’s operations.
|
|
•
|
Diamond Green Diesel Holdings LLC (DGD) is a joint venture with Darling Green Energy LLC, a subsidiary of Darling Ingredients Inc., that was formed to construct and operate a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel. The plant is located next to our St. Charles Refinery and began operations in June 2013. Our significant agreements with DGD include a debt agreement whereby we financed approximately
60
percent of the construction costs of the plant, an operations agreement that outlines our responsibilities as operator of the plant, and a marketing agreement.
|
In the event of certain conditions, the debt agreement provides us (as lender) with certain power to direct the activities that most significantly impact DGD’s economic performance. Because the loan agreement conveys such power to us and is separate from our ownership rights, DGD was determined to be a VIE. For this reason and because we hold a
50
percent ownership interest that provides us with significant economic rights and obligations, we determined that we are the primary beneficiary
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of DGD. DGD has risk associated with its operations because it generates revenues from third-party customers.
|
|
•
|
We also have financial interests in other entities in which we hold a
50
percent ownership interest, which is a significant variable interest. These entities were determined to be VIEs because the entities’ contractual arrangements transfer the power to direct the activities that most significantly impact their economic performance or reduce the exposure to operational variability and risk of loss created by the entity that otherwise would be held exclusively by the equity owners. Furthermore, we determined that we are the primary beneficiary of these VIEs because (a) certain contractual arrangements (exclusive of our ownership rights) provide us with the power to direct the activities that most significantly impact the economic performance of these entities and (b) our
50
percent ownership interests provide us with significant economic rights and obligations. The financial position, results of operations, and cash flows of these VIEs are not material to us.
|
The VIEs’ assets can only be used to settle their own obligations and the VIEs’ creditors have no recourse to our assets. We do not provide financial guarantees to our VIEs. Although we have provided credit facilities to the VIEs in support of their construction or acquisition activities, these transactions are eliminated in consolidation. Our financial position, results of operations, and cash flows are impacted by our consolidated VIEs’ performance, net of intercompany eliminations, to the extent of our ownership interest in each VIE.
The following tables present summarized balance sheet information for the significant assets and liabilities of our VIEs, which are included in our balance sheets (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
VLP
|
|
DGD
|
|
Other
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and temporary cash investments
|
$
|
35
|
|
|
$
|
121
|
|
|
$
|
19
|
|
|
$
|
175
|
|
Other current assets
|
4
|
|
|
81
|
|
|
—
|
|
|
85
|
|
Property, plant, and equipment, net
|
854
|
|
|
354
|
|
|
136
|
|
|
1,344
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
11
|
|
|
$
|
17
|
|
|
$
|
7
|
|
|
$
|
35
|
|
Debt and capital lease obligations,
less current portion
|
524
|
|
|
—
|
|
|
48
|
|
|
572
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
VLP
|
|
DGD
|
|
Other
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and temporary cash investments
|
$
|
81
|
|
|
$
|
44
|
|
|
$
|
7
|
|
|
$
|
132
|
|
Other current assets
|
—
|
|
|
211
|
|
|
—
|
|
|
211
|
|
Property, plant, and equipment, net
|
747
|
|
|
356
|
|
|
140
|
|
|
1,243
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
18
|
|
|
$
|
43
|
|
Debt and capital lease obligations,
less current portion
|
175
|
|
|
—
|
|
|
—
|
|
|
175
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reflects activity related to our reportable segments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Ethanol
|
|
Corporate
|
|
Total
|
Three months ended September 30, 2016:
|
|
|
|
|
|
|
|
Total segment revenues
|
$
|
18,718
|
|
|
$
|
987
|
|
|
$
|
—
|
|
|
$
|
19,705
|
|
Less intersegment revenues
|
—
|
|
|
56
|
|
|
—
|
|
|
56
|
|
Operating revenues from external
customers
|
$
|
18,718
|
|
|
$
|
931
|
|
|
$
|
—
|
|
|
$
|
19,649
|
|
Operating income (loss)
|
$
|
990
|
|
|
$
|
106
|
|
|
$
|
(204
|
)
|
|
$
|
892
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2015:
|
|
|
|
|
|
|
|
Total segment revenues
|
$
|
21,739
|
|
|
$
|
879
|
|
|
$
|
—
|
|
|
$
|
22,618
|
|
Less intersegment revenues
|
—
|
|
|
39
|
|
|
—
|
|
|
39
|
|
Operating revenues from external
customers
|
$
|
21,739
|
|
|
$
|
840
|
|
|
$
|
—
|
|
|
$
|
22,579
|
|
Operating income (loss)
|
$
|
2,295
|
|
|
$
|
35
|
|
|
$
|
(191
|
)
|
|
$
|
2,139
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
Total segment revenues
|
$
|
52,302
|
|
|
$
|
2,780
|
|
|
$
|
—
|
|
|
$
|
55,082
|
|
Less intersegment revenues
|
—
|
|
|
135
|
|
|
—
|
|
|
135
|
|
Operating revenues from external
customers
|
$
|
52,302
|
|
|
$
|
2,645
|
|
|
$
|
—
|
|
|
$
|
54,947
|
|
Lower of cost or market inventory
valuation adjustment
|
$
|
(697
|
)
|
|
$
|
(50
|
)
|
|
$
|
—
|
|
|
$
|
(747
|
)
|
Asset impairment loss
|
56
|
|
|
—
|
|
|
—
|
|
|
56
|
|
Operating income (loss)
|
3,280
|
|
|
214
|
|
|
(542
|
)
|
|
2,952
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2015:
|
|
|
|
|
|
|
|
Total segment revenues
|
$
|
66,618
|
|
|
$
|
2,513
|
|
|
$
|
—
|
|
|
$
|
69,131
|
|
Less intersegment revenues
|
—
|
|
|
104
|
|
|
—
|
|
|
104
|
|
Operating revenues from external
customers
|
$
|
66,618
|
|
|
$
|
2,409
|
|
|
$
|
—
|
|
|
$
|
69,027
|
|
Operating income (loss)
|
$
|
6,097
|
|
|
$
|
155
|
|
|
$
|
(540
|
)
|
|
$
|
5,712
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by reportable segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Refining
|
$
|
37,993
|
|
|
$
|
38,068
|
|
Ethanol
|
1,277
|
|
|
1,016
|
|
Corporate
|
6,995
|
|
|
5,143
|
|
Total assets
|
$
|
46,265
|
|
|
$
|
44,227
|
|
|
|
11.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
Decrease (increase) in current assets:
|
|
|
|
Receivables, net
|
$
|
(278
|
)
|
|
$
|
1,093
|
|
Inventories
|
557
|
|
|
(45
|
)
|
Income taxes receivable
|
165
|
|
|
88
|
|
Prepaid expenses and other
|
(28
|
)
|
|
(11
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
Accounts payable
|
494
|
|
|
(1,007
|
)
|
Accrued expenses
|
46
|
|
|
(5
|
)
|
Taxes other than income taxes
|
8
|
|
|
(50
|
)
|
Income taxes payable
|
(11
|
)
|
|
(17
|
)
|
Changes in current assets and current liabilities
|
$
|
953
|
|
|
$
|
46
|
|
The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable balance sheets for the respective periods for the following reasons:
|
|
•
|
the amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of debt and capital lease obligations;
|
|
|
•
|
amounts accrued for capital expenditures and deferred turnaround and catalyst costs are reflected in investing activities when such amounts are paid;
|
|
|
•
|
amounts accrued for common stock purchases in the open market that are not settled as of the balance sheet date are reflected in financing activities when the purchases are settled and paid; and
|
|
|
•
|
certain differences between balance sheet changes and the changes reflected above result from translating foreign currency denominated balances at the applicable exchange rates as of each balance sheet date.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were no significant noncash investing activities for the
nine
months ended
September 30, 2016
. Noncash financing activities for the nine months ended
September 30, 2016
included:
|
|
•
|
an accrual of
$20 million
for the purchase of
382,935
of our common stock, which was settled in early October 2016, and
|
|
|
•
|
a noncash transfer of
$68 million
between additional paid-in capital and noncontrolling interests for ownership changes in VLP, and the establishment of a
$25 million
deferred tax liability on the equity transfer. This noncash transaction is further described in
Note 6
.
|
Noncash investing and financing activities for the nine months ended
September 30, 2015
included the recognition of a capital lease asset and related obligation associated with an agreement for storage tanks near one of our refineries. Noncash financing activities for the nine months ended
September 30, 2015
also included an accrual of
$30 million
for the purchase of
506,100
shares of our common stock, which was settled in early October 2015.
Cash flows reflected as “other financing activities, net” for the
nine
months ended
September 30, 2016
included the payment of a long-term liability of
$137 million
owed to a joint venture partner associated with an owner-method joint venture investment.
Cash flows related to interest and income taxes were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
Interest paid in excess of amount capitalized
|
$
|
312
|
|
|
$
|
301
|
|
Income taxes paid, net
|
305
|
|
|
1,532
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
12.
|
FAIR VALUE MEASUREMENTS
|
General
U.S. GAAP requires or permits certain assets and liabilities to be measured at fair value on a recurring or nonrecurring basis in our balance sheets, and those assets and liabilities are presented below under
“Recurring Fair Value Measurements”
and
“Nonrecurring Fair Value Measurements.”
Assets and liabilities measured at fair value on a recurring basis, such as derivative financial instruments, are measured at fair value at the end of each reporting period. Assets and liabilities measured at fair value on a nonrecurring basis, such as the impairment of property, plant and equipment, are measured at fair value in particular circumstances.
U.S. GAAP also requires the disclosure of the fair values of financial instruments when an option to elect fair value accounting has been provided, but such election has not been made. A debt obligation is an example of such a financial instrument. The disclosure of the fair values of financial instruments not recognized at fair value in our balance sheet is presented below under
“Other Financial Instruments.”
U.S. GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. Following is a description of each of the levels of the fair value hierarchy.
|
|
•
|
Level 1
- Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2
- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
•
|
Level 3
- Unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recurring Fair Value Measurements
The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of
September 30, 2016
and
December 31, 2015
.
We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the tables below on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Total
Gross
Fair
Value
|
|
Effect of
Counter-
party
Netting
|
|
Effect of
Cash
Collateral
Netting
|
|
Net
Carrying
Value on
Balance
Sheet
|
|
Cash
Collateral
Paid or
Received
Not Offset
|
|
Fair Value Hierarchy
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
753
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
778
|
|
|
$
|
(706
|
)
|
|
$
|
—
|
|
|
$
|
72
|
|
|
$
|
—
|
|
Physical purchase
contracts
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
n/a
|
|
|
n/a
|
|
|
1
|
|
|
n/a
|
|
Foreign currency
contracts
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
n/a
|
|
|
n/a
|
|
|
1
|
|
|
n/a
|
|
Investments of certain
benefit plans
|
57
|
|
|
—
|
|
|
11
|
|
|
68
|
|
|
n/a
|
|
|
n/a
|
|
|
68
|
|
|
n/a
|
|
Total
|
$
|
811
|
|
|
$
|
26
|
|
|
$
|
11
|
|
|
$
|
848
|
|
|
$
|
(706
|
)
|
|
$
|
—
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
706
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
724
|
|
|
$
|
(706
|
)
|
|
$
|
(18
|
)
|
|
$
|
—
|
|
|
$
|
(86
|
)
|
Environmental credit
obligations
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
|
n/a
|
|
|
n/a
|
|
|
63
|
|
|
n/a
|
|
Physical purchase
contracts
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
n/a
|
|
|
n/a
|
|
|
11
|
|
|
n/a
|
|
Total
|
$
|
706
|
|
|
$
|
92
|
|
|
$
|
—
|
|
|
$
|
798
|
|
|
$
|
(706
|
)
|
|
$
|
(18
|
)
|
|
$
|
74
|
|
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Total
Gross
Fair
Value
|
|
Effect of
Counter-
party
Netting
|
|
Effect of
Cash
Collateral
Netting
|
|
Net
Carrying
Value on
Balance
Sheet
|
|
Cash
Collateral
Paid or
Received
Not Offset
|
|
Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
649
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
682
|
|
|
$
|
(557
|
)
|
|
$
|
(12
|
)
|
|
$
|
113
|
|
|
$
|
—
|
|
Foreign currency
contracts
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
n/a
|
|
|
n/a
|
|
|
3
|
|
|
n/a
|
|
Investments of certain
benefit plans
|
64
|
|
|
—
|
|
|
11
|
|
|
75
|
|
|
n/a
|
|
|
n/a
|
|
|
75
|
|
|
n/a
|
|
Total
|
$
|
716
|
|
|
$
|
33
|
|
|
$
|
11
|
|
|
$
|
760
|
|
|
$
|
(557
|
)
|
|
$
|
(12
|
)
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative
contracts
|
$
|
522
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
557
|
|
|
$
|
(557
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
Environmental credit
obligations
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
n/a
|
|
|
n/a
|
|
|
2
|
|
|
n/a
|
|
Physical purchase
contracts
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
n/a
|
|
|
n/a
|
|
|
6
|
|
|
n/a
|
|
Total
|
$
|
522
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
565
|
|
|
$
|
(557
|
)
|
|
$
|
—
|
|
|
$
|
8
|
|
|
|
|
A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:
|
|
•
|
Commodity derivative contracts consist primarily of exchange-traded futures and swaps, and as disclosed in
Note 13
, some of these contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but because they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.
|
|
|
•
|
Physical purchase contracts represent the fair value of fixed-price corn purchase contracts. The fair values of these purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.
|
|
|
•
|
Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.
|
|
|
•
|
Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily Renewable Identification Numbers (RINs) in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California Global Warming Solutions Act (the California cap-and-trade system, also known as AB 32) and Quebec’s
Regulation respecting the cap-and-trade system for greenhouse gas emission allowances
(the Quebec cap-and-trade system), (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. These programs are further described in
Note 13
under “Environmental Compliance Program Price Risk.” The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using the market approach based on quoted prices from an independent pricing service.
|
There were no transfers between levels for assets and liabilities held as of
September 30, 2016
and
December 31, 2015
that were measured at fair value on a recurring basis.
There was
no
activity during the three and
nine
months ended
September 30, 2016
and
2015
related to the fair value amounts categorized in Level 3 as of
September 30, 2016
and
December 31, 2015
.
Nonrecurring Fair Value Measurements
As discussed in
Note 2
, we concluded that the Aruba Terminal was impaired as of June 30, 2016, which resulted in an asset impairment loss of
$56 million
that was recorded in June 2016. The fair value of the Aruba Terminal was determined using an income approach and was classified in Level 3. We employed a probability-weighted approach to possible future cash flow scenarios, including transferring ownership of the business to the GOA or continuing to operate.
There were
no
assets or liabilities that were measured at fair value on a nonrecurring basis as of
September 30, 2016
and
December 31, 2015
.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below along with their associated fair values (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and temporary cash investments
|
$
|
5,949
|
|
|
$
|
5,949
|
|
|
$
|
4,114
|
|
|
$
|
4,114
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Debt (excluding capital leases)
|
8,875
|
|
|
10,005
|
|
|
7,292
|
|
|
7,759
|
|
The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:
|
|
•
|
The fair value of cash and temporary cash investments approximates the carrying value due to the low level of credit risk of these assets combined with their short maturities and market interest rates (Level 1).
|
|
|
•
|
The fair value of debt is determined primarily using the market approach based on quoted prices provided by third-party brokers and vendor pricing services (Level 2).
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
13.
|
PRICE RISK MANAGEMENT ACTIVITIES
|
We are exposed to market risks primarily related to the volatility in the price of commodities, foreign currency exchange rates, and the price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under
“Risk Management Activities by Type of Risk.”
These derivative instruments are recorded as either assets or liabilities measured at their fair values (see
Note 12
), as summarized below under
“Fair Values of Derivative Instruments,”
with changes in fair value recognized currently in income. The effect of these derivative instruments on our income is summarized below under
“Effect of Derivative Instruments on Income.”
The cash flow effects of all of our derivative instruments are reflected in operating activities in our statements of cash flows for all periods presented.
Risk Management Activities by Type of Risk
Commodity Price Risk
We are exposed to market risks related to the volatility in the price of crude oil, refined products (primarily gasoline and distillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.
To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fair value and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for trading purposes. Our objectives for entering into hedges or trading derivatives are described below.
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
Economic Hedges
– Economic hedges represent commodity derivative instruments that are used to manage price volatility in certain (i) feedstock and refined product inventories, (ii) fixed-price purchase contracts, and (iii) forecasted feedstock, refined product or natural gas purchases and refined product sales. The objectives of our economic hedges are to hedge price volatility in certain feedstock and refined product inventories and to lock in the price of forecasted feedstock, refined product, or natural gas purchases or refined product sales at existing market prices that we deem favorable. Economic hedges are not designated as fair value or cash flow hedges for accounting purposes, usually due to the difficulty of establishing the required documentation at the date the derivative instrument is entered into for them to qualify as hedging instruments for accounting purposes.
|
As of
September 30, 2016
, we had the following outstanding commodity derivative instruments that were used as economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels, and soybean oil contracts that are presented in thousands of pounds).
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by
Year of Maturity
|
Derivative Instrument
|
|
2016
|
|
2017
|
|
2018
|
Crude oil and refined products:
|
|
|
|
|
|
|
Swaps – long
|
|
16,154
|
|
|
485
|
|
|
—
|
|
Swaps – short
|
|
16,349
|
|
|
20
|
|
|
—
|
|
Futures – long
|
|
93,710
|
|
|
777
|
|
|
—
|
|
Futures – short
|
|
87,610
|
|
|
2,178
|
|
|
—
|
|
Options – long
|
|
2,000
|
|
|
—
|
|
|
—
|
|
Options – short
|
|
2,000
|
|
|
—
|
|
|
—
|
|
Corn:
|
|
|
|
|
|
|
Futures – long
|
|
16,875
|
|
|
550
|
|
|
—
|
|
Futures – short
|
|
34,935
|
|
|
4,970
|
|
|
10
|
|
Physical contracts – long
|
|
16,807
|
|
|
4,913
|
|
|
10
|
|
Soybean oil:
|
|
|
|
|
|
|
Futures – long
|
|
81,600
|
|
|
—
|
|
|
—
|
|
Futures – short
|
|
118,320
|
|
|
20,580
|
|
|
—
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
Trading Derivatives
– Our objective for entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions for crude oil and refined products.
|
As of
September 30, 2016
, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels).
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by
Year of Maturity
|
Derivative Instrument
|
|
2016
|
|
2017
|
Crude oil and refined products:
|
|
|
|
|
Swaps – long
|
|
1,260
|
|
|
1,500
|
|
Swaps – short
|
|
1,260
|
|
|
1,500
|
|
Futures – long
|
|
48,588
|
|
|
1,399
|
|
Futures – short
|
|
48,170
|
|
|
1,846
|
|
Options – long
|
|
22,550
|
|
|
133,490
|
|
Options – short
|
|
22,150
|
|
|
133,490
|
|
Corn:
|
|
|
|
|
Futures – long
|
|
—
|
|
|
500
|
|
Futures – short
|
|
—
|
|
|
500
|
|
We had no commodity derivative contracts outstanding as of
September 30, 2016
and
2015
or during the
nine
months ended
September 30, 2016
and
2015
that were designated as fair value or cash flow hedges.
Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated in currencies other than the local (functional) currencies of those operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes and therefore are classified as economic hedges. As of
September 30, 2016
, we had forward contracts to purchase
$328 million
of U.S. dollars. These contracts matured on or before
October 31, 2016
.
Environmental Compliance Program Price Risk
We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. Certain of these programs require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. The cost of meeting our obligations under these compliance programs was
$198 million
and
$94 million
for the three months ended
September 30, 2016
and
2015
, respectively, and
$532 million
and
$283 million
for the
nine
months ended
September 30, 2016
and
2015
, respectively. These amounts are reflected in cost of sales.
Effective January 1, 2015, we became subject to additional requirements under greenhouse gas emission programs, including the cap-and-trade systems, as discussed in
Note 12
. Under these cap-and-trade systems, we purchase various greenhouse gas emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we recovered the majority of these costs from our customers for the
nine
months ended
September 30, 2016
and
2015
and expect to continue to recover the majority of these costs in the future. For the three and
nine
months ended
September 30, 2016
and
2015
, the net cost of meeting our obligations under these compliance programs was immaterial.
Fair Values of Derivative Instruments
The following tables provide information about the fair values of our derivative instruments as of
September 30, 2016
and
December 31, 2015
(in millions) and the line items in the balance sheets in which the fair values are reflected. See
Note 12
for additional information related to the fair values of our derivative instruments.
As indicated in
Note 12
, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
|
September 30, 2016
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
|
Futures
|
Receivables, net
|
|
$
|
749
|
|
|
$
|
702
|
|
Swaps
|
Receivables, net
|
|
21
|
|
|
17
|
|
Options
|
Receivables, net
|
|
8
|
|
|
5
|
|
Physical purchase contracts
|
Inventories
|
|
1
|
|
|
11
|
|
Foreign currency contracts
|
Receivables, net
|
|
1
|
|
|
—
|
|
Total
|
|
|
$
|
780
|
|
|
$
|
735
|
|
VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
|
December 31, 2015
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
|
Futures
|
Receivables, net
|
|
$
|
648
|
|
|
$
|
522
|
|
Swaps
|
Receivables, net
|
|
30
|
|
|
33
|
|
Options
|
Receivables, net
|
|
4
|
|
|
2
|
|
Physical purchase contracts
|
Inventories
|
|
—
|
|
|
6
|
|
Foreign currency contracts
|
Receivables, net
|
|
3
|
|
|
—
|
|
Total
|
|
|
$
|
685
|
|
|
$
|
563
|
|
Market and Counterparty Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.
Effect of Derivative Instruments on Income
The following tables provide information about the gain or loss recognized in income on our derivative instruments and the income statement line items in which such gains and losses are reflected (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as
Economic Hedges
|
|
Location of Gain (Loss)
Recognized in Income
on Derivatives
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
2016
|
|
2015
|
2016
|
|
2015
|
Commodity contracts
|
|
Cost of sales
|
|
$
|
42
|
|
|
$
|
122
|
|
|
$
|
(210
|
)
|
|
$
|
159
|
|
Foreign currency contracts
|
|
Cost of sales
|
|
4
|
|
|
24
|
|
|
5
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Derivatives
|
|
Location of Gain
Recognized in Income
on Derivatives
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
2016
|
|
2015
|
2016
|
|
2015
|
Commodity contracts
|
|
Cost of sales
|
|
$
|
13
|
|
|
$
|
20
|
|
|
$
|
51
|
|
|
$
|
41
|
|